Canada’s banking system: Solid as a rock?

Canada’s big 5:  The global darlings

There’s no doubt that our banks have been the darling of the world over the past two years.  The world has been quick to heap praise on our banks, while our politicians have been quick to direct that praise back to their own oversight of the system.

Interestingly, our big 5 escaped the financial crisis largely unscathed, though not without a massive dose of assistance on the part of our government.  The boys over at Sprott Asset Management wrote about this back in November 2009 when they noted that the leverage ratio of our big 5 banks exceeded that of the top 10 US banks.

Why did the Canadian banks escape the crisis largely unscathed?

There are two major reasons.  The first is that our real estate downturn was largely averted (postponed?) by some dramatic action on the part of the central bank and the government.  Interest rates were cratered.  Unprecedented stimulus measures enacted.  Demand was dragged forward.  As a result, the banks saw little by way of a hit to their unsecured lending or their mortgage portfolios (the bulk of which are backstopped by the government anyways).  But let’s understand that the Canadian banking system is on such solid footing today precisely because real estate did not continue on its downward trajectory.

This is lost on some writers like Jay Bryan of the Montreal Gazzette who, in an article from June 17, 2010 suggested that, “Our real-estate rebound was possible because Canada’s banking system remained in good health, unlike the shattered US one”. This is cart-before-the-horse mentality at its finest.  The entire banking system fiasco in the US was CAUSED by write-offs associated with bad debt from real estate.  Not the other way around.

For the second reason why our banks fared so marvelously, I’ll turn it back over to Eric Sprott and David Franklin from the publication highlighted above:

“The answer is that they received significant assistance from the Canadian government. First, they received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby Canada Mortgage and Housing (CMHC) purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

Next, the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Finally, a Canadian Bank (that shall remain nameless) also received assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program, for a total government expenditure of $114 billion.

For reference, the entire tangible common equity of the Canadian Banks in 2008 was $68 billion. Can you put two and two together? The Canadian government injected a sum through mortgage purchases worth more than the entire tangible common equity of the Canadian banking system! On top of that, the Bank of Canada provided more than 50% of the tangible common equity of the system in emergency liquidity facilities.”

The problem with facts like this is they get in the way of a good news story.  To wit:

Canadian Banks: A better system

Canada’s financial system good example for world to follow: Carney

Flaherty: Banking system strong

Canada’s banking system a G20 model: PM

No one wants to hear that our banks, for some reason a new source of national pride, actually received a backdoor bailout courtesy of Canadian taxpayers.  To be fair, there was greater oversight and a generally more conservative approach to lending by our big banks, but had the government not stepped in to discretely provide a form of bailout, our perspective would be quite a bit different.  I do find it amusing that I’ve seen little mention in any of the big dailies of any of the government’s involvement in the back-stopping the banking system in Canada.

New report finds Canadian banks lagging US counterparts in tier 1 capital

A new report by Canaccord Genuity analyst Mario Mendonca suggests that the tier 1 capital ratios at Canada’s big banks are actually lagging that of their American peers.  Tier 1 capital is the safe, liquid assets that can provide a lifeline in the event of a financial crisis.

While certainly not earth-shattering news, it does make it a bit more difficult to hold our banks up as beacons of prudence to the shame of those crazy yank banks…..seemingly a pastime of choice for some of our newspapers.

Canada’s banks not so much stronger than U.S.’s

Canadian banks may struggle to meet rules
I’m not particularly bullish on Canadian banks simply because their balance sheets are not particularly transparent.  It is difficult to establish just how much unsecured debt makes up their portfolio, what derivative counter-party risks they are exposed to, etc.  For this reason, I prefer to stick to companies with strong balance sheets and stable, predictable earnings.

It should be interesting to see how the banks fare as real estate comes under increasing pressure over the next few years.



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41 Responses to Canada’s banking system: Solid as a rock?

  1. Mango says:

    Yes, banks could not make margin calls on home buyers and banks avoided the margin call with the government repo’ing all the debt from them. That was a smart move. If they had not done that, you might not have been able to walk over to you local bank and pulled out cash out of an atm. The government kept people calm and the market rebounded.

