# Canada: Worst capitalized central bank in the west



## Rusty O'Toole (Feb 1, 2012)

According to this article by Simon Black. But don't worry, the 2013 budget proposes allowing them to top up their account from yours, in case they run short.

"As the world’s top central bankers gathered at their annual jamboree recently, the governor of Bank of Canada, Stephen Poloz, undoubtedly received envious comments from his fellow money magicians for Canada’s perceived status as a global financial safe haven.

This newly found perception was perhaps best exemplified during a Bloomberg interview, when the CEO of RBC Wealth Management – the biggest financial institution in Canada said that “Canada is what Switzerland was 20 years ago, and the banks in Canada are what Swiss banks were 20 years ago.”

This is the new flavor of Kool-Aid. Canada is seen as the new banking safe haven and an “island of safety and stability” because of its perceived sound fiscal position, commodity wealth and solid economic performance.

Now, anytime I see central bankers slapping each other on the back, I’m going to be skeptical. But here at Sovereign Man, our conclusions are all data driven… so we dove into the numbers.

First, the Big Daddy himself—Canada’s central bank.

Any strong, healthy banking system requires a central bank with a pristine balance sheet… specifically, substantial net equity as a percentage of assets.

So how strong is the balance sheet for Banque du Canada? Not very.

As it turns out, Banque du Canada is actually the most pitifully capitalized central bank in the western world. They’re in such bad shape they actually make the Fed look healthy.

Hong Kong’s Monetary Authority Exchange Fund is a good example of a strong balance sheet; their latest figures as of 30 June show a whopping capital reserve equal to nearly 22% of total assets.

This is a massive margin of safety for the central bank.

The US Federal Reserve, on the other hand, shows a capital reserve of just 1.27%. And Canada? A tiny 0.47%… as in less than one half of one percent.

This isn’t safety and stability. It’s a rounding error.

Moreover, Canada also has ZERO reserve requirements for its banks; this means that Canadian banks are not obliged to hold any of their customers’ deposits.

So yes, it’s legally permissible for a Canadian bank to loan out 100% of its customers’ funds.

Not to worry, though. The Canadian Deposit Insurance Corporation (CDIC) is standing by to insure bank deposits up to $100,000.

But when you look at it closely, there isn’t much there for depositors at all. There’s roughly $646 billion of eligible deposits in the Canadian banking system. Yet the CDIC only has $2.8 billion in cash available to insure it all… a ratio of just 0.43%.

Even more troubling is that Canada has legislated an actual Cyprus-style confiscation of deposits in the event that Canadian banks deplete their capital.

Buried deep into the government’s Economic Action Plan 2013 is a provision that would implement a “bail-in” regime for “systemically important banks”.

This would legally allow the banks to tap into customer deposits if the banks get into trouble… something I don’t find particularly safe.

Last, the Canada myth really starts to become apparent when you look at the country’s gold reserves.

At the beginning of this century Canada held 46.19 tonnes of gold. Now they hold only 2.99 tonnes. That’s a whopping 93.5% decline in gold reserves in just over a decade!

In other words, Canada’s monetary leadership has made a conscious decision to reject real assets in favor of paper assets that can be conjured out of thin air.

They’ve managed to run their central bank into borderline insolvency.

It’s important to look at facts and not rely on sentiment.

To anyone who rationally looks at the data, the obvious conclusion is that Canada is certainly NOT the safe-haven it’s been built up to be."


----------



## andrewf (Mar 1, 2010)

"According to this article by Simon Black. But don't worry, the 2013 budget proposes allowing them to top up their account from yours, in case they run short."

^This is, of course, utter nonsense. The Budget says no such thing. And the BoC could always just print dollars if it runs short.

This is just a load of click-baiting misinformation. As if the government would announce their evil secret plot to confiscate your deposits in their televised budget speech.


----------



## GoldStone (Mar 6, 2011)

Ah here it is. Our weekly THE SKY IS FALLING thread. This is so comforting.


