Skip to main content

Jeremy Rudin, new OSFI head, speaks at the Economic Club luncheon in Toronto.MARK BLINCH/The Globe and Mail

Canada's banking regulator is washing his hands of the idea of forcing banks to assume more of the risks from their mortgage businesses.

Jeremy Rudin, who took the helm of the Office of the Superintendent of Financial Institutions this summer, says it would be up to the Finance Minister to make any such changes.

"This is an initiative that really belongs to the government as a whole," he said when asked on Tuesday what he thought of the idea. Mr. Rudin was speaking to reporters in Toronto after delivering a speech to the Economic Club of Canada in which he laid out his thoughts on the challenges of supervising financial institutions.

"It's something that, if there's an interest, it would be an issue for the Minister of Finance to lead," Mr. Rudin said about the notion of forcing banks to have more skin in the game when it comes to from their mortgage lending.

The concept has been talked about for a while, but it has received more attention of late. The Organization for Economic Co-operation argued in favour of it in a report in June, saying that lenders should have to take on more of the risk from the home loans that they make. The OECD noted that in other countries with mortgage insurance, the insurance tends to cover 10 to 30 per cent of the losses, and it suggested imposing a deductible.

In Canada, federally regulated banks must buy mortgage insurance when they sell a mortgage to someone who has a down payment of less than 20 per cent (in practice they pass the premiums along to the mortgage borrower). The insurance – which is sold by three insurers: Canada Mortgage and Housing Corp. (CMHC), Genworth Canada and Canada Guaranty – makes the bank whole if a mortgage borrower defaults. The concern from groups such as the OECD is that such a system gives the banks an incentive to lend riskier mortgages than they otherwise would.

Evan Siddall, the chief executive officer of CMHC, said in June that the concept of a deductible is a "pretty good idea," and Finance Minister Joe Oliver said at that time that it was something that could be looked at. Mr. Siddall reiterated in a speech about two weeks ago that CMHC is evaluating "risk-sharing with lenders to further confront moral hazard" and is advising the government about its thoughts. Mr. Oliver then suggested that this is something that will be looked at in the longer term, and that he doesn't want to do anything too soon or make any dramatic changes. "Obviously it's one of the things one looks at, but I don't want to signal we're doing anything," he told a Bloomberg News reporter in Australia.

While it would be up to Mr. Oliver to make any legislative changes that require all three mortgage insurers to impose a deductible, CMHC could, in theory, go it alone and choose to make changes to its own insurance. It would undoubtedly lose market share if its two rivals didn't follow suit. The question is how much.

Mr. Siddall has made it clear that he actually wants CMHC to have less power in the market. At the moment, the Crown corporation commands the majority of market share, and so it is a price setter – Genworth and Canada Guaranty tend to adopt the premiums that CMHC sets for mortgage insurance.

"Our task is to define a strategy for CMHC that preserves our buffering role in a crisis, while not assuming so large a market presence that we distort pricing to consumers," Mr. Siddall said in his September speech.