How Solid are Canada’s Big Banks?

“Foxes are in charge of the hen house.”

By Peter Diekmeyer, Canada, for Sprott Money:

The World Economic Forum consistently ranks Canada’s banks among the world’s safest. Competent regulators have overseen stress tests, tightened lending standards and delinquency rates are low. Demographics are good and the country’s diversified economy is backed by a treasure of oil, wood, gold and other natural resources.

So the experts say.

Institutional investors, relying on the work of Jeremy Rudin, Canada’s chief bank regulator, agree. In fact, Canadian financials accounted for 35.5% of the market capitalization of the benchmark exchange (NBF February).

However this façade hides major uncertainties. Key concerns stand out, which if unaddressed, could spark solvency and liquidity issues in one or more of Canada’s Big Six banks.

The fragilities can be seen in an IMF report, which calculated that Canada’s financial sector accounted for a stunning 500% of GDP in 2012. Today, the assets of the Big Six banks alone are more than double the size of the country’s economy.

Each (RBC, CIBC, Scotiabank, BMO, TD and National Bank) have been designated “systemically important,” which in turn, due to sheer size and interconnectedness, suggests that they are almost certainly “too big to fail.” That means the collapse of any one Big Bank would threaten to trigger systemic implosion.

More ominously, if Canada’s financial system, arguably the world’s best, is riddled with pores, what does that say about the US, the UK, and Japan? Let alone Italy and Spain? Yet signs of fragility are everywhere. Consider:

Complacency following “secret” $114 billion bailout

A quick review of key metrics suggests Canada’s banking sector, which, on the surface, having largely escaped the 2008 financial crisis, has thus learned little from it.

As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.

“Three of Canada’s banks – CIBC, BMO, and Scotiabank – were at some point under water,” Macdonald writes. “With government support exceeding the value of the company.”

Sadly, details were largely kept secret, Macdonald says, hidden in footnotes and legalese, where even the term “bailout” was shunned. Reforms that could have strengthened the system were thus avoided and the Canadian public remains largely unaware of the dangers.

(A Canadian Bankers Association spokesperson denied that any Canadian bank was bailed out or was in danger of failing, but conceded that the Canada Mortgage Housing Corporation (“Canada’s Fannie Mae”) bought up $69 billion worth of assets and that the Bank of Canada advanced additional liquidity funding).

“Canada’s Fannie Mae” piles on risk amidst residential real estate bubble

In March, the Economist magazine calculated that Canadian residential housing is 112% overvalued relative to rents and 46% overvalued relative to incomes. Even Canadian bank economists, enablers of previous excesses, now describe average Toronto prices, which surged 23% last year to CAD $727,000, as a bubble.

Canadian banks have lent into much of the excesses and “Canada’s Fannie Mae” (the CMHC) has guaranteed more than $500 billion in mortgages; almost as much as the US GSEs did relative to GDP prior to the 2008 crisis.

Canadian banks have never seen a major real estate implosion

Because Canadian real estate prices never collapsed during the 2008 financial crisis to the degree they did in the US and the UK (let alone Japan), regulators, investors and analysts are totally unprepared for any such eventuality.

As noted above, there are no indications that any Canadian regulatory body such as OSFI or any financial institution has had a Japan style scenario gamed out by independent risk experts. This even though some Canadian demographic trends, particularly with regards to workforce aging and retirements for the coming decade are roughly similar to what Japan’s were, at the peak of its bubble.

Canadians are in record debt

Worse, Canadians are in debt up to their eyeballs. According to Statistics Canada the ratio of household credit market debt (this excludes government, financial and business debts) reached a record 166.9% of disposable income in the third quarter of 2016. That was up from 166.4% in the second quarter.

Inflated asset prices currently keep those debts under the rug. However asset price levels are temporary; debts linger.

Foxes are in charge of the hen house

Another dangerous sign stems from the fact that all key stakeholders that facilitated the 2008 bubbles and ensuing crisis escaped unnoticed. That means the foxes remain in charge of the hen house.

For example, as Macdonald notes in his paper, Gordon Nixon, CEO of RBC, Canada’s largest bank during the crisis, took in CAD $9.6 million in compensation in 2008, and $12.1 million in 2009.

Canadian bank CEOs and directors now figure that they’ll be bailed out and collect their bonuses, no matter what risks they take.

Bank CEOs aren’t alone in escaping blame for running the system into the ground in 2008. Most Canadians wouldn’t recognize David Dodge either. However, as governor of the Bank of Canada, he fostered the easy-money policies which facilitated the debt and asset bubbles that led to the ensuing troubles.

OSFI: financial sector “group think” stress tests

Another key threat to Canada’s financial system relates to the “group think” that pervades top officials, which leads them to err simultaneously. This is evident in the stress tests that various regulators (the IMF, OSFI, the BOC) have conducted or overseen on the big banks, which remain riddled with holes.

Shorn of business cycle theorists, the stress tests only considered scenarios based on Canada’s history dating back to the 1980s. This despite the fact that eight years of unconventional monetary policy suggests that there are high risks that Western economics are in the midst of a 1930s-style liquidity trap.

