TORONTO – Ratings agency Moody’s says that despite soaring home prices and household debt levels, Canadian banks could weather the effects of a severe housing crisis.
Moody’s says it conducted stress tests to determine the impact on major Canadian banks in the event of a 25 per cent drop in home prices countrywide.
The analysis also included an additional 10 per cent decline in Ontario and British Columbia, where prices have skyrocketed in recent years.
In a report published Monday, the ratings agency says that under such a scenario total direct losses to the banking system would reach almost $18 billion. However, Moody’s says the banks would be able to generate internal capital to cover those losses within several quarters.
The ratings agency says the negative impacts of a housing downturn in Canada would be reduced by a number of factors that differentiate Canada from U.S. mortgage markets.
Reality check: Can Canada’s red-hot housing markets be reined in?
Those factors include government-guaranteed mortgage creditor and lender insurance, as well as lower rates of subprime lending and a lower prevalence of certain kinds of securitization practices.