Laughing All the Way to the err…Bank
The Canadian Bankers’ Association must be happy.Â They’ve somehow managed to convince pundits south of the border, and even a few here who really ought to know better, that they’ve somehow been able to weather the economic and financial storm with absolutely no help from the federal government.
The most recent evidence for this position is this editorial by Newsweek editor Fareed Zakaria.Â Fareed is a fine writer and a lot of what he has to say in this article is sensible but his fact-checking needs a bit of work because it is simply not true that Canada’s banking sector has not faced any calls for bailouts or interventions.Â In fact, the federal government has intervened, and aggressively, by exchanging rock-solid highly liquid government debt (a value of zero when measuring risk-weighted assets) for illiquid mortgage assets (counted at full value in risk weighted capital/asset ratios), all in the name of helping grease the wheels of finance.
WeÂ can quibble about whether the feds will come out ahead on this exchange — the Finance Department, the Parliamentary Budget Officer and Mark Carney (by implication — 3.8%? what is that guy smoking?) seem to think so — but the bottom line is that this exchange wasn’t done out of the goodness of anyone’s heart.Â It was done simply because the banking sector was and is in trouble (hang onto your dividends — the grim reaper of recession is coming).Â The government intervened.
That’s not the only thing the federal government has done to help the banking sector get through this “tough patch”Â (can we say “L” shaped folks?).Â They’ve also changed accounting rules that essentially allow the banks to delay the kind of dramatic writedowns on loan-losses that would send shudders of fear through the financial sector. And let’s not even get into the Bank of Canada’s willingness to take on a lot of truly dubious assets as collateral (hello ABCP market … feeling limber are you?) or the feds backstopping the whole ABCP rescue effort.
Don’t get me wrong.Â I’m not sure any of this is wrongheaded (although all things being equal, I would favour Duncan Cameron’s public utility proposals) but to characterize this as “no bailout and no intervention” is simply wrong and whitewashes history.Â Worse yet, while Fareed may be right in praising our vaunted regulatory system, he fails to recognize that the CBA has been using the crisis as an opportunity to push for Canada to align its accounting standards (see above) with the same global “best practices” that got the world into this mess.
And don’t get me started on the budget’s proposal to repeal the infamous (for tax geeks) Section 18(2) of the Income Tax Act, a provision that would have had implications for bank lending to domestic firms investing abroad and which would certainly have added generously to the fed’s tax take). Â The subject of another post.