- Interest rate hikes have affected Canada’s nearly C$2 trillion mortgage market.
- OSFI has asked banks to allocate billions to bad debt.
The Office of the Superintendent of Financial Institutions (OSFI) has called for heightened capital reserves in response to the mounting mortgage risks. Amidst the backdrop of the Bank of Canada’s aggressive interest rate hikes, the prolonged extension of mortgage repayment terms has raised concerns.
According to a report by Reuters, Canadian homeowners are increasingly struggling to make payments, which has triggered concerns about the financial stability of the nation’s banks. This has forced OSFI to implement revised capital guidelines.
These new directives, set to take effect next year, require financial institutions to bolster their capital reserves, particularly for mortgages where payments fail to cover the interest portion of the loan.
Canadian Banks Adapt to Changing Mortgage Sector
Canada’s top six banks, including Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto Dominion, have jointly allocated approximately C$3.5 billion towards provisions for bad debt in their most recent quarterly earnings.
During the first nine months of this fiscal year, these major banks collectively set aside C$9.45 billion, more than four times the amount allocated in the previous year. The elevated interest rate environment, which has seen the Bank of Canada raising rates to a 22-year high of 5%, has significantly impacted variable-rate mortgages.
The uncertainty surrounding the Canadian banking sector’s resilience against mounting mortgage risks has impacted the performance of these institutions. Shares of the big six banks have experienced losses ranging from roughly 3% to 12% so far this year, reflecting investor concerns about the sector’s challenges, Reuters reported.
In a separate announcement, OSFI warned of growing risks associated with elevated borrowing costs, particularly in the housing and commercial real estate sectors. These areas have been identified as top vulnerabilities, underlining the regulator’s commitment to safeguarding Canada’s financial system from various potential risks.
