Were the Canadian Banks Bailed Out?
The conventional line has been, no. Our banks were strong. Unlike the US and Europe, no bailout was needed to deal with the global financial crisis of 2008.
This line, of course, always conveniently neglected the Extraordinary Financing Framework, or dismissed it as trivial.
Now Finance Minister Flaherty – seeking new powers to turn down foreign investments by our banks – has clarified the situation, as reported in the Globe:
Unlike the United States and Europe, the Canadian banking sector has survived the global financial crisis largely unscathed as not a single Canadian bank has gone under. Yet Mr. Flaherty noted the Canadian government did step in to help the banks at the onset of the crisis.
“Ultimately, it all leads to Ottawa doesn’t it?†he said. “If you look at what happened in 2008, we guaranteed the wholesale debts of the banks, we purchased insured mortgages from them. These were all decisions taken here by the government in co-operation with the Bank of Canada.â€
So, the Canadian banks needed a helping hand from the government in the form of guarantees and asset purchases to weather the storm. In short, a bailout. Which is why the Minister wants powers to shape bankers decisions, in case he has to do it again.
A short while ago a real estate agent I know told me (while sort of laughing) that he had just sold a new $500,000 house to a young couple with no money. In Regina. A 30 year mortgage. What about the down payment? The bank which provided the mortgage also gave them a Home Equity Loan, which they used to provide the down payment. Why would the bank do that? I asked (while knowing full well the answer). He replied, “there was no risk for the bank as CMHC has insured the mortgage.” And no doubt bundled it up in a MBS, backed 100% by the taxpayers. But this is different from the USA.
Who really knows what happened with our banks. There is such a small groups of individuals involved at the commanding heights, that I do not think even the governor of the bank of Canada knows to what degree Canadian banks were bailed out. Information within such a small group of such massive wealth is privileged.
So potentially we will never know.
Ahem. That was nothing remotely resembling a bailout.
The Canadian government offered to purchase INSURED assets. As in, assets that were absolutely no risk to the banks whatsoever anyway. The banks did not need “bailing out” and the Canadian government did not do this to somehow rescue the banks from owning already guaranteed safe assets.
They did it to free up credit as a wider economic stimulus measure in the face of the then impending total freeze up of the global credit system. They would take those mortgages off their books to free up capital for more lending.
The banks couldn’t have cared less whether those purchase guarantees were made. The mortgages were already fully insured, they were not going to lose any money on them either way.
Remember the ABCP crisis? Some $35 billion of ‘non-bank’ asset backed commercial paper? In the U.S., regulators compelled the banks to bring equivalent ABCP onto their balance sheets. Not so in Canada – OSFI protected the banks, not the consumer. That was Canada’s bank bailout.
1) There was no bailout, the purchase of performing mortgages that were guaranteed by the government was a liquidity injection, just like businesses that use factoring companies it gave banks cash in place of cash flowing assets, so that thye had the liquidity to continue to lend thats not a bailout, the governmnet lends overnight money at 1%….they were likely collecting 4-5% on those performing mortgages. Good deal for all. Re: the couple with the loan….banks won’t lend you the downpayment in Canada….unless you have other assets to secure the loan and disclose that the down payment was borrowed. Our lending criteria in Canada is pretty strict which is WHY we survived the crisis….my bet is this couple circumvented good lending/borrowing policy and went straight to a mortgage broker who got them private money…excellent realtor that does the deal for the commission and then shows the couple that cant afford it, how to get the mortgage throught the back door….
http://www.levyinstitute.org/pubs/wp_698.pdf
An interesting study for assessing the size of the Fed bailout south of the border. I wonder if such a study could be done in Canada, that is, taking into consideration the cosy relations between the banking sector and the state. Although, given the size of the transfers and guarantees south of the border, it looks like their financial sector is probably closer than a communist system. Some staggering numbers!
Just a follow up on that aching feeling that Canadian banks got more than we know.
So much for capitalism and the rise of the shadow banking system- the rot in the foundations that is hidden and untouched- the self regulating markets in action!