Despite soaring mortgage lending, Canadian banks are strong enough to absorb any hit that might result from a potential real estate correction, said Ed Clark, chief executive of Toronto-Dominion Bank.
Unlike U.S. banks, lenders on this side of the border did not get involved in the kind of risky practices that helped drive the U.S. housing boom of the previous decade and that ultimately caused so much carnage when the crisis hit in 2008, Mr. Clark told shareholders at TD’s annual meeting.
Canadian banks didn’t require government bailouts and were able to go out into the markets and raise significant capital to fortify their balance sheets over the last few years.
If the housing market corrects, the big banks are strong enough “that they could absorb that hit,” he said.
In answer to a shareholder question, Mr. Clark acknowledged that there are “slightly different views” about where the housing market is headed, but he noted that “we all think that Canada is not at risk of a U.S.-style meltdown.”
Even if real estate does correct, the drop won’t be as severe as the U.S. experience and banks will be prepared to absorb any potential losses owing to their strong capital positions.
Bank of Canada Governor Mark Carney has warned that elevated consumer debt levels represent the biggest domestic risk to the financial system.
Mr. Clark said Canadian policy makers are faced with a “classic macro-economic dilemma” as they try to deal with quickly rising consumer debt levels. On the one hand there is a need to keep interest rates low to maintain the economic recovery but it’s those low rates that are causing consumers to go out and take on more debt.
Ottawa has been responding by tightening the rules around mortgage lending, most recently with the introduction of proposed new requirements around underwriting and disclosure from the Office of the Superintendent of Financial Institutions.
Mr. Clark said OSFI’s draft rules would need “some tweaks” to make them “practical and implementable,” but in general “we are doing the right thing” to make sure the situation doesn’t get out of control.”