The Big Banks’ Big Secret

The CCPA today released my report: “The Big Banks Big Secret” which provides the first public estimates of the emergency funds taken by Canadian banks.  The report bases its estimates on publicly available data from CMHC, the Office of the Superintendent of Financial Institutions, US Federal Reserve, the Bank of Canada, as well as quarterly reports from the banks themselves.

The conventional narrative about the performance Canada’s big banks during the financial crisis goes as follows: while American banks bet heavily on sub-prime real estate and had extensive shadow bank holdings, Canadian banks did not.

However, the details of exactly how much each Canadian bank received, when they received it, and what they put up as collateral, has remained locked away at CMHC and the Bank of Canada.  Not even Access to Information requests have been able to free this information.

In this study I estimate that, at their neediest, Canada’s banks had received $114 billion in support, a figure equal to 7% of the size of Canada’s economy in 2009.

This is equivalent to $3,400 for every man woman and child in Canada.

It is almost 10 times more than the auto bailout for which Canadians put up $14 billion and for which the loan portion has been repaid.

During the financial crisis, Canadian banks accessed three separate programs from both the Canadian and U.S. governments. Canadian banks received $33 billion dollars (converted to $CDN) through the U.S. Federal Reserve programs. At the same time, they also accessed $41 billion at the peak of the crisis through a nearly identical Bank of Canada loan program. Finally, they received $69 billion selling mortgages to CMHC for cash.  These peaks occurred at different times.

Canada’s Big 5 banks drew on government support programs for an extended period from October 2008 through June 2010.  In other words, Canadian banks continued to rely on government supports for one and a half years, well after the financial crisis had subsided.

The largest recipients of aid were Scotiabank, Royal bank and TD Bank. They received an estimated $25-26 billion at their peak.  CIBC received somewhat less money: an estimated $21 billion at peak.  BMO received an estimated $17 billion.  Most of these peaks, except for TD occurred in the early months of 2009.  TD peaked much later in September 2009. (See charts below)

The banks are very different sizes in terms of market capitalization.  Royal is the biggest and BMO is about a third the size or Royal.  So I’ve also adjusted the figures for the size of the banks.

On the relative side, three of Canada’s biggest banks, Scotiabank, Bank of Montreal and CIBC, received estimated peak support that at some point was equal or greater than the value of the company itself.  That is to say that at some point during the financial crisis, it would have cost less money for the Canadian and U.S. governments to have bought every single share in these companies rather than providing them with support. (see charts below)

CIBC in particular received estimated aid worth at peak 1.5 times the value of the company, it spent the better part of the first three months of 2009 underwater.

The federal government claims it was offering the banks ‘liquidity support’ but it looks an awful lot like a bailout to me.  Whatever you call it, government aid for the country’s biggest banks was far more substantial than the official line would suggest.

It is worth noting: Over the entire aid period, Canada’s banks remained profitable, reporting $27 billion in total profits between them and the CEOs of each of the big banks were among the highest paid Canadian CEOs. Between 2008 and 2009, each bank CEO even received an average raise in total compensation of 19%.

In the U.S., they called these sorts of programs: bailouts, in Canada we call them backstops.  In the US, they have released the full details of the support, in Canada those details remain secret.  It is time for the government to come clean with the actual figures of how much support each bank received, when they received it and what they put up as collateral.

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  • Wasn’t the bailout needed because of the world-wide collapse of trust and liquidity between banks, which wasn’t really the Canadian bank’s fault. It was just as irrational as the boom that preceded it.

    I guess being punished unfairly because of the vagaries of capitalism happens to big banks, as well as unemployed workers. I guess the difference is that government is more serious about helping big banks.

    I’m not sure it would have been better to buy to banks instead of bailing them out. Buying their existing stock wouldn’t have reduced the need for additional capital.

  • Thanks for the comment, its true that the global crisis started in the US and not in Canada. What I find interesting is that some banks needed dramatically more support than others, particularly on a relative basis. So I think there are lessons that can be learned in the Canadian context.

    I’m certainly not advocating that the banks be nationalized. Rather, I’m using the relative measure (as a proportion of market cap) to adjust support for bank size and finding some fairly large differences.

  • Why did banks get a bailout? Why not a loan to be repaid?

  • Market capitalization isn’t a good measure of a company’s size, as it is effected by all kinds of things like excepted profits ten years from now, hype and other irrational factors. That’s why a medium sized company like Apple can be have the highest market capitalization in the world. Assets or despots is a better measure for banks.

