OSFI moves to raise bank's capital requirements for residential mortgages

Canada's top financial regulator wants to update the rules that govern how much capital lenders must hold to offset the risk that the residential mortgages on their books go bad.
Canada's top banking regulator wants to require lenders to hold more capital reserves against the residential mortgages they loan out. (Daniel Munoz/Reuters)

Canada's top financial regulator wants to update the rules that govern how much capital lenders must hold to offset the risk that the residential mortgages on their books go bad.

In a release Friday, the Office of the Superintendent of Financial Institutions said it is going to consult with players in the industry on new rules that could be in place by 2017 governing the capital requirements put upon Canadian financial institutions when they loan money to consumers for mortgage and home-equity lines of credit.

"Risks in the Canadian mortgage market continue to evolve," deputy superintendent Mark Zelmer said.

Essentially, the regulator is saying they're going to force banks to have more money set aside in case the mortgage loans on their books go bad. Having to keep more money in reserve could reduce their appetite to loan out more money to would-be borrowers, which could work to cool the housing market.

"The purpose of OSFI's regulatory capital framework is to ensure, as much as possible, that federally regulated financial institutions can absorb severe but plausible losses," Zelmer said.

Among the proposals on the table is to implement a "risk-sensitive floor" to the financial models that banks internally use to assess how much they are able to loan out to any given borrower looking to buy property. Changing those models would potentially cause banks to reassess the risks, which would change how much money they're willing to loan and who may be eligible to borrow.

"It will require more capital when house prices are high relative to borrower incomes," Zelmer said.

New down payment rules, too

The move came on the same day that Ottawa announced it was hiking the down payment requirement for federally-insured mortgages to 10 per cent for the portion of a purchase price of any home that's over $500,000.

Both moves are aimed squarely at achieving the same goal: making sure Canada's housing market isn't overinflated, and adjusting the risk to more reasonable levels without setting off a panic.

Economists on Bay Street said the down payment rules are unlikely to have a dramatic impact on the market, but may achieve their aim of ratcheting down risk on the margins.

"While it sounds dramatic, our analysis suggests that the overall impact will be felt only at the margin given the relatively small segment of the market that will be impacted," CIBC's Benjamin Tal said of the new down payment rules.

"Today's moves will represent another step in protecting home buyers from taking on too much mortgage debt relative to the value of their home in a low interest rate environment," TD Bank added.