The Office of the Superintendent of the Financial Institutions (OSFI) Canada is focusing on how the country’s banks are reacting to the current low interest rate environment.
“When low interest rates first appeared, OSFI saw that the impact was most noticeable on pension plans and insurance companies,” said the organization’s superintendent, Julie Dickson, in a speech at the Bloomberg Canada Economic Summit in Toronto on Tuesday.
“But a sustained low interest rate environment, especially combined with a flat yield curve, affects the banking sector as well, largely through squeezing net interest margins, which negatively affects revenues.”
The environment can provide incentives for banks to grow their earnings asset base by trying to gain market share and increase the proportion of higher-yielding assets both in the lending and investment portfolios.
What’s more concerning, she said, there are businesses that may become too reliant on low financing costs and may increase their leverage.
“We are also cognizant that the longer the low interest rate environment persists, the more interest rate risk can be built up,” Dickson added. “Yet dependence on low interest rates can become significant, meaning that transition to higher rates could be very painful.”
Separately, she announced her intention not to serve a second term as superintendent when her current term ends in July 2014.