    This was a good move and helped the Canadian financial system. Job well done.

  2. debunking says:

    The report from Sprott is trying to promote gold sales to public.
    What better way to do it than create fear and doubt about the banks.
    Not to say that our banks are the best, but any report regarding the future of economy and banks by gold promoters is not worth the paper it is written on.

    • And your rebuttal to the facts contained in the report would be….?

      • backwardsevolution says:

        Yes, I remember being shocked when I read that our banks got bailed out too. I think it was the day before our last election, if I remember correctly, shoved through quietly so that no one would notice. Our bought-and-paid-for media was and has remained silent on the issue. $114 billion. What is that, about $4,000.00 for every man, woman and child in Canada?

        Mango, “the market rebounded”? Did it rebound on its own? The word “rebounded” means something had a natural inclination to move that way. Nothing could be further from the truth. It WAS moving in the right direction – down – until it was manipulated back up.

        Ben, you are doing great work. What a tremendous void you are filling. Actually someone investigating and getting to real facts! Thank you so much.

    • Mango says:

      A hard time for gold bugs right now as you point out. But I don’t think we have seen the wow, gold is at 2000 factor. Inflation bugs are running towards the metal with fiat, that might be out of steam, but still believe in the luster.

      If I had to worry about inflation, I would start with ag stocks. Not gold in usd$. Try pot or agu in cad$

  3. Paxtor says:

    The CMHC backstops the risky mortgages held by the big 5, but does it backstop lost revenues from interest on these mortgages (when/if they default)? Additionally, does it backstop lost unsecured debt?

    It won’t take a huge shock for these banks to lose serious value on the market. It will only take a major earnings miss or two. These banks are priced for near perfection.

  4. Vince says:

    Excellent piece! What is incredbile about Canada is that the government could have gotten so involved without any public discourse. They have actually consistently misled the world as to the state of the banks here. Multiply the numbers by 10 to see how they relate to the US bailouts.

  5. Mango says:

    I looked back on your posting web’s. One of things that you have always pointed towards is a graph -income to debt ratio. You have only drawn one conclusion, it cannot go on and it is a signal of a housing meltdown.

    Here is what a real economist says about has to say about your death star

    • SuperPL says:

      Here is economist stating the opposite. He is also a “real economist” since your last post hinted that only real economist” can have rational debates/opinions.

      Maybe you should contact that economist and call him a clown too, after you’re done putting our husband in his place.

      • Mango says:

        SuperPL – what is PL? Personality of a Loser?

        Ben just pointed out the other day that 2/3 are fixed and 50% of home owners don’t even have a mortgage! This guy doesn’t even have a graph. Maybe you should look at the Kangaroo example of rock bottom rates to 7+ and homes continue to boom.

        Why is everyone on this site so one way? The moment you challange with numerical examples or MSM stuff, I feel a wave of hate.

    • From the article:

      “What he does focus on is, first, the rate at which the ratio is rising. You won’t come away less worried about debt levels after you check out the growth numbers. Mr. Tal said that before the financial crisis, the debt-to-income ratio was less than 130 per cent.

      The big increase since then is notable in its own right, but it’s staggering when you realize that much of the growth came while the economy was in recession. Mr. Tal calls it the first recession where debt levels actually grew.

      Mr. Tal also focuses on how increases in the debt-to-income ratio compare to growth in income. He said incomes were rising at about 2 per cent not too long ago, while the debt-to-income ratio surged by 12 per cent.”

      So if your own personal numbers are increasing it’s cause for concern, but according to you it’s not a concern if the aggregate numbers show the increase. You have greatly misinterpreted this article. Keep trying, Mango.

      • Mango says:

        i was bringing another view point to something you had pointed out. Debt to income alone can’t work. Savings or HAM as you once said I believe is real and you cannot simply ignore it.

    • Jordan says:

      I think you may have mis-read the article, Mango.

    • Best Place on Meth says:

      You’re so right Mango, debt can go up exponentially forever.

    • SuperPL says:

      “SuperPL – what is PL? Personality of a Loser?”