    I believe the Canadian bailouts where in the form of loans which have been repaid. I assume even the mortgages having mostly been paid off as they cycle through renewal.

  • Darwin, I’d argue that the value of a company is what you need to pay to control it and in the case of public companies that is the value of all the shares.

    I can’t claim to be original in this comparison. When bloomberg news released the US Fed data which they called a bailout in the US, they used market cap as a means of adjusting the figures for bank size. That’s what got me interested in this in the first place and so I copied their approach.

  • Please correct me if I’m wrong, but didn’t the Canadian government basically lend this money to the banks, earn interest on it, and then have it all repaid?

  • Excellent work David, I think you have struck a hot spot. I also believe there is still a whole bunch we still do not realize in what happened in the case of Canadian banks. I find it all way to easy to say they were loaned some money and they paid it back.

    It is much more than that. Dig into the creation of the shadow banking sector and the process of securitization and creation of credit default swaps, and you will witness a system that begs for regulation. Why, because as you state in your paper today, the banks could have failed, and were in serious trouble. We at least need to take a stand and ask for more transparency in return for backstopping the too big to fail notion. The SEC is a joke, and in many ways I think you have only just uncovered a bit of inconvenient truth here.

    Great work in a subject that until we get the data, we all will be scratching our head wondering if, maybe our banks were deep in the shit, like our neughbours south of the border. True everybody was running for liquidity, but hey we are in a global system here, and if a need for a national backstop in terms of liquidity, and insurance on higher risk mortgages that keep the housing bubble going in Canada, then we do have a democratic right to see the messy deals. At least in the states they got to see the mess, albeit they are still finding out new stuff in terms of toxicity and bank worth to this day. If you are insolvent using one set of numbers like mark to market but pretty good using other methods that discount underwater mortgages.

    There is so much in Canada that is yet to be written, and yet mufflers is all we hear. Thankfully we had a loud unmuffled motor today named Mr. MacDonald.

  • This was a day the banks have been fearing for quite a while. I am so glad the media took a huge bite into this today. The CCPA should be very proud of your work David, and it surely is a day I will remember for quite some time. Amazing work.

  • .. a vast and empty country .. Canadians are bearers of water and hewers of wood. Would a prime minister that views such a country & citizenry as his, bother to inform his electorate ? The people that entrusted the country to him? After all its just accounting numbers or banking stuff.

    Well .. look past the small matter or cover up of billions given away along with salary raises for the CEO’s and see the deception level underway re the resources and environment of the Canada that is home to those banks.

    Ask what deals have been struck with China.. and why.
    Seriously .. this is stuff that’s way over our heads ??

    Ask why all Canadians are not appraised of ALL the actions of the government that elected them, in a timely and honest way… how about doing so.. right now.. !

    Ticking off the failures, just off the top of my head, I get – Tar Sands Uber Alles – Electoral Fraud & Obstruction – Foreign Resource Ownership – Defense Accounting Errors – Fisheries Incompetence and Obstruction – Prorogation Fraud – American Electoral Volunteers and Service Providers – Patronage – 300,000 temporary foreign laborers in Canada – BC Environmental Review Sale and Fraud – Afghanistan Troops – Kyoto Misrepresentation – Fantino/Vaughn Mudslinging – Lavalin Payouts and Fraud – Anonymous Updating Canadians about Minister Toews – Climate Aint Changing – Petro Lobbyists Policy Setters – Dinos walked with Adam and Eve – and the inevitable Hitler reference invoked in Parliament

    I see a very deceptive, ignorant, dangerous & aggressive lout pack with serious internal morality and ideology issues in charge of the clubhouse in Ottawa. This is unfolding like a frat house fights with the other frat houses film. The whole deal reminds me of the Facebook movie.. non-stop exercises in manipulation – money – ego – control .. and if the rules don’t favor you.. change them secretly, without discussion ..

  • Francis Fuller

    Great report!

    If I understand correctly, the banks abilty to avoid risk was dependent on the role of CMHC and its purchase of bank originated mortgages. This implies a significant transfer of risk from private institutions to the public. A second analysis appears to be required – What is the effect on the public purse if the Cdn real estate market undergoes a 20% correction? What is the cost to the public if the market shifts from boom to bust? My belief is that the Cdn public has aquired a huge basket of negatives and is largely unaware of the risk they have accepted (or will be forced to accept).

  • Prof Wray of UKMC has some similar research wrt to bailouts south of the border.

