Canadian Mortgage Market Primer and Some History

TD published a mortgage market primer (PDF) back in 2010 written by Eric Lasalle. Lasalle outlines some succinct information about financing methods and regulations surrounding Canadian mortgages, including differences to the American model, outlines some numbers in terms of the mortgage market size and composition, and comments on his take on the stability of CMHC and banks given this backdrop, all dated 2010.

Also an interesting read is the history of mortgage financing since World War 2 in chapter 6, written by James Poapst, from the CMHC-published book House, Home, and Community: Progress in Housing Canadians, 1945-1986.

This all is nerdy, but readable, stuff, for those who take it upon themselves to pronounce over what ails the current Canadian housing and mortgage markets. You know what they say about history...

This

I've been calling for changes in OSFI guidelines for close to a year now. This is no surprise, and it should not be a surprise if this is the type of tightening of credit the Bank of Canada has been lobbying.

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=4831

OSFI is issuing for comment Draft Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures. Guideline B-20 sets out OSFI’s expectations for prudent residential mortgage underwriting, and is applicable to all federally-regulated financial institutions that are engaged in residential mortgage underwriting, the purchase of residential mortgage loan assets and, where appropriate, the issuance of mortgage insurance – in Canada and internationally. Interested parties may submit comments to OSFI regarding draft Guideline B-20 by May 1, 2012 through their industry associations or directly to OSFI. Comments concerning the draft Guideline should be sent by e mail to B20@osfi-bsif.gc.ca.


Things just got interesting.

From the Canadian Press

Canada will likely avoid a crash or serious correction in its “somewhat pricey” housing market, with the possible exception of Vancouver, says a new paper from the Bank of Montreal.
The analysis by BMO economists suggests alarms about Canada’s housing market by international observers, from the International Monetary Fund to The Economist magazine, are exaggerated or simplistic.
“The main takeaway is that the national housing market appears somewhat pricey, but is far removed from a bubble,” said economists Sherry Cooper and Sal Guatieri in the report released Monday.
“In our view, the (market) is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ‘pin’.”
Even Toronto’s hot condo market–one of the subjects of many of the warnings–is more likely to cool rather than collapse, BMO said, noting that a sharp decline in construction for rental units is stimulating demand for condos.
The report estimates that half of new condos in the Toronto area are purchased by investors, and about 22% are rented.
The one exception to the sanguine view appears to be Vancouver and parts of British Columbia, where home prices and demand from an influx of non-resident Chinese investment is elevating prices and construction. Home prices in Vancouver have climbed by 159% over the past 10 years, more than 50% higher than the national average.
“Bottom line is, we expect the Canadian housing market to cool down rather than bust over the next couple of years, with the possible exception of Vancouver and parts of B.C. which will likely experience further correction,” said Guatieri in an interview.
By cooling, he predicted that prices, sales and start-ups will essentially be flat this year and likely next.
Housing has become an area of concern for policy-makers over the last few years as Canadians continued to dip into the mortgage market to take advantage of historically-low interest rates. As a consequence, household debt to disposable income has shot to over 153%, the highest in ever and close to the levels reached in the U.S. before the subprime crash.
Earlier in the month, Finance Minister Jim Flaherty said he was prepared to intervene for the fourth time in six years if there is no let-up in borrowing.
The BMO economists say the government, and the Bank of Montreal, are correct to worry about a continuation of the trend, but that is not likely. In fact, except for a few hot spots, that cooling trend has already begun with prices rising only by 0.9% last year. Home starts have also dipped well south of the over 200,000 level.
Nor is it likely that Canada will fall into another recession, or that interest rates would rise so quickly that a significant number of households would be unable to meet mortgage payments.
Canadian households are not as vulnerable as their American counterparts, the economists say.
Canadian home ownership equity is 67% in Canada, compared to 39% in the U.S., and even debt-to-income ratios are far better in Canada when the cost of health care U.S. households must pay is factored in.
The report argues that many of the measures used by alarmists to suggest housing is due for a severe correction are exaggerated or simplistic.
On the important measures which gauge affordability, households are on firm ground. House prices to family incomes are elevated from 10 years ago, but not excessively so, at a ratio of 4.9 versus 3.2 a decade ago.
The exception again is Vancouver at 10, nearly double what it was a decade ago. Also elevated is Toronto at 6.7 versus 4.3.
“Let’s assume the worst case scenario and house prices fall by 10%, would that affect anything?” asked Guatieri. “There has been such an increase in house values, that I don’t think it would pose a serious problem for Canadians or the economy.”
Guatieri said the situation would become a problem if home prices and household debt continued to outstrip income growth, but trends on both fronts are moderating.
Originally published on Advisor.ca