      Grade 5 humor, I see you went back to school 🙂

  6. mac says:

    So much snarky sarcasm directed Mango’s way. She’s understood the part where Tal foresees the ability for Canadians to tolerate even more debt.

    “Will we see a debt-to-income ratio 20 years from now over 200? Absolutely. Will it be a bad thing? Not if it rises slowly.”

    Does that translate as him thinking it’s not that big of a deal as the media is currently making of it? Maybe.

    I have a question for you Mango. You’ve posted in the past that you bought 3 years ago. I’m guessing you bought in Vancouver. But I’m wondering what you bought… detached, attached, etc., and in what general area? I don’t want your address, I’m just trying to qualify your opinions with your ownership experience. If you bought a house in Dunbar in 2008, I can see why you’re so bullish. If you bought a condo in Coquitlam, I’d tend to see your bullishness more as defensiveness, perhaps, no offence intended.

    You’ve also mentioned that you won your husband over to your side after a multi-year struggle. Can I ask, how long was the delay while you’re husband was addicted to bear blogs and how much do you think it cost you?


  7. DancinPete says:

    Is there a better stat than “debt-to-income” that covers living expenses-to-income?

    I’m currently renting with no debt. So technically my debt-t0-income ratio should be good. How does my monthly rent obligation factor in? It’s not technically debt, but I have to pay it each month to live somewhere, so I’m not in the same financial position of someone who’s paid off their mortgage and is living rent free.

    • That’s a great point DP! A liability to income ratio would be interesting. You’d have to convert the rent you pay into the debt burden associated with a similar residence since your rent is technically a liability.

      That being said, I’d venture a guess that you are far from the norm. I don’t know that there are too many like us. If there are, it only means that the debt-income ratio is actually worse for those who do carry the debt.

      Also keep in mind that homeowners have ongoing expenses as well….maintenance at 1-3% of home value per year….property taxes, etc.

      • Mango says:

        Mac, my parents moved across this country so much that over time it resulted in my father basically teaching me about property, saving, renting, managing and he instilled values in me about investing and keeping a decent portion of that in real estate. He started me off with giving me my first place as a wedding gift (he hated that I married a renter)

        I have not looked back since. Always on the hunt for value, solid tenants (he showed me how to spot the loser, which he equated to my husband because he rented! He paid on time!)

        I have some flats in Vancouver, Toronto and Montreal. I have some basic rules

        1. How low can it go? What is my downside on every flat
        2. Who is my future buyer – should I buy near a park, school so a family can purchase from me or young professionals. If I don’t know who my future buyer is, then I cannot buy it.
        3. I follow demographics via stats canada like a hawk. If a area becomes the first stop for new immigrants, your values become statle very very quick for example. Stick to the proven areas. i learned this the hard way. But this is part of RE investing.
        4. No such thing as “up and coming area” I missed out on many chances to make money because of this rule. Only during this recent boom has it worked. I choose not to buy in and won’t budge. Schools, Hospitals, Roads, Parks never move. So your house is ok around that area. New areas never have this, so I think they will fail in the long run as condo people are today averaging between 26-30. They will need space for kids, family in about 5-6 years. That means less condo, more home. Old folks will want less home and more condo, this is key transtion to watch. The first step is the geezers dropping like fly’s. The young are still adding to condo trade at a rapid pace. I don’t see that stopping
        5. You pay a premium to get into a good area, someone in the future will pay it you. Balancing that premium is very very hard. I have been fortunate here. How do people live, work, travel – the easier you make it for them, the more they pay you for that access. Most people want ideally – space, easy drive to work, schools for kids that are solid. I paid up for that huge 10 years ago, people are now paying that to me. I don’t see that stopping. Today’s condo buyer is my buyer tomorrow when they to have a family.

        I can keep going, but mac it has never cost me anything, just frustrating when people read this stuff and don’t understand what is going on people’s heads, the buyer’s head…I focus on that. Hopefully others here will also.

      • Mango says:

        try net worth calculations and then moving housing down 5, 10,15, 20% you will find it.

