If policy makers want Canadians to stop borrowing too much, it's up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street's longest-serving senior bankers.
Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians' alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.
In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking "is a highly competitive industry," Mr. Clark said. "If we said 'Look, we're going to be heroes and save Canada from itself, and we'll impose a whole new [mortgage] regime on everyone else,' the other four [large] banks would say 'Let's carve them up.' "
His comments came just days after some stark warnings from Bank of Canada Governor Mark Carney about Canadians' personal debts, which now sit at 148 per cent of disposable incomes. In a speech earlier this week, Mr. Carney did not prescribe any specific remedies, but painted a picture of a Canadian consumer that is stretched, and would suffer if there were an economic shock or higher unemployment, just as U.S. consumers have.
Some believe Mr. Carney's message was directed at the major banks, who provide the bulk of residential mortgages in Canada, which represents the biggest portion of personal debt. But Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because "market share loss is perceived as a strategic loss, not just a numerical or dollar loss."
In the spring, the federal government fine-tuned the rules on mortgages, requiring borrowers to make higher down payments in some cases and forcing banks to ensure that borrowers could handle higher interest rates before approving a loan application. But there is rising pressure to do more, and Mr. Clark said TD has modelled different ways the government may respond to ballooning household debts to assess their impact.
One option would be to shorten the maximum amortization schedule. TD's analysis shows that would be the most blunt way to attack the debt problem. The government already stepped in and shortened the maximum mortgage term to 35 years from 40 years, and it could tighten that limit to 30 years.
There are other options. Home buyers could be forced to put in a higher minimum down payment, or the government could extend the qualifying rate to 6 or 7 years from 5. That rate determines the length of time that someone who has a floating rate mortgage must be able to make payments at fixed rates.
At the moment no one knows which is Ottawa's preferred method, or if any will be used. Mr. Clark said it will depend on how severe the government thinks the debt threat is.
But before any new rules are written, Mr. Clark said the stakeholders must define an end goal. "Let's figure out where we would like to be," he said. Once they have an answer, then the question becomes, "How do you get there without taking the air out of the [economic] balloon?"
Mortgages with less than 20 per cent down payments must be insured in Canada, and most of that insurance is provided by the federal Canada Mortgage and Housing Corp. That protects financial institutions from losses on many of the riskiest mortgages. As for TD, its mortgage portfolios are in top shape, so Mr. Clark doesn't have much reason to transform his business. In 2010, TD lost only one basis point (a basis point is 1/100th of a percentage point) on its mortgage portfolio.
"If the government doesn't do anything, three years from now, TD isn't going to suffer," he said.
Mr. Clark proposes government action, citing rules on credit cards as an example of where the banks follow whatever guidelines are provided. The Canadian banking system is run by "adults" who are able to come together and work with the government to guide the process, he said, so there is no trouble sitting everyone down at the same table.
Still, his views don't mean TD has not addressed the issue internally. Mr. Clark said he is watching the market closely because mortgages have a huge effect on his retail business, which steers the ship.
"Most people, certainly analysts and investors, think of banks as wholesale banks, and the retail business is kind of a sidecar activity," Mr. Clark said. The reality is the exact opposite, he said.
Peering into 2011, Mr. Clark said the private sector will have to step up to keep Canada's economy improving. The Canadian government did its part to support the banks, he said, and now businesses, who benefited from the liquidity, must step up do to theirs.
"The private sector has to say, 'What is it we should be doing?' "