BoC to invite smaller institutions to the fold

Amid a slowdown in the national housing market, with sales falling 3% year-over-year in April and prices growing at their slowest rate in almost 9 years, the Bank of Canada has stated that it will be focusing on smaller lenders to allay potential risk factors.

Chief among the BoC’s planned steps is the expansion of its in-house stress testing to cover smaller financial institutions and mortgage insurers in its scope.

“The Bank is looking at the possibility of including a larger number of financial institutions in its simulations,” a spokeswoman stated in an email to The Wall Street Journal.

Said institutions include lenders that lie outside the purview of the current federal regulatory regime. Although the BoC itself isn’t a regulator, it still keeps an eye on financial institutions as part of its mandate is to evaluate the stability of the national financial system.

The move came as tighter mortgage rules continued to propel the growth of some of these smaller lenders by pushing an ever-larger number of borrowers towards alternative lending avenues.

Read more: Canadian banks’ earnings not suffering from housing slowdown, for now

The BoC has yet to specify which institutions it will be including in its stress-testing, although it did note that among the more important contributors to stability are small banks, credit unions, investment funds, and trust companies.

“The failure of one or more of these entities could have adverse financial and economic spillover effects,” the BoC said back in 2014.

Capital Economics economist Paul Ashworth said that while it makes sense for the BoC to broaden its range of industry players to examine, it might prove challenging for the central bank to get clear financial details of less regulated institutions.

“Unless you’re going to go through all their balance sheets and talk about what possible default rates these different firms could accumulate, I think it would be very hard to model that accurately,” Ashworth explained.

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