Highly-Regulated Canadian Banks 'Easily' Survive Housing Crisis: Moody's

(RTTNews) - The largest Canadian banks would be able to absorb the impact of a severe downturn in the housing market without incurring "catastrophic losses," according to Moody's Investors Service.

The ratings agency noted that while increasing household debt and rapidly increasing home prices in Canada showed conditions similar to the U.S. leading up to the financial crisis, there were significant structural differences between the Canadian and U.S. mortgage markets.

This includes explicitly government-guaranteed mortgage creditor and lender insurance, lower rates of sub-prime lending, and lower prevalence of "originate-to-distribute" securitization practices.

Moody's also noted that half of Canada's mortgage debt outstanding - nearly C$700 billion in residential mortgage loans - is explicitly supported by the Canadian government.

Moody's simulated a mortgage crisis for rated Canadian banks and mortgage creditor insurers, quantifying losses using historical experience in Canada as a base and the U.S. mortgage crisis experience as a severe scenario.

The rating agency's stress testing assumptions included an overall house price depreciation of 25 percent in each scenario to simulate collateral value drop.

It also included an additional 10 percent house price decline in the provinces of Ontario and British Columbia - two regions that have experienced significant price appreciation over the past several years. The stress test did not include consideration of spillover effects of a house price correction.

Moody's noted that while the Canadian banks could incur losses of almost C$18 billion, they would be able to generate internal capital to cover their losses within a few quarters.

While Royal Bank of Canada (RY.TO, RY) would suffer the largest absolute loss under Moody's severe stress scenario, Canadian Imperial Bank of Commerce's (CM, CM.TO) capital would be most at risk due to its operational focus on Canadian retail lending.