----------



## gibor365 (Apr 1, 2011)

_But when you look at it closely, there isn’t much there for depositors at all. There’s roughly $646 billion of eligible deposits in the Canadian banking system. Yet the CDIC only has $2.8 billion in cash available to insure it all… a ratio of just 0.43%._
Not a problem at all.... Canada can always print money as much as they want.... Everyone will get 100K back, but it will worth 10-20K in todays $


----------



## sags (May 15, 2010)

And........visions of people carting around wheelbarrows full of cash to buy lunch.........just went through my head.

So.........if the statistics are correct on the bank capital reserve situation.........who would pay the depositors in an inevitable bank run?

Or would they just lock the doors, until it all got sorted out.....................12 months later?


----------



## andrewf (Mar 1, 2010)

Amazing that the inevitable bank run never happens. Kind of like Jesus coming back. It'll happen any day now.


----------



## Rusty O'Toole (Feb 1, 2012)

andrewf said:


> "According to this article by Simon Black. But don't worry, the 2013 budget proposes allowing them to top up their account from yours, in case they run short."
> 
> ^This is, of course, utter nonsense. The Budget says no such thing. And the BoC could always just print dollars if it runs short.
> 
> This is just a load of click-baiting misinformation. As if the government would announce their evil secret plot to confiscate your deposits in their televised budget speech.


Quote from Budget, page 155

"The Government proposes to implement a ―bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.
This will reduce risks for taxpayers. The Government will consult
stakeholders on how best to implement a
bail-in regime in Canada
.
Implementation timelines will allow for a smooth transition for affected
institutions, investors and other market participants."

Your account is an asset to you, a liability to the bank. To find out what a "bail in" means, see Cyprus.

This gives banks the assurance that if they gamble and lose, someone will bail them in. 

The budget if you want to check for yourself.
http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf


----------



## Rusty O'Toole (Feb 1, 2012)

I keep hoping someone more knowledgeable than me about the Canadian banking system will come forward and prove we have nothing to worry about.

But, it appears Canada's banks are taking risks they should not take, and the regulations and safety nets are inadequate to protect the public, although they do a good job of protecting the banks.


----------



## andrewf (Mar 1, 2010)

Or you can review what the government has been saying about bail-in mechanisms both before and after that speech. They have always been referring to contingent capital, not deposits. Because the government already guarantees deposits, they would rather private bond holders be at risk.

You have an agenda, but anyone who has been following the government's policy on this issue (and I am no Harper apologist) in context knows that they are referring to contingent capital. And if a government was planning to use deposits to bail in banks, THEY WOULD NOT ANNOUNCE IT IN ADVANCE.


----------



## GoldStone (Mar 6, 2011)

Rusty O'Toole said:


> Your account is an asset to you, a liability to the bank. To find out what a "bail in" means, see Cyprus.


Oh please, stop fear-mongering.

Ottawa clears up confusion over bank ‘bail-in’



> The Finance Department issued a clarification Tuesday explaining how a Canadian-style bail-in of the banks would work, should it be needed. The statement emphasized that depositors’ money would not be used to help stabilize a shaky bank. Instead, Canadian banks must rely on their own capital, which they must set aside for a rainy day.
> 
> ...
> 
> ...


Rusty, we've beaten this horse to death. Why do you keep flogging it?


----------



## fatcat (Nov 11, 2009)

the whole fffing thing is so ridiculous
reading too much soverign man or zero-hedge is like smoking crack
it affects your capacity to understand reality

any government ... our government can do whatever the F it wants if it deems the circumstances warrant it
and the consequences be damned and sorted out later

they may not get re-elected but we grant our government extraordinary power over our lives
and there is no place on earth to escape the reach of a government that doesn't reserve for itself extraordinary power

sovereign man is a joke who lives in a dream world peddling fantasies to gullible people
he is a certified fear peddler along with faber, rogers, sprott and a long list 

there is good money in fear


----------



## sags (May 15, 2010)

It appears that all previous comments from the media and the Finance Ministry, are only conjecture, as the "bail in" provisions are still under consideration and review.

