Privatizing CMHC would weaken banks, leave economy vulnerable: TD’s Ed Clark

ByJohn Greenwood, Financial Post December 12, 2013 - Any move by Ottawa to privatize or even tinker with the Canada Mortgage and Housing Corporation would weaken the Canadian banking system and put the economy at risk, the chief executive of Toronto-Dominion Bank said in an interview Thursday. The Canadian banks sailed through the financial crisis, emerging mostly unscathed because their massive holdings of residential mortgages stayed liquid, unaffected by the freeze-up that afflicted fixed income assets around the world because they were guaranteed by the CMHC.

CMHC insurance “provided us with stability in both earnings and liquidity that differentiated us [from banks in the rest of the world],” Ed Clark said in an interview.

So any government effort to reform the Crown corporation — as Jim Flaherty, the Finance Minister, has mused several times — risks “taking away the very things that made Canadian banks [so resilient]“, he said.

Mr. Clark said one of the lessons of the crisis that began in 2008 was how crucial a stable banking system is to the health of the economy.

“So if you take that away, [how do] you explain to people that the unemployment rate in the next downturn will be a lot higher because you decided to dismantle what made Canadian banks different,” he said.

Despite a spate of warnings about the precarious state of Canadian real estate — most recently Deutsche Bank released a report saying that Canadian housing market is the most overvalued in the world — Mr. Clark said he doesn’t believe things have gotten out of control.

“For the moment, I don’t think we are in a bubble,” he said, adding that at the same time prices can’t keep going up for ever.

The challenge for bankers and policymakers such as Mr. Flaherty is to figure out the difference between “rapidly expanding prices” and a bubble. For the time being, he said, both groups need to keep close watch on the market.

“If a year from now housing prices start to take off again, then I’ll be advocating to say we’ll tighten [the rules around mortgage lending] again.”

Since 2008 Mr. Flaherty has moved to tighten mortgage rules several times. He’s also put the CMHC under tighter regulatory oversight — it’s now directly overseen by Canada’s financial regulator, the Office of the Superintendent of Financial Institutions.

Still, even after all those steps housing prices continue to rise along with household debt, which has been escalating in tandem with real estate prices and now sits at record levels. Recent statistics suggest that while the rate of growth has slowed down over the last year, average consumer debt continues to rise — a worrisome trend that has left this country vulnerable a potential economic shock like a sharp rise in interest rates.

Mr. Clark acknowledged that if a meltdown were to take place, the banks would be protected thanks to the government mortgage insurance. But he noted that it would be difficult for TD to thrive if the Canadian economy ends up on its back. Trying to differentiate between a strong real estate market with rapidly rising prices and a bubble is a very tough thing to do, “so I err on the side of let’s slow this thing down and I think we have slowed it down. Because if you get it wrong, it’s really bad”.

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