As reported on Reuters, Canada’s main financial regulator is coming under increasing pressure from banks and mortgage industry lobbyists to ease a stress test designed to cut out risky lending, but the regulator is expected to hold off on changing the rules, three sources with direct knowledge of the matter told Reuters.

Proponents of a change say easing the terms of the test would alleviate a housing slowdown and stem the flow of borrowers being pushed toward loosely regulated private lenders but one source with direct knowledge of the matter said the regulator is reluctant to meddle with a test it introduced only 13 months ago.

The Office of the Superintendent of Financial Institutions, Canada’s main financial regulator, introduced rules last January requiring banks to test borrowers’ ability to repay mortgages at an interest rate 200 basis points above their contracted rate.

The stress test was part of a range of measures, known as B-20, designed to ensure banks maintained vigilant mortgage underwriting standards at a time of red-hot housing markets in Toronto and Vancouver.

Canadian Imperial Bank of Commerce’s Deputy Chief Economist Benjamin Tal said he supports the principle of a stress test but believes it should be flexible and adjusted to account for interest rate moves and market conditions.

“It’s not something that has to be set in stone. It should be more dynamic,” he said. “You have to assess the damage to the housing market, whether that damage is too severe, and what other forces in the market are leading to slower growth.”

However, since its introduction, markets have cooled, with sales falling in each of the last four months of 2018 and the average price of homes falling in the final three months.

That has led to calls to review the test, taking into account the impact of three interest rate hikes last year as well as other measures including foreign buyers’ taxes in Toronto and Vancouver.

Keep reading on Reuters

 

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