# Big six banks declared too-big-to-fail



## james4beach (Nov 15, 2012)

The OSFI has declared that the Big Six banks are "too big to fail"
http://www.cbc.ca/news/business/story/2013/03/26/osfi-banks-capital.html

I think this is a really stupid move by government. It basically says: you are going to get bailed out, no matter what you do. Oh and please be responsible...

Why should the banks be responsible or control their risk? Government is pledging to support them in any case! It's a green light to go nuts, without worries.

Bank CEOs, executives, and high-income Bay Street employees are basically the best paid government workers in Canada. In my eyes, as long as they are back stopped by taxpayers, they are public employees.


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## OptsyEagle (Nov 29, 2009)

I really felt sorry for CIBC yesterday. With the bad luck of timing they went "ex-dividend" yesterday. At the same time BNN was beating this story to death all day and since CIBC opened down $0.94 a share because of their dividend, BNN, and every commentator they brought on, assumed it was because of this ruling. They figured that this drop signaled that there must be a problem at the CIBC. Since the other banks did not see a drop (they did not go ex-dividend yesterday) they all dumped on CIBC. The stock went down another $0.65 or so from all this bad press. Not one commentator figured this out.

Bad day to go ex-div.


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## crazyjackcsa (Aug 8, 2010)

A conspiracy nut might take this as a sign that some banks are on the road to doing just that...


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## andrewf (Mar 1, 2010)

Even if they are too big to fail, this does not mean that equity and bondholders should/would be made whole. You can deal with the moral hazard by codifying (either in legislation, or a explanation of OSFI's intended approach to a bank recapitalization) what happens when a bank is insolvent/illiquid. Equity holders get diluted, bond holders are partially converted to equity, etc. This is painful enough to reduce moral hazard on the part of the banks and their investors.

The capital structure should be flexible enough that a bank should not collapse, just reorganize, possibly with bridge financing from the government.


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## doctrine (Sep 30, 2011)

Saying they are too big to fail is dumb. Forcing them to have stringent capital requirements is good. Poor advertising, in my opinion.


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## james4beach (Nov 15, 2012)

andrewf said:


> Even if they are too big to fail, this does not mean that equity and bondholders should/would be made whole.


That's true. The natural process of bank recapitalization means issuing more stock, so it's guaranteed to dilute the equity. Even in America, with all those bailouts, there was plenty of bank equity that went to zero. Citigroup and Bank of America equity has been very heavily diluted. Fannie Mae, Freddie Mac, and AIG equity was wiped out - even though they were all bailed out. Same with preferred shares... wiped out in the bailouts.

And that is despite the US government being very, very generous with bailouts and bankster love. So the message to an investor is: don't presume your stock (or preferred) investment is safe due to 'guaranteed bailouts'.

The picture with bonds is less clear. But why bother with bank bonds anyway? You'll find equally good rates with GICs, and those are CDIC insured.


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## dogcom (May 23, 2009)

They have been to big to fail all along, now it is out in the open. Of course by being classified officially means more stringent capital requirements and supervision. I think the higher the requirements the better so we don't get into a disaster with our banks.


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## james4beach (Nov 15, 2012)

Higher capital requirements is a good thing, but it doesn't go very far to mitigate risk. It all depends on what can count as capital, and the definition is pretty generously applied. What became clear in the American crisis it that it only really makes sense if you use the most conservative definitions (i.e. tangible common equity). Using those conservative measures, bank leverage in the USA and Canada is still around 33:1 ... that's Lehman territory ... dangerously high. The banks don't have nearly enough capital, so a slight boost in capital requirements still comes far short of the safety zone.

On top of that, these balance sheet capital requirements don't even acknowledge the off balance sheet derivative exposures. The Big Five banks collectively have $19.1 trillion notional derivative exposure off balance sheet, see
http://www.greatponzi.com/reports/cdn-credit/health-2012-Q4.html

In my opinion, the talk of 'stringest capital requirements' is more for show than anything else. Even ignoring off balance sheet derivatives, banks are still dangerously undercapitalized. Throw in the derivative exposures, and it's a farce.

