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(Igor Mazur)
(Igor Mazur)

Streetwise

Why banks don't fret about household debt Add to ...

For all the talk about Canada's sky high household debt loads, you don’t see much action from Canada’s banks. In fact, for a brief moment there, Bank of Montreal led a charge that forced a number of them, including Royal Bank of Canada and Toronto-Dominion Bank , to lower their mortgage rates below 3 per cent.

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The laissez-faire attitude has prompted outrage. How can they encourage borrowing when Canadian households’ ratio of debt to personal disposable income was last pegged at a high of 152.98 per cent?

Take a look at the banks' portfolios, as outlined in a recent Moody's report, and you’ll understand why. For credit cards, Canadians' payment rates are much, much better than the U.S. and the U.K., and have been for the past decade. As for mortgages, the percentage whose payments are 90 or more days past due is quite low -- and even lower than the peaks at two different periods during the 90s. On top of that, the banks insure these mortgages to offset losses.

Of course, this doesn’t make endless borrowing right. Everything may look good now, but the situation can very quickly deteriorate. As seen in the U.S. during the crisis, pretty much everything is correlated. Go through a big bout of unemployment, and suddenly credit card and mortgage payments become a big problem at the exact same time.

Yet the banks have trouble acting on their own to prevent such a situation. If, say Scotia , were to hike its mortgage rates to deter borrowing, the other banks have no reason to follow suit. There just isn’t any urgency because their mortgage portfolios are all in good shape. And the banks can’t exactly come together on their own to hash out a plan because that would be collusion. That’s why you hear calls from people like TD's Ed Clark to get the government to consider tightening the mortgage requirements once again.

Still, in residential mortgage land, the percentage of loans whose payments are 90 or more days past due rose to only about 0.45 per cent during the crisis, according to the Canadian Bankers Association, and has since fallen to about 0.4 per cent. (Keep in mind that arrears of 90+ days are the worst kind, because they’re the most likely to be written off by the bank.) Twice in the 90s, this rate hit about 0.65 per cent, showing just how much better things look today.

As for credit cards, Canadians’ principal payment rates have been remarkably steady for the past decade. Over the eight years leading up to 2008, the payment rate averaged 33.4 per cent, according to Moodys, and during the crisis period of 2008-09, it only dropped to 30.6 per cent. For much of the past decade, payment rates in the U.S. and U.K. were in the 16 to 20 per cent range.

Of course, Canada saw some stress, and there was a big spike in credit card delinquencies in 2009 and 2010, but they have since come way down. Charge offs are now just north of 3 per cent, and the average for the decade before the crisis wreaked havoc was about 2.5 per cent.

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