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Lane Says Mortgages Are Key Part of Canada Shadow Banking

June 26 (Bloomberg) -- Bank of Canada Deputy Governor Timothy Lane said the central bank is working on ways to improve the safety of the country’s “shadow banking” sector, which he said is smaller than in the U.S.

Turning government-insured mortgages into easier-to-trade securities is an important part of shadow banking in Canada, Lane said a speech today in Toronto. He made no comment on the outlook for Canada’s economy or monetary policy in the speech, and said in response to an audience question afterward that risks from the housing market have moderated.

“We are seeing a moderation over the last year in both the buildup of household sector indebtedness and also related imbalances in the housing market,” Lane said. “That doesn’t mean to say that the risk has suddenly disappeared and it’s still a risk that we are watching very closely.”

The central bank has said that shadow banking -- which refers to financial activities that occur outside the regulated banking system -- can provide benefits by offering a wider range of services. That view contrasts with officials from other countries who, since the global financial crisis, have called for stricter curbs on some types of non-bank activities.

“The goal is to create incentives so that risk is allocated and managed appropriately, both in banking and in shadow banking activities, making the entire financial system stronger and more resilient,” Lane said.

Canada’s shadow banking industry is equal to about 40 percent of the country’s gross domestic product, less than the 95 percent share in the U.S., Lane said.

To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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