  • David Macdonald

    Thanks for the reference MikeB. It is sure that analysis of these types of programs is much more developed in the US. In Canada, secrecy around the data has made it almost impossible.

  • David Macdonald

    matt, thanks for your comment. Its certainly true that the loans from the Bank of Canada and US Federal reserve were all repaid by July 2010, with interest. The mortgages purchased by CMHC almost all mature by 2014 and the government will make money on them.

    The cdn gov’s also made money on loans to automakers and the US Fed made money on its loan programs, that the US financial press called ‘bailouts’ . So you might call that a successful bailout I suppose. The issue for me isn’t that the moneys were repaid with interest, but rather the depth of the crisis for Canadian banks and that that is not what Canadians were told.

  • Francis you raise a huge issue that still remains. That is, CMHC, is kind of the Fanny and Freddie of the USA. That is, they are a risk holder, and you are right, the Canadian banks are still using the CMHC to defend themselves against losses. And I would add, given the increasing worries over a housing correction and potential bubble burst, are the backstop for the banks to avoid those losses. And recall that in many cases the banks are securitizing these mortgages and reselling them and making money on the fees and such. The key is the rating that the CMHC guarantees these mortgages. We could potentially be in a similar swagger towards the abyss that the USA was before its crisis. We don’t know, because the banks and the government refuse to release these details. And I do think that everybody was getting a bit nervous with the CMHC and that is why Flaherty is considering pulling the plug on the CMHC in this role. I do think something extremely whacky is going on behind the scenes as to me for Flaherty to act in this manner must mean something big.

    It sure would be nice if we had at least a little bit of clarity and transparency, or potentially it is a real horror story we don’t want to know. Something is definitely going on though behind the scenes I can smell it.

    Sounds like maybe a lot of foreign interests in the real estate market-and lots of money being made- at least for now. That cannot be good for anybody in the medium term and for sure the long run it is death by over priced real estate assets.

    They have got to contain this bubble and control its deflation. But being the free marketeers, I would be surprised if Flaherty or anybody acts to contain it.

    You cannot raise rates as it will kill the economy through a drag on consumer demand, and also raise the dollar and make manufacturing even more competitive.

    They have to bring rein in the CMHC loans to the banks but I think the banks are making way too much money at this and are doing what they can to keep the runaway bubble going- look at the new rates we seen last week, 2.9%- those are insane for a bubble filled market. But recall, whoever signs up the most mortgages, gets them CMHC certified and resold into the market makes lots of cash on the fees and the resale.


  • sorry that should read ‘manufacturing more uncompetitive.’

  • You’re welcome David. For the record, I am Canadian. It is just hard to get away from so much US data and commentary. PEF is a great reality check for Canadians. That’s why I read.
    – Michael Boudreau

  • So, I don’t recall ever hearing about the credit unions getting bailed out. Here or in the US, actually. And yet I also don’t remember hearing about rashes of credit union failures. Could it be that depositor-owned credit unions are more stable than banks?

  • PLG, I was just speaking last week with credit union in Sudbury, and from that discussion, I would conclude, at least in their case, they have a whole lot more internal policy that prevents some of the transactions and risks associated above. However, they like the CMHC security just as much as anybody. Now this may be more to do with the smaller size, but there seemed to be a whole lot more emphasis on security rather than profits and risk taking.

  • actually I should re-phrase that risk taking- as I am not sure the big banks are actually taking a risk, potentially the smaller banks are not too big to fail. However, Caisse Populaire- Dejardins did get into a bunch of trouble, however I am no longer sure they qualify as a true credit union, given their activities.

  • If the problem was “the world-wide collapse of trust and liquidity between banks” and not bad Canadian mortgages (which hasn’t really been a problem, yet) the small banks and credit unions wouldn’t have had a problem because they don’t play in those markets.

  • Didn’t you here? This morning in Toronto, economic rock star Governor Carney accepted the award for ‘Canadian of the Year” from a local speaking group. During his speech he stated unequivocally that liquidity support is NOT a bailout.

    No smoke here, as who dares to doubt ex GS bagman Carney, presently courted by the beleaguered Bank of England and standing toe to toe with JPM tough guy Jamie Dimon?

  • I find it is somewhat misleading to term the swap program engineered by the government of Canada, the CMHC and the banks as a bailout. It was an asset swap between the banks and ultimately the federal government. The banks required liquidity during the crisis and the government of Canada provided it in exchange for perfectly good mortgages, not US style toxic waste mortgages having little or no value. It would have been a bail-out if the mortgages had been of little value.
    What it did demonstrate is that the government of Canada was ready to immediately help out the banks in a big way, yet do very little for workers who lost their jobs.

