BNN - Wednesday, May 22, 2024 - 03:00 p.m. (ET) - Segment #5

>> Look at the tsx down about half a percent right here. We saw a little bit of giveback in those commodity sectors that took the tsx ever so slightly to a record high yesterday. But today, materials and energy stocks pulling back tech, though, was a bright spot. We did get an upgrade shopify, but goldman sachs and bombardier rocketing higher on the back of an upgrade from bank of america. So there were some pockets of strength there broadly, though, as we take a look at the tone south of the border, also pulling back from these record highs and a lot of this again driven by weakness in energy and materials. Tech was sort of flat. And of course, we know that the elephant in the room is nvidia, which in about 20 minutes time set to reveal its latest set of quarterly results were expecting revenue to search a whopping 243%. Not every day you see it 2 trillion company that is growing 243%. So we'll see if they can earn their keep us the stock as it around record highs. But ahead of all that, we've got a great conversation coming up right now. Canada's banking regulator is warming warning of the payment shock as homeowners renew mortgages at higher rates. In fact, 76% of outstanding mortgages are up for renewal in 2 years. This is one of the top risks outlined in osfi's annual risk report out today. And joining me in studio is peter routledge, superintendent of financial institutions. Thank you so much for joining great to be back. It's great to be back memory ice to talk to you back in the day about bank stocks. And now we're talking about regulating them. >> And these residential reston north just part of all the risks that you looked at, but you have been talking sometime about what's going on in the residentiamarket, if you could just distill, what are your chief areas of concern? I start by to look over are still pretty hope by historical standards >> So far you mention 76% of canadian mortgage ores have still to renew. But the first 24% have renewed. And so far, so good. >> But the report did note that there is some elevated distress. There's a bit of a mouse in the snake and that mask the snake. I would call that variable rate mortgages with fixed payments. They were very popular during covid 2021 in particular. So they're going to count for newell in 2020 for starting in 2025. And then big chunk of it is in 2026. >> And in those cases, the way those products are designed, there is a fairly high likelihood that there will be a significant payment shock for those households. And the good news is that banks and canadians are managing that problem early. And part of what part of the reason we've been vocal about it is to prompt a bit of early action, but it's still a fairly sizable problem and could produce outsize losses. And we're calling attention to it right now. So and gets ready and it's a big truck gets 15% >> Of fix pain lot variable rate, but 6 payment. And so the consequences been negative amortization. And I've been reading and I understand your comments on it and that correct to say you're just not a fan. >> Yeah, I think the system would be better off if the product was less prevalent. We're not in the business defining what products are permissible are not permissible. >> But we would be nudging and we are nudging our institutions to think about this product. >> In light of the its inherent risk characteristics. We have a direct connection with canadian consumers. But anyone asked me, I would say you might want to be careful with that product over the long run. It can really create issues. And given that if it were a little less prevalent, I think the system would be a little bit more resilient and that would be a good thing. Having said that, it allowed people during a time of unprecedented rate increases. >> To hang on and give them time to deal this payment shock that is coming. >> Up, would you agree that if we didn't have that, that the consequences could have been worse because he would have been faced with increased expenses right away. So that's that would date. And you mentioned 24% of folks have renewed most of them of those folks have been. >> Folks 5 year fixed mortgages and they've been renewing and absorbing higher payments quite handily. Why, because they've been used to hire 5 year fixed rate payments to start with and then the actual delta's quite a bit lower problem with a variable rate mortgage with 6 payments. You negatively advertising? So I your pet making your mortgage payments every month. Your mortgage owing is increasing. Meanwhile, your contractual amortization shrinking from 25 to 20 years. And so that sets you up for a big payment shock and that can be stabilizing. >> Now you've you said you've been encouraging the to look at this. And I wonder, what does that encouragement look like? Are you telling them to

take greater provisions against these particular type of loans? >> We're not that directive. We will say things like make sure your provisions are realistic and have a balanced forwardlooking do of risks down the line. And if risks are intensified, we would expect provisions to increase. We also are doing is increasing capital requirements for mortgages that find or that are negatively advertising and that increases the costs of banks holding those mortgages on their balance sheets and may be a bit of a disincentive for the product points one of the risks associated with with with residential mortgages. If you're looking at >> Loan to value, you're looking at loan to income in particular. And in the assessment today. >> You talked about the osfi do about osfi doing more work in limiting loan would loan to income and limits. I should, I should say, what might that look like? What parameters are you are you looking to play some financial institution? Most important thing to remember is those are a parameter would apply to an institution, not to an individual borrowers. So canadians want. >> See, feel or experience, meaning a percent of your portfolio can only have this level of risk. So for example, we could say to an institution and during covid, you are running a loan to income north of 450%. You know, half of your mortgages were like that. >> Today with high rates, only 20% of your mortgage there, like that. So in that case, we would set a ceiling of say around 30. So the next time rates fall to very low levels that that ceiling bynes today, you won't feel it, institutions will not have to make decisions based on it. Think of it is like a backstop, just in case. >> Now, given all these risks that you outlined today, part of your job is to tell the banks how to prepare for what kind of buffers they need in the event of a downturn. And you've held at 3.5%. Are you happy with that level? >> Well, what I can tell from our last press release is that, you know, between 2022 2023. We bought an expensive insurance called hires capital buffer for a very, very unlikely, but very, very scenario. And we thought that insurance was sufficient and we didn't need to buy any more. And we said if owner abilities got worse. Buy some more. But right now we don't think we need markas vulnerabilities are well within the buffer. And that remains the case today. Are admirably adapting to a higher interest rate environment. >> Well, I was just to say there are signs of a slowdown. And I wonder how you think about the balance you know, when you require bank to to hold that capital, it's at the expense of credit that flows into the economy at a time when it needs it. How do you think about striking that balance? >> So when we think about the buffer, we think about what's really a severe stress. And I would the closest to a close way to describe will let's go back to 2008 9. Remember how severely stressful that event and that economic shock was. Well, we have buffers in place that would absorb losses in that severe stress. And so when we see deteriorating credit losses, when we see business credit losses rising. Her credit losses rising and we are today, it's nowhere close or it, it isn't nowhere in the neighbourhood of what we saw in 2008 9. And so that's why I say the buffers we have in place are adequate insurance for a very, very severe downsides. Are they too aggressive and because of that scenario, doesn't seem like it's in the offing. What would it take to reduce so the way we think about too aggressive or is not aggressive enough as we very rigorous, very severe stress tests. >> And we ask ourselves okay, if these very, very severe, it is very, very severe scenario arrives. >> How much capital it heat up. Does are, but what are buffer? Capture all that loss by stopping dsb at the domestic stability 3.5% were saying we think we have a buffer to absorb stress losses in that very, very severe environment. We don't need any more if we had any less, then we would risk having losses that exceed the and then we have all sorts of financial stability problems. And so yeah, let's say, for example, vulnerabilities lesson over the next 3 years are stress has should pick that up and we should be able to gradually lower. The bats now will probably be a little bit later than bank investors and bank executives might like, the way our methodology works, it would permit that. >> There is some banks that are managing capital levels, though, even with that buffer even about that. And are wondering, what's, how are they going to ploy some of that excess capital in this environment as a regulator our

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