No, Canada's Big Banks Don't Justify America's Too Big to Fails → Washingtons Blog
No, Canada's Big Banks Don't Justify America's Too Big to Fails - Washingtons Blog

Friday, April 23, 2010

No, Canada's Big Banks Don't Justify America's Too Big to Fails

In response to the chorus of experts calling for the mega-banks to be broken up, defenders of our current banking system argue that because Canada's banking system is pretty stable, and Canada has some giant banks, size isn't the issue.

This might be a great argument ... except that Canada's banking system is completely different from America's banking system.

Instead of listing numerous differences, I'll just raise two.

First, as Newsweek points out:

Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1.

Of course, Congress or regulators could demand lower leverage ratios.

But the second difference is harder to fix. Specifically, 5 American banks hold virtually all of the world-wide exposure to derivatives, especially credit default swaps. See this, this, this and this.

Unlike the 5 giant derivative dealers in the U.S. who pretend - because they want to keep their derivative sale profits high - that reining in derivatives would be bad for the economy, Canada's banks don't see much need for much exposure.

As the Bank of Canada wrote in 2000:

Anecdotal evidence also suggests that Canadian banks have been slower to embrace credit derivatives than their international counterparts. Reasons cited
for the slow emergence of credit derivatives in Canada include the Canadian banks’ access to cost-effective funding through their retail deposit base, as well as
their ability to achieve a broad diversification of credit risk internally through their national branch networks.
Can't congress or regulators fix this?


Derivatives will never be reined in until the too big to fails are broken up. The banks are so big and politically powerful that they have bought the politicians and captured the regulators.

So the American banking giants - which have repeatedly gone bankrupt due to wild speculation - are a totally different animal than the Canadian banks. The former is up to their ears in derivatives while the latter isn't. And the former is preventing any transparency or regulation of derivatives.

Unless the too big to fails are broken up, they will go bust again - and bring the system down with them.

As the Newsweek article also points out, Canada's real estate bubble hasn't popped yet. Even with lower leverage and derivatives holdings, the big Canadian banks might not fare so well when that happens.


  1. "Unless the too big to fails are broken up, they will go bust again - and bring the system down with them."

    Washington the sentence should start with "Until the too big as opposed to "unless." We are wishing and not acting. You'll never go broke underestimating the stupidity of the American Public. Ask the man on the street what a derivative is and you will get a blank stare. These banks are stealing the present and future wealth of the American Sheeple. It is a sad thing for me to even discuss with family as their eyes just glaze over.

  2. Not true. You can't listen to the government controlled media, they are complete liars in CANADA. Here are the real derivative holdings for the top CANADIAN BANKS. This is SCARY:

    Royal Bank ($624 billion assets) ;
    $4.8 trillion total derivatives ;
    $4.3 trillion OTC derivatