Saturday, March 30, 2013

Canada banking situation

Considering events in Nicosia it is startling the announcement this week that Canada's six largest banks have now been deemed too big to fail. hmmm, I mean why would the government make such an announcement at this time? Especially in the unmistakable backdrop of the situation in Cyprus. Is there concern that one or more of the majors is in trouble? Is there a quiet, electronic bank run going on? The domestic money is stuck, we can't pull out or go anywhere (nor are we inclined to). How much foreign capital is deposited in Canada's banks, and are they quietly pulling out or threatening to pull out.

By announcing this while Cyprus is going on could be interpreted as a signal that all deposits will be protected, there will be no "haircut" on depositors in any scenario. This renders deposit insurance (capped at $100k) now effectively infinite. Again, why would the government make such an assurance. Although everyone implicitly understands and accepts that the federal government would intervene for a major bank in Canada to prevent a disorderly failure; in the past the implicit understanding was strong enough. So by coming out now with an explicit announcement it is actually a sign of weakness, not strength. After all before now there was never a need to make such an announcement, the combination of the strength of the institutions, and the implicit social federal guarantee were sufficient.

It's a concern. After all it was just a couple of years ago that the federal government created $70 billion out of thin air and swapped this raw clean cash for a portfolio of dodgy mortgages off the banks books. I just realized now that the government by doing that very quietly created a "bad bank" to be presumably eventually wound down. Speaking of Canada's bad bank, what is the status of the people's $70 billion investment? Who is managing this portfolio, how many of the mortgages have gone into foreclosure, what are the losses at this point on the $70 billion portfolio now that inventory of listings is rising fast and housing prices are set to stall and then decline? Why does the media and opposition never speak of this or ask any tough questions, or even any questions at all for that matter?

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