Home Corporate Governance No Canadian bank bailouts? Says who?

No Canadian bank bailouts? Says who?

Institutional brokerage staff at Canada’s bank-owned investment dealers are in line for a record payday this month. And I see in my morning DTM offering that one of the justifications of this largess is that the public pursue was not used to keep our large financial institutions afloat during the recent global financial crisis, unlike the USA or United Kingdom:

Government officials noted yesterday that the situation in Canada is very different from that in Britain, adding there was no need for a bank bailout here.

It is a matter of some national honour that Canada’s bank’s didn’t receive direct capital injections from the government. That much is true.

But what isn’t true is that the banks survived the past twelve months without extradordinary financial support from the federal government and the Bank of Canada.

Between September 2008 and March 2009, Canadian banks reduced their holdings of domestic residential mortgages from $486.1 billion to $434.9 billion according to Bank of Canada stats; on a net basis.

Where did those mortgages go, you ask? Did 10% of Canadian homeonwers sell their homes and move into rental accomodation enmasse during a six month period?

Of course not. The federal government created a unique program through CMHC specifically targeted at allowing Canadian chartered banks to move tens of billions of dollars of assets off of their balance sheets. The reason? Canadian banks couldn’t raise sufficient and/or cost-effective funding from their traditional sources – primarily other global financial institutions – and needed Crown intervention to keep the wolf from the door. By mid-November 2008, the federal government had agreed to take $75 billion of mortgages from Canadian banks.

Assuming the risk-weighting of these assets was 20%, the feds essentially put $15 billion of capital into the Canadian banks that participated in the $75 billion CMHC program. Even Finance Minister Jim Flaherty agrees:

“At a time of considerable uncertainty in global financial markets, this action will provide Canada�s financial institutions with significant and stable access to longer-term funding,” said Minister Flaherty.

How is “stable” “long term funding” from CMHC any different than the pref share offerings via the American TARP program, other than the fact that Canadian taxpayers didn’t receive any purchase warrants on Canadian bank shares as compensation? Let’s not forget, the TARP was originally designed to take assets off U.S. bank balance sheets so as to free up capital.

The Canadian government also took steps in October 2008 to guarantee medium term lending in an effort to underpin the inter-bank lending market (see prior post “Political expediency trumps free market” Nov 3-08).

I’m all for paying teams what the market will bear (see prior post “Media new battle ground in I-bank bonus season war” Nov 25-09). But this heads I win, tails you lose bonus madness can’t be justified by the “lack” of a federal bank bailout.

There is ony a subtle distinction between injecting capital into a bank and relieving it of assets so that it can avoid a capital injection. Kind of like your Dad temporarily buying your bike from you when you ran out on money in University, and then selling it back to you six months later when you were flush from a summer job.

The notion that Canada’s “free market” took care of itself over the past 15 months is poppycock.

(disclosure – we own BMO, BNS and TD in our household)

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8 Comments  comments 

8 Responses

  1. Once again, you are the only person I know in the finance industry who actually has the courage to say what is otherwise blatantly obvious, yet sadly unspoken. Astounding that the myth of the well managed Canadian banks and Canada as a whole is now a global truism. Mainstream financial media are so utterly lacking in the coverage or examination of this, too focused on daily market drama and problems elsewhere, it would seem. And lets be clear, through the government support of the banks, further funds flowed to other financial institutions and industries, resulting in many other completly unpublisized bailouts. All would be viewed as clever, perhaps even desirable in avoiding greater financial instability, if it wasn’t such a grotesque distortion of free markets, and the outright usurping of democracy. The banker bonuses that follow? Mistake. Slowly but surely, the public is waking to the excpetional role that finance is playing in a modern economy, and it does not look defensible. I would hope that clever people would see the benefit of not detroying the whole ecosystem of public confidence, and that is in their interest, but no sign yet this is the case. Good luck with managing the necessary sacrifices that will be asked of the global citizenry yet to come.

  2. erik


    Where does this “assume 20% risk weighting” come from?

    CMHC says “The mortgages involved are high-quality assets that are already guaranteed through government-backed mortgage insurance.”

    How is this comparable to investing in US bank prefs? Mortgages are backed by real houses, probably over-collateralized, with credit insurance just in case, and US prefs are backed by… another fed bailout? A sliver of common equity?

    On top of that US banks had very different problems than their Canadian counterparts; chock full of 105% equity liar loan mortgages for example.

    We’re talking apples and oranges here.

    Using your analogy the CMHC “bailout” is more like your dad buys your bike and gives you cash upfront now because you’re in a bind, then sells it on Ebay later at cost, and you have to find a new bike on your own.

    I don’t see how this is such a huge freebie for Canadian banks. If anything with their mortgage portfolios down they get less earnings from interest they have given up from the mortgages they sold. On the other hand I do see how freeing up the loan book for new business helps new home buyers.

  3. Hi Erik

    Thanks for the comment.

    Every bank has to have capital to underpin loans, whether they are insured by CMHC or not. There will be variability in the amount of capital applied, without a doubt.

    My educated guess is the avg. capital applied here would have been 20%. If it was just 10%, or even 5%, we are still talking billions.


  4. doctor stock

    Interesting post… Yet, as Erik points out, what happened south of the 49th parallel is different. Nevertheless, your point is well taken… our banks are not unaffected. What’s more, the Canadian consumer has been hit hardest… the savings in the Prime Rate has not been passed along; Canadians with secured home-equity line of credits are paying above prime at all of our esteemed banks; and the list could go on. As they say, $*%# rolls downhill and it has landed on the front door of the average consumer again.

  5. Phil May

    Mark what do you mean “Every bank has to have capital to underpin loans” There’s no legal requirement for fractional reserve banking in Canada.

  6. Yes there were Canadian bank bailouts. Here are some further references:

    1. http://www.greatponzi.com/reports/cdn-credit/health-20101208.html near the bottom shows Big Five Use of Emergency Fed Loans and describes the secret credit facility recently disclosed. Banks like Royal and Scotia borrowed tens of billions$ from the rescue facility.

    2. Google: Sprott don’t bank on the banks … also describes pretty clearly the kind of bailouts the banks received, including a massive purchase by the Canada Pension Plan (i.e. YOU and ME) of bad bank loans.

  7. Robert Kraljii

    Whatever the difference between what happened in the US and Canada, both are intrusions into the free market (a myth for propaganda purposes only)
    Canadian Banks have been too big too fail for so long, it’s silly to claim some kind of superiority to US Banks on these or any other grounds.

  8. […] Wellington Financial Blog talked this topic Dec 2009.No Canadian Bank bailouts? Say’s Who? […]

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