Canada’s housing downturn is among the biggest risks to the financial system, regulator warns

A slowdown in Canada’s housing market is one of the biggest risks facing the financial system this year, the country’s financial regulator said on Thursday, adding that it plans to revise the stress test. existing home loans and to extend its application to other loan products.

According to the Office of the Superintendent of Financial Institutions (OSFI) in its first annual Risk Outlook Report for the year ending March 31, 2023.

While lenders are “well capitalized and appear to be financially resilient, such a sequence of events could lead to borrower defaults, a disorderly market reaction and broader economic uncertainty and volatility,” the regulator said.

OSFI has identified income verification issues in certain “problematic” areas and is considering extending the application of the stress test to products such as reverse mortgages, equity mortgages and plans. combination loans, which have become more common, he said.

The stress test sets the qualifying rate for mortgages at the higher of 5.25% or 200 basis points above the rate paid by the borrower.

Other risks to the financial system include cyberattacks, digitalization of money, climate change, a slowdown in the commercial real estate market, riskier corporate debt financing and third-party deals, said the regulator.

OSFI is conducting a pilot project to help financial institutions identify technological weaknesses and plans to consult a draft guideline on managing operational risk this fall, he said.

It will also issue guidance on institutions’ climate risk management and financial disclosure expectations and, with the central bank, conduct exercises to assess the impact on mortgage and securities portfolios and balance sheets, it said. -he declares.

Pandemic-related changes to workplaces and shopping habits have introduced uncertainty for office and retail properties, and a prolonged sharp rise in unemployment and work-from-home policies could pose risks additional, the regulator said.

Noting some gaps in COVID-related risk assessment and management, OSFI said it would consider developing supervisory expectations for commercial real estate.

(Reporting by Nichola Saminather; editing by Grant McCool and Marguerita Choy)

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Canada

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Don F. Davis