Toronto's skylineMARK BLINCH
The biggest Canadian banks are going to feel the pinch of new rules further limiting their access to government mortgage insurance where it really hurts – their ability to pile up easily sold assets to meet new regulatory requirements for liquidity ratios.
International banking regulators are demanding that banks start to hold enough liquid assets to cover all their funding needs for 30 days. The idea is that when funding markets shut down, as they did during the financial crisis, banks will be able to keep running for a month even with no way to tap markets for new money.
It's not clear when Canadian banks will have to comply, but the expectation is that this country will do what it always seems to do: force our banks to meet the standards before anyone else. That may mean the banks will have to be ready by 2015.
One of the asset classes that qualifies as "liquid" is National Housing Act Mortgage-Backed Securities (NHA MBS). Those are bonds created by bundling together mortgages, and which are backed by government guarantees. As The Globe and Mail reported Tuesday, the government has moved to sharply limit the guarantees that will be available to banks and other lenders.
One effect, as the story explains, is likely to be higher mortgage rates that may slow housing price gains, a government goal. Banks get good prices when selling securitized mortgages, enabling them to lend more cheaply than if they cannot securitize those mortgages.
Another big effect will be on the banks' attempts to meet the liquidity requirements.
A glance at the liquid assets sections of bank disclosures shows how much they have been depending on NHA MBS as a source of liquidity. At the country's two biggest banks, the amount of NHA MBS sitting on the balance sheet has soared as it has become clear that the liquidity requirements are going to hit soon.
Royal Bank of Canada's disclosure showed the bank held $24.6-billion of NHA MBS in its liquid assets category as of the end of the most recent quarter, up from $17.4-billion six months before. That's a 41-per-cent increase.
Toronto-Dominion Bank's NHA MBS stockpile jumped 30 per cent to $40.5-billion, from $31.1-billion, in the same period. TD's NHA MBS account for about a fifth of its liquid assets.
The need for increased liquidity is a "huge incentive" for banks to stockpile NHA MBS assets, said Peter Routledge, an analyst at National Bank Financial.
The new international liquidity proposals came at the same time as bank treasurers, who had the "fear of God" put into them during the financial crisis, were already pressing to have more liquid assets on hand. The double incentive, Mr. Routledge said, fed the spike in mortgage-backed securities that led to the government crackdown.
"They [treasurers] are not taking advantage [of government guarantees] in any way," Mr. Routledge said. "That was just treasurers being smart and taking liquidity."
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)
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