\u201cWhat we\u2019ll see is insolvencies will go up. Well, nobody\u2019s better off if more and more Canadians are insolvent, right? Someone\u2019s got to pay for that.\u201d<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tAs consumers struggle, are lenders next?\t\t\t<\/h2>\n<\/p><\/div>\n The higher cost of living brought on by a spike in inflation since the pandemic and a rise in interest rates have made it challenging for many Canadians to make ends meet.<\/p>\n
This is especially the case for lower-income households that typically have lower credit scores.<\/p>\n
Lower credit scores means it\u2019s more difficult to get a loan or line of credit compared with a higher score. This can include a mortgage, auto loan, credit card, bank loan or even a personal loan.<\/p>\n
Those higher-risk borrowers \u2014 those with low credit scores \u2014 are referred to as \u201csubprime,\u201d and those who provide them with higher-risk loans \u2014 typically at a much higher rate of interest \u2014 are what\u2019s known as \u201csubprime lenders.\u201d<\/p>\n
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Major banks and lending institutions in Canada typically cater to lower-risk individuals and businesses, although some may take on higher-risk profiles at more expensive interest rates.<\/p>\n
There are options available for those with higher perceived risk to get a loan or line of credit, but it typically means having to pay higher interest rates from alternative or subprime lenders because of the inherent risk that those borrowers may not be able to pay their loans back.<\/p>\n
For some of these higher-risk lenders, that\u2019s exactly what\u2019s now happening.<\/p>\n
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A Canadian alternative financial lender called Goeasy saw its stock price tank 70 per cent in the past month, as of publication, and soon after, it reported a massive, unexpected increase in loan losses in its most recent quarter.<\/p>\n
\u201cGoeasey has been in the subprime lending business for a very long time, and in past cycles they proved very adept at adapting to the credit cycle, and taking in enough money to absorb credit losses, and generating a very high return on equity \u2014 even in times of strife,\u201d says Mike Vinokur, senior wealth advisor and portfolio manager at Propellus Wealth Partners of IA Private Wealth.<\/p>\n
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\u201cThey may not have done proper due diligence or not had proper controls in place, and that\u2019s blowing up.\u201d<\/p>\n
Vinokur adds that although the struggles for Goeasy appear to be a one-off situation, even big banks are starting to see small cracks emerging in lower risk profile loans.<\/p>\n
\u201cBorrowers with lower credit scores unable to access typical prime lending arrangements from one of the six big banks for example, turn to alternative lenders that use different adjudication methods in order to extend credit,\u201d Vinokur says.<\/p>\n
\u201cWe\u2019ve seen higher non-performing loans [loans that default or are close to defaulting] at the big banks, and that\u2019s with prime credit, that perhaps there\u2019s a higher non-performing level of loans now being seen in real time with lenders that extend to subprime borrowers.\u201d<\/p>\n
If borrowers continue to default on loans, including lower-risk and higher-income households, there could be a ripple effect that impacts the broader economy if more lenders don\u2019t protect themselves to absorb potential losses on bad loans.<\/p>\n
\u201cCanadians are more and more stressed. They\u2019re getting pushed to the edges of their map with respect to their budget, and then what happens is that as soon as you hit the edge, you now lean on credit products,\u201d Yanchuk Oleksy says.<\/p>\n
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\u201cWhen they\u2019re coming to us for help because the stress and the debt load has gone above their noses, sometimes they\u2019ve hit the end and insolvency is the only option.\u201d<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tAre subprime risks spreading?\t\t\t<\/h2>\n<\/p><\/div>\n That said, financial experts who spoke to Global News emphasized that while there is strain on subprime borrowers and some subprime lenders, the situation appears to be generally isolated \u2014 for now.<\/p>\n
But things could change for the broader economy if the problem quickly accelerates.<\/p>\n
\u201cThere\u2019s a lot of capital on the balance sheets of our financial institutions to be able to buttress any kind of downturn,\u201d Vinokur says.<\/p>\n
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\n\t\t\tMore on Economy<\/button>More videos<\/button>\n\t\t<\/p>\n<\/p><\/div>\n\u201cWe have to monitor the situation to see what is the rate of change of escalation because that\u2019s always the key question.\u201d<\/p>\n
