Some of you may have heard that there are some changes coming in the mortgage industry that could end up costing you more. I just wanted to give you all a very brief overview of the changes that are coming, however the costs associated with this are still relatively unclear.
The Canadian government regulates banks, credit unions, trust companies, etc. through the Office of the Superintendent of Financial Institutions or OSFI. The best description of what they do is within their mandate noted on their website…
“OSFI acts to protect the rights and interests of depositors, policyholders, financial institution creditors and pension plan beneficiaries while having due regard for the need to allow financial institutions to compete effectively and take reasonable risks.”
This basically boils down to protecting Canadians from a similar mortgage crisis that the US experienced starting in 2007. No small task as what happened then had ripple effects globally for years.
Among its many rules and policies, OSFI has what is called a Capital Adequacy Requirement (CAR) guideline that dictates the ratio of a bank’s capital to its risk. In simple terms it is similar to what a water reservoir is to a city. A federally regulated guideline to make sure that there is a healthy reserve on hand in case of a drought or in this case financial loses. Under the proposed new guidelines this amount is not expected to increase by very much. However what is new is the “countercyclical buffer” policy. This allows OSFI to continually monitor the markets and have the banks put aside more capital if the markets start to become abnormally volatile. To extend the metaphor, start rationing water well ahead of when the reservoir starts to run dry.
These changes were introduced as a proposal and open to public consultation until October 18, 2016. That being said however, these changes are to come into effect on November 1, 2016 for the big banks. I will let you decide what “open to public consultation” means with these dates already set in stone.
The money to set aside certainly will not be coming from bank profits, but it still remains to be seen how much this will really cost Canadians in the long run. It will be difficult for the average consumer to see these costs as they will disappear into slightly higher borrowing costs and less return on your investment dollar. Even so, I am sure that it will be a small price to pay to ensure our national financial well being.
This is a very basic outline but if you are interested in learning more, please let me know and I will send you links to many good industry articles that go into this in more depth.