Mark Zelmer, deputy superintendent of the Office of the Superintendent of Financial Institutions (OSFI), has warned financial institutions not to grow complacent about household debt levels.
"I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago," commented Mr. Zelmer in a speech to the C. D. Howe Institute in Toronto on June 26. "Moreover, with interest rates near record low levels, there is not much scope for interest rates in Canada or the United States to fall further – something that helped people weather storms in the past."
Mr. Zelmer suggested there are limits to how much comfort lenders should take from stress tests, pointing out that "they are just a model after all", and also reminded the audience that being well-capitalized is not enough. "Recall that some financial institutions lost access to funding markets in the midst of the global financial crisis even though they were reporting healthy regulatory capital ratios at the time," he said.
OSFI's supervision is no substitute for stringent internal controls, and Zelmer said that lenders and insurers are ultimately responsible for their decisions. "After all, they are the ones that willingly granted the loans and insurance in the first place," he concluded.