TORONTO (Reuters) - Canada’s banking watchdog is increasing its scrutiny of the consumer loan sector to make sure the country’s banks don’t lower their standards to boost lending volumes.
“What we are doing is stepping in to increase the monitoring of that portfolio,” Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), said following a speech in Toronto on Monday.
Canada’s banks are considered among the strongest in the world, but they are facing the prospect of prolonged low interest rates, which narrow the margins they make on loans and mortgages.
Narrow margins pinched the banks’ profits in the most recent quarter, but that was partially offset by stronger lending volumes.
Canadian Finance Minister Jim Flaherty recently tightened mortgage standards, and Bank of Canada Governor Mark Carney has warned about consumer debt levels, saying that a sudden rise in interest rates could be catastrophic for overstretched borrowers.
Dickson said Canada’s big lenders have been prudent in their practices so far, but she warned against letting standards slide, by raising loan-to-value ratios, for instance, or waiving due diligence requirements.
“I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen those standards,” she said.
“It’s kind of an early warning on the part of OSFI.”
As banking regulator, OSFI is responsible for implementing global regulations agreed on by the Basel banking committee.
Lenders are phasing in more stringent capital and liquidity rules beginning in 2013, and global regulators will soon release a list of “too big to fail” banks that will face even tighter standards due to concerns their collapse could imperil the global financial sector.
Dickson told reporters that no Canadian bank is on that list of 28 lenders.
However, some worry that OSFI may apply tighter standards to several Canadian banks, determining them to be “too big to fail” on a national basis.
Canada’s banking sector is dominated by five large lenders.
“This is still the outstanding question,” said Terry Campbell, head of the Canadian Bankers Association, an umbrella group of Canadian banks.
“It remains to be seen what will happen on a national level.”
Reporting by Cameron French; editing by Peter Galloway