The Canadian Bankers Association has called on the Canadian ministry of finance to raise a 4% cap on covered bond issuance as a proportion of bank assets to increase private funding of Canadian uninsured mortgages, highlighting that it is lower than in most developed jurisdictions.

The proposal was included in the industry body’s response to a consultation on lender risk sharing for government-backed insured mortgages launched by Department of Finance Canada in October as part of a wider package of measures to support a “healthy, competitive and stable” housing market. The Canadian Bankers Association (CBA) published its submission yesterday (Tuesday), the day the consultation closed.

The CBA argued that the Department of Finance should consider an increase to the limit on covered bond issuance among alternative measures to lender risk sharing that are “relatively simpler, more targeted, and less disruptive to the existing lending market structure, yet still meet its stated objectives”.

“Covered bonds are an alternative source of funding for lenders that contributes to the stability of the financial system,” said the CBA, citing a benefit noted by Canada Mortgage & Housing Corporation (CMHC), which administers the Canadian covered bond framework.

It noted that insured mortgages are not permitted to be held as covered bond collateral, with neither the federal government nor CMHC providing any guarantees or backing for covered bonds.

However, Canada’s regulatory cap on issuance at 4% of bank assets – a limit introduced by the Office of the Superintendent of Financial Institutions (OSFI) – is among the most restrictive among advanced economies.

“Raising the limit would increase private funding of Canadian uninsured mortgages and hence reduce taxpayer support for mortgage financing,” said CBA.

Representatives of CMHC and issuers have nevertheless previously indicated that they expect any review of the covered bond limit to come as part of a wider consideration of issues arising from overall asset encumbrance.