As if that were not enough, the stress tests only considered Canadian economic performance. But the first question a doctor will ask is what ailments there are in your family history. Canada’s family (the G-7) includes Japan. An obvious stress test scenario would have looked at Japanese metrics during the past two decades.

Worse, regulators allowed the banks themselves to conduct the key bottom-up stress testing, rather than outsourcing the job to independent consultants. That’s like asking a drunk to check the inventory list in the wine closet to make sure everything is still there. Finally, the stress tests appear to have omitted any probability of freezing up of key counterparties, as occurred with AIG during the 2008 crisis. What would happen if there was a 1% default in the notional value of the $1 quadrillion global derivatives market? (a $10 trillion loss) We don’t know.

The fact that bureaucrats who looked away during the buildup to the 2008 financial crisis weren’t reprimanded will have major implications going forward. That’s because Jeremy Rudin, head of OSFI, the organization most closely charged with overseeing Big Bank stability, was one of those bureaucrats.

Rudin’s story is instructive because it mirrors that of almost all key Canadian financial sector regulatory officials.

Rudin (according to his official biography) spent the pre-2008 crisis years in increasing positions of responsibility in Canada’s finance ministry, which culminated in an assistant deputy minister posting. As insiders know, ADM is a crucial position, which gave Rudin, if he did his job well, better access to information and contacts than even his bosses had.

Yet during his years at the heart of the action, Rubin either saw no unusual risks building up, or he reported none.

(This on its own is stunning as there were clear warnings, well in advance, to anyone who was paying attention, from a slew of prognosticators (ranging from Robert Prechter, to Ian Gordon, Peter Schiff, Douglas Noland, Henry Liu and many others) of severe impending risks).

In either case, the chances that Mr. Rudin would identify systemic risks in Canada’s financial system if they existed today, or would forcefully report them to the public in a way they understood, are slim.

Worse, OSFI junior officials likely would not either.

In fact, no Canadian regulatory official is allowed to speak to the press without prior approval from the top. The career of any insider who forcefully publicly expressed doubts about sector solvency, liquidity, or risk concerns would essentially be over.

(OSFI spokesperson declined to comment on Mr. Rudin’s record prior to joining the organization).

Canadian bank accounting structures are lax, complex and opaque

Almost unnoticed during the 2008 financial crisis, was that Big Four audit firms all happily signed the financial statements of global big banks, including those in Canada, which only months later proved to be insolvent.

Nothing was said, because most Canadians, even seasoned investors and analysts, have little knowledge of the technical accounting standards, that govern the banks. That’s not surprising, because Chartered Professional Accountants of Canada, the body that regulates the profession, keeps key information about those standards and how their audits are conducted behind a paywall. This makes it particularly difficult for the public to monitor its performance.

(A CPA Canada spokesperson declined to comment regarding the cost of a hard copy of one of its handbooks, referring questions to its online store, but said that to maintain regular, timely access to the changes would cost $145 a year ($1,450 for ten years + tax)).

Auditors can’t be sued for incompetence

Furthermore, as Al Rosen of Accountability Research tirelessly points out, Canadian auditors essentially can’t be sued for incompetence. Their focus is thus naturally on maximizing audit fees and drumming up ancillary revenues from their clients; while presumably doing as little actual verification work as possible.

As such, there is a strong temptation to overlook fraud, error or incompetence.

New IFRS 9 standards may be worse than previous rules

New IFRS 9 accounting standards, which are currently being implemented throughout the Canadian financial sector, to address deficiencies identified in the wake of the 2008 financial crisis, appear to be more of the same.

In fact in some key areas, notably the flexibility the new rules give managers to value loan impairments, the regulations are dangerous. Because these days accountants often use flexibility to make things look better than they really are.

Worse, because IFRS 9 rules give the appearance of addressing the issue of misstatements, while not actually doing so, they will almost certainly do more harm than good.

The reasonable investor can draw only one conclusion: bank financial statements are highly unreliable at best. And if they were wrong, no one would tell you.

Regulatory silos, amidst complexity and opacity

The biggest and most worrying challenge is that Canadian financial sector stakeholders have erected a variety of complex regulatory and information bodies; but none has clear overall authority and power to maintain system stability.

All have evolved into solid silos, which have little clue what the other organizations are doing. For example it is unclear whether economists at the Bank of Canada have internal access to the skills needed to comprehend a 200-page bank financial statement or to analyze a derivatives book.

The upshot is that likely not one Canadian financial regulator in a 100 can provide a decent global-macro assessment of system stability. Obvious steps, proposed by outsiders have been ignored, or deemed superfluous.

(Eg. A Glass-Steagall style break-up of the big banks, cleaning up Canada’s auditing industry, running regular stress tests conducted by independent consultants, using Japan-style scenarios, banning derivatives trading or tightening system credit).

Regulatory rentiers

One way to understand why regulatory safeguards are so faulty, is to assess bank auditors and regulators the same way they look at banks: as interest groups, whose main goal is to extract rents, fees, jobs and promotions from the system.

The key interest of the regulators in such a scenario, would be to foster maximum growth among the financial institutions they feed on. Surprisingly, judging from the aftermath of the previous financial crisis, regulators might well benefit from a recurrence, particularly if the institutions were once again bailed out with taxpayer funds.

