Canada might be in the middle of a second wave of COVID-19, but that doesn’t mean a federal banking regulator is about to enable a second wave of deferred mortgage payments.
Superintendent of Financial Institutions Jeremy Rudin said Friday that, in the early days of the pandemic, banks and insurers had to be in a position where they could make “almost blanket judgments” on granting loan and premium payment deferrals.
The Office of the Superintendent of Financial Institutions (OSFI) allowed those deferred loans and premiums to be treated like they were still being paid for up to six months, which meant the banks and insurers avoided having to set aside more capital.
Six months in, though, Rudin said his office believed the financial industry was ready to go back to a case-by-case basis for its deferrals. OSFI announced at the end of August that it would phase out the special capital treatment for deferrals, and the regulator is not currently planning on reversing that decision, despite a second wave of COVID-19 cases hitting Canada.
“Obviously, if we get into a situation where blanket decisions again are required then, of course, we’d have to consider making a further change or perhaps reversing our previous decision,” Rudin said Friday during a conference call with reporters. “But that’s not the situation in which we find ourselves.”
Yet Rudin’s comments come as Canada’s COVID-19 cases have been shooting up again, prompting some governments to reimpose restrictions on certain businesses, and as a number of borrowers are still deferring loan payments. Meanwhile, loan and premium payment deferrals granted after Sept. 30 are no longer subject to OSFI’s special capital treatment.
Still, OSFI said in August that the decision to wind down the special treatment reflected that the measures were meant to be temporary, and that the financial institutions were still free to grant deferrals on a case-by-case basis if they so chose. According to the Canadian Bankers Association, more than 778,000 people had been allowed to defer or skip their mortgage payments as of the end of August, with approximately 32 per cent of those people having resumed repayment.
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“There’s nothing that prevents banks from continuing to offer deferrals,” Rudin said. “We’re just phasing out the extraordinary capital treatment because it’s no longer necessary.”
Rudin’s comments on Friday also came after the regulator and the Bank of Canada had just finished hosting a virtual get-together for financial watchdogs, the International Conference for Banking Supervisors.
Although the conference allowed regulators to talk shop and discuss various trends in the banking sector, there was at least one note of caution about the loans that financial institutions are currently sitting on. A keynote speech given by Pablo Hernández de Cos, the chair of the Basel Committee on Banking Supervision and the governor of the Bank of Spain, warned that it was only a question of “when, not if,” asset quality at banks would worsen during the pandemic.
“A resurgence in COVID-19 cases coupled with the unwinding of support measures could further magnify the crystallization of bank losses,” the governor said, according to a copy of his speech. “The mutation of this crisis into a banking one would be devastating.”
Yet so far the watchdogs of the international financial system see their job as having been done pretty well. And unlike the global financial crisis a decade ago, the COVID-19 crisis didn’t emanate from banks, which have also been called upon by governments to help deliver assistance to hard-hit people and businesses.
“All the supervisors around the globe have demonstrated flexibility and responsiveness in maintaining the important balance between bank resilience and the need to keep credit flowing to companies and households to support their resilience,” said Carolyn Rogers, the Basel Committee’s secretary general and a former OSFI assistant superintendent, during the conference call with reporters.