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How Money is Created

I've been fascinated and somewhat confused of late by the concept of how money is created. Given certain developments recently involving the Swiss unilaterally instituting an exchange rate ceiling, summarized by Kash over at The Street Light, Canada's horror and dismay what we would do when "currencies go to war", and the general idea about how Canada "creates" money, I thought I'd link to some thoughts on the subject. This does not necessarily clarify much on the matter, but does indicate the Bank of Canada is somewhat of a black box and there is no ultimate online authority I was able to dig up.

Worthwhile: Currency, Interest, and Redeemability

Money as Debt (video)

Wiki: Fractional Reserve Banking

Gilligan's Corner: Canada’s Private Banks have no Reserve Requirements (read the comments too)

Steve Keen: The Roving Cavaliers of Credit

First year macro textbook chapters on money in Canada ch10 and ch11 (PDF)

MacroMania: Fractional Reserve Banking

When trying to get information on the basic functions of the banking system and currencies, I am reminded that the web has a few disagreements, and can make things seem rather complicated.

Bill C-3 Gets Royal Assent

Bill C-3, the one I discussed here, received royal assent on June 26th. This bill includes changing and formalizing how mortgage insurance operates in Canada. Many of the provisions in the bill are not new but were administered through informal agreements now made formal through legislation, though there is much detail that is under the authority and at the whim of the government of the day. Most notably:

• The Ministry of Finance can impose additional capital reserve ratios on CMHC and private mortgage insurers
• The Ministry of Finance can effectively revoke the ability of certain lenders from applying for government-backed mortgage insurance.
• CMHC and mortgage insurers must pay fees in accordance with elevated risk levels it incurs
• CMHC must open its books to the Ministry of Finance
• CMHC's books will be available through FOI if not publicly displayed
• There is a 10% deductible to any funds that are paid by the government to backstop private mortgage insurers. CMHC is 0%

If you have time there are some interesting testimonies from the Parliamentary Standing Committee on Finance sitting on June 20, 2011. Among parties present were Finn Poschmann (CD Howe), Jane Londerville (U Guelph), and Karen Kinsley (CMHC). I highlight a few excerpts for the record, emphasis mine:

Poschmann: Private mortgage insurers, which operate, as I said, in roughly one-third of the residential mortgage insurance market that CMHC does not occupy, have their liabilities guaranteed by the Government of Canada, less a 10% deductible. We could call that a 90% guarantee. This makes it possible for the private insurers to compete in the residential mortgage insurance business with CMHC.

CMHC is a crown corporation, the liabilities of which are backed 100% by the full faith credit of the Government of Canada and therefore the federal taxpayer. This means that CMHC's cost of capital is less than it is for the private insurers. In order words, it costs the private insurers more to go to the market to raise money to underwrite the insurance premiums that they, in turn, write. It costs more because they do not have the Government of Canada's backing. But as I indicated, the system works well enough that the existing private insurers tend to hold about 30% of the market. The system more or less works, however imperfectly it may do so.

Dr. Londerville: the CMHC, as a crown corporation, has its mortgage insurance policies implicitly 100% guaranteed by the federal government under the Basel accord. CMHC-insured mortgages, then, require no capital reserves by financial institutions. Clauses 22 and 24 in this act retain the corresponding maximum protection for private companies at only 90%. At the moment, the lender decides who will insure a mortgage loan: CMHC or a private insurer.

