Banking watchdog winding down special treatment for COVID-19 mortgage deferrals

A federal financial watchdog announced Monday it is winding down regulatory relief it has provided to banks that are allowing customers to delay payments on mortgages and other loans during the coronavirus pandemic.

The Office of the Superintendent of Financial Institutions (OSFI) has allowed federally regulated lenders to treat loans on which the payments are being deferred as performing, or still being paid back, due to COVID-19.

This special treatment, which meant banks didn’t have to increase their capital levels because of the deferrals, was allowed for up to a maximum of six months.

However, OSFI said Monday that it is phasing out the special capital treatment, saying its decision “will ensure that reporting requirements remain accurate in reflecting credit risk” and that it reflects how the relief it granted during the pandemic was temporary.

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“The gradual phase out of this special capital treatment supports the ongoing stability of Canada’s financial system by ensuring a smooth transition back to pre-existing requirements,” the regulator said in a press release. “Institutions will continue to have the flexibility to address clients’ needs on a case-by-case basis using the support measures they have in place for borrowers.”

More than 760,000 Canadians have deferred or skipped a mortgage payment during the pandemic, which is around 16 per cent of the number of mortgages in bank portfolios, according to the Canadian Bankers Association. There have also been thousands of additional deferrals granted for credit card and other loan payments.

OSFI now says that loans granted payment deferrals before Aug. 31 are still eligible for six months of the special treatment, but those granted after Aug. 30 and on or before Sept. 30 will be eligible for such treatment for up to three months. Any deferrals after Sept. 30 will not be eligible for the special capital treatment, the regulator said.

Similar relief had been granted by OSFI for insurance companies that have granted loan and premium-payment deferrals. Those deferrals will now receive the same regulatory treatment going forward as the bank-provided deferrals.

Furthermore, OSFI said it would lift a moratorium it had placed on portability transfers for private pension plans.

“The changes announced today result from our ongoing effort to ensure that our regulatory measures continue to be appropriate for this unprecedented situation while remaining risk-focused and forward-looking,” said Jeremy Rudin, the superintendent of financial institutions, in the release.

OSFI announced during the early days of the pandemic a variety of measures aimed at keeping the financial system humming, such as the special deferral treatment and reducing a buffer that requires banks to hold extra high-quality capital to guard against certain risks.

The regulator said Monday that, over the past five months, Canadian financial institutions and private pension plans “have demonstrated their resilience and continue to adapt their risk management tools, operations, and processes to the current environment.”

Therefore, OSFI added it “has begun the careful transition back to its standard regulatory and supervisory position.”

Financial Post

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