The mantra of the Harper government is that the Canada's banking sector is a bright star in the banking heavens. No public opportunity is lost to take credit for the resilience of Canadian banks during the 2008 financial crisis: "Without wanting to appear arrogant or vain, which would be quite un-Canadian," claimed our finance minster, Jim Flaherty. "While our system is not perfect, it has worked during this difficult time."
Sorry to break it to you, finance minister: there are some indications that this overconfidence may undermine the very qualities that helped the Canadian banking system to withstand the financial turbulence of 2008.
Why did the Canadian banking system get in less trouble than others? Are Canadian regulators that much smarter than their counterparts abroad? Are Canadian banks just inherently more prudent?
Let's not kid ourselves with this Canadian superiority shtick. A very particular set of circumstances pertained to 2008, and we cannot assume they will recur the next time a global financial meltdown threatens Canadian banks. Elsewhere, I have discussed what those special circumstances were, but out of them all, the key issue is fear.
Prior to the financial crisis, Canadian banks were not entirely sure that the government would smile upon them if they got involved in too much financial hocus-pocus. Sure, banks and their regulators are pretty cozy, but any one bank that got too far out of line might be punished if its risky bets failed. This uncertainty about how the government might react if a major Canadian bank was under pressure made banks more cautious. A little anxiety amongst bankers goes a long way to improving their behaviour.
Fast forward to 2011. Are banks still as worried that they will bear the consequences of their misadventures? I don't think so.
In the heat of the financial crisis in October 2008, the Canadian government sent out a message loud and clear: we will help our banks no matter what. Several avenues were quickly opened to help the banks borrow money from the government using a variety of financial assets as collateral.
Perhaps most eye-popping was the announcement that the Canadian Mortgage and Housing Corporation would provide $25-billion in cash to major financial institutions by buying CMHC-insured mortgage pools from them. As the crisis continued, the government kept increasing the upper limit of these purchases. The program finally allowed $125 billion in purchases by the time the crisis eased.
So what was happening there? It's not like these mortgage pools were posing a threat to the banks that held them (these mortgage pools are already insured up the yin-yang by the government ). The point of this exercise was to announce to financial markets that any and all mechanisms would be made available to make sure banks could get their hands on plenty of funds to withstand a financial panic. Even if the Canadian banks didn't need money, the government put on a show of demonstrating that financial institutions had only to ask and the spigots would be opened.
This precedent demonstrated that the government would think way outside the box to help banks. Before October 2008, no one dreamed that the mandate of the Canadian Mortgage and Housing Corporation included protecting Canadian banks from international financial crises. Then suddenly CMHC is able to funnel $125-billion to banks in the blink of a press conference? Talk about public policy improvisation on the fly. And banks drew the obvious conclusion: this government will do whatever is necessary to stand by us, regardless of the letter of the law.
So while Canadian banks made it through the crisis without outright bailouts, that doesn't mean they didn't have help. And the support they got in their moment of need has lingering effects on financial stability moving forward.
Today, Canadian banks can rest easier, knowing that they will not be allowed to fail. I don't suppose they will even be allowed to hurt very badly. And this de facto safety net provides an incentive for banks to get a lot more adventurous.
As the financial crisis knocks on in Europe, it is painfully apparent that banks that are viewed as "too big to fail" pose a significant threat to the public purse and the stability of the financial system. But the G-20 has mostly failed to solve the problem of implicit or explicit government safety nets for big banks. It is up to domestic regulators to try to make sure the biggest banks do not abuse the security of government support and merrily ratchet up the sorts of risk-taking that may well contribute to the next financial crisis.
Canada has a great opportunity to preempt these dangers. Every five years the Bank Act comes under review in Canada, and 2011 is the next scheduled review. And you'd think in the wake of a financial crisis, there would be some important questions to ask. Like, say, how are we going to prevent banks from exploiting the safety net that they know the government will make available if systemic banking stability is threatened?
Shamefully, it seems Canadians will be denied the opportunity to make the bank review a critical exercise. The upcoming Bank Act review is hardly whispered about publicly, except to say it will be confined to a narrow "technical" exercise. Decoded: little details can be tweaked, but no meaningful policy issues will be discussed. It would seem that the Harper government thinks that Canada's banking system is so fabulous that these hard questions don't even need to be asked.
No doubt the Harper government will fight the next election congratulating themselves on their banking smarts. It is ironic, and potentially tragic, that all of this bragging only masks the possibility that the Canadian regulatory landscape is losing the very qualities that made it resilient in the past.
Ellen Russell is a senior economist with the Canadian Centre of Policy Alternatives. This is the first of an ongoing monthly column.
The corporate and financial oligarchs have the Harper government in their pocket...all public policy is made only after consulting them. Our so called democratically elected policy makers answer only to those that can support them in a manner to which they will become accustomed...once out of office and in the 'private sector'...