For a discussion of US bank capitalization (from the former TARP inspector), see
http://www.greatponzi.com/articles/20130110-banks-risky.html

How much capital is enough? This part is not US-specific. "They [experts] would say 8% or 10% of tangible equity. But the academic research indicates it should be far higher than that, maybe 20% to 30%, "


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## james4beach (Nov 15, 2012)

So to clarify the numbers there, the OSFI is talking about boosting capital requirements by +1%, when what's needed is more like a +15% increase. It's a step in the right direction, but wholly inadequate.

And I'm being generous here and assuming that the Canadian measure (8% common equity tier 1 ratio) is the same as tangible common equity.

This is why I don't invest in the banks. They're too highly leveraged! It's not rocket science.


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## Oldroe (Sep 18, 2009)

So what is it you do invest in James. You love to connect US bank against Canadian banks and of course Ireland RY bank has some connection to Canada RY.

Just what are you selling.


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## james4beach (Nov 15, 2012)

Why do you think I'm selling anything? You sure don't like it when I point out the risk of the banks.

I generally advise people to stay away from stocks. You can meet your savings goals with cash, savings accounts, and GICs.

Above all else, I advocate paying off debts and maintaining sufficient cash to cover 1 to 2 years of living expenses. Any amounts in excess of this can be invested in GICs. Only after all of this should you consider any stock investment, imho.


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## james4beach (Nov 15, 2012)

Oldroe said:


> So what is it you do invest in James . . . Just what are you selling.


I don't understand your suspicions of me. Over 400 posts and I haven't tried to sell you anything yet.

Why don't you direct that suspicion and critical thinking towards the shills and crooks trying to sell you & your family all kinds of bank stocks and semi-crooked bank products? Why aren't you critical of the bank insiders who work at the OSFI and pretend to regulate the banks? Or the real estate speculators and developers who run the audit committee of the CMHC.

Why aren't you critical of a highly leveraged banking system that is entirely dependent on a rising Canadian housing market? Why aren't you critical of the mainstream media for its total lack of criticism and for totalling ignoring the billions in federal assistance for Canadian banks?

The Canadian banks were bailed out by THREE separate institutions, for god sake! Yet in this country we still pretend that the banks are stable and never needed assistance. Total denial.

Or let me guess... you hold tens of thousands$ in "high quality dividend paying" bank stocks, I bet. You've been told they are high quality companies, trusted names, that won't ever go bankrupt. They increase their dividends every year. Forget about their financial statements... don't read the financials, don't look at the off balance sheet exposure. Just buy more bank stocks and be happy, right?

Leverage is fun on the way up, and very painful on the way down. I want people to be aware of how much leverage is involved with the Canadian banks, and I want people to be aware that if housing cools, or European banks collapse, or American banks collapse... then Canadian banks will de-leverage too, and it will be painful.


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## kcowan (Jul 1, 2010)

OptsyEagle said:


> I really felt sorry for CIBC yesterday. With the bad luck of timing they went "ex-dividend" yesterday... Not one commentator figured this out.
> 
> Bad day to go ex-div.


A concrete example of why talking heads can be dangerous to your portfolio.


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## Oldroe (Sep 18, 2009)

You state loose fact on Canadian bank then you run it into a US bank problems having never proved a Canadian bank problem then you jump to Ireland and off to Spain running your brand of fear having not proved 1 thing.

So I ask what are you selling fear.


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## james4beach (Nov 15, 2012)

I state loose facts? Here I'll make it more concrete for you:

OSFI will require that big Canadian banks have common equity tier 1 ratio of 8%. However, 8% is insufficient bank capital according to source: Neil Barofsky, former Special US Treasury Inspector General of TARP (Bloomberg interview)


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## dogcom (May 23, 2009)

I agree with you james4beach that the 8 percent is not enough and just a step in the right direction. Derivatives are also out of control over the entire planet this is also true. Trusting the banks or anyone for that matter is not something I will do. 

I for one would like to see much greater requirements not because I will buy the banks, but more to keep my money safer that is in the banks.


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## james4beach (Nov 15, 2012)

Oldroe said:


> You state loose fact on Canadian bank then you run it into a US bank problems having never proved a Canadian bank problem


The Canadian bank *problem* is that there is too much leverage in these institutions. The proof is in their tangible common equity measures. You don't like my 'loose facts' so here are the numbers.
Globe and mail article describes tangible common equity ratios

This shows the Big Five banks have "tangible common equity ratios of less than 4 per cent" which translates to greater than 25:1 leverage. CIBC has 36:1 leverage.