OSFI, CMHC, the BOC, ratings agencies and the CPA Canada, are perennially engaged in power grabs, for more staff, budgets and bigger salaries.

A new financial crisis, would enable them to point the finger at each other, and to demand more laws, regulations and bigger budgets, to set things right. They’d likely get much of what they ask for.

In short, none have any interest in rocking the boat. To a man, their risk experts missed the boat during the 2008 financial crisis. None, based on research done for this article, will sound the whistle, before the next one occurs.

That said, the seasoned investor faces challenges. Just because a crisis is inevitable by no means implies that it is imminent.

The overwhelming support that Canada’s big banks get from regulators, auditors, rating agencies and analysts (including those outside the country), suggests that an investor’s base case scenario would give them the benefit of the doubt, and to set aside a blogger’s meanderings.

Maybe Canadian banks are among the world’s best. Maybe the financial system would remain stable if one went under. Nevertheless, there is plenty of room for doubt.

Furthermore, the evident risks in the Canadian financial system, suggest that a decent review of those in other G-7 nations is clearly in order. It also suggests that there a good case for hedging one’s investment bets … and preparing for the worst. By Peter Diekmeyer, Sprott Money

“Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter told clients. Many have called it “housing bubble,” now it’s official. But it has kept cities from falling into a fiscal and financial sinkhole. Read…  Why Toronto (and Other Cities) Inflate Housing Bubbles to the Bitter End

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  70 comments for “How Solid are Canada’s Big Banks?

  1. mick says:

    The 2014 Ominibus bill, giving banks the legal right to take THEIR money says it all.
    Yes, the money in Canadian banks now legally belongs to the bank. Canadians will receive no warning, just discover one day their money is gone.

    • TheBalf says:

      Mick is right. Flaherty and His cohorts in every G7 country passed similar legislation to protect taxpayers from future bailouts. The problem is they’ll be replaced by bail-ins, and not just by shareholders who “own” the banks but by DEPOSITORS too!

      • d says:

        Then keep your deposits under the bail in ceiling.

        If there aren’t enough bank’s to go round then create some unrelated (As determined by the bail in regulation’s) entity’s.

    • Nick says:

      I doubt this very much — it simply doesn’t make sense. A country that seized bank deposits would simply cause a run on the banks, making them fail anyway. Why would they want to do this, when they can print money and lend it to banks at 0% interest?

      • robt says:

        Search for ‘bail-in’ in the document, from the Government of Canada:

        Keep in mind that the terminology ‘creditor’ means ‘depositor’, i.e., your bank account.
        As suggested by a commentor above, the best ‘protection’ is to keep any accounts in any bank below the 100,000 dollar deposit ‘insurance’ level, or purchase GICs in 100,000 amounts from different insured issuers. If a bail-in happens Cyprus-style, the bail-in is for amounts above the deposit ‘insurance’.
        Note that in Canada, the deposit insurance is 100K, in the States I believe it’s 250K.

        • Nick says:

          I’m not asking whether a mechanism exists for this — I’m asking why the government or banks would ever do this? It simply doesn’t make sense — the government has many avenues for supporting a failing bank that don’t involve taking money from individual depositors; and taking money from individual depositors would cause the bank to fail immediately.

          Cyprus is not a convincing analogy — for one, it’s part of the Eurozone (and a very small part), which means it can’t print its own money and is constrained by European regulations regarding bank bailouts. Canada is independent. Two, in Cyprus, the financial sector was enlarged by Russian money-laundering. This meant that it was beyond the capacity for the local government to deal with (particularly given European constraints), AND that a lot of the money seized belonged to foreigners.

          Suppose BMO is ready to collapse tomorrow. If it seizes money from depositors, no one will ever bank at BMO again, ever. The bank is finished, and other Canadian banks will likely collapse as well — who would keep their money in them? If the Canadian government lends it money through one of the avenues that already exists, then BMO will survive.

          So my question is still, why would anyone choose the route that destroys the entire banking system, when better routes that preserve it exist?

        • tony says:

          neither country has enough money to pay out loses

        • robt says:

          Nick, Cyprus was the model for this, and legislation is happening everywhere in the world now whether it makes sense to us or not. It certainly helps to reduce the liability of the government – the obvious aim of such legislation.
          The bank is restructured, new shares are issued for the amount confiscated, life goes on, and people forget – at least the ones that didn’t have their funds taken. The value of the shares issued remains to be seen – and they can be illiquid anyway, with long-term holding restrictions.
          The lost funds are usually characterized as belonging to ‘the rich’, or ‘foreigners’, the usual technique employed to minimize sympathy.
          Also, Canada has always been a destination for hot money – the current wave is from Asia, and into the real estate market. In the ’70s and ’80s is was from the Carribean, Hong Kong and Taiwan. Later, much came from Russia in the turmoil of the ’90s

      • d says:


        The target in Cyprus was the Russian’s and the Cypriot banking industry.

        The french and other Malicious Eu partners, got both.

        Take most depositors money, Socialist government is happy, bank’s are happy, Jealous have not’s are happy.

        When bank’s are allowed to take peoples money in a mass appropriation, you always need to look, at the Rationales, behind the taking.