As a consequence, banks whose loans are insured through a private firm must set aside some capital reserves against the possibility of default by the insurer, which is not a requirement if the loan is insured by CMHC. Thus, rates of return are higher on CMHC-backed mortgages.

When profit margins are thin and banks are nervous about capital reserves, as in the financial crisis that began in 2008, this makes a major difference. The evidence of this is in the growth of CMHC's mortgage insurance premium income during 2008 and the drop in Genworth's.

Because of the difference in levels of guarantee, each financial institution's treasury or risk officer determines how much of the institution's mortgage insurance business can be sent to private investors, limiting the amount because of the capital reserve requirements. The implication of this for consumers is reduced choice. This is not a competitive marketplace with consumers freely choosing which company will insure their loan, even though they are the ones who pay the large upfront fee for this insurance.

CMHC's stated plan for 2010 was to have $520 billion in insurance outstanding, which represents approximately 70% of the market. Genworth has been competing in this market since 1995 and holds most of the remaining 30%. To me, one party with such a dominant share of the market implies inadequate competition. There are now two relatively new competitors in the market to battle for the private company share of insurance. To make this a truly competitive market, changes to the 90% guarantee are necessary, either by reducing CMHC's guarantee or by raising the one for the private sector.

Poschmann: The key point, Mr. Chairman and Mr. Adler, is clarity from the point of view of parliamentary oversight and oversight by the public of the risks to which Canadians are exposed through CMHC's mortgage underwriting and mortgage insurance activities and securitization activities. Again, we have little reason to doubt that the risks inherent in these activities are well managed. However, they are very large numbers, and they're very large risks. If you think about the impact of a significant housing market shock, while CMHC is well capitalized, as Ms. Kinsley has indicated--capitalized, they say, at higher than the standards that OSFI requires, so we should be well protected as taxpayers--nonetheless a significant market shock could easily eat up the capital that CMHC has set aside.

Kinsley: The issue of the differential in our mandate and the cost of that really gets to the nub of the difference in the guarantee between CMHC and the private insurers. We are, by virtue of being a crown corporation, 100% guaranteed by the Government of Canada. Recognizing that private insurers can select the markets they choose to be in, and obviously they will not serve those that are less profitable, the government has set the guarantee for private insurers at 90%. That 10% differential in the guarantee, in order to create a level playing field between us, compensates us for that difference.

We have been able to operate successfully on that basis, as is evident by our annual returns, and the over $12 billion that we've been able to return to the government.

I see the key points from this testimony as:

• CMHC enjoys a reduced cost of capital. Londerville argued convincingly that this produces an unfair advantage for CMHC compared to private insurers who will either accept higher risks with lower premiums or give up market share. That CMHC commands 70% of the market means they set the price.
• Banks are transferring significant risk provisions onto CMHC via the 100% guarantee. This means they do not need to provision for counterparty risk on their balance sheets. As was mentioned this was somewhat helpful in 2008 when banks were scared of counterparty risk. The 100% guarantee does not show up on the balance sheets of those making the loans.
• CMHC is well capitalized and can withstand a moderate housing recession without touching government coffers. A severe recession would likely wipe them clean, and they would be asking for some of the expropriated monies back, though it's a bit funny that a corporation would be asking its shareholders for dividend clawbacks. (Imagine if RBC asked shareholders for its dividends back!)
• Kinsley opines that the 100% guarantee is necessary to compensate CMHC for providing mortgage insurance when private insurers are unable or unwilling to provide insurance in certain market segments. The problem here is that there is no condition by which an outsider can determine which markets are "distressed" enough that private insurers refuse to step up, and one major reason why CMHC commands the market share it does.

