The Bank of Canada has been scrutinizing whether competition among banks and other lenders is helping to drive consumer debt loads to record levels.
A presentation to central bank's top officials last year, obtained by The Globe and Mail under Access to Information laws, suggests that areas in which a large number of financial institutions are physically present also have a greater proportion of consumers with too much debt.
Research has found that "neighbourhoods with more bank branches and payday lenders per capita (i.e. more competition) have looser lending standards (higher leveraged households) and experience greater bankruptcies (i.e. instability)," says the presentation, which was given to bank officials in the summer.
The disclosure adds a new dimension to the public debate about the factors that have caused Canadians to borrow record amounts of money. The latest Statistics Canada data say that Canadian families owe nearly $1.65 on average for every dollar of after-tax income, the highest level in 22 years of tracking those figures.
Last year, Finance Minister Jim Flaherty tightened the rules on mortgages for a fourth time in four years, saying the government would no longer insure mortgages that are amortized over a period longer than 25 years. But while the government can change the rules, it can do little to affect longer-term mortgage rates. A year ago, fierce competition for customers caused some major banks to begin offering five-year mortgages at 2.99 per cent, triggering a price war in the sector.
At the time, Mr. Flaherty said he cautioned some bank executives about competing too hard to lower rates. "You should be cautious about your lending practices, because this is the type of practice that led to a mortgage crisis in the United States several years ago," he said he told them. "So my expectation is that you will not compete to the bottom on interest rates, which is the direction they were going."
The Bank of Canada has also been seeking to determine how consumers seeking mortgages would be affected by shocks to bank-funding costs. Funding costs rose dramatically during the financial crisis when liquidity dried up, pushing up the costs of consumer and business loans until Ottawa intervened.
The presentation was obtained through an Access to Information request, sent to the bank in June, for documents pertaining to the mortgage and housing markets. Hundreds of pages were sent in response over the holidays, the vast majority of which are entirely redacted.
The 24-page presentation, which was given to the bank's management forum on July 22, was partly redacted. It focuses on work being done by Jason Allen, a principal researcher at the bank. The management forum includes Governor Mark Carney, senior deputy governor Tiff Macklem, and the bank's other deputy governors, advisers and department chiefs. It meets to talk about ideas, identify issues facing the bank, share information, and align strategy.
A number of slides have been cut from the presentation, including some pertaining to consumers' ability to manage their credit card debt. A number of the ideas in the presentation come from papers that Mr. Allen has published. The governing council was told about the role that discounting plays in how much individuals pay for their mortgage and notes that there is "substantial dispersion in rates across people, institutions, and markets."
Over all, the research aims to provide advice on policies that could help to mitigate risks and vulnerabilities among Canadian households, in particular by strengthening the "macroprudential orientation" of Canada's regulatory system, the presentation says. Macroprudential regulation, a concept that got a lot of buzz during the financial crisis, entails taking steps to protect the entire financial system as distinct from rules that are designed to keep individual banks healthy.
Mr. Carney told the Senate banking committee this fall that Canadian authorities are co-operating closely to monitor the financial situation of the household sector. He has been worried about rising consumer debt loads as well as the country's housing market, particularly the condo market in Toronto.
The presentation outlined the role of mortgage and credit card debt in bankruptcy filings, illustrating that mortgages are by far the largest liabilities for homeowners who file for bankruptcy or strike deals with their banks, while credit cards play a greater role when it comes to renters.
Consumer debt levels have hit record levels, with Statistics Canada saying in December that the most recent data suggest Canadian families owe nearly $1.65 on average for every dollar of after-tax income. That has sparked much worry among policy makers in Ottawa. While they've taken some comfort from a slowdown in the annual rate of increase in household debt, Mr. Carney warned last month that the rate could go up again and there's a need to be "vigilant" about monitoring debt loans and changing policies if need be.