        • nicko2 says:

          No great loss, Cyprus is a haven for dark money. Important to note, none of the big banks lost money. Not all banks are equal.

        • bev kennedy says:

          Leverage using investors shares as proof of resources and then ramping up leverage in the derivatives market is another way to expose investors to loss as these assets pledged by the big banks but not owned by the big banks can certainly be lost
          And exactly why was it our government had to bail out our big banks and then go into deep denial re any of this post 2008?

    • bkennedy says:

      Write to the financial standing committee and MPS who want an independent inquiry

    • bkennedy says:

      How does this play into the savings deposit insurance if cash is traded for shares and the share price of the troubled bank keep tanking?

  2. Sidera says:

    Five years ago I had a run in with Jim Flatherty, the late fininace minister at a baseball game. After instituting the 40 year zero down mortgages in 2008, I was eager to chat with him regarding the burgeoning housing bubble he had created. I told him the cmhc was going to go bankrupt and he had nothing say. There was a look a dispaire I will never forget. It was almost like he was a child caught lying and had to deny everything he had done. There was no rebuttal from Mr. Flatherty, no political spin was delivered in that moment. As a lifetime politician and lawyer, one would think he would have the ability to stand up to some kid who was challenging his work.

    Flaherty’s triplets are my age, 22 at the time, and come from the same town. I asked what kind of future we have in the next coming years, just an uneasy and almost teary eyed politician who wanted nothing more than the situation to end. The educated and well connected man knew how big the bubble and how bad the bust.

    To this day, I will remember our interaction and the proceeding housing boom that has followed. For only time will tell the damage to be done.

    Thanks for the article. Safe investing.

    • Nick says:

      His look of despair was probably owing to a desire to watch the baseball game and finding that the person in the seat next to him was a conspiracy theorist ready to discuss complex financial matters.

      • d says:

        When wealthy and powerful people are out and about, on non business matter’s particularly Sporting or Social events of the type mentioned its very bad form, to talk shop.

        Unless they first broach the subject themselves.

        Paparazzi are scum, people who talk shop when they corner a person of interest, simply trying to be a person, are not much better.

    • Peter says:

      Great post Sidera.

      I had similar interactions with Flaherty.

      He was a gentleman, he did his best. But he knew exactly the seeds that he, and his fellow members of the establishment had sown.

    • Aubrey Garrett says:

      I guess some people would sooner attack you for speaking to a public servant – a man that receives his paycheck from you, then to listen. You were able to get by the spin doctors and some don’t like it.
      “Good on you” for lifting a rock so we could see the creepy crawlers under it. Canada and New Zealand were the first two countries to pass the new banking mandate that stripped us of Depositor status at a bank and put us at the bottom of the bank creditor list.
      Thank you for your post. Your post sheds a bit of light in the dark corridors of banking.
      ps Interesting to see the trolls attacking your post!

  3. Shawn says:

    As a Canadian who reads your blog, I was happy to read an article on our banks up here in the great white north. Better than average doesn’t mean good, and I’m suspect of their never ending increase in profits and dividends…one day the party will end. Thank you for the article and the work that you and your contributors do.

  4. robt says:

    “As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.”
    The report is here; it’s not a huge report.
    It took 5 years of ‘Freedom’ of Information requests to even get the information to create the report, the type of information that, in the US, was publicly known almost in real time.

    • Alistair McLaughlin says:

      robt, the information was freely available in Hansard, the official diary of Parliamentary proceedings. Hansard is available online, and it contains the summary of the Insured Mortgage Purchase Program written by the All-Party Finance Committee when the program was initiated. That’s where I first learned about the details of the program back in 2009. There was no “secret bailout”. That is a fabrication. Also, it never cost taxpayers a cent, nor were taxpayers ever at risk from the IMPP. The risk was already inherent in the fact that the mortgages were already insured by the CMHC.

      • robt says:

        It was not debated in Parliament, and information is still not forthcoming from government agencies or the Bank of Canada.
        The title of the report is after all: Big Banks Big Secret.
        Denial is not just a river in Egypt.

        • Alistair McLaughlin says:

          Are you seriously claiming that the purchase of over $100 billion in mortgages from banks never came up in Question Period?? That it was never discussed by the All Party Finance Committee? Is that what you’re saying? Because Question Period debates, and Committee work, are all recorded and published. They’re like court transcripts – they’re that exact. And it’s all in there. Strong opinions are no replacement for poor researching skills.

        • Alistair McLaughlin says:

          Here’s a link to the January 29 2009 House of Commons debate in Hansard:

          Scroll down to where Edmonton-Leduc Member of Parliament James Rajotte addresses the house on behalf of the Finance Minister. Keep scrolling until you get to the part where he mentions the IMPP: “It commits an additional $50 billion to the insured mortgage purchase program, increasing the overall size of this program to $125 billion.”

          Note how he puts an actual number on it. That’s how I knew – in January 2009 – about the $125 billion the government made available to purchase mortgages from the banks. Again, I remind you, Hansard is an exact record of Question Period debates. It contains word-for-word transcripts of what transpired on the Commons floor.

