Blame for high levels of household indebtedness in Canada should be attributed, at least in part, to the lending practices of the Canadian banking system, says a recently released report by the Action Canada Task Force on Household Debt. One solution offered by the task force: draw up a code of conduct for bank lending.
I would also take a look at how the socialization of risk in the banking industry encourages greater loan volumes. A prime example is the CMHC guarantee on mortgages provided to homebuyers with down payments of less than 20%.
Because the risk to the banks capital has been substantially removed, there is an incentiveto crank up mortgages to higher risk homebuyers. Without CMHC backing, these kinds of mortgages would be harder to get and only available at higher rates. As a result, the amount of lending would be lower.
Another example is the CDIC program that insures bank accounts and GICs. Because thisgovernment guarantee encourages Canadians to feel these vehicles are riskless, banks can pay low interest rates on them. Absent this backing, higher interest rates would have to be offered, which would give Canadians more incentives to save versus spend.
A C.D. Howe Institute reportreleased in January provides some ideas for dealing with the CMHC situation. One recommendationis to roll backCMHC mortgage insurance andallow private insurers more scope. Similarly, ashas been suggested elsewhere,the risk that the CDICinsures againstcould be shared more with the private sector.
Rob Carrickand Ellen Rosemanprovidedcoverageofthe report issued by the Action Canada Task Force on Household Debt. The task force was composed of six up-and-coming young adults who are part of a fellowship program funded by Action Canada (a registered charity supported by private groups and Heritage Canada).