A move by major banks to securitize government-insured mortgages may be exacerbating the buildup of household debt in Canada, a top Bank of Canada official says.
Canada has seen a doubling of securitized mortgages in the past five years, deputy governor Timothy Lane warned in a speech Wednesday to financial analysts in Toronto.
“A key concern is the potential misallocation of resources away from non-mortgage lending toward mortgage credit – which, in the current economic environment, contributes to the buildup of imbalances in the household sector,” he said.
When mortgage funding is funded by debt securities, rather than deposits, “it moves lending away from its traditional on-balance-sheet model,” Mr. Lane added.
Securitized mortgages are part of the so-called shadow banking sector – financing that operates outside the tightly regulated banking industry. Shadow banking is still relatively small in Canada, equal to roughly 40 per cent of Canada’s gross domestic product, against 95 per cent share in the U.S.
Mr. Lane also said regulators need to keep a close eye on specialized mortgage lenders. “While their small size suggests that they do not pose a systemic risk, they do involve elements of shadow banking risk that call for careful monitoring,” he said.