          House of Commons debates are also televised events; CPAC carries them in full, usually in real time. So that would have been televised. Yet you, and the Canadian Centre for Policy Alternatives, didn’t know about the IMPP for another five years. Ouch. That’s got to sting.

        • Aubrey Garrett says:

          Well said, Robt!!
          At first blush, it appears as if you have brought some banking trolls out of the woodwork. lol

  5. Well done! There is hidden fragility (to put it mildly) everywhere behind the facade. It’s like waiting “for the big one” in earthquake terms…

  6. 2banana says:

    Canadian banks already have a built in ‘TARP”

    And have used it before…

    Banks got $114B from governments during recession
    Support for banks ‘more substantial than Canadians were led to believe’: CCPA report

    One of the most well-known ways in which policymakers helped the banks during the crisis is through a $69-billion CMHC program whereby the housing agency took mortgages off the balance sheets of big Canadian banks. In contrast with other support facilities, all of the funds granted by the CMHC were through selling assets (in this case mortgages) to the housing agency. They were not funds that had to be paid back.

    • Alistair McLaughlin says:

      The total figure was $108 billion out of $125 billion made available. I got that from Hansard, the official diary of Parliamentary proceedings. That was the total value of mortgages airlifted off the banks’ balance sheets (purchased by the CMHC. The government actually made money on the transaction. Issued debt at crisis level interest rates, and purchased mortgages locked in at higher, pre-crisis rates. Something the purveyors of the “secret bank bailout” theory like to leave out.

      • Kam says:

        So you are saying the Canadian banks didn’t need the $108 billion, nor the backing of the U.S. Federal Reserve ?
        Odd thing that…the Canadian government taking advantage of Canadian banks by buying up illiquid mortgages.
        Cash, liquidity is oxygen and when you have none left, only apologists talk (after the fact) about what a great deal it was for the lenders (the public) to provide critical oxygen to banking monopolies.

        • Alistair McLaughlin says:

          So you are saying the Canadian banks didn’t need the $108 billion?”

          Yes, that’s what I’m saying. They did not need one cent of it. The mortgages were already insured by the CMHC. They thus posed zero risk for the banks. The risk – both before and after the $108 billion purchase – was borne entirely by the Canadian taxpayer.

          As for the Federal Reserve and TARP money that went to the Canadian banks’ US operations, I have no idea. I was referring specifically to the IMPP.

        • Kam says:

          “The didn’t need one red cent of it”.!!!!!!!

          Nonsense. They needed liquidity and they needed it badly. The Federal Reserve stepped up for BMO and TD. And the Canadian Government converted promises to pay (mortgages) to cash. Without that cash the Canadian banks couldn’t pay their bills (insolvency), so stop spouting nonsense.

        • Alistair McLaughlin says:

          Kam, its difficult to tell whether you’re just making things up or if you really are that misinformed. I will be charitable and assume the latter. At no point were the banks unable to pay their bills. The concern was that they would stop lending. The liquidity injection was to make sure they would keep lending, and not have to resort to calling loans, which could lead to a credit collapse.

        • Alistair McLaughlin says:

          Not to pile on or anything (but you do make it easy), here’s an update on the IMPP presented to the House of Commons in March 2009:

          Since you seem like the type who is averse to reading anything that doesn’t confirm your own conspiracy theories, I’ll quote the relevant part:

          Although it is still too soon to say for certain, the results of the latest auctions conducted by CMHC suggest that the financial institutions’ interest in the IMPP is declining, hence the possibility that the financial markets are gradually returning to a normal mode of operation and that the program’s $125 billion budget will not be completely used.

          If the banks needed money that badly – to the point where they “couldn’t pay their bills” – wouldn’t they have clamoured after ever penny they could get their hands on, and sold every mortgage that ever graced their books if need be?

          If you need to see the numbers, have a look at the chart contained in the report. The first $48 billion was quickly snapped up by the banks between October and February. However, on February 20, 2009, $7 billion was on offer from the CMHC. The banks parted with just $2.338 billion worth of mortgages. On March 11, the CMHC made available $4 billion. On that day, the banks were willing to sell just $2.103 billion worth of mortgages. At that point, just over $50 billion total had been spent by the CMHC purchasing mortgages from the banks. Another $75 billion was still available. Yet the banks were already losing interest, choosing instead to hang onto their mortgages and keep collecting the interest themselves. Too busy “worrying about paying their bills” to accept the money I guess.

        • Wolf Richter says:

          Thanks Kam and Alistair for the discussion and the info – much of it very interesting. But I think it’s time to have a good brew and change topics.

      • bev kennedy says:

        Wonder why the government here sold off the bulk of its gold reserves a,d exactly wha( the better alternative investments were?

  7. Andrew says:

    Does the 2014 Omnibus bill allow credit unions to “haircut” or bail-in depositors’ savings? My money is currently sitting in a VanCity account.
    A big thanks for a great article.

    • Paulo says:


      I also use a Credit Union in BC (Coastal Community). I asked this specific question of my in-house financial advisor when I rolled an RRSP into a RRIF last year. My goal was to continue to build up my cash holdings (term deposits) with the express goal of purchasing a neighbours property in the next few years. By doing this at a slow and steady rate I am able to stay under a particular tax threshold for income.

