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The heart of Toronto’s financial district at King and Bay Streets.

KEVIN VAN PAASSEN/THE GLOBE AND MAIL

The Fitch ratings service says it believes Canada's big banks can likely withstand a moderate to severe housing downturn – but they would feel the pinch.

The Chicago-based service says Canada's biggest six banks – TD, RBC, Bank of Montreal, CIBC, Scotiabank and National – all have equity ratios well above what is required under the new Basel III requirements.

But the U.S.-based rating service says a housing crash in Canada would push down those ratios as the value of their mortgage assets plunge in relation to their considerable loan levels.

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In fact, Fitch says, it's because Canadian home values have been rising in the last seven years despite a soft economy that the six banks have been able to appear so financially sound, as their rivals in the U.S. and Europe have struggled.

Fitch also says loan-to-value ratios can reverse quickly during a housing correction.

"Fitch generally believes that Canadian home prices are likely nearing a plateau and could exhibit some weakness over a medium-term time horizon," the rating service says in an assessment issued Tuesday.

"We believe a sharper than expected correction would flow through to higher (risk-weighted asset) levels, thereby putting further pressure on regulatory capital ratios at a time when rising credit losses will likely hurt retained earnings."

Still, Fitch concludes the banks' capital buffers will be adequate to withstand a moderate to severe real estate price shock.

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