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What's good for the goose…..

Optimize Blog - April 1, 2010 - 0 comments

As the financial reform debate continues to be held around the world some defenders of the retention of banking status quo cite Canada as a reason why things should be left untouched. Canada after all has only five big banks and there was no crisis as the rest of the worlds financial institutions collapsed.
All five of Canada’s major banks were profitable in 2009, and none required a taxpayer bailout. So how can this be and is it the result of industry structure and strong regulation? The banks certainly have some stringent requirements and for example if you take out a loan over 80 percent of a home’s value, then you must take out mortgage insurance. There are also tough Tier One capital requirements and leverage restrictions making total assets relative to equity (and capital) somewhat limited.
This sounds good in theory but in actuality the Canadian banks were significantly more leveraged and in theory therefore more risky than some of the well-run American commercial banks. For example, JPMorgan Chase was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged. Canada’s five largest banks averaged 19 times leveraged.
So if Canadian banks were more leveraged and in many cases less capitalized than their US counterparts what is the real secret of their success?
Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages. This works well for the banks; they originate mortgages, then pass on the risk to government agencies.
One could argue that the other systemic strength of the Canadian system is camaraderie among the regulators, the Bank of Canada and the individual banks. But could this mega-bank scenario work elsewhere?
There is no doubt that during the coming months there will be ongoing lobbying in both the US and Europe to use the Canadian system as ‘evidence’ that large banks can succeed and no longer provide a threat to national financial stability. The opposing view of course is smaller and more capitalized banks.
Here at Zeitgeist we’ll be watching the debate closely but in the meantime we wish all our readers a Happy Easter.

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