      His reply was that being Provincially regulated, the Credit Union…nay, all BC Credit Unions, had unlimited liability coverage for the customers savings accounts. That is for cash and similar accounts, and not for Credit Union RRSP accounts, which of course, are marketplace investments. FDIC for the 5 majors is limited to $100,000.00. BC Credit Unions have no liability limits.

      I just researched your question and came up with this:

      “Now I’m not one to tell you what to do with your own money, but I wouldn’t suggest holding large deposits of cash in one of the Big Five (especially if it exceeds the $100,000 guarantee limit). Credit unions are more numerous and regulated by the provinces. ”

      and: “The current CDIC regime can only account for 25,000 bank customers at a maximum of $100,000. Canada’s credit crisis is likely to exceed this requirement. Whether the government takes a bail-out or bail-in approach is more or less irrelevant. In the former case they steal from taxpayers to prop up bankers. In the latter scenario, they take from the depositors themselves. So as a taxpayer, as long as you’re not holding all your money in one of the Big Five (or the National Bank, Canada’s sixth largest bank), you’re better off with a bail-in. If only marginally.”

      I worked very hard for my money over a long and varied life. I am sure you work hard for your money, too. 30 years ago I used to bank at the Royal until they tried to shaft me on a mortgage renewal. (I had an assumed mortgage from a house purchase). I switched at that time and have never been happier. Plus, Credit Unions are unionized, member owned, and make an honest effort to support their host communities. Banks are all about profits and political influence that oozes out from Bay Street.


      • robt says:

        A province may offer unlimited deposit insurance, but that would be from provincial funds, and only up to some realistic limit that the province could bear. In the case of a serious financial event, the province cannot create money as the federal government/Bank of Canada could. Even then, rules can change overnight – one can imagine that compensation would not be rescinded – just held in limbo, or promised for years ahead.
        Another method used is to merge institutions – during the Canadian banking crisis of the early ’90s – which most people never even noticed, a large number of smaller banks and trust companies were absorbed into bigger ones. The Bank of BC, as an example, was ‘bought’ by HSBC for either a dollar or a hundred dollars, can’t remember, and the Government of Canada gave HSBC 100 million to facilitate the sale.

  8. Nick says:

    I don’t think anyone things this statement . . .

    “Maybe Canadian banks are among the world’s best. Maybe the financial system would remain stable if one went under. ”

    . . . is true. When I emigrated to Canada and opened an account at Scotiabank, I asked about how deposit insurance worked. They explained the technical terms, but then said that if Scotiabank failed, that meant Canada had gone belly-up too. There is no way that the world financial system would remain stable if one of the big Canadian banks failed, much less the Canadian financial structure.

    I think this is a good article, Lord knows the last financial crisis left people here with a sense of complacency, satisfaction, and security — it would be strange if there weren’t vulnerabilities in the system now. That said, when you’re talking about banks that all survived the Great Depression and have a giant amount of strong institutional support, ‘failure’ would point to a truly exceptional crisis.

  9. Thomas Dapice says:

    I believe the proverbial associations are fox and chickens, and wolves and sheep.

    • d says:

      No, that involves chasing and some escapes injurys Etc,

      Try two lions, and a captive lamb, democratically discussing, whats for lunch.

  10. Akam15 says:

    I don’t think any other the points made here come anywhere lose to how corrupt the banking system was in America. The standard mortgage in Canada still requires 20 percent down, nothing like the liar loans that were rampant in Florida and Cali. So maybe home prices are over valued in Van and Toronto based on income. But many people buying homes there are paying all cash. It’s a safe haven for funds from Asia. So you might lose 20 percent of the house price in a correction. They could also lose 20 percent of their purchasing power with a devalued yuan. I think Chinese buyers will take that risk all day long

    • Alistair McLaughlin says:

      Wrong. CMHC insures mortgages with as little as 5% down, and has done so since March of 1992. Also, between 2006 and 2009, you could get a CMHC-insured mortgage with 0% down for as long as a 40 year term. Fortunately that was short-lived. The 2008-09 meltdown put the fear of God back into the government, and they quickly started tightening rules again. The rules are still tightening, with new, stricter qualification standards kicking in just two weeks ago. Yet the housing bubble – in Toronto at least – continues unabated.

    • R2D2 says:

      Watch the following:

      Most purchases are done by getting the down payment part from smaller lenders, then using that lent money for a mortgage that is insured by CHMC. So, the whole purchase in many cases is done by borrowed money.

      The above video discusses many tricks and myths about Canada real estate.

      • Alistair McLaughlin says:

        Pre-financial crisis, my sister bought a condo in Calgary. She told the lender (BMO) “But I don’t have enough for a down payment.” The loans officer said, “No problem, we’ll lend it to you.”

        Since the crisis, lenders have gotten a little less obvious (but no less blatant). They’ll arrange a borrowed down payment from some alternative lender rather than lend it themselves, thus keeping with the letter, though not the spirit, of CMHC rules.

        Or they’ll game the Home Buyers’ Plan that allows a home buyer to use their RRSP for a down payment. The home buyers is given an “RRSP loan” to deposit money into his RRSP. After the requisite 90-day waiting period, the home buyer then withdraws the money and uses it for the down payment under the Home Buyers’ Plan. So the lender can say they didn’t lend money for the down payment. It was an RRSP loan!

