The term shadow banking has been applied to the Canadian mortgage landscape lately as house prices in Vancouver and Toronto soars and mortgages are more difficult to obtain due to the government’s attempt at slowing the market.
It has been thrown around haphazardly and gives a perception that mortgage lending in this area is a large hidden unregulated system that can bring the economy down or at least do great harm.
One article mentions how new rules will push more people to borrow through mortgage investment corporation which is the most remote corners of Canada’s shadow banking sector accounting for 40% of Canada’s banking space. Now when you add headlines such as “Subprime Lending, Which Wrecked U.S. Economy, Becoming A Problem In Canada” and “Subprime Lending Market in Canada Skyrockets to Record as Banks Tighten Reins”, this certainly seems like there is something to worry about. Wow, 40% of Canada’s loans are unregulated subprime lending?
Fortunately, this is not true. This unwitting confusion or willful sensationalization is made possible by the fact that the term shadow banking is not clearly defined. In recent years, it has been mainly used to describe and understand the financial crisis of 2008. It has also come up when referring to the unregulated banking and financial activities in China and whether it would cause a global crisis. In this sense, it covers a lot of financial activities. Basically as long as it is not through a bank, it is shadow banking. This would include commercial papers, money market funds, bonds, treasury bills, securitized instruments and finance company loans. In this definition insurance companies, mutual fund companies, trusts, credit unions and pension funds are part of the shadow banking system. That is why shadow banking seem to make up such a large part of the banking space!
Now to put things into perspective. A 2012 CD Howe report on shadow banking in Canada estimated the major parts of the shadow banking system are about 868 billion dollars. Finance company loans consist of 95 billion but only about 15 billion are mortgage loans. When you compare the 2 trillion that chartered banks have out as loans, you can see this 15 billion dollars is only about 0.5% of the total loans outstanding. Hardly anything to write home about AND most of those loans are regulated.
In the next article I will peel away more confusion around mortgages within the shadow banking system.