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Vinokur uses the COVID-19 pandemic as a recent past example of a \u201cbig problem\u201d that could rapidly grow from a small, isolated issue in the financial system.<\/p>\n
\u201cCan banks use their existing profitability to soften the blow over time, wait for that stability, and then go into the next economic cycle?\u201d he says.<\/p>\n
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\n\t\t\t\t<\/p>\n\n\t\t\t\tWhat’s different now vs. in 2008?\t\t\t<\/h2>\n<\/p><\/div>\n Since the financial crisis from 2007 to 2009, lenders like large banks and other institutions in the U.S. and Canada have been required to be more prepared for potential issues.<\/p>\n
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In 2011, the U.S. Federal Reserve began requiring that banks undergo stress tests to gauge their ability to absorb the impacts of potential economic shocks and continue lending out money.<\/p>\n
In Canada, banks were required by the Bank of Canada to set aside loan loss provisions starting in 2018 to prepare for potential economic downturns rather than respond to them after the fact.<\/p>\n
The details were shared in a 2016 research study titled \u201cTiming of Banks\u2019 Loan Loss Provisioning During the Crisis.\u201d<\/p>\n
\u201cAfter the global financial crisis, and following the suggestion of the Financial Stability Board, the G-20 and the Basel Committee on Banking Supervision initiated a project to replace the incurred loss model with the expected loss model,\u201d the Bank of Canada said.<\/p>\n
\u201cThis has resulted in the changeover from the incurred loss model under IAS 39 toward the expected loss model under International Financial Reporting Standards (IFRS) 9, scheduled to become effective in 2018 (e.g., Gaston and Song (2014)). Under IFRS 9, banks will have to provision not only for credit losses that have already occurred but also for losses that are expected in the future.\u201d<\/p>\n
Last month, some of the biggest banks in Canada announced they were increasing their loan loss provisions amid rising economic uncertainty brought on by the trade war and U.S. tariffs.<\/p>\n
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This means the banks are concerned that some of the loans they have issued to borrowers may default and they will end up taking a profit hit.<\/p>\n
That was also just before the Iran war began, and sent energy markets surging on global supply concerns that could result in an inflation spike.<\/p>\n
Vinokur says Canada is in a relatively good position considering the demand and revenue increase for energy resources like oil, and the banking system is in a good financial position despite many consumers struggling to pay for their loans.<\/p>\n
\u201cIt would have to get very extreme, very fast for our banking system to start to really feel the brunt of it,\u201d he says.<\/p>\n
\u201cRight now, they [the big banks] I think have been reasonably conservative in adding credit loss, loan loss or credit loss provisions, and let\u2019s not forget that they\u2019re still earning record amounts of profit.\u201d<\/p>\n<\/p><\/div>\n
#rising #debt #defaults #warning #sign #looming #economic #crisis #National<\/p>\n","protected":false},"excerpt":{"rendered":"
Some subprime lenders appear to be facing strain as debt levels and the rate of borrower defaults start to rise in Canada and the U.S., which may leave many wondering if there are early parallels to the 2008 financial crisis. The concerns come as U.S. tariffs and the war in Iran continue to ramp up […]<\/p>\n","protected":false},"author":1,"featured_media":4336,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[60,16,1118,1077,4418,426,39,4416,613,4420,17,4417,50,4049,4419,4415,1645,135],"class_list":{"0":"post-4335","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-politics","8":"tag-canada","9":"tag-consumer","10":"tag-crisis","11":"tag-debt","12":"tag-defaults","13":"tag-economic","14":"tag-economy","15":"tag-financial-crisis","16":"tag-iran","17":"tag-looming","18":"tag-money","19":"tag-mortgage-defaults","20":"tag-national","21":"tag-rising","22":"tag-sign","23":"tag-subprime","24":"tag-warning","25":"tag-world"},"_links":{"self":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts\/4335","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4335"}],"version-history":[{"count":0,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/posts\/4335\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=\/wp\/v2\/media\/4336"}],"wp:attachment":[{"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4335"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4335"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.worldpumpnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4335"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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