OTTAWA (Reuters) - The recent liquidity strain at Home Capital Group (HCG.TO) highlighted the vulnerability associated with overreliance on less-stable funding sources, but the alternative lending sector is a business that works, the Bank of Canada said on Thursday.
In its semi-annual Financial System Review, the central bank said the market largely viewed the alternative lender's situation as "idiosyncratic to" Home Capital, and Governor Stephen Poloz later defended the sector as one which provides an important service.
"There are lots of folks out there who are self-employed or have recently moved to Canada, other cases where they just don't have the paperwork it takes to walk in and be approved at a bank for a mortgage in 60 seconds because they don't fit the template," Poloz told a news conference.
"So this alt-lending sector does an important service, it fills that space ... and as you can tell from the stats that have been published, they have very, very low default rates, so it's a business that works."
Home Capital, which accounts for about 1.5 percent of Canadian mortgage lending, was Canada's biggest non-bank lender and typically the first port of call for would-be borrowers who did not meet banks' more stringent lending criteria.
The rapid withdrawal of deposits at Home Capital beginning in April coincided with allegations by the Ontario Securities Commission that the company failed to adequately disclose a 2014-2015 review of mortgage origination business partners and underwriting processes, remediation actions and associated effects on business operations, the bank said.
The company has said the accusations are without merit.
The central bank said depositors were sensitive to information about the lending industry amid rising household indebtedness and housing market imbalances - the two biggest vulnerabilities to Canada's financial system.
"This focus was particularly acute for HCG because its main business is mortgage lending to borrowers who do not meet all the lending criteria of traditional financial institutions," the bank said.
It added that federal financial sector authorities are "working collaboratively" to monitor HCG, which said in late May that it continues to work on developing longer-term liquidity solutions.
"Market participants have remained confident in the capital and liquidity position of other Canadian lenders," the bank said in the review.
Lenders not supervised by Canada's main financial regulator account for around 15 percent of new mortgages in Canada, and Home Capital's near-collapse six weeks ago has seen some of them inundated with more new business. [L1N1IV0JA]
Reporting by Andrea Hopkins; Editing by Cynthia Osterman