  • Yes, an asset swap with the end result being risky non prime mortgages now held by the government, 68 billion of new cash reserves and equivalent amount of guaranteed interest bearing government bonds now held by the chartered banks.

    Sweet deal for the banks, bailout or liquidity support, irregardless of how one defines it.

  • I have to disagree with you Keith. It was not quite the clean sober picture you paint. Not all mortgages are created equal, however one that is CMHC backed, can be graded a lot higher and comes with a whole bunch less risk, which creates a lot less risk for somebody to make money on trading. It is the process that is the problem, and just like in the US the assets did not have to become toxic, until those making the money off mass produced mortgages finally went to far. How do we know we have not went that far now, or back then. How do we know that all these CMHC insured mortgages or guarantees were above board? I do smell abuse, and I do smell profits from risk passed onto somebody else, other than the gatekeepers- who are also the ones that own the farm.

    Open the books and lets verify and have a look.

    Only then will the grimy windows be cleaned. Was it just a storm or is that grim from a trough inside the banks? That is my issue and yes I am a believer in insured mortgages by the state, but not in a manner that is abusive. So prove it and I will shut up, and I think that is what David’s whole point is and to me Keith you got kidding me that you are not even the least bit suspicious?

    Come on man.

  • Re Paul Tulloch:
    Certainly in the presence ”grimy windows” we can’t be sure of much. It would indeed be interesting to know what the default rate of those swapped mortgages is compared to those the banks kept. Still, the swapped mortgages were already mostly guaranteed by the federal government in any case. The government claims it’s making a profit on them so presumably the default rate is not all that high, if this is to be believed. Since then there has not been a wave of defaults of Canadian mortgages. This experience is contrary to the US situation where massive fraud was involved in granting the mortgages in the first place and many millions of people later defaulted. So what difference did the swap make? Not much it seems to me, but it did provide the banks with liquidity when they needed it.

    Our banks do have a very sweet deal (and high profits) as I have noted in comments to other posts. They have a protected banking oligopoly in one of the wealthiest countries in the world. I support this oligopoly because it allows us to control our banking system, a critical part of a monetary economy as the financial crisis has demonstrated. However the banks should not be allowed to abuse their position of privilege by paying low wages and charging excessive fees and interest rates.

  • Yes I agree the US and Canadian experiences are different in terms of relative degree of abuse, but I still feel there was abuse, and for that matter undoubtedly still some of it going on.

    The sweet deal is an understatement- the US banks were undoubtedly put in the position they were with mortgages due to the fact that they could not extract the level of revenue that Canadian banks can, given their deal- i.e. service charges, and profit extraction from rates, and as we have been seeing with some banks using so quite underhanded means in avoiding taxes, (and those are only the banks we caught). So in many ways, it is the ability of the banks in Canada to extort higher profit rents due to their near monopoly that potentially prevented the level of abuse witnessed in the USA. That and a bit more oversight over the mortgage requirements. I wonder if the banks had more competitive pressures on them in Canada, would they not be forced into more investment in terms of productive activity investment.

    This means of course, 1) closing of some financializing of the economy that does not support productve investment (shutting down some of the speculative casino) 2) tougher labour standards of their own workers so they could not extract more saving on the back of their workers.

    I would not have such a huge issue with the oligopoly if the banks would stick to banking- but they get into everything from media distortion in the culture wars to policy lobbying that ensures their sweet deal.

    Sorry but I do not agree on this one, and we definitely need to have a whole lot more transparency into the process.

  • At the time the mortgage swaps occurred the Canadian real estate prices had stopped increasing and it looked like it would collapse.

    Since then the Canadian real estate market has miraculously resumed bubbling.

  • But for how long?
    As to claims to be profitable . . . well, maybe. But it would be nice to see the genuine books, because this government has lied like rugs often enough before, and some important ministers in it have a history of whoppers back from the Ontario Mike Harris years.

  • It would be very interesting to see where they go with the new CHMC cap. I hate to see a hard cap on it, as that will only contribute an acceleration towards deflating too fast.

    It would be nice to see something done to those buying for pure speculative purposes. Something has got to give as affordability combined with current mortgage rules seemingly are up against wall- so a hard cap on the CMHC would be a huge hit to the flow into the market, and be targeting the wrong people.

    We need to do something though otherwise it will implode and it will be the tax payer that gets nailed and we will be talking bail outs and toxicity of assets. We could see a whole lot of underwater housing assets, but the speculators will be the first out as there capital is merely investment which is a whole lot more portable then those that actually live in the asset.