Canadian banks employ a significant percentage of the Canadian population. We don't want a significant portion of these employees to be laid off. Yes, our banks are important and may deserve some special attention from time to time. Harper is right. Comparing globally, we were forced to assist our banks much less than other countries.
in 2008, CCPA and unions supported bank bailouts.
sure you said help workers and home owners and others too, which didn't happen.
in the next collapse, given the likelihood aid for most civilians will be absent, will the CCPA and unions enable the system in a similar prop-and-whine manner?
If my memory serves correctly, the Harper government funneled a first instalment of $25 billion to the CMHC in November 2008 and then followed that up with another $50 billion in December, the next month. Didn't even know that they sweetened the pot with an additional $50 billion thereafter?!
They made it happen like a breeze. No debate, no media. Right time of year to squeak things through. And desperate at that time to ward off the potential threat of a political merger to oust his PC's. When the first payoff worked so smooth they passed the next one while everybody was thinking about christmas.
It amounts to a BAILOUT that is equitable in proportion to our US counterparts (1:10). And still they claim we had no financial meltdown like they did.
The bubble is still building, and surely will burst...The empirical evidence is mounting all around this city, and what follows inevitably a wave of foreclosures...Our banks DID give 35-40 year amortized mortgages on very little down. Our central bank HAS HELD down the interest rates to promote the real estate game well beyond the obvious risks. All of this a concert to maintain the illusion of a relatively robust economy. And now interest rates rise, inflation mounts, and the type of work that pays enough to maintain those mortgages (average=$150,000 combined household income) is waning at a frantic clip.
Thanks Ellen for this timely reminder...I look forward to your subsequent posts.
The CMHC has one mandate. Help those who can't raise 20% of the cost of the house as a down payment to buy the house. Don't you agree with this mandate?
Canadian banks participate in fractional reserve banking, which is in itself simply a government sponsored Ponzi scheme. The fact that it's internationally accepted and entrenched, doesn't change the facts of the matter.
There is simply not enough money, and there never will be enough money, to cover the debt inherently and explicitly created by that financial system. It was explicitly created by a few international banking families to replace slavery with a more covert means to the same end. Anyone who tells you we can keep bailing out the banks, or that our banks can do anything whatsoever to avoid inevitable collapse, is sorely deluded, or otherwise has been brainwashed into placing faith in the status quo. Mind you, that is in itself the status quo...
If not for the fractional banking system, where approx. 90% of all deposits are lent out, where does the money to lend out come from?
RDP,
a) The law was changed in the '90s to require ZERO reserves. Banks can lend out 100%. Repeatedly. Ad infinitum.
b) "Deposits" are created by banks at the same time they create loans. It's a standard accounting practice. The bank enters the amount of the loan on one side of the ledger, creating a "loan" from thin air as an "asset"- an asset which generates interest, requiring repayment to the bank. An equal amount is entered on the other side of the ledger creating a "deposit" out of thin air as a "liability" - theoretically an amount the bank "owes" to a non-existent "depositor".
The banks books look balanced based on the illusion that an actual person has deposited cash in the bank which the bank then loans out.
c) Bank-created 'money' is simply the power to type computer entries. It's ridiculous we have allowed them to have that power.
Not true Handshere.
Banks need deposits to create loans. If I am the only client of a bank and deposit $100, the bank can't lend out more than $100. They only have $100 to lend out. If they have a 1000 client each depositing $100, they can't lend out more than $100,000. That's all the bank has. Reserve ratios aren't 0%. They are about 10%. So, the bank takes my $100 and lends out $90. They create a chequing account for the borrower and deposit the $90. Now, the borrower is borrowing the money for a reason. He writes a cheque to purchase what he borrowed the money for. The seller takes the cheque as payment and deposits in his bank. His bank lends out $81. This goes on and on. Every $100 deposit supports $1,000 of loans and deposits in the banking system with a reserve ratio of 10%. Nothing is created out of thin air.
The loaning bank deposits the loan in a chequing account with the full knowledge that the borrower will quickly redeem the money to buy what he borrowed for.
Zero reserves are required now.
100% reserves ought to be required, if private banks and interest are accepted at all, so that they only loan out government-created money.
100% reserves ought to be required?
Let's say the you buy $100 of a GIC and it pays you 1%. You want the bank to be forced to hold all your $100 in the vault. How is this money supposed to earn enough to pay you your interest and the salaries and expenses of the bank? Banks borrow and pay interest (sometimes not, but that is up to you. (you don't have to put your money in a chequing account)) and loan and earn a greater rate of interest. This is the business of banks. The spread pays for everything and hopefully there is some left for profit.
Money sitting in a vault earns nothing.