        • Nick says:

          I don’t understand what’s so nefarious about this — the RRSP money is real money, owned by the person buying the home. It’s called a loan, because they have to repay it into the RRSP in a set period of time. Normally you can’t withdraw it without a penalty prior to a certain age — all this program does is waive the penalty if you’re buying a house.

          RRSP is a Registered Retirement Savings Plan — it consists of your own money, deposited at a rate determined by your earnings.

        • Nick says:

          My apologies, didn’t read carefully, I missed your sentence about the person being given money to deposit into their RRSP. Wouldn’t this only work for people who had decent cap space (i.e. decent earnings), but no savings?

        • Some Guy says:

          “Since the crisis, lenders have gotten a little less obvious (but no less blatant). They’ll arrange a borrowed down payment from some alternative lender rather than lend it themselves, thus keeping with the letter, though not the spirit, of CMHC rules. ”

          OSFI is currently on the warpath against these arrangements, but the reality is it will always be a cat and mouse game as long as interest rates are low and the music is playing.

          One of the issues the article missed is the division of government responsibility for lending in Canada. Banking is one of the few aspects of Canada that is under federal regulation (via OSFI). But credit unions, payday lenders and other non-bank lenders are covered by provincial regulation, which is a patchwork of mostly pretty lax standards across the country.

  11. Alistair McLaughlin says:

    There is some excellent information and criticisms in this article. However, it needs to be pointed out that the “bank bailout” (officially called the Insured Mortgage Purchase Program – IMPP) did not cost the taxpayers a cent. In fact, the federal government made money off the transaction. The government issued bonds at crisis-level interest in 2009, and used the proceeds to purchase over $100 billion worth of mortgages from the banks. These mortgages were already insured by the CMHC, thus no additional risk was taken on, as the feds were already on the hook for defaults. As those mortgages were locked in pre-crisis when rates were much higher the federal government made money off the interest spread.

    The action was taken not to rescue the banks, but to prevent a liquidity crunch that could have forced the banks to start calling in loans. This, in turn, would have forced many clients into instant insolvency, quite possibly triggering an economic calamity in Canada.

    Now, I shouldn’t have to bother, but before someone starts accusing me of defending the banks or the government or the CMHC, or of having some other ulterior motive, or of being “in denial, let me say this: If banks were forced to maintain adequate reserves to begin with, this injection of liquidity in the form of the IMPP would have been entirely unnecessary. Also, Canada has done virtually NOTHING to ensure adequate reserves since. I’m neither defending the actions nor the players; in a properly and conservatively regulated banking sector (meaning very few and very simple, but very tough regulations enforcing very high reserve requirements), the government would not have felt compelled to airlift $100 billion worth of mortgages off the banks’ balance sheets to prevent a liquidity crisis. The feds made money on it this time. It might not work out so well the next time.

    • R2D2 says:

      You said: “These mortgages were already insured by the CMHC, thus no additional risk was taken on, as the feds were already on the hook for defaults. As those mortgages were locked in pre-crisis when rates were much higher the federal government made money off the interest spread.”

      So, you mean one branch of government buy from another branch of government. It’s like I pull money out of my left pocket and put it in my right pocket, and say I have twice as much money. CHMC is the government.

      • Alistair McLaughlin says:

        No, as I stated, the government purchased the mortgages from the banks. CMHC – the government mortgage insurance arm – provides mortgage insurance. The insured mortgages themselves remain the property of the lenders, unless the lender decides to package the mortgages into some sort of mortgage-backed security and sell them, which often happens. Sweet deal for the banks. They get the benefits of lending without the risk. It will blow up in our faces at some point, of that I am pretty certain.

        • R2D2 says:

          I quote you “The government issued bonds at crisis-level interest in 2009, and used the proceeds to purchase over $100 billion worth of mortgages from the banks.”

          You said government bought the mortgages; so which is it? There you say government bought them, and now you say “The insured mortgages themselves remain the property of the lenders, unless the lender decides to package the mortgages into some sort of mortgage-backed security and sell them”.

        • Alistair McLaughlin says:

          Try reading the entire sentence, not just the first half. You quoted it for crying out loud. “…unless the lender decides to package the mortgages into some sort of mortgage-backed security and sell them, which often happens.

          I realize I have a somewhat cumbersome and verbose writing style, so I’ll shorten it for you:

          The mortgage remains the property of the lender unless they decide to sell it. Under the IMPP, the lenders sold the mortgages to the CMHC. Yes, they were already insured by the CMHC, but were not yet owned by the CMHC, until they bought them from the lenders.

          So, it was not “one branch of government buying from another.” It was government buying government-insured mortgages (not government-owned mortgages) from the private lenders.

  12. Maximus Minimus says:

    You can bring down Canadian banking by shutting down one single venue out of these: bring back above real inflation interest rates (and mortgage rates), stop foreign investment in real estate, stop flooding the country by third world immigrants.
    That said, Canadian banking is a fraternity designed to squeeze the customer to the limit. In that sense, it are as solid as it gets.
    The risks have been transfered to CMHC (Fannie Mae), i.e. the government. Nice if you are a bank.

