2. Canadian Banks – An
Introduction
For the fifth consecutive year the World Economic
Forum has ranked Canada’s banking system as the
world’s soundest. This is good news that benefits
Canada and Canadians. The banking industry annually
contributes tens of billions of dollars to Canada’s GDP,
directly employs more than a quarter of a million
Canadians and provides financing for businesses across
the country, including close to $87.7 billion in credit to
small businesses alone last year.
Banks represent a little more than half (58 per cent) of all
lending supplied to businesses through business loans,
short-term promissory notes known as bankers’
acceptances, non-residential mortgages and other
lending products. Considering the financing market more
broadly, including capital markets, banks represent
3. Demand for business credit
rebounding
During the recent economic
downturn, many businesses
reduced their borrowing
because of the economic and
market uncertainty. And, while
banks continued to provide
businesses with access to
credit, businesses did not
access that credit as much as
they had in the past.
Business financing is now
growing in response to
increasingly favourable
economic growth and
confidence. These conditions
are becoming broad-based
4. How lending decisions are made
Bankers look at the total
business package when
making financing decisions
and the ability to repay a loan
is determined by the business
plan, cash flow projections,
asset base, sales and
marketplace analysis and
business viability.
Banks make all lending
decisions on a case-bycase
basis. The terms of the loan
are based on the financial
situation of the individual
business within the context of
5. Role of Bank of Canada
Bank of Canada is projecting
Canadian economic growth
to slow down in coming
years. It also admits that
there is some slack in the
labour market. In the
economic outlook, Bank of
Canada governor Mark
Carney stated that core
inflation expected stay within
2% range till 2014. The
above statements show that
the bank is likely to keep it
overnight target rate at the
present level.
6. Cont..
Maintaining a super-low overnight rate comes with
the risk of overheating consumer debt. As a
responsible central bank it wants to keep businesses
lubricated enough with accessible finance but at the
same time it does not want to encourage individual
to hoard cheap loans.
BOC did deliver on its promise to keep enough
liquidity in the financial market. Unfortunately it
cannot simply print and distribute cash to people. It
has to use the existing system such as bank and
other financial institutions to act as a delivery
7.
8. How the problem began ?
The banks started to distribute the wealth to
whomever it found as “Creditworthy”.
Later it was seen that mortgage lending went up and
business loan went down.
Now that the people borrowed too much and an
immediate rate hike will bring the weak economy to
its knees – the central bank was trapped.
Therefore we sew a rescue mission. Instead of just
regulating the banks or tightening the lending policy –
A decision has been made to act on both the fronts.
More requirements are being put in on the banks to
lend and planning to restrict CMHC from insuring
every borrower. It is my view that this is a good plan if
it works, at least worth a try.
9. Changes in Lending Policy
The Office of the Superintendent of Financial
Institutions Canada (OSFI) is the primary regulator
and supervisor of federally regulated deposit-taking
institutions, insurance companies, and federally
regulated private pension plans.
It has made every effort to rein in consumer debt
levels and to reduce the risks to the financial
system posed by record mortgage debt
levels. Most recently, it has asked all federally
regulated banks to comply with its demand for a
change and tightening in mortgage underwriting
10. TDCT first to implement
changes regulated
The first federally
bank to announce changes in
its lending policy is TDCT (TD
Canada Trust).
Below is a summary of the
changes.
Equity Lending Changes
Equity lending programs have
been discontinued for salaried
employees.
Maximum 65% loan to value for all
applications where the borrower is
self employed.
Regardless of the loan to value, or
11. New US Resident lending policy
in Canada
. There has also been changes to the Canada-US
tax treaty and this particular Bank will no longer
gross up the interest rate for US Residents. Income,
downpayment and credit history will have to be
confirmed as usual and will be subject to the same
debt servicing qualifications.
There used to be a tax treaty between the US and
Canada. The Canadian Banks had to gross up the
interest rate by either approx 1.48 or 1.74 and send
a withholding tax down to the US IRS (Internal
Revenue Service). The particular Bank that has this
new program for US Residents is no longer doing
that as the tax treaty is over.
12. Conclusion
“While banks understand the importance of providing credit
businesses, they also have a responsibility to protect
their depositors’ money. Banks continue to make lending
decisions on a case-by-case basis, extending credit to
those for whom it would be beneficial and who have the
capacity to repay the loans. This prudent approach is a
key reason why banks in Canada have largely avoided
the financial difficulties that have plagued banks in other
countries. Maintaining these sound, fundamental
principles of prudent lending is important to Canada’s
banking system and also in the best interest of all
Canadians.”
