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OSFI warns banks on lending

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Canada's financial regulator is sending an "early warning" to Canada's banks about lending, concerned that some may be tempted to lower their standards amid shrinking margins in order to boost their loan books.

In the face of shrinking lending margins, which have sapped profits from the banking sector in recent quarters, the head of the Office of the Superintendent of Financial Institutions said she is telling Canada's banks to ensure they maintain prudent lending practices.

In a low interest rate environment, consumers may be tempted to borrow more than they should at a time when banks are also clamouring for business.

"The concern is that the conditions are such that there will be tremendous pressure on banks to loosen those standards," Julie Dickson, head of the regulator, told reporters after delivering a speech to the financial community in Toronto. "Really my point is it's kind of an early warning on the part of OSFI."

Dickson said in her speech that the regulator is looking closely at consumer loans, making sure banks aren't lending too much against the value of a home.

"The message from OSFI to financial institutions is that current levels of interest rates already make borrowing extremely attractive to all borrowers.... institutions should guard against loosening historical underwriting standards, for example, by moving to higher loan-to-value ratios or waiving due diligence requirements," Dickson said.

She added that OSFI believes banks should be focusing on these issues "more so than they have historically."

"Extremely low rates will be with us for even longer than envisaged before the summer. This has likely increased the incentive for consumers - again - to borrow. Banks also have an incentive to lend, given low margins and the need to compete."

Margin compression has been a drag on bank earnings for much of this year. Amid concerns about growing consumer debt levels, Canada's Finance Minister stepped in this year to tighten lending on riskier mortgages by shrinking amortization periods, increasing mandatory down payments and lowering the amount homeowners can borrow against their property.

OSFI officials "have been very focused on home equity lines of credit and mortgage lending," Dickson said in her speech.

As well, OSFI is working with the international Financial Stability Board, a group created by the G20 nations to discuss financial matters, to develop global principles "for what constitutes safe mortgage lending," Dickson said.

Such principles would cover down payments, verification of income, and loan-to-value ratios.

"This work is being done because the global crisis showed that the consequences of weak underwriting practices in one country can be transferred globally through securitization," Dickson said.

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