I would recommend to policymakers that CMHC's function of providing access to housing (and not necessarily mortgage insurance) in times when the private market is dysfunctional is noble but there must be limits. When its mandate starts encroaching on mainstream market functions, by underwriting 70% of a market that by all accounts is functioning as it should -- private insurers (well, insurer) are competing -- it risks usurping its mandate. In the extreme, as is potentially the case now, when house prices are high, CMHC can only fulfill its affordability mandate by taking on more risk, when it should be focused on lowering, not enabling high, prices.

The other elephant in the room is that Canada has not yet experienced a moderate or severe housing recession in 20 years, and certainly not when interest rates are so low. While we can opine that CMHC is well-capitalized and that, perhaps, making mortgage insurance fully private may help against future asset price bubbles, we do not have an example that can be reasonably used as a passable stress test. Australia was cited as a country that privatized its mortgage insurance business about 15 years ago, but Australia has not experienced a severe housing recession under this regime to validate private insurers' capital adequacy requirements. In other words, thinking that insuring against correlated risks can be privatized should be thoroughly vetted against potential housing market shocks in hundreds of years of world history. In my view, the best way to prevent governments from bailing out insurers is attempting to avoid the risk entirely, and that means using lower prices and higher yields as a fundamental gauge to set housing policy.

With Bill C-3 now emerging from the legislative sausage-maker its implementation will hopefully pave the way for recasting CMHC's important but dangerous role in Canada's housing market.

OSFI in da House

Warning: longish post dealing with mortgage lending. If you are having trouble sleeping, please read on...

The Financial Post has run a story on OSFI (Office of the Superintendent of Financial Institutions) taking an increasing interest in Canada's housing market (emphasis mine):

Canada’s top banking regulator is on a fact-finding mission to gauge the scope of foreign investment in residential real estate.

Industry sources say the Office of the Superintendent of Financial Institutions is sizing up the market, most likely as part of its active campaign to “stress-test” the country’s big banks to measure how they would be affected by volatility in various market segments.

OSFI is taking a broad look at bank exposure to household debt and how the financial institutions are monitoring loan portfolios amid growing concerns over the ability of Canadians to handle their debt load.

In the case of the housing market, sources point to global trends that could affect investment in Canada — such as China’s recent policies to curb speculative real estate investment in that country — as evidence that Canada is operating in a fast-changing market that could be adversely affected by decisions made in other countries.

They suggest OSFI wants to know how big a factor foreign investment in Canada’s housing market is, and how big it is likely to become, so the regulator can measure the potential impact on banks if demand were to dry up.

“It’s something they are trying to get information on,” said a source close to the situation. “It’s not something they can find out so easily.”

Rod Giles, a spokesman for OSFI, said the regulator does not comment on specific supervisory actions, but he confirmed that the “housing market including real estate linked lending activities” is among a set of “emerging issues, risks and markets across the Canadian financial system” that is being monitored by the Ottawa-based regulator.

I'm not sure the concentration on foreign ownership is the biggest story. It might be for all I know but OSFI seems to be taking a much broader look at bank lending (and likely non-bank lending too, as much as it is able) to ascertain how at risk banks -- and households and government -- are to house price declines. It is interesting to look at what OSFI is likely looking for in terms of the Canadian housing market. Some reasonable possibilities are:

• Total exposure banks have to falling house prices.
• Whether certain regions are contributing to large distortions on banks' balance sheets.
• Whether foreign investors are playing a direct part in leveraged speculative activity.
• What exposure governments may have to falling prices.
• What exposure homeowners may have to falling prices.

OSFI is likely gauging whether banks will themselves be in distress if prices fall nation-wide or in certain regions identified as being in a speculative bubble (like Vancouver). On this front it does not appear so, at first glance. Banks have little exposure to high ratio loans due to the requirement for mortgage insurance. Lower ratio loans are typically on 5 year or less terms so, for the most part, loans can effectively be called before prices drop drastically.

OSFI is likely also determining how exposed the entire economy and the government will be to dropping house prices. CMHC-insured loans are required to have borrowers qualify at the posted 5 year rate even if they take a variable rate mortgage. However there is no explicit requirement that the same longer-term diligence is performed with low-ratio mortgages. According to a mortgage broker friend of mine banks will often qualify people at the variable or "blended" rate for TDSR/GDSR.