  • Seems like we know whose side the Globe and Mail is on in this recent critique of the banks. Almost every media outlet printed or put out something on David and the CCPA’s work, except the Globe and Mail. And today, I am sure after some belly aching from the big banks to the editor- voila a fight back piece for the banks- “The World’s Best Banks Are Canadian”. Tell me that is not cultural interference of the facts?

  • On the question of whether the financial support to the banks constituted a “bail-out” or transmission of liquidity to the economy, and whether this was a subsidy to the banks or not, I think Dean Baker and Travis McArthur had the soundest approach when they calculated the value of of the “Too Big to Fail” Big Bank Subsidy through the TARP program back in September 2009.

    They calculated the average spread between big and small banks cost of funds before the financial crisis as a benchmark and then during the period when the TARP funding put this “too big to fail” (TBTF) policy into place and then multiplied the difference by their assets for that period.

    Canadian banks may not have been close to failure, partly because we also have an implicit if not explicit TBTF public guarantee for big banks, but they did benefit from a lower relative cost of funding thanks to this liquidity support from the government — and that is a good estimate of the “subsidy” value of this support. This might be considered a conservative estimate of the TBTF guarantee for big banks, as the benchmark cost of funds for big banks no doubt already reflects some expectation from lenders of an implicit TBTF guarantee for big banks from the government.

    Of course, this calculation may be more difficult for Canada as we have a much smaller group of small banks as a benchmark comparison.

    On the flip side, there is of course a potential cost to the implicit TBTF policy, which is big banks and finance companies undertaking riskier loans, ensuing financial crises and the resulting costs for the economy.

    Since the big banks are essentially guaranteed by the federal government, what’s so wrong with nationalized banking institutions? The radically socialist province of Alberta has it with the ATB Financial.

  • “The radically socialist province of Alberta has it with the ATB Financial.”

    I have always maintained, with a straight face, the Alberta is communist conspiracy to take over Canada. I now source Milton Friedman as the basis for this claim.

  • Letter to Editor, Vancouver Sun May 11, 2012

    Unusual loans to Canadian banks raise questions

    Re: Canadian banks didn’t need – and didn’t get – bailouts, Opinion, May 4

    Many Canadians are still suffering as a result of the recent financial crisis and a depressed economy.

    But in 2009 and 2010, while receiving emergency lending from the Bank of Canada, CMHC, and the U.S. Federal Reserve, Canada’s largest banks were consistently profitable.

    In fact they were able to increase the multimillion-dollar compensation packages of their chief executives, who were already among Canada’s highest paid.

    This government liquidity support to the banking industry amounted to $114 billion, the equivalent of seven per cent of the Canadian economy, or $3,400 for every man, woman and child in Canada.

    These figures are estimates, uncovered in research by the Canadian Centre for Policy Alternatives. Unfortunately we do not know the exact amount each bank received because, unlike in the United States, the details of this extraordinary financial support by the Bank of Canada and CMHC has not been made public.

    This gives new and cogent meaning to the phrase “the invisible hand.”

    Larry Kazdan Vancouver
    © Copyright (c) The Vancouver Sun

  • The problem is not the bail-out itself. These emergency funds were not a blank check for the banks and were (or will be) repaid. Where I see the problem is the lack of transparency around the whole process. The economy is now slowly improving, according to Bloomberg new jobs are being created and also outlook of real-estate market are according to the article Why Canada Shouldn’t be Afraid of Subprime Crisisquite good. But sooner or later another crisis will inevitably come and we should ensure that policies we will then use will be transparent and clear.

  • The issues for me are definitely:
    1) transparency (ie., in Canada there is very little)
    2) The government basically bought all CMHC insured mortgages from the banks (which is equivalent to what they would have done had all those mortgagees defaulted); with what money did they buy those mortgages from the banks? Since the government has ceded money creation to the private banks, did they borrow money from the banks and pay interest, in order to buy the CMHC backed mortgages? If so, then the government provided not only liquidity, but provided profit to the banks as well! Even if all the mortgages get paid back with interest, and the government makes out fine, it doesn’t change the fact that the banks would make out like bandits!

    Anyone have any data on this?

  • There are so many ways the housing sector could stumble over the next while, but the government seems to have a pretty tight control of the interest rates. But if Europe and the States go into full blown austerity, this could change literally overnight. This is an interesting article on the decision not the change the re-qualifying rules in Canada.

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