Canadian watchdog sets stress test for smaller lenders

TORONTO (Reuters) - Canada’s banking regulator said on Tuesday it will require the country’s smaller lenders to test how they would withstand a 50 percent drop in property prices in Vancouver and a 40 percent decline in Toronto.

A construction worker works on a new house being built in a suburb located north of Toronto in Vaughan, Ontario, Canada on June 29, 2015. REUTERS/Mark Blinch/File Photo

The move, which builds on an existing requirement that lenders test their resilience to a 30 percent decline in home prices across all regions, is the latest in a series of measures by Canadian authorities to counter a risk posed by soaring house prices in the two Canadian cities.

However, the country's biggest six lenders - Royal Bank of Canada RY.TO, Toronto Dominion Bank TD.TO, Scotiabank BNS.TO, Bank of Montreal BMO.TO, CIBC CM.TO and National Bank of Canada NA.TO - are excluded from the test, as is Britain's HSBC HSBA.L, the regulator said.

Those larger institutions are subjected to regular stress tests by the regulator, the terms of which vary from bank to bank and are not made public, it said.

The Office of the Superintendent of Financial Institutions (OSFI) said earlier this month it was tightening oversight of mortgage lending, citing concerns about record household debt and a sharp jump in prices.

Property markets have surged in Vancouver and Toronto since the 2007-2009 financial crisis, fueled in part by foreign investors, mostly from mainland China.

Canada’s banking regulator does not publicly announce the results of bank stress tests in the same way as its counterparts in the United States and Europe, but it considers the tests important in ensuring the country’s banks have sufficiently strong capital buffers to withstand market shocks.

OSFI said that, previously, only the impact on banks’ core capital ratios was assessed in the test, but this year the impact on banks’ leverage ratios, which do not take into account risk weightings used by banks, will also be tested.

Canadian Finance Minister Bill Morneau announced in June that the Liberal government would set up a working group of federal, provincial and municipal officials to recommend policy changes aimed at preventing a housing bubble.

British Columbia introduced a new 15 percent property transfer tax on foreign real estate buyers in Vancouver on Monday.

Residential purchases in British Columbia by foreign buyers accounted for 6.6 percent of transactions from June 10 to July 14, data released by the province’s government showed on Tuesday. In metro Vancouver, where prices have surged, foreign buyers accounted for 9.7 percent of purchases.

Additional reporting by Leah Schnurr in Ottawa; Editing by Meredith Mazzilli and Matthew Lewis