IMF Says Home Prices, Debt Concerns for Canada Banks

Canada’s banks are able to weather severe financial stresses, though elevated home prices and high household debt are still a worry, the International Monetary Fund said today.

“Mortgages and consumer loans secured by real estate represent the single largest exposure of banks, and elevated house prices and high household indebtedness remain an area of concern,” the IMF said in a report on Canada’s financial industry. The Washington-based lender said housing is a worry even with a “substantial level” of government-guaranteed mortgage insurance.

Canada’s financial system, ranked the world’s soundest for six straight years by the World Economic Forum, continues to be resilient, the report said. The country’s banks are “well capitalized, profitable and continue to report low non-performing loans,” the report said in its Financial System Stability Assessment report for Canada.

“Canada’s financial system successfully navigated the global financial crisis, and stress tests suggest that major financial institutions would continue to be resilient to credit, liquidity, and contagion risks arising from a severe stress scenario,” the IMF said.

The country’s banks could handle a “liquidity shock as characterized by a withdrawal of funds and haircuts on liquid assets,” the IMF said. While lenders face risks because of their reliance on wholesale-funding markets, exposures between banks and other counterparties are small, keeping spillover risk quite low, the IMF said in its report dated Jan. 10.

Big Six

The strength of Canadian banks and insurers makes it difficult for newcomers to break into the market, the IMF said. Canada’s six big lenders hold 93 percent of bank assets and three domestic insurers hold three quarters of life and health coverage, according to the report.

Canadian life insurers remained solvent even in the severe stress tests. Life insurers, which make up 16 percent of financial industry assets, saw their solvency ratios eroded somewhat as guaranteed-benefit plans and a prolonged period of low interest rates ate into profits, the IMF said.

The IMF’s solvency stress tests results suggest that, while all banks would fall below the regulatory threshold during severe economic distress, resulting recapitalization needs are “manageable.”

To contact the reporters on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net; Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net

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