Strong, but not invulnerable

Canadian banks

Ever since the start of the global financial crisis the government of Canada has boasted about the strength of the country's banks, gleefully pointing out for five years running that the World Economic Forum has pronounced the Canadian financial system the strongest in the world. It may be strong, but it is not invulnerable. On October 26th, Moody's, a big ratings agency, said it was reviewing six of the largest Canadian banks with an eye to downgrading their credit ratings.

Two of Moody's big concerns are soaring consumer-debt levels, which a recent revision by Canada's national statistics agency revealed to be worse than had been thought, and high house prices, which paused briefly during the 2008-09 recession before resuming an upward march that has taken some markets into bubble territory. Exposure to what Moody's called "volatile capital markets businesses" was also given as a reason for reviewing Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Toronto-Dominion Bank and Caisse Centrale Desjardins (Royal Bank of Canada was the only big bank not on the list).

Moody's is not the only one worried about the willingness of Canadians of all ages to pile on record amounts of debt. Mark Carney, governor of the Bank of Canada, the central bank, has been warning his countrymen for more than a year that debt-fuelled economic growth is unsustainable. Yet the central bank has contributed to the problem by keeping its benchmark interest rate at 1% since September 2010. Aspiring homeowners found low mortgage rates too tempting to resist. Mr Carney maintains that while raising rates now might stem the borrowing binge, it would put other parts of the economy at risk. It would also put upward pressure on an already high Canadian dollar that is trading around parity with the greenback. Only after all other policy levers have been used, including recent moves by the government to tighten mortgage conditions, would he be inclined to use monetary policy to address the problem, he says.

The banks have also had a hand in pushing the ratio of household debt to disposable income, a measure of the ability to repay debt, up to 163.4 in the second quarter of this year from 109.3 a decade earlier (see chart). Aside from issuing ever larger mortgages as housing prices rose, the banks made it easier for owners to borrow against the value of their homes using secured personal lines of credit (PLCs). An analysis by the Bank of Canada pointed to this as one of the main reasons why debt levels have soared. "In 1995, secured PLCs represented about 11% of consumer credit; by the end of 2011, this share was close to 50%," the analysis said.

Housing sales have softened recently, but prices continue to climb. It is not at all clear that Mr Carney's warnings have sunk into the public consciousness. The Globe and Mail, which prides itself on being the national newspaper of record, recently ran a how-to article explaining how recently discharged bankrupts with a bad credit rating could still get a mortgage. The big banks are forecasting a soft landing in the housing market, but with so much at stake they have a biased view. Still, even if the landing is harder and bumpier, Canada is unlikely to experience the same kind of financial havoc that happened in the United States when its housing bubble burst. Subprime mortgages are only a small part of the market and homeowners who do not have a 20% down payment on a house are required by law to buy mortgage insurance. However, Moody's is worried enough to start its review. David Beattie, a vice-president at the company, said even if the ratings are downgraded, the Canadian banks would continue to be among the highest-rated banks globally. But Canada would lose some of its bragging rights.

Банки Канады

Дата добавления: 2015-11-14