      • Financial Newbie says:

        Hmm… what would be included in this “liability to income” ratio?
        Rent + Internet + cell phone + transportation + food + entertainment / income = 31% for me.

        Then again, I could cut some of that stuff out.

        Yes, a L/E ratio makes me feel pretty good about me 😀


  8. mac says:


    For you… a quote from VHB (Vancouver Housing Blogger)… the one and only original bear blogger on Vancouver Real Estate, now retired but blogging over at Vancouver Condo Info:

    VHB Says:
    February 3rd, 2011 at 12:45 am
    Looking at the numbers, I think you would have to be insane to think that Chinese buyers don’t matter in certain markets like VW and Richmond. I mean, the index for Richmond SFH is now over **300**. West Van is around 200. The y-o-y in Richmond is 22.6%. That’s +22.6%.

    This doesn’t mean that these places are immune–not at all. But the buyers that are pushing the market in these areas–today in 2011–are very likely Chinese.

    • ATP says:

      Hong Kong buyers also mattered a lot in VW and Richmond until a lot of them sold and moved back. It would be interesting to see if immigrants from Mainland China might one day do the same.

  9. mac says:

    By that, I believe he means Mainland China, foreign money, being stowed away in Canada rather than Canadians of Chinese descent.

  10. mac says:


    I think Hong Kongers were hedging their bets during the build up to the handover. Mainland Chinese must be wanting to get the money out of the country and it seems they’ve found a small pocket of land, with a limited supply of Commodity X (land with SFHs), which perhaps can be supported by enough demand from home.

    It’s not a bad deal when you consider Commodity X comes with access to free education, cheap university education, property taxes you can dodge until you sell up and leave, no taxation on income and 200% increase on Commodity X when the kids are done studying and ready to go back to ShenZen and take up a job at the ol’ man’s factory. It sounds like a pipe dream but feels real when you live here.

    • Mango says:

      Don’t believe for a second that Vancouver is part of Canada. It is a part of China. So using local Canadian income to measure against it is useless. The government offers amazing deals for Canadian passports. My renters from China believe so much in space, water and resources..they come from a place where everything is in demand and you have to wait in lines. They land in the native themed airport YVR and see faces they know. They go outside, smell the fresh air, fall in love and will pay the price to live in it. They then will get money from Mainland, HK, Korea, etc to keep up the dream.

      Will they have a clue if you asked them to name 5 Canadian PM’s. Hell no. Will they have a clue about the Canadian culture and mix. Hell no. But you know what, they are a gentle people, they work hard and pay the rent on time. They value security and are very respectful to the host country. Many Asians themselves are amazed at the wealth coming from the very country they left in fear. Just the fact of open boarder system and a country that is desperate for people.

      I embrace it.

      • ATP says:

        “Don’t believe for a second that Vancouver is part of Canada. It is a part of China.”
        “Will they have a clue if you asked them to name 5 Canadian PM’s. Hell no. Will they have a clue about the Canadian culture and mix. Hell no.”

        “They … are very respectful to the host country.”

        Mango, do you see the irony there?

      • ATP says:

        “They then will get money from Mainland, HK, Korea, etc to keep up the dream.”

        What happens if the easy money from Asia, especially China, stops flowing? I know you may think it’s impossible. I wouldn’t be so sure. There are huge structural problems in the Chinese economy. I am proud of China’s achievements, but I am also deeply concerned that she may get hurt by her own hubris.

    • ATP says:

      A limited supply of land with SFH in Canada, the second largest country in the world by land area? You must be joking, right?

      My point is simple: A lot of people from Hong Kong who left before 1997 thought they were going to live in Canada happily ever after. After all, it was a trendy thing to do at the time and there was a bit of vanity behind the motivation as well. Many liquidated and moved all their assets to Canada. But as the initial excitement over the McMansion dwindled and the economic reality of Canadian living started to sink in, people found themselves contemplating moving back, especially when they saw their friends who did not emigrate prosper as the Chinese economy grew. So, with Canadian passport in hand, they sold their Richmond/West Van/Scarborough SFH and bid farewell to the big sky and clean air. Care to guess what happened to the price of Commodity X at the time?

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