An overlooked question in all the commotion about high consumer debt levels: What about the banks?
They are, after all, the prime source of the mortgages, lines of credit and credit cards that Canadians have used to build up record levels of household debt. While highly profitable, each of these lending products can be financially toxic to bank customers if used to excess.
Having the banks accept some responsibility for smarter borrowing is the main thrust of a report to be issued Friday by the Action Canada Task Force on Household Debt. Financed by the federal government and private philanthropists, the Action Canada program is designed to build leadership by bringing young adults together to attack problems of the day. The six-person debt task force has been meeting over the past six months.
To improve the ability of people to manage and repay debt, the task force proposes that the federal Department of Finance work with the banking industry to develop a mandatory code of conduct on lending. Part of the code would include tougher standards for mortgage applicants, and part would include tighter controls on lines of credit.
The task force consulted with bankers and found them open-minded about taking a role in addressing high debt levels, said Derek Dunfield, head of research for the task force and a visiting scholar in Behavioural Economics at the MIT Sloan School of Management.
"The one thing I consistently heard from each bank is that we definitely value this stuff, but we can't do it by ourselves," Mr. Dunfield said. "If we do, the other banks won't and we'll be competed out of existence."
That's where the Finance Department comes in. Mr. Dunfield said the task force believes that a push from government is the best way to get the entire banking sector to act together. "This is a perfect place for government to act," he said.
The banks are major players in Canada's debt story, but they're keeping their mouths shut about it for the most part. One of the few bankers to speak up was Toronto-Dominion Bank chief executive officer Ed Clark, who said in mid-December that it was up to government, not banks, to cool mortgage borrowing. That was two months after his bank revamped its mortgages to make it easier for clients to tap into their home equity (and harder to switch to another lender).
On mortgages, the task force recommends that the government go even further than it already has to safeguard people against borrowing too much. Specifically, it suggests that home buyers be tested for their ability to afford the higher interest rates that lie ahead. One option would be to see whether they can afford a mortgage with a higher rate than they're actually taking, a step that is already used by financial institutions for people who want variable-rate mortgages. Another option would be to ensure buyers can afford a 25-year amortization (they could still choose 30 years if they want).
The task force is particularly concerned about lines of credit, which it blames for fuelling almost all growth in borrowing in recent years. It wants banks to:
Offer people a default monthly payment on their line of credit that is higher than the current minimum of just the amount of interest owing;
Stop pre-approving people for credit products or increasing their existing credit limits without being requested to do so by a customer; and
Consult with borrowers to see whether they might get their debts paid off sooner with a loan as opposed to a credit line (loans would have higher interest rates, but credit lines don't ever need to be paid off).
Changing the culture of borrowing is another focus of the task force report. It suggests providing tools that promote saving and debt repayment, and a public education campaign along the lines of one that has proved effective at changing borrower behaviour in New Zealand.
The Action Canada task force was financed in part by the federal Heritage Department and has nothing to do with the Task Force on Financial Literacy that was commissioned by the Finance Department and issued its recommendations earlier this month.
Mr. Dunfield thinks the literacy task force placed too little emphasis on debt. "They pushed for savings, but $1 in savings is a lot less effective than $1 going against your debt. Interest rates on debt are usually higher than what you can get on savings."
That's a good tip, but we've heard it before. What we haven't heard is a plan for bringing the banks into the debate about high household debt levels. In presenting one, the Action Canada task force has done some good work.
Feeling the pinch
Facts and figures on debt from the report of the Action Canada Task Force on Household Debt:
Total household debt is about $1.5-trillion, or three times the national debt.
Personal spending on consumer goods and services accounts for 58 per cent of GDP.
Canada's debt-to-disposable income ratio surpassed that of the United States for the first time since the late 1990s in the third quarter of 2010.
One in 10 Canadians is not financially secure enough to be able to handle a surprise expense of $500.
63 per cent of Canadians feel their debt limits their ability to achieve financial goals for retirement and going back to school.
More info: debtcrunch.ca
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