In order to give perspective on what this leverage means: Lehman Brothers close to its collapse was around 44:1 leverage using the equivalent measure.

Is this still too wishy washy for you? Maybe you need to read it from a journalist before you take it seriously, since you seem to want to ignore everything I say. The Globe and Mail author writes:

"On that basis, Canadian banks are just as leveraged as European banks, and far more so than American banks. Is the legend of Canadian bank invincibility starting to shake for you just yet?"


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## doctrine (Sep 30, 2011)

> You can meet your savings goals with cash, savings accounts, and GICs.


Those will not be safe if the Canadian banks fail, not in Canada at least. Do you keep money out of the country, if so which one? Or when you say cash, do you mean physical cash or electronic cash?


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## james4beach (Nov 15, 2012)

dogcom said:


> I for one would like to see much greater requirements not because I will buy the banks, but more to keep my money safer that is in the banks.


Agreed! My primary concern is my deposits, and my future taxes. Reckless banks --> my deposits are at risk and I may have to pay more in future taxes to fund bank losses.


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## james4beach (Nov 15, 2012)

I will also add, note the apples-to-apples comparison using tangible common equity.

The TARP inspector says for bank stability he'd like to see a value at least 8% tangible common equity, and ideally more like 20%. The Canadian banks (as per Globe article) are at 4%.

So you can see how undercapitalized the Canadian banks are. We're at 4% capital, and the expert says the target is 8% and ideal 20%.


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## james4beach (Nov 15, 2012)

doctrine said:


> Those will not be safe if the Canadian banks fail, not in Canada at least. Do you keep money out of the country, if so which one? Or when you say cash, do you mean physical cash or electronic cash?


If the Canadian banks fail, CDIC insurance still exists and the government (eventually) reunites you with your money. I still keep money in bank accounts.

I don't see any better option for 'cash'.

If banks fail, CDIC insurance protects your cash. Stocks however would crash. So I still prefer the cash option.

My other major investments are Government of Canada bonds. I accept their low yields because I perceive them as safer than bank deposits.


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## My Own Advisor (Sep 24, 2012)

The reality is, if our banking system fails, the rest of the country goes with it. I'm not sure how this is different for any other developed country on earth.

If you want equities in your portfolio, and seeking returns over crappy bond yields, I'm not sure what you could invest in that's not linked to the financial sector.


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## andrewf (Mar 1, 2010)

100% cash, GIC and savings account is an expensive way to fund a retirement.


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## james4beach (Nov 15, 2012)

andrewf said:


> 100% cash, GIC and savings account is an expensive way to fund a retirement.


I don't quite follow. Are you saying this because stocks are expected to outperform cash & GICs?

You'd better be praying that our stock market ends up different than Japan's, then


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## Oldroe (Sep 18, 2009)

So you really don't invest. Except for Gov. bond. No much wonder you live and die on Globe and mail journalist.

You don't need to worry about your bonds if the banks are broke the Gov. is broke and guess what your bonds are broke.


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## andrewf (Mar 1, 2010)

I'm not praying. I'm applying reasonable expectations to the information available. Japan had terrible equity returns in the decades following a bubble that reached a CAPE of 80. Current CAPE values in North America are in the 20 range.


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## andrewf (Mar 1, 2010)

Oldroe said:


> So you really don't invest. Except for Gov. bond. No much wonder you live and die on Globe and mail journalist.
> 
> You don't need to worry about your bonds if the banks are broke the Gov. is broke and guess what your bonds are broke.


This isn't true. The government has an unlimited supply of Canadian dollars.


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## Cal (Jun 17, 2009)

But the banks are protected...that is why I invest in them.

But I do agree w your original arguemnt, that the 8%, should have been 12 or 15% to trade off for ensuring they won't fail.


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## Oldroe (Sep 18, 2009)

And the way the gov. gets the money into the system is the banks so if the bank is broke the Canadian Gov. is broke. So the banks aren't going broke.

Now James likes to equate Canadian banks to US forgetting that our banks wanted the restrictions taken off so they to could write crazy mortgage 45 years no down payment. Bank of Canada said no. 