They are still in the "consulting" process.

On August 1, 2014........the Finance Ministry released the "proposed" regulations thus far........and seeks further input.

http://www.mondaq.com/canada/x/3329...+Releases+Proposal+for+Canadian+BailIn+Regime

It looks like the proposal is to protect deposits up to the limit of CDIC insurance, which is to be reviewed.


----------



## HaroldCrump (Jun 10, 2009)

S&P and Moody's downgraded the Canadian banks precisely because of the bail-in provisions that put bondholders on the hook for making up capital losses, instead of the tax-payers.

If the tax-payers are on the hook (i.e. absolute guarantee by the federal govt.) then they would have _upgraded_, instead of _downgrading_, the banks - because in that case, the bondholders and the shareholders (both preferred and common) would have no downside.
That is the theory, at least.

In practice, the real question is - if ever such a situation arises that contingent capital needs to be converted to common equity for the Big 5 Canadian banks, there will be massive widespread losses for many govt. backed pension plans.
Will the govt. still stand their ground under political pressure?

What if the banks have to liquidate some of the federal and provincial bonds they hold to raise cash levels?
A lot of our debt is held internally by the banks and insurance companies.
Will the govt. still allow such a liquidation to proceed without stepping in and explicitly bailing out the bank in question?
Assuming it is one bank, of course.

Explicitly or implicitly, the tax-payers will take a hit.


----------



## carverman (Nov 8, 2010)

Rusty O'Toole said:


> Moreover, Canada also has ZERO reserve requirements for its banks; this means that Canadian banks are not obliged to hold any of their customers’ deposits.
> So yes, it’s legally permissible for a Canadian bank to loan out 100% of its customers’ funds.
> Not to worry, though. The Canadian Deposit Insurance Corporation (CDIC) is standing by to insure bank deposits up to $100,000.
> *But when you look at it closely, there isn’t much there for depositors at all. There’s roughly $646 billion of eligible deposits in the Canadian banking system. Yet the CDIC only has $2.8 billion in cash available to insure it all… a ratio of just 0.43%.
> ...


Canada is certainly not the safe haven it used to be, but other than Switzerland, that probably holds more foreign money capital than from it's own citizens, they were, and maybe still are for the most part..the world's bankers.
...what other country these days is any safer from a bank failure or a major recession these days? 
I bet you may not even count these countries on the five fingers of your hand.

We are in a global economy, like it our not and that has changed banking quite a bit in the last 20 years...the big 5 banks in Canada today are are not the same as "your father's banks" . They are in the business to make profits,
as much as they can legally grab.

Their practice of offering low ball interest rates that don't even keep up with inflation, yet keep their lending rates as high as they can in this competitive economy, ensures that their investors/depositors are not going to get rich from their investments, only the banks themselves. This is propped up by the monetary policy of our central bank,
who seems to have their own ideas on what is right for us. The fact that we came out practically unscathed 
for the most part in the big recession of 2008 that was prompted by greed and corruption within the US
banking and insurance industry tells us something. 

As far as the CDIC having only 2.8 billion in cash or liquid assets available at a ratio of 0.43%..I'm not going to lose any sleep at night over that "fact of reality in today's economy"...Canada so far has enough natural resources to sell to whomever in the world has the cash to buy them, and as long as we highly industrialized countries (like China
and others in the Pacific ring or the US that is willing to buy them. the big Four don't have anything to worry about their depositors beating a path to their door (or ATMs), like what happened in Greece or Cyprus....
....and barring any major world banking meltdown, I'm sure they can for the most part, handle any major cash crunch ....if that ever happens.

I would be more concerned about the buying power of the depositor's money..not sitting in the big banks vaults, but lent out as loans..if *all their borrowers go into default*..as in the case of a DEPRESSION, like what happened in 1929....
But hopefully, at least for me and my GICs, my bank and the CDIC, will come through when I need that money to live off.