On this front, OSFI has some reason to be concerned for homeowners and the government. When rates rise, homeowners may have trouble qualifying at elevated rates. Banks will effectively call the loan on renewal, require mortgage insurance or, in some cases, foreclose or instigate a homeowner to sell on a short timescale for those who don't qualify at the 5 year mortgage rate. In this scenario, the mortgage market experiences a "squeeze" as few will be able to qualify at the higher rates and CMHC-insured loans increase in prevalence as borrowers see their equity vanish. Either way there is incentive for the government to step in with a higher level of guarantee or risks a replay of the credit squeeze of late 2008 and early 2009.

What could OSFI recommend? When it comes to reducing government exposure to falling house prices, OSFI would likely be looking closely at how well TDSR/GDSR for borrowers match up with the 5 year mortgage rate. If there is a discrepancy, I expect some arm-twisting to ensure banks' future loans of all terms can be smoothly transitioned to any other term length.

OSFI could also regiment lending in other ways; for instance, touted recently by Mark Carney in a recent paper (PDF) (hat tip commenter RP1 on The Economic Analyst), using countercyclical capital buffers (where banks are required to keep larger capital reserves when private debt ratios are elevated from their long-term average). It would certainly be embarrassing if the Bank of Canada's governor would preside during a situation of high private debt ratios, experience a subsequent house price crash and concomitant fallout, all without said beneficial countercyclical reserves in place.

See also:

Putting 贰 and 贰 together

Carney says a four letter word

A Tale of Two Vancities

The old adage is that markets are built on disagreement and in financial markets this is most certainly true when leverage is involved. Witness the latest "disagreement" between two mortgage lenders:

For best mortgage deal, move to B.C.

Mortgage rates are near all-time lows but for the best deal, move to British Columbia.

The province has Canada's most expensive housing but its residents are getting rockbottom rates thanks to a ferocious battle between B.C.'s credit unions and the banks.

B.C. home prices, Vancouver in particular, have long outpaced the rest of the country. The Canadian Real Estate Association said nationally home prices were up 8.9% in March from a year ago, but take out B.C. and the percentage shrinks to 4.3%.

The credit unions are another factor behind the higher prices in the province -loans from credit unions are as low as 3.64% on a five-year fixed rate closed mortgage. Canadians in other provinces, even hard negotiators, are lucky to get 4.19% from big banks...

But bond yields have dropped 30 basis points since April 11 and the banks have been slow to compensate for the situation, waiting to see if rates go back up. Mr. McLister says the banks raise rates more quickly than they lower them.

"We just have retail deposits and that's what we use for funding," says Norman Krannitz, vice-president of treasury of Coast Capital. "We looked at our deposits rates and they weren't going up so we decided to ride it out. We love the business we are getting."

Wow. Vancity is pulling out all the stops to get market share of BC's piping hot real estate market (well parts of BC's real estate market are hot, others not so much but that's a different story). How, then, does one square this with this announcement?

Home Capital ramps up uninsured mortgage lending

Home Capital Group made a strong return to uninsured mortgage lending in the first quarter, after scaling back considerably over the last year to avoid excessive losses from risky loans...

[CEO Gerald Soloway] said the company is being cautious when considering loans that will go toward properties in Vancouver or downtown Toronto, because the markets are showing signs of overheating. The company would rather lend in a stable market, than one that is posting swings in either direction.

So here we have two seemingly divergent assessments of Vancouver's housing market. On one hand, Vancity is aggressively offering mortgages, even fixed rate ones, to the mortgage market including those in Vancouver proper (one assumes). At the same time HCG is backing away from markets that they feel are in asset price bubbles. What's going on?

First we should point out that 5 year rates were on their way down -- yet again -- so we should expect a dropping of prime rates in the next month or so from the big 5 banks, barring any significant shift in debt markets. Nonetheless Vancity is financing 5 year rates from its deposits, not exclusively securitizing or duration-matching them as other lenders often do. HCG does something similar to Vancity in part but with a catch, that it is rated as investment grade BBB and not regionally-focused.