The banks said we will buy each other out and have the volume to compete. The Canadian Gov. said no.

So when the US lost control of their financial system Citi bank had 280 billion in bad paper. You can look the rest up.

All 5 Canadian banks had 30 million bad paper. (never did hear what deal they got). But there is no comparing Canadian Banks to US banks, Ireland turn regular 160k property's into 8-900k.


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## fatcat (Nov 11, 2009)

james, i agree with andrew on this one

cash, savings and gic's simply aren't enough (unless of course you live on 20K a year and have 2 million in assets or something)

you will just break even with inflation and thus slowly go broke

if you are talking about living a fairly spartan lifestyle (i live simply and am debt free but at 64, i need to take risk in the event that i live to be 90 or something) and accounting for every penny then perhaps your plan will work ... 

but central banks are injecting so much money into the system you must find a way to pick up some returns that are inflation sensitive and none of your investment vehicles will do that


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## james4beach (Nov 15, 2012)

fatcat said:


> james, i agree with andrew on this one
> 
> cash, savings and gic's simply aren't enough (unless of course you live on 20K a year and have 2 million in assets or something)
> 
> . . . but central banks are injecting so much money into the system you must find a way to pick up some returns that are inflation sensitive and none of your investment vehicles will do that


I agree that stocks can perform very well as an inflation tracking investment. If suddenly we get the high inflation fall-out from QE, then stocks could do quite well. Commodities & gold would go bonkers too.

I'm just saying there are no guarantees with stocks, not even long term. Even with the S&P 500 now at an all time high, that's a nil return over 13 years which is a very long time to wait.


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## andrewf (Mar 1, 2010)

There's no guarantee of real return with cash, GIC or savings accts. You take risk however you slice it.


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## My Own Advisor (Sep 24, 2012)

Well said, nothing is risk-free.


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## RBull (Jan 20, 2013)

Yeah, nothing is risk free. I can't see anyone suggesting there is a guarantee with stocks. Looking globally I also don't see any true guarantee on savings accounts. 

However, I'd rather take my chances in the market right now for a good part of my portfolio. I don't believe in this "banks can't fail" nonsense but I'm also a long way from staying up at night worrying that they will. If I did I wouldn't have any investments in and with them. 

Staying all cash, GIC's, HISA, no matter what would stress me more than having a more traditional asset allocation, unless things changed dramatically with interest rates or equity markets.


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## kcowan (Jul 1, 2010)

Oldroe said:


> All 5 Canadian banks had 30 million bad paper. (never did hear what deal they got).


Remember that any bad paper was stuff they bought outside Canada. We have not yet seen the made-in-Canada part of their shaky holdings.



james4beach said:


> I agree that stocks can perform very well as an inflation tracking investment. If suddenly we get the high inflation fall-out from QE, then stocks could do quite well. ... Even with the S&P 500 now at an all time high, that's a nil return over 13 years which is a very long time to wait.


The performance of stocks is already reflecting the effects of QEs which are just pumping air into the balloon.


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## fatcat (Nov 11, 2009)

from this article in the national post (by david rosenberg): http://business.financialpost.com/2013/02/27/david-rosenberg-why-cash-is-your-least-safe-bet/



> The one thing we know with certainty is that Mr. Bernanke is going to punish and relegate investors who are sitting in cash to negative real returns, not just for another five months or five quarters, but five more years, and therefore cash is arguably the least safe asset class to be in today.


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## My Own Advisor (Sep 24, 2012)

Staying all cash, GIC's, HISA, no matter what would definitely stress me out. That recipe is a total loser to inflation.


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## james4beach (Nov 15, 2012)

My Own Advisor said:


> Staying all cash, GIC's, HISA, no matter what would definitely stress me out. That recipe is a total loser to inflation.


I don't know, I'd kind of be stressed out by a *six year* investment in the TSX that's barely returned anything (approx 2% per year). GICs etc would have returned more than 4% per year

Hmm... which is better ... +2% a year with a -50% drop in the middle,
or +4% a year which goes up in a staight line

Maybe I'm missing something, but which looks like a better investment to you?


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## andrewf (Mar 1, 2010)

But that's cherry-picking. And not everyone has a 100% allocation to the TSX.


