Monday, May 21, 2012

Bank Risk Halved by Taxpayer Backed Mortgage Insurance

In this limited stress test RBC and CIBC were the most exposed to mortgage risk (based partly on the size of their mortgage book relative to other lending)
BMO and TD were the least exposed (partly to do higher use of mortgage insurance) Canadian banks' residential mortgage exposure manageable
As of Jan. 31, 2012, the six largest Canadian banks (The Big Six) had $912 billion of exposure to the domestic residential mortgage market through residential mortgages ($730 billion) and home equity lines of credit (HELOC, $182 billion). Fitch used a single-factor stress test to assess the impact of a real estate shock on the banks and, more broadly on the system.

Fitch applied three-year cumulative losses of 1%-10% on the residential mortgage and HELOC exposures of the six largest Canadian banks. Cumulative gross losses for the Big Six varied from $9.1 billion-$91.3 billion depending on the magnitude of the stress, but declined to net losses of $4.1 billion-$41.5 billion after taking into account mortgage insurance provided by mortgage insurers owned or backed by the Canadian government.

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