“One of the reasons that Canadians (and international commentators, other finance ministers and global financial institutions) buy this Canadian banking fairy tale is the way the government accounts for the money borrowed to support the banks.”
The sorry spectacle of Conservative cabinet ministers flying around the world defending banks from a tax to cover their next, inevitable, meltdown is bad enough. What is perhaps worse is that it is being largely justified by the perpetuation of the myth that Canada did not have to bail out its banks. Canada has the best banking system, doesn’t it? That’s what the media has been saying for months now.
We [Canada] are, according to the IMF, actually the third worst of the G7 countries, behind the US and Britain, in terms of financial stabilization costs.
First, Canada put up $70 billion to buy up questionable mortgages from the big five banks, through the Canadian Mortgage and Housing Corporation, taking them off the banks’ balance sheets. That is almost the exact equivalent the US bailout – it spent ten times as much, $700 billion, and its economy is about 10 times as large.
Secondly, the Harper government established a fund of $200 billion to backstop the banks – money they could borrow if they needed it. The government had to borrow billions – mostly from the banks! – to do it. It’s euphemistically called the Emergency Financing Framework – implying that our impeccable banks might actually face an emergency. It is effectively a line of low-interest credit and while it has not all been accessed, it’s there to be used. Could it help explain why credit has not dried up here as much as it has in the US?
Third, the government now insures 100% of virtually all mortgages through CMHC eliminating risk for the banks – and opening the door to the ridiculous flood of housing loans we have seen over the past few years. The result: housing has become unaffordable for tens of thousands of Canadians and new rental housing has dried up. Source [Editor’s note: it appears since this article came out the original source went down. Canada’s finest strong-arm tactics at silencing the truth at work.]
Figure this one out: The Bank of Canada lowers the bank rate by 1/2 a point yesterday (May, 2010) and the Canadian banks raise their lending rates to business and for mortgages. The lame excuse is that they are having difficulty finding money to lend. This is nonsense. Most people would agree that the Canadian economy is sliding into recession or at least slowing down measurably, mostly due to the tragic woes of our American customer to the south. Indeed, the Canadian economy also depends heavily on the construction industry to fuel it. As the banks raise interest rates, they further slow the economy. Mr. Harper’s finance minister (Flaherty) says that it is not his job to tell Canada’s big banks what to do concerning interest rates. Well it is probably high time that Canadians wake up to the gouging that their financial institutions perpetrate on them with the support of the Canadian federal government.
If Canadian Chartered banks are so well capitalized, and are well regulated by the OSC and friends, and are immune to global economic downturns, well then why is it that these chartered banks are still charging a 1% interest rate buffer on all lines of credit, credit card debt, and mortgages in addition to their internal prime rate? Their pitiful excuse is that the costs associated with the financing of long term debt has gone up, so to offset this, they levied a 1% surcharge on all outstanding debt. Some institutions pass this off as a CDIC insurance for deposits. Essentially the enhanced 1% surcharge is supposed to be held in reserves to pay for depositors needs for a particular time frame (higher reserve requirements).
This 1% buffer as a cash grab to pay for Canadian chartered bank misadventures in investing in the Toxic Mortgage asset purchase south of the border. Indeed, CIBC and friends made significant investments in US toxic mortgage assets, and it produced punishing losses that were passed to retail customers. Thus the 1% surcharge to the Chartered Bank’s internal prime rate can also be agreed that this 1% charge made the Canadian banks generate high profits off the ‘brows’ of the underpaid worker (i.e. high profits that ALL BANKS ARE REPORTING).
There is a big difference between cheap credit and easy credit. Had there not been so much easy credit around for so long, the construction industry bubble would not have grown so big. People in Canada were borrowing money to purchase new condos and apartments (perhaps even houses) with no intention of actually occupying them. They flipped those units for a quick profit and at the same time created a false shortage of units available for sale in the market place as well as inflating the price per unit. The governments (municipal, provincial and federal) were quite well aware of the situation and did s.f.a. to regulate the inflation in housing prices. Now we face a real estate market where the buyers have disappeared, the listings are rapidly climbing and the prices are falling. Boom and bust!