So on one side we have publicly-traded HCG with national exposure to mortgage assets and has its debts regularly rated and reviewed, so it seems reasonable there is some outside pressure to look more critically at certain regions of the country to assess default risk: bond analysts would certainly raise their eyebrows from behind those thick glasses if they didn't. Vancity, on the other hand, is primarily financed through BC-based deposits and is member-owned; it has more correlated exposure to mortgage default risk and deposit withdrawals, and by all accounts seems relatively unworried with the state of Vancouver's real estate market. Why would they? Is anyone even asking uncomfortable questions in the boardroom?

Does Vancity have some special insight into aggressively lending into Vancouver's real estate market, one where price-income ratios are among the highest in the English-speaking world, or is HCG raising a big red flag avoiding the "miracle" of Vancouver's housing market? We shall see!

Globe and Mail: no need to slow down housing market

I think this one ought to be preserved for posterity. From an editorial in today's G&M:

Housing is undoubtedly still in demand and interest rates are at historical lows, but there is no agreement that there is a bubble in the market. Canada was spared massive exposure to subprime mortgages, and the American experience is helping inform bank prudence north of the border. Meanwhile, Canadians are largely succeeding at keeping up with standard mortgages, despite the economic downturn; their capacity to meet future obligations will only increase once the downturn ends.

Moreover, Canada's regulatory regime is already doing well at keeping Canadians solvent and in their homes. Unlike in the United States, homeowners do not get tax deductions on their mortgage interest payments. The era of the no-money-down mortgage has faded in Canada.

It is certainly true that free-money fueled housing bubbles don't create problems for banks until they pop. But what may be less true is the contention that this one won't pop.

And BTW, why should banks be prudent when they unload the sucker mortgages on the taxpayer through CMHC?

It is stunning that so many people are blind to what is going on--when we have right in front of us in the US a giant example of what happens when you give free money to people to spend on houses. Hint--it doesn't end well.

Bank of Canada cuts lending rate to record low of 1%

From CBC:

The Bank of Canada on Tuesday cut borrowing costs to a record low as it warned the economy will shrink this year. In a further move to bolster the sagging economy, the bank reduced its key overnight rate by half a percentage point to one per cent. The bank has now trimmed 3.5 percentage points from the overnight rate since it started its latest cycle of cuts.Tuesday's cut reduced borrowing costs below 1.12 per cent, which had been the lowest point set back in 1958.

More rate reductions may also be in the offing, as the Bank of Canada said more stimulus could be needed to boost the sagging economy."Major advanced economies, including Canada's, are now in recession and emerging-market economies are increasingly affected," the bank said."Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence."

Bank sees recovery in 2010

The Canadian economy is expected to contract by 1.2 per cent in 2009, but the bank sees a recovery in 2010, when the economy is projected to expand by 3.8 per cent.Back in October, the bank projected growth of 0.6 per cent in 2009, and 3.4 per cent in 2010.The bank will provide more details on its outlook for the economy on Thursday, when it releases its Monetary Policy Update.

The bank also signalled that inflation fears have abated. The so-called core inflation rate is expected to fall to 1.1 per cent in the fourth quarter of this year, while the overall inflation rate is expected to dip below zero for two quarters in 2009 because of lower energy prices."With inflation expectations well-anchored, total and core inflation should return to the two per cent target in the first half of 2011 as the economy returns to potential," the bank said.

The major Canadian banks quickly moved to reduce their prime rates to three per cent. That differed from some of the past moves by the Bank Canada, when the big banks either delayed lowering their prime rates or did not pass along the full cut. The banks cited the tight credit markets as the reason why they were not passing along the cuts to customer borrowing rates.

Borrowing is getting cheaper if you can qualify and you are willing. It doesn't seem like the willing qualify these days and the qualified seem unwilling!