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## fatcat (Nov 11, 2009)

james4beach said:


> Maybe I'm missing something, but which looks like a better investment to you?


the better investment can only be determined when it's too late to pick it !!! ... we have to choose based on current available evidence ... there is a case to be made for both inflation and deflation ... you need to prepare for both ....


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## dogcom (May 23, 2009)

Here is a good article. 
http://www.safehaven.com/article/29342/canadian-deposits-as-safe-as-cypriot-deposits

Forum buddies should not be concerned about there bank stocks going to zero no where near as much as losing your deposits. I say go to 30 percent for requirements and who cares about a few losses for stock holders because my deposits come first.


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## jcgd (Oct 30, 2011)

I would hazard a guess that most of us here have more in bank stock than we do deposited at the same banks. I know I do. I'd much rather lose all my bank deposits than my stock value.


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## andrewf (Mar 1, 2010)

dogcom, that particular argument has been thorough debunked. The government is not talking about using deposits as bail-in capital for banks. They authors of that article are deliberately misconstruing what the government has said. In context, the government is referring to newly issued contingent capital (essentially bonds that can be converted to equity at a predetermined rate, when the regulator determines it to be necessary) that banks will have to raise once the appropriate legislation is put in place.

I think all the doomers out there should kindly shut up about the implications of this legislation until we, you know, see it. They are stirring up panic about measures the government has indicated it would like to put into law, but has not even introduced legislation for as of yet. This fear-mongering is highly unethical, and we should question the motives of the people behind it.


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## My Own Advisor (Sep 24, 2012)

jcgd said:


> I would hazard a guess that most of us here have more in bank stock than we do deposited at the same banks. I know I do. I'd much rather lose all my bank deposits than my stock value.


Yeah, losing the bank deposits would suck but losing any banks stocks would be even worse! :frown:


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## andrewf (Mar 1, 2010)

Also, it's crazy to think that equityholders would be made whole in any scenario involving deposits being confiscated.


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## james4beach (Nov 15, 2012)

andrewf: I think you're right. In a scenario where a bank suffers huge losses, equity inevitably goes first (since it's readily issued to raise capital) before you get anywhere near touching the deposits. At the very end of the chain, if all other options are insufficient including central bank and government support, deposits may be defaulted upon.

It's important to remember that deposits are always at risk. I loan money to the bank, and the bank compensates me for the risk by paying interest to me. The deposit *is* a loan, and like any loan it carries risk of default.

This is why it's so important to stay within the CDIC limit. The government has been very clear about saying the first 100k is insured. Deposits beyond the CDIC limit are at risk of loss, and that's the same situation in any country.


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## OhGreatGuru (May 24, 2009)

The meaning of "Too Big to Fail" is misconstrued by many people. 

This is a risk assessment, meaning they are too big to be allowed to fail, because the economic consequences to depositors, government and the economy in general would be too great. The policy of conducting a formal risk analysis to officially identify such institutions came out of international financial circles due to the financial crises we have had in the last few years. Once officially designated the government can now justify subjecting the Big Six to tighter rules such as more stringent capital requirements and supervision. This is risk management.


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## james4beach (Nov 15, 2012)

OhGreatGuru said:


> The meaning of "Too Big to Fail" is misconstrued by many people.
> . . .
> Once officially designated the government can now justify subjecting the Big Six to tighter rules such as more stringent capital requirements and supervision. This is risk management.


That's very optimistic of you. Is the government really going to regulate the biggest banks enough to keep them safe? I seriously doubt it. Already we currently see that capital levels are insufficient, even with the "stricter" new rules.

Here's what the government would be doing if they really were going to keep the banks from blowing up and destroying the country. They would rip apart the investment banking divisions, so they could no longer be protected under the wing of depository instutitions. That means no more RBC Capital Markets, no more Scotia Capital, etc.

Then they would outlaw large off balance sheet derivative positions. RBC has over $7 trillion in derivatives.

So the remaining regulated bank would be a pure depository institution. And capital requirements would be boosted to the 25% level.

There is nothing CLOSE to these kinds of rules for the banks. The government isn't going to do anything to dramatically lower risk, not any time soon. This is just a free pass for the hyperleveraged hedge funds to keep doing what they're doing, all backed by YOU the taxpayer.


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## dogcom (May 23, 2009)

According to this article the Canadian central bank is the worst when it comes to reserves and it also mentions Canadian banks can hold zero reserves if they wish.