Now, when the economy is in decline, real estate markets are unstable and energy costs are inflating, our greedy bankers decide to widen the margin they take on loans. The Federal Government has a duty to regulate the financial institutions in such a way as to be fair and equitable to all Canadians. After all, the Federal Government grants each bank its charter which enables the bank to lend more money than it actually has in assets. In fact, the big banks run the country; not the reverse. When they have made serious errors of judgment in the past and found themselves in a loss position, they have been repeatedly bailed out by government. We can therefore conclude that the system is corrupt at all levels. It’s time for major change or a revolution!
Myths about Canadian banks
First thing: Canada having the strongest systems for banking has nothing to do with Stephen Harper and his Cons nimrods, they have been in a minority government for the past two and a half years. Which then leads to why the Canadian banks are doing so well is the past government of Canada which held a majority government for 8 strong years. this is totally the works of Jean Chretien and before all the conservatives start screaming that only people in Quebec could believe that, I grew and live in Calgary.
Second thing: It’s great are banks are doing well but within the year they to will start to struggle Canada’s economy has always fallen the States economy with a 11 to 12 month lapse. The states are in a depression and we will blindly follow them there for however long that it takes for Obama to deepen it further. Canadian banks have been writing bad mortgages all over Canada and why do you think they allowed the new 35 and 40 year mortgages? It was because the Canadian Retail board artificially increased property value just as the states did theirs. How many people have extended themselves to max just to afford there ridiculous monthly mortgage, if the interest rates jump two percent are housing market will crash as bad as the states did.
As any statistician knows, sometimes numbers can be used to lie. In this case, they have essentially come up with a scoring system in which, presumably, they rate a country’s banks in a variety of categories and then take the average of those categories to arrive at a final number. If that’s how it was done, that’s obviously highly subjective and it becomes very difficult to understand whether Canada’s 6.8 is really that much higher than Britain’s 6.0. (This isn’t a measurable scale.)
Moreover, any ranking that places some European banks behind those of developing countries needs a reality check. Are they honestly telling us that our money is as safe in Botswana as it is in Germany? Please.
So, long story short, we should not let this report affect our views of Canadian banks too much. It’s good to be on top; no denying that, but that doesn’t necessarily mean we are doing much better than the others.
For years they have made billions every quarter – and largely from gauging their everyday customers. Other countries gave free and discount banking and not all foreign banks are finished by any measure.
Perhaps some should tell the economic forum that Canadian banks are probably the world’s most hated since they’ve legally been allowed to nickel and dime to death and it’s only recently they started paying any taxes. Now they save money by not giving you drops in the prime rate, they keep much of it for themselves. How Canadian is that? For years they were exempt from paying a buck in tax. How ludicrous. Perhaps it would be good for at least one of them to go under. It would be a good lesson to the others.
75-80% of Canadian trade is done with the USA, who are about to surpass the 100% debt to GDP ratio (Federal debt only to boot). Who will see their housing values fall another 35% or so? Who are about to see the general collapse of commercial real estate and who are mired for God only knows how long two unwinnable wars in Iraq and Afghanistan while they saber rattle Iran and North Korea? Yes, Canadians think their little economy is above all that.
The current Canadian government bailed out their private banks by taking (read forcing) the CMHC to take $75B in shaky consumer mortgages. This freed up that amount for the private banksters to lend out to said to be better risks. CMHC now has the added privilege of that amount and has due to Harper and co. lifting the cap CMHC has on mortgage insurance which before Harper CMHC had about $175B on its insurance books but now has about $600 Billion on insurance books. Most of its insured mortgages are to dubious buyers who are likely just as in the USA to default.
Indeed, CMHC does not have the cash reserves to pay to the banks and this amount of insured mortgage monies and if/when their mortgages crash will have to go to the Feds and ask them to get the money they need. Ordinary Canadian taxpayer dollars are being given so that the same gangster banksters can get hundreds of billions of tax monies to fuel them and to cover the defaulted CMHC mortgages.