OFSI tells banks to stress-test for housing decline

SMALLER LENDERS

ment of the new tests for the smaller banks is that they will measure the impact on more than just the closely watched CET1 capital level and total ratios. They will also contemplate scenarios in which a bank’s “authorized leverage ratio may be breached.”

Insured mortgages are not used to calculate capital requirements, but they are included in the leverage ratio, so their impact would be captured by the new stress test requirements, said Jason Mercer, an analyst at Moody’s Investors Service.

“In theory, a bank could beat the stress by assuming it starts insuring the remainder of its mortgage portfolio,” he said. “The leverage ratio would then pick this up” and could fall below the required threshold even if capital did not.

The regulator’s steppedup stress tests are “not surprising given the recent concerns on housing and household debt,” said Mercer, who recently wrote a report that estimated a U.S.-style housing crisis would cost the country’s biggest banks and mortgage insurers more than US$17 billion.

Unlike regulators in the United States, OSFI does not make the results of bank stress tests public. However, the bank watchdog has been making tweaks over the past year, in tandem with federal and provincial governments, aimed at cooling red-hot real estate markets and tamping down financial risk.

OSFI’s directive to smaller banks Tuesday came on the heels of the B.C. government’s move this week to introduce a 15-per-cent tax on foreign homebuyers. The land transfer tax, widely viewed as a tool to cool the hottest pocket of the province’s real estate market by reducing foreign speculation, is to come into effect on Aug. 2 and would apply to residential real estate in Vancouver.