Why Canada's Banks Don't Need Help

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In the midst of the worst financial crisis since the Great Depression, Canada has joined the ranks of governments that in recent weeks stepped up to help banks cope with more fallout from bad U.S. subprime mortgages. In Canada's case, however, the reason for the assistance is a little different from some of its G-7 partners. Unlike banks in the U.S., Britain and Germany, which needed to be bailed out with hundreds of billions of dollars in new capital, Canada's major banks are solid and solvent. They don't need any help to work through their subprime exposure.

Why has Canada withstood the subprime tornado better than other countries, and should the Canadian banking system be a model for G-7 and G-20 leaders when they gather in Washington on Nov. 15? Consider that the Geneva-based World Economic Forum, an influential think tank whose annual conference attracts the likes of Bill Gates and Tony Blair, earlier this month ranked Canada's banking system as the soundest in the world. The U.S. came in at No. 40, and Germany and Britain ranked 39 and 44, respectively. (Switzerland was No. 16, just ahead of Namibia.) "For Canadian banks, having higher capital ratios than anyone else in the world is a source of pride," says analyst Mario Mendonca with Toronto-based investment bank Genuity Capital Markets.

The average capital reserves for Canada's Big Six banks " defined as Tier 1 capital (common shares, retained earnings and non-cumulative preferred shares) to risk-adjusted assets " is 9.8%, several percentage points above the 7% required by Canada's federal bank regulator. That's a little better than major U.S. commercial banks like Bank of America, but significantly higher than an average capital ratio of about 4% for U.S. investment banks and 3.3% for European commercial banks.

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@Robert Gentel,

re. "Why Canada's Banks Don't Need Help"

perhaps not yet !
downturns in the U.S. economy have in the past several decades always been felt in canada - but usually delayed by several months and perhaps even a year or two .
with canada - particularly ontario - heavily depending on automobile exports to the U.S. (about 80 % of production going to the U.S. !!!) , things are getting very sour in that industry - and it will be felt throughout canada , i believe .
the canadian auto industry might easily shed up to 100,000 jobs - where those people are going to find jobs , nobody seems to know .

perhaps canadian banks are somewhat more prudent than U.S. banks but they aren't completely shielded from a downturn in the economy .
to use bank of nova scotia as an example :
share price : dec. 2oo5 : $32 , sept. 2007 : $54 , today : $37 , the low was $34 about a month ago .
they are still paying a good dividend : appr. 4% (just received $350 today - it's not a major investment for us - our income is from various government plus employer's pensions) .

of course , i'm hoping that canada will make it through the crisis .
having lived in canada for over 50 years , i remember that canada has been "throught the wringer" before . canada was on the watchlist of the IMF in the 1970 - i'm sure you know what means .

so i hope you'll send good thoughts to canada , robert - just as i send good thoughts towards the U.S. !
hbg

additional comments :

http://able2know.org/topic/125147-2#post-3473229

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@hamburger,

Happy to reciprocate those good thoughts.

Is there any possibility that Canadian banks don't need help yet (and hopefully never) because they never developed a feeling that help wouldn't be available? In other words, does Canada have any history of bailing out the private sector?

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@roger,

how does the oil imported from canada bolster the economy there?

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@roger,

roger wrote :

Quote:

In other words, does Canada have any history of bailing out the private sector?

i don't think there have been any large-scale bailouts in canada in the last several years - some small banks in western canada were wound down some years ago .
i don't think the canadian government would have enough money for a large-scale bailout - maybe that's a good thing ???

the automobile companies (the big three) have received plenty of "subsidies' over the years . since they are the largest unionized employers , the big three had an easy time to use the assistance of the unions to put the squeeze on the government . (no subsidies = large job losses .. .. no government wanted that to happen on their watch ) .
hbg

in canada it's called an "investment" not a "bailout" ... and ford still cut the jobs ... after pocketing the money

Quote:

On September 3rd (with a federal election looming) Steven Harper announced his Government’s decision to “invest” 80 million dollars into Ford’s future. Everyone looked happy: The Government of Ontario, the Opposition, the CAW… The Opposition and the CAW said that this decision was long overdue. Canada’s Industry Minister Jim Prentice claimed that this “investment” will help make the Canadian automobile industry more competitive and will “create or sustain” up to 750 jobs. A week later came another sobering announcement: Ford announced the elimination of one of its shifts and the layoff of 500 workers from the same plant where Jim Prentice had made his announcement the week before.

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The rest of the article tells the major reasons Canada'a Banks do well in this environment.

"Another factor that helped make Canada the new gold standard in banking was Ottawa's decision in the late 1980s to allow commercials banks to acquire investment dealers on Toronto's Bay Street, the country's financial hub. As a result, these institutions are subject to the same strict rules as commercial banks, while U.S. investment dealers are subject to only light supervision from the Securities and Exchange Commission. Morgan Stanley and Goldman Sachs, of course, will now be under the U.S. Federal Reserve's supervision since they have been chartered as bank-holding companies.

Canada's banks make bad investments on occasion. When Toronto-based CIBC, Canada's most aggressive big bank, took $3.5 billion in charges against the U.S. subprime debacle, federal regulators quickly arrived on the scene. But here's the difference: CIBC ended up selling $2.94 billion worth of its own shares in the first quarter of this year to shore up capital reserves. "The relationship between government and banks is a positive one," says Minister of Finance Jim Flaherty. "We have a lot of discussions and regular meetings. The common goal is a sound financial system."

There is, of course, a flip side to Canada's regulatory system. When the global economy was flying high, Canadian banks complained about not being allowed to merge to become more significant international players. "In hindsight, that decision may have saved Canada from having a Royal Bank of Scotland on its hands," says Lawrence Booth, a finance specialist at the University of Toronto's Rotman School of Management, referring to the overly ambitious bank's bailout earlier this month by the British government.

Says FFlaherty: "The credit crisis we're facing is the result of unbridled greed. We need to bridle greed." Perhaps when world leaders sit down in Washington to forge a 21st-century New Deal for the global financial system, it may have more than a smattering of Canadian banking know-how.

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@Woiyo9,

Hmm..
The Canadian banks are strong because of strong government regulation.

Who would have thought such a thing possible?

1 Reply

@parados,

Oversight!

1 Reply

@Woiyo9,

Oversight requires that they oversee regulations.

Without regulations, what will they oversee?

1 Reply

@parados,

perhaps one reason for the canadian banks being somewhat cautious is that most were founded by the scottish immigrants - they also started some of the first breweries <GRIN> !

scottish thrift and humour seem to go hand-in-hand :

http://myweb.tiscali.co.uk/nescotland/images2/jokect2.jpg

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Why Canada's Banks Don't Need Help

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