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“This could have profound impacts on the insured mortgage funding market and the equity market’s perception of credit risk in the banking sector,” Jason Bilodeau, an analyst with Macquarie Capital Markets, said in an Oct. 4 note to clients.

One reason Canada’s banking industry has been cited as one of the world’s most stable is that the government backs all the mortgage insurance obligations in the market. That includes fully-backing mortgage insurance sold by Canada Mortgage & Housing Corp. and 90 per cent when sold by private insurers like Genworth MI Canada Inc. that compete with the government agency. This iron-clad government support on insured mortgages is “unique” in the world, according to the finance department.

More than half of Canada’s $1.4 trillion home loan market is made up of insured mortgages, according to figures from the Bank of Canada and finance department. Home owners are required to take out insurance if their down payment is less than 20 per cent of the house value, though banks often buy so-called portfolio insurance even when the down payment exceeds that level.

As household debt levels swelled amid housing booms in Vancouver and Toronto, groups including the Organization of Economic Co-operation and Development, CMHC and the even the department of finance have called for lower risks to taxpayers.

A switch to risk-sharing “would require mortgage lenders to manage a portion of loan losses on insured mortgages that default, rather than transferring virtually all the risk onto the taxpayer via the government guarantee for mortgage insurers,” Morneau told reporters Monday in Toronto.