CEO of Canada's biggest bank calls for caution as Ottawa considers adjusting mortgage stress test

  1/8/2020 |   SHARE
Posted in Mortgages and Real Estate by Marti Philp| Back to Main Blog Page

Big 6 Banks Canada

The chief executive of Canada’s biggest bank says the federal government needs to exercise caution as it considers adjusting the mortgage stress test that has loomed over the country’s housing market since it was introduced in 2018, rankling many in the real-estate industry.

“We have to be a little bit careful,” Royal Bank of Canada chief executive Dave McKay told a banking conference on Tuesday morning, noting that the test has “generally been good policy” in the absence of higher interest rates that could slow demand for housing.

Canada has mortgage stress tests in place for both loans that are insured against the borrower defaulting and those that are not, with both measures aimed at ensuring homeowners can meet their obligations to federally regulated lenders such as banks if circumstances change.

However, Prime Minister Justin Trudeau recently tasked Finance Minister Bill Morneau with reviewing and considering recommendations from financial agencies “related to making the borrower stress test more dynamic,” according to the minister’s mandate letter.

“The stress test certainly delayed purchases, caused consumers in Canada to look at less expensive homes, and to adjust their desire for the cost of the home they’re purchasing, or delay,” McKay told a conference in Toronto. “And I think we have to be a little bit careful how we adjust it. But if done in the right way, and with the right objectives, (it) can be achieved.”

While the stress test has been defended by regulators as necessary and prudent, it has been targeted by the real-estate industry as a weight on the housing market that has made it harder for Canadians to buy homes. The comments from McKay, though, came as concerns around Canada’s housing market and the overall indebtedness of domestic consumers continue to linger.

Tuesday’s RBC Capital Markets conference saw the CEOs of all of Canada’s big banks weigh in on the year ahead, and National Bank of Canada CEO Louis Vachon defended the stress test when he was asked about it.

Vachon also suggested that another three to six months should be allowed to pass before any changes are made to better determine the impact of the measure.

“If they had a time machine …. most of the U.S. regulators would say, ‘We would have tightened up underwriting standards in 2005, 2006, to avoid what occurred later on,’” Vachon told the audience.

Jamey Hubbs, an assistant superintendent at the Office of the Superintendent of Financial Institutions, the federal banking regulator that enacted the uninsured mortgage stress test, also spoke at the conference.

In December, OSFI said it would require the Big Six banks to hold slightly more high-quality capital, as the regulator said key risks, including Canadian household indebtedness, remained high. Hubbs said Tuesday that OSFI would also “increase its focus on global vulnerabilities that may affect Canadian financial stability,” according to a transcript of the speech that was posted to the regulator’s website.

As for the stress test, Hubbs said the B-20 guideline, of which the uninsured stress test was a part, has been effective in improving underwriting standards and making banks more resilient.

“Recently, OSFI has seen a renewed uptick in mortgage credit growth and housing prices in some regions, while the share of new mortgages to highly indebted borrowers has again begun to rise,” Hubbs said. “We are keeping an eye out for effective compliance of the principles and other potential effects like changes in renewal rates, or shifting of products.”

Federally regulated financial institutions, such as RBC, saw mortgage originations slow when the uninsured stress test came into effect at the start of 2018. Recently, however, the Canadian housing market has been having a renaissance, with the Toronto Real Estate Board reporting Tuesday that home sales in December were up 17.4 per cent over the same month of last year.

McKay said the bigger challenges facing the housing market have less to do with demand and more to do with managing supply. Demand will continue to rise, stress test or not, as, among other things, Canada continues to attract an increased number of immigrants, McKay said.

What’s needed is more supply, which falls more on the municipal and provincial levels of government.

“We’ve moved into a strong seller’s market again, from a balanced marketplace,” McKay said. “And we haven’t been in a buyer’s market for quite some time because of those supply-demand dynamics.”

Here’s what other big bank chief executives had to say at the RBC Capital Markets Canadian Bank CEO conference:


Some comments made by the CEOs suggested targets for earnings growth set by the Big Six in previous years might prove tough to hit amid the low interest rates and choppy credit conditions of today.

Bank of Montreal CEO Darryl White on Tuesday broke down the “math” for the audience. BMO has aimed for medium-term earnings-per-share growth of seven per cent and above, he noted. Revenue growth for 2019 had been six per cent, he said, while those of its peers had been five per cent. BMO is eyeing expense growth, meanwhile, of two per cent or lower, White noted.

“And so, if you think you’re going to get to seven per cent EPS growth, you have to have a view that you’ve got an eight or a nine or a 10 on revenue,” he said. “I don’t think that’s going to happen for us or for others absent something unusual going on in the environment.”

However, White added later, “we might get close, it depends on what happens over the course of the year.”


The Bank of Nova Scotia didn’t wait until Tuesday to update investors on its business. The lender said Monday evening in a press release that its first-quarter results will be boosted by around $175 million after-tax, mostly because of an approximately $410-million net gain from the previously announced sale of its 49-per-cent interest in Thailand’s Thanachart Bank Public Co. Ltd.

Scotiabank’s Thanachart gain will be offset somewhat by a few other items, including an estimated increase to its allowance for credit losses tied to the addition of a “more severe pessimistic scenario” in determining reserves.

“I don’t want to be flippant, these are big sums of money, but we just thought it was good housekeeping and an appropriate time of the year to do it,” Scotiabank CEO Brian Porter said.

TD Bank

Toronto-Dominion Bank in November said it was supporting the acquisition of TD Ameritrade Holding Corp. (approximately 43 per cent of which is owned by TD) by Charles Schwab Corp., a deal that came in the wake of the two U.S.-based brokerages slashing certain commissions to zero.

However, TD CEO Bharat Masrani does not see the zero-commission trend migrating north of the border.

“I see the Canadian business as very much part of a retail offering, rather than a monoline offering, which was more of the case in the United States,” Masrani said Tuesday. “I don’t see it coming here.”


Canadian Imperial Bank of Commerce acknowledged last year that it had been stung by a drop-off in housing activity in big cities. CEO Victor Dodig said Tuesday that the bank had, among other things, “committed to a more diversified” loan origination model, instead of a focus on Toronto and Vancouver.

CIBC has also been adding pieces to its U.S. business over the past few years, including the acquisition last year of Milwaukee-based boutique investment bank Cleary Gull. Also joining CIBC was Lowenhaupt Global Advisors, a family office in St. Louis and New York. Dodig suggested that his bank is still interested in similar “tuck-in” deals.

“We’re not looking to do anything dramatic,” Dodig said. “We’ve got a good franchise, we’re looking to focus on the organic growth of our existing footprint and some geographic expansion where it makes more sense. And I think you’ll probably see tuck-in acquisitions on the wealth management front as we go forward as well.”

Source: Financial Post

Bank of Canada, Big Six, Canadian Banks, Canadian Housing Market, Canadian Mortgage Market, Canadian Real Estate Market Outlook, Housing Affordability, Housing Demand, Stress Test

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