Canadian bank regulators are jumping into action to contain economic risk. The Office of the Superintendent of Financial Institutions (OSFI) made emergency changes last week in response to COVID-19. These changes include dropping the update to the mortgage stress test, lowering domestic stability buffers, and asking banks to halt share buybacks and dividend hikes.
Mortgage Stress Test Changes Suspended
First off, uninsured mortgage stress test changes next month are now suspended. A few weeks ago, OSFI announced the benchmark rate used for testing would become more “responsive.” This change would see the benchmark based on real world lender rates, instead of posted rates. The impact would have been uninsured mortgage borrowers would have access to more capital, starting April 6, 2020.
Changes are now on pause, due to a rapidly changing environment for investors. The Bank of Canada’s surprise rate cut last week may lead to drastically lower rates as is. Regulators don’t want to compound issues, until it’s clear whether the market can handle the drop. Also worth a note is, the overnight rate was cut, but lenders have yet to pass it on. In fact, some banks have actually hiked fixed rates since the announcement.
Domestic Stability Buffer Hike Cancelled, and Cut
The domestic stability buffers (DSB), required by domestic systemically important banks (D-SIBs), has been dropped. D-SIBs are banks required for the country to operate. Since they’re so important, regulators ask them to put aways a DSB in addition to regular capital buffers. In a liquidity crunch, regulators can lower the DSB to help provide liquidity. This allows them to free up extra capital, while not impacting their stability. As of April 30, 2020, banks were supposed to see their DSB hiked to 2.25% of their risk weighted assets.
The hike is now cancelled, and it came with a cut to inject a lot of emergency capital for D-SIBs. The rate was immediately lowered to 1.25%, which OSFI estimates injects $300 billion in additional lending capacity. They also committed to not increasing the buffer for another 18 months at least. This is a huge liquidity injection to facilitate loans.
Asked To Halt Share Buybacks and Dividend Cuts
OSFI is also asking banks to halt share buybacks and dividend hikes. The request is to ensure banks are passing on the lending liquidity to households and businesses, instead of using the capital to entice shareholders. OSFI has expressed this request will remain in place until economic conditions improve… which could be a while.
There’s plenty of liquidity, and Canada’s lenders appear to be flush with capital. They are reserved in passing this liquidity onto already indebted households though. OSFI’s requests might force them to pass on the liquidity to borrowers. However, will people want to take out a loan in an environment where regulators are trying to force loans?
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Essentially no economy but grocery for two months. It doesn’t matter how much the government promises aid right now, they won’t be able to effective replace the income lost.
Real crap storm we’re looking at.
Scotiabank hiking fixed on a rate cut was the most surprising thing I’ve seen in a long time. I still expect a prime cut this week to reflect the changes to the overnight, but I’m guessing they’re only going to pass on 30 bps or so instead of the full 50bps.
It seems you don’t know how the rates work. The BoC rate only affects variable rate mortgages, whereas the bond market dictates fixed mortgages.
Are you thinking of something else? Bond yields are directly impacted by the direction of monetary policy, which dictates fixed mortgages.
So it is unusual for the overnight rate to decline, while yields rise. Especially for mortgage bond yields, since they’re generally government backed with little risk.
No in this case it is not, as the US fed cut and QE was specifically put in to ease up the bond market and provide liquidity… this is not a normal situation here.
The Fed has cut the Fed rate to zero. Is this a good sign?? The Fed has lost control of the economy and is panic mode. This will be reflected in the public and the markets.
The real question is what next..? The Fed has nothing left in it’s tool box, except to print endless amounts of dollars to try to reinflate the economy..
Not a good thing.. My guess this is the end of the US dollar.
Hope every one still has a job in 2 weeks..as it looks like the virus will taker down 50% of the world economy..
The Fed has lost control and is in panic mode? Re-read your comment. I haven’t read many comments in as big a panic mode as yours.
1. The CAD to USD is sitting at 72 cents. The Euro was sitting at 1.14 recently, but has dropped back down to 1.12. Yen was at .0097 recently, but now back down to .0094. There’s nothing pointing to the USD crashing out at this point.