    • R2D2 says:

      The migration population increase is a myth. Toronto migration population I think has risen something like 1% in the last 5 years or so. I don’t remember the exact numbers, but they were small; nothing like they have rumored it to be.

  13. R2D2 says:

    “In March, the Economist magazine calculated that Canadian residential housing is 112% overvalued relative to rents and 46% overvalued relative to incomes.”

    Are you kidding me? Median family income in Toronto is around $CAD 60K. On the other hand with 2016 prices, and prices had increased dramatically since then:

    “For a detached house in the city of Toronto, the average price last month was $1.28 million, while the average price for all homes was $782,051, TREB said. TREB president Mark McLean said a shortage of homes for sale helped drive the rise in prices.”

    By income, they are probably overvalued by at least 250%, not 46%.

    It’s amazing how opaque Canada is, and for some unknown reason, no one calls them for it.

    • Alistair McLaughlin says:

      I saw it quoted recently that Toronto is nearing where Tokyo was in 1989. I believe it.

  14. Kam says:

    Canada, the country where Bureaucracy breeds and Personal responsibility and initiative goes to die.

  15. Del says:

    Trudeau passed legislation allowing Canadian Banks to seize depositors money and issue bank stock or shares in it’s place. He has been planning for Canada to fail well before he got help from Soros, Obama and Islamists. Who in their right mind would want shares of a Bank that is failing? Shares with virtually no value. Big deal – take my $1000 and issue 200 billion shares. Liberal toilet paper. With any luck those shares would have his picture to give us some small satisfaction.

    Me? I have bullion and cash hidden. I truly do not trust my Canadian Bank and they know it.

    • PIGL says:

      You should sell your boullion and invest in tin. You can make real nice hats out of the foil. You know to protect your brain from Islamist moonwaves.

      “Soros” forsooth.

  16. Divya says:

    I think you can replace the word Canada with australia in this article and everything will pretty much still hold true.

  17. FranSix says:

    Canada engaged in bond-swapping, where underperforming mortgage bonds were swapped for gov’t bonds. Thus the housing bubble continued. Essentially the housing bubble is now publicly subsidized. As long as the corporate bond market continued to grow based on mortgage backed securities, the economic numbers look good.

    Bond-swapping will probably be resorted to in the housing crash.

    The trade surplus went from a $50 billion surplus to a $50 deficit during the period of the financial crisis, which was mitigated somewhat by the decline of the $CAD during the oil price rout.

    But I think that investors participating in tax-free savings accounts may see the bail-in of those accounts should the banks see another financial crisis, since they don’t own the securities that they buy in the accounts. You would have your account forcibly cashed out and capital gains taxes would apply.

  18. d says:

    This article. Contains fact’s, very little sarcasm, and no obvious sensationalism.

    It also read well.

    It has also elicited some informative comment’s.

    More please.

    • bkennedy says:

      So despite having to bail out the banks to the tune of 114 billion our government allows the same entities to continue to run roughshod over the legal rights of clients retail consumers of there same big banks per reports by cbc. Interesting

      • d says:

        “So despite having to bail out the banks to the tune of 114 billion our government allows the same entities to continue to run roughshod over the legal rights of clients retail consumers of there same big banks per reports by cbc. Interesting:

        Yes causes one to think they have been taking lessons from, the french, the ECB, and European’s.

        The french have always had to much influence in the Canadian financial and legal system’s.

        • PIGL says:

          Excuse me? the French have about as much influence on Canada’s financial and legal systems as do the Neptunians.

  19. FranSix says:

    Mortgage bonds issued by Bay Street banks hit a record to start off the year:

  20. FranSix says:

    A look at buying houses in Toronto. From my perspective, everyone talks housing as a way to advance their financial status, even if they borrow at 10X earnings. Absolutely everyone in need of a home is at risk with the onset of recession. In fact, people at risk of bankruptcy are rolling the dice on mortgages they have absolutely no hope of paying in the eventuality of the onset of difficulties. They believe themselves affluent as a cinsequence. And they’re buying homes that were a risk in the last housing bubble, or buying condos which you simply could not resell. Foreign buying is coming from around the globe,(not just China) and these people depend on the bubble economic and credit in their own asset bubble.

    • bkennedy says:

      Do the numbers for zsurvivors benefits for cpp and oas and what the survivor really will receive. And then ask why are our politicians so lax regarding the banks and investment industry with only a pretend regulatory oversight system? And ask why the regulators also aren’t explaining the difference between advisor and adviser and lack of fiduciary obligations for one of the two.
      Cpp is not just reduced by half by the way regarding the payout entitlements from the deceased.
      The government needs to come down really hard on the banks and others in the investment industry who are more focused on their own profits than providing good ethical service to their customers

  21. bev kennedy says:

    Our regulators don’t even bother to vet the contract clauses retail investors sign when they open accounts prior to investing and get quite huffy when called out on this
    Consumer oversight outside the banking financial industry *re much more rigourous….eg for a gym membership vetting contract cl*uses would be a basic but with so much more on the line re a lifetime of savings……this is a, ignored duty.

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