I don't know if any of this is true or not but here it is.

http://www.silverdoctors.com/presen...entral-bank-in-the-west-hint-its-not-the-fed/


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## lonewolf (Jun 12, 2012)

Weiss an independent rating service ( not paid by the banks to give the rating ) has had one of the best track records for predicting strength of banks United States. ( Banks that have failed in the past have been given a failing grade by their rating )

Looking @ their ratings in 2001 for the banks in "Conquer the crash" book only one large bank was given an A+ rating, There is a list of the 2 strongest banks in each state & there were 24 banks with A+ ratings. Just because a bank is bigger does not mean it is stronger.

Weiss was taken over by TheStreet.com

Some of the wealth protection experts say keeping money in a safety deposit box is very dangerous as it is against the law. Taking money out of circulation, When the United States had a law of 10 years in prison for owning gold I read that safety deposit boxes would be checked.


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## HaroldCrump (Jun 10, 2009)

It is silly to keep cash in a safety deposit box...esp. at the bank.
It is the worst of both worlds, and protects you against nothing.

Historically, people have often stored wealth-like items such as gold and silver, but not cash.
The wealthy store (and insure) art and other collectibles.

But no one stores cash.


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## dogcom (May 23, 2009)

I was watching a reality show the other day where they follow around a biker gang as they do their daily lives and in this episode one of the bikers needed cash to buy a new bike. He told his fellow biker to dig in the back yard under a rock to find a PCV pipe filled with cash. His fellow biker asked why he did this and he said he found it safer then leaving it in the bank or safety deposit box where the authorities can find it and confiscate it and they had done so to him in the past.


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## HaroldCrump (Jun 10, 2009)

dogcom said:


> he said he found it safer then leaving it in the bank or safety deposit box where the authorities can find it and confiscate it and they had done so to him in the past.


Nonsense, unless that cash was ill-gotten via illegal activities, such as drug trading (quite likely in this case).
In the case of tax evasion, bank accounts can be frozen as well.


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## dogcom (May 23, 2009)

Of course it probably was and I believe he also had problems in the past with women, as he was an older biker.


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## carverman (Nov 8, 2010)

dogcom said:


> Of course it probably was and I believe *he also had problems in the past with women*, as he was an older biker.


LOL! You dont have to be a older biker with stashes of cash to be in trouble there.:biggrin:

I think ZZTop has a song for that..."Planet of Women"



> What can I do, I'm a nervous wreck?
> There's girls everywhere, I better go and check
> I can't tell a diamond from a hole in the ground
> They all got my head spinning round and round
> ...


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## sags (May 15, 2010)

You can deduct the cost of a safety deposit box from your taxes.......can the biker deduct the of the PVC and a shovel ?


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## Nemo2 (Mar 1, 2012)

sags said:


> You can deduct the cost of a safety deposit box from your taxes.......can the biker deduct the of the PVC and a shovel ?


The shovel can be deducted only if it's proven to be used in the interment of a rival bike gang member......however, this might engender a Pyrrhic victory against the CRA when the downside is proven to outweigh the tax benefit.


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## cashinstinct (Apr 4, 2009)

sags said:


> You can deduct the cost of a safety deposit box from your taxes.......


In 2013 federal budget, it was proposed it would not be tax deductible anymore in 2014 and it passed into law:



> Safety deposit box rental deduction – fees paid to a financial institution for safety deposit box rental are no longer deductible for taxation years beginning on or after March 21, 2013;


http://www.mnp.ca/en/media-centre/blog/2013/7/24/update-on-budget-measures-now-passed-into-law

I only posted one link, but many links can be found on the topic.

However, I still see it on CRA website... strange.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

Before choosing a safety box only for tax reasons, research is needed.


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## dogcom (May 23, 2009)

Sags to the biker who is trying to stay clear of the system I would think that he wouldn't be concerned about saving or paying taxes on the buried money.

Carverman I think maybe ZZ has some buried riches as well.


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## sags (May 15, 2010)

Nemo2 said:


> The shovel can be deducted only if it's proven to be used in the interment of a rival bike gang member......however, this might engender a Pyrrhic victory against the CRA when the downside is proven to outweigh the tax benefit.


Lol.............


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