"Boring" Canada's Financial Tips for the World

Ottawa, November 13, 2008

From Finance Canada.

The following guest column by the Honourable Jim Flaherty, Minister of Finance, appeared in today’s Financial Times. In it, Minister Flaherty outlines Canada’s five-point plan to restore stability to the international financial system.

"The financial crisis that began 14 months ago in the US has intensified and spread around the world, threatening to roll back economic progress that has been made over the past two decades. Governments have been responding in a co-ordinated fashion and will continue this work in the lead-up to the summit of the Group of 20 leading economies.

"Few countries are as dependent on trade or as integrated into the global financial system as Canada. Yet our financial sector continues to weather the turbulence better than many other countries. This did not happen by chance. Canadians by nature are prudent and our financial system has been characterised as unexciting. Canada’s regulatory regime ensures that stability and efficiency are balanced. As a result, Canadian taxpayers have not had their money put at risk in response to this crisis. If Canada’s financial system is boring, perhaps the world needs to be more like Canada.

"Before we examine grand designs for global regulatory regimes, we need to recognise that good regulation begins at home. Effective national regulatory regimes could have prevented this crisis and must be our first line of defence against any future one. We all need to draw lessons from those systems that worked well and apply them to our national regulatory regimes.

"First, we need to regulate all pools of capital that rely on leverage. The crisis has demonstrated the devastating impact that unregulated entities can have. Transparency requirements must be the price of admission to global markets. Different financial services may have different regulatory requirements, but we need to bring them all under a regulatory umbrella.

"Second, capital and liquidity buffers need to be large enough to handle big shocks. Moreover, regulators must restrain overall use of leverage. Some have criticised high Canadian capital requirements for banks as being too conservative. But the strong balance sheets of Canada’s banks through this period speak for themselves.

"Third, it is not enough for regulation to look at individual institutions. It needs to look at the system as a whole. Risks that may appear sensible in isolation can be unsustainable from a systemic perspective. This systemic vantage point must be used to mitigate any tendency to underestimate risk when times are good. This requires co-ordination across the government, central bank and regulatory agencies.

"Fourth, we need to make market infrastructure more transparent and resilient. Non-transparent over-the-counter trades and naked short-selling reduced the stability of the system.

"This crisis has demonstrated that even countries with strong financial systems can feel the effects of inadequate regulatory regimes elsewhere.　Countries may hesitate to impose new requirements on their own institutions if these measures will create a competitive disadvantage. This points to the importance of the fifth step: strengthening international co-ordination, review and surveillance to create a better second line of defence. Canada was a pioneer of the joint International Monetary Fund-World Bank financial sector assessment program. This independent review of domestic financial systems should be mandatory and public. We need to strengthen the role of international colleges of supervisors to ensure better understanding of systemic risks and to co-ordinate national actions. We need IMF surveillance with teeth. Countries must live up to their responsibilities to support global financial stability and growth. Nowhere is this more important than in correcting global imbalances through appropriate exchange rate and macroeconomic policies to support growth.

"The process of how we make decisions is equally important. In two decades of unprecedented growth, we have seen the emergence of dynamic new economic players that must be full participants at the global table. Canada took one of the largest share cuts of any country in the recent IMF reform exercise to ensure that emerging economies are better represented. This broader range of voices must be heard in other venues such as the Financial Stability Forum.
"Together, these reforms must ensure that incentives are aligned to support stability and that resilience is built into the financial system.

"The open market system did not fail in this crisis. However, some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework. We need to work together to strengthen those frameworks, and that work must begin at home."

Canadian Banking - Up for Discussion

Video here. http://www.cnbc.com/id/15840232?video=926680705

TORONTO, Nov 12 (Reuters) - Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday. While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to C$75 billion from C$25 billion -- the federal government is actually making money on that program, TD Bank President and Chief Executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages from banks that a government agency has already guaranteed, he said. Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said. Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said. TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfill its business objectives, he said. The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said. But TD, Canada's second largest bank, would consider U.S. acqusitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said. He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.