OTTAWA (Reuters) - The head of Canada’s banking regulator said on Wednesday that his biggest worry is whether there are current warning signs of impending problems that regulators are missing.
Financial crises and major institution failures often follow a narrative of displaying warning signs that were either not seen or ignored, said Jeremy Rudin, head of Canada’s Office of the Superintendent of Financial Institutions (OSFI).
“That’s the thing that bothers me the most - is there something right now that is staring us in the face but we don’t see it? And that’s a question that I ask myself constantly,” said Rudin, who was speaking before a Senate committee on banking.
The risk that regulators will not be able to spot the problem areas ahead of time means having enough capital and liquidity in institutions is an important generic protection that is not scenario dependent, Rudin said.
“If you’ve got a lot of capital you can absorb losses, and you can absorb whatever loss there is,” he said.
Canada’s hot housing market and high level of household debt have sparked worries the country could be headed for a U.S.-style market crash, though policymakers have repeatedly said mortgages in Canada are of a better caliber than the ones that were available in the United States.
While there is a big exposure in the Canadian financial sector to the housing market, that type of exposure is usually found in every financial sector, Rudin told Reuters following his Senate appearance.
Having the risk management, capital and liquidity to back up that exposure means the regulator will not need to rely on forecasting what the housing market is going to do, he said.
“We have to be prepared for a negative, plausible but nonetheless quite negative scenario, and we feel we are,” Rudin said.
Reporting by Leah Schnurr and Randall Palmer; Editing by Lisa Shumaker