2. People are not simply going to lose their jobs within 2 weeks. Will they have issues paying for their mortgages this month? Maybe. But a company is not simply going to fire people after 2 weeks.
3. Where’s this ‘virus will take down 50% of the world economy’ coming from?
Let’s just look at the fatality rate of this virus. For those who contract the disease, those over 80 have a 14.8% fatality rate. 70 – 8.0%, 60 – 3.6%, 50 – 1.3%, 40 – 0.4%, 30/20/10 – 0.2%
To further put things into perspective, up to March 14th:
Covid-19 – 121,061 cases – 4,368 deaths – 3.9% fatality rate – 113 countries
Ebola – 33,577 cases – 13,562 deaths – 40.4% fatality rate – 9 countries
SARS – 8,096 cases – 774 deaths – 9.6% fatality rate – 29 countries
Take a quick look at the numbers so far. Clearly this is bad for seniors (over 70), but all others shouldn’t be too worried.
I don’t mean to undercut the situation, but you’re way overboard.
As well, take a look at other things happening in the world. The virus is affecting this swoon, but there are likely other things happening in the world that are contributing to the situation. Don’t attribute all this to a virus. And one that pales in comparison to the effects of a virus such as the Ebola virus.
The virus has just lit a match on overall poor credit conditions. The actions of the Fed so far are on a much larger scale than what happened in 2008-2009 already. This is a Great Depression level and speed of decline though. As far as mass layoffs, that would occur mid April at the latest if current conditions exist. I will wait until April 6th to see where we are Corona wise but this feels more like a cover for another fleecing of the public by Wall Street while people are distracted by a deadly virus.
German auto manufacturers just closed their assembly plants.
German comp. have a different requirements to labour, but how long before factories are forced to close across Europe and N. America.
To suggest that 50% of the world’s economy could be affected is maybe an understatement.
When has the Fed rate ever been Zero, after 3 rate drops in a week..If that is a panic I certainly don’t know what is…
The only action the Fed has is now to print endless amounts of US dollars.. In 2008 they printed some 13.5 trillion after numerous bailouts.
What will it take this time??
The real problem is the bond market,, The corp. bond market froze up last week and without liquidity corp. world cannot roll over maturing debt and refinance a new issue. This results in corp. bankruptcy..Not just the corp. bond market but US cities have bond issues along with school districts and municipalities. All these require bonds to be rolled over.
The effects of this rests solely on the stability of the US dollar and the international response to maintaining the dollars value, all this while their own currency is under pressure.
How irresponsible from bank of canada try to pump up the price of already inflated of housing.
Don’t worry.
It will not work
The people they could not afford the housing price even before now the Bank of canada is going to pull in more people in crises. .
https://betterdwelling.com/city/toronto/toronto-households-are-going-broke-fast-insolvencies-rise-18/?utm_source=Better+Dwelling+Website+Signup&utm_campaign=34be195331-fras_jan_112018-3094981_COPY_01&utm_medium=email&utm_term=0_bde8feedee-34be195331-309124101
Real estate prices may rise due to reduced economic activity in other sectors of the economy. Investors will be feeling equities for the relative safety of condos despite the fact that price appreciation may slow slightly in 2020.
That’s absurd. We are right in the middle of best part of the year for real estate and we are at the beginning of Social Distancing. You want strangers tracking through your home? You want to be going to open houses? The government is literally saying not to do this. You think people are going to purchase in a survival mode the government is scaring people into. On top of that we were spiking higher leading into this so there is nowhere to go but down with a recession coming.
This is some epic retardation right here.
OSFI is bunch of JOKERS running the shit show..
SEP 2019: “The index (BDO Affordability Index), which examines how affordable life is in Canada, shows that:
– 53% of Canadians are living paycheque to paycheque
– 25% say their debt load is overwhelming
– 27% don’t have enough for their daily needs.
On top of that , Canadians have a minuscule saving rate!
This recession will bury tons of Canadians, government can try, but they cant save the patient, too sick!