"Chicken Little-The Sky is Falling" theories will always be there, but until that actually happens, we just carry on with our lives and hope that in our lifetimes the sky does not fall down on us. :biggrin:


----------



## sags (May 15, 2010)

How quickly people forget the world banking system was teetering on the edge.........only a few years ago.

The sky did fall for Bear Stearns, Lehman Brothers.........and tens of millions of Americans who lost Trillions of dollars of their wealth.

Could it happen again ? Let's hope our banks are prepared.........if it does.


----------



## james4beach (Nov 15, 2012)

The bail-in provisions refer only to *uninsured deposits*. There is nothing in the government's plans that undermines CDIC deposit insurance. Beware of insured vs uninsured amounts. If you exceed the 100k per institution insurance, then your deposits _may_ be subject to bail-in. Large depositors (e.g. business accounts, condo reserve fund) should beware.

The CDIC limit is there for a reason. It clearly spells the limit of what the government will protect come hell or high water, after that point your money is a deposit in the traditional sense, meaning it's totally subject to the bank's ability to repay you.

-- That being said --

One must keep a healthy skepticism about Canadian banks and how solid they are. _All_ large Canadian banks used the secret Federal Reserve loan facilities offered to troubled banks, as well as secret support from the Bank of Canada, CMHC, and CPP (again... never fully disclosed to the public). Our banks were hit very hard during the financial crisis, but unlike the US, we never acknowledge this in our society. Canada has been arrogant and secretive about the extent of banking trouble we experienced.

CIBC, BMO, and Scotiabank took emergency loans from government that exceeded the company values. This is a polite way of saying they were completely underwater, and became worthless (zero equity value) during the financial crisis. The only reason we don't remember them having zero equity value is that the bail-out loans were secret, never disclosed to shareholders or the public market.

All you stock holders out there got really lucky that the loans were kept secret. If the true financial condition of the Canadian banks were known, you would have seen CIBC, BMO and Scotia stock values plummet near $0. This is one of those situations where people shrug and say the ends justify the means... shareholders were lied to and not told true financial condition, but hey, everything worked out OK so no big deal.

Read this report on the 2008 Canadian bank bailouts



> Amazing that the inevitable bank run never happens.


True, a "bank run" didn't happen, but crippling losses requiring a total bailout by government _did_ happen. Without support from the Federal Reserve, Bank of Canada, CMHC and CPP, several banks would have become insolvent.

I don't think you should be so blasé about the state of our banks in '08. When it takes a total of four government entities spanning two countries to keep the Canadian banks operational, you can hardly pretend the banks fared well during the crisis. They came within an inch of their lives!


----------



## sags (May 15, 2010)

It is usually a warning sign when someone keeps telling you something is fine, it's great, no need to worry, .....when you didn't ask them about it in the first place. 

My teenager used to do that...."Dad, the car is fine...." he would say....and I would immediately go out to check the damage.

After the US bank stocks got thoroughly trashed.........our politicians probably figured it best to keep it all quiet.


----------



## carverman (Nov 8, 2010)

sags said:


> It is usually a warning sign when someone keeps telling you something is fine, it's great, no need to worry, .....when you didn't ask them about it in the first place.
> 
> My teenager used to do that...."Dad, the car is fine...." he would say....and I would immediately go out to check the damage.
> 
> After the US bank stocks got thoroughly trashed.........our politicians probably figured it best to keep it all quiet.


American greed, their gov't policies and their banks fallacy to lend to those that couldn't afford it, became their downfall. 
If you lend money at subprime rates to somebody that in reality can't afford it, and that somebody loses their job in a down turned economy..
how will they be able to make the mortgage, property taxes or utilities? They don't.
In that situation, they live like squatters until the bank's bailiff comes to throw them out on the side walk with their stuff on the front lawn.

Our Canadian banks, and to some degree gov't policy on mortgage rates, ensures that we have some protection in that regard.
In the 80's we had something like 2008 US economic collapse in reverse, we had a mini recession AND mortgage interest rates that climbed dramically in a very short time, (Forget which year that was mid 80s). Home owners in an overheated Toronto real estate market bought homes that were financed by the banks at very high ratios..around 5% 
down payment and with CHMC mortgage insurance, they were able to buy those homes even though they were well above the recommended formula for mortgage payments based on monthly net income. 

The mini recession hit, some jobs were lost due to downturn of the economy then the mortgage rates went up shortly afterwards when the renewals came up. The real estate prices took a tumble in the depressed economy.

People that no longer could afford those same houses, or sell them, because they owed the banks more than they could list those homes in the depressed real estate market..just "walked away" or were evicted by the mortgage companies and the properties were put up for sale again at the lower real estate market. 

The banks had the option of suing the people that walked away for the difference between the signed mortgage debt and what they got from the power of sale resale, minus legal fees....very nasty situation. 

The Cause of the 2008 Financial Crisis 


> The facts are that approximately 6% of all mortgage loans in United States are in default. Historically, defaults were less than one-third of that, i.e., from 0.25% to 2%.
> 
> A huge portion of the increased mortgage loan defaults are what are referred to as ‘sub-prime’ loans. Most of the sub-prime loans have been made to borrowers with poor credit ratings, no down payment on the home financed, and/or no verification of income or assets (Alt-A’s). Close to 25% of sub-prime and Alt-A’s loans are in default.
> 
> ...


----------



## james4beach (Nov 15, 2012)

carverman, I do agree that Canada has systemic advantages and our banking system is probably fundamentally more solid than the US (for instance I have both US and Canadian deposit accounts but keep nearly all my money in Canadian banks). To clarify for everyone: I do think Canadian banks are safer, and virtually all my US income flows into Canada for this reason.

However there are big changes to the Canadian financial system that are radically different from the 80s and 90s:
* historically unprecedented debt-to-income levels... borrowers in Canada are more leveraged than ever
* massive real estate price appreciation across the whole country, NOT just regional
* derivatives boom, most of it off balance sheet. Big Five have about $21 trillion (notional) derivative books, increasing at around 12% a year
* securitization of most debt assets, as opposed to conventional loans, meaning less perceived risk
* CMHC, which has grown tremendously large, offloading debts from banks and changing their behaviour

These are major differences from past decades; it's not your grandpa's banking system. There's been incredible "innovation" in finance since 2000.


----------



## sags (May 15, 2010)

The "subprime" lending scandal was a problem, but it would not have led directly to the depth and breadth of the recession.

Homes can be repossessed and eventually sold......mitigating the loss. 

The "credit crisis" that occurred at roughly the same time, was far more dangerous and devastating.

Lenders didn't trust each other anymore. Everyone was calling in loans and HELOCs. Borrowing money was impossible.

The economy is so tightly wound and dependent on trust and credit............that it started to unravel almost overnight.

I remember reading on a financial forum ......the running commentary from posters living in New York City who were observing all the long, black limousines lining up in front of a building late on a Sunday night. They recognized the "big names" in banking climbing out of the cars and were reporting it live on the forum.

Later it was learned that this meeting......with the bankers summoned by US Treasury and Fed officials, were held to ponder the complexity of the problems and come up with a viable solution..........."a right now.....tonight.......before you leave the building" type of solution.

There was a time period..........when many top officials seriously thought the world financial system was going to collapse.

This is the "danger" I think J4B is referring to.

Some unrelated event in some bank in some foreign country........and everything starts to snowball and unravel with lightning speed.

In occurrences like that....drastic measures have to be taken.....and if seizing deposits is one of them....that is exactly what they will do.

Will it happen ? I wouldn't bet any money on it happening, despite the incredibly long odds one could collect.

But who knows what the future holds ? Nobody thought it would happen before.


----------

