Canadian banking watchdog has decided to phase out emergency mortgage deferral rules introduced following the outbreak of the Covid-19 pandemic.
The Office of the Superintendent of Financial Institutions (OSFI) has begun rolling back temporary changes in its regulations due to which banks and insurance companies ended up treating deferred loans as potential loan losses.
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The temporary rules allowed financial institutions to offer payment deferrals on mortgages, credit cards, premiums and business loans to thousands of financially affected clients.
The initiatives were part of a six-month payment deferral programme offered by the banks to clients, which the regulator has now shortened to three months.
In a statement, OSFI said: “While the special capital treatment and regulatory flexibility related to payment deferrals was warranted at the onset of Covid-19, as both lenders and borrowers adapted to the extraordinary circumstances and unprecedented disruptions related to the pandemic, banks are now in a better position to employ their business-as-usual alternatives to support troubled borrowers.”
As per the norms, to protect against potential losses, banks are required to have more capital against the non-performing loans.
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By GlobalDataDue to the temporary regulations, banks were able to calculate their capital adequacy ratio by treating deferred loans as performing loans, hence becoming more generous with deferrals.
As OSFI is bring the rules back to normal, so if a bank granted a payment deferral before 31 August can treat the loan as performing for up to six months.
However, if a bank grants a new payment deferral before September end, the loan will be treated as performing for up to three months.
The roll back on payment deferrals comes a week after banks in Canada posted their third-quarter financial results, with the big six banks setting aside billions to cover for future loan losses.
Some of these banks include Scotiabank, Bank of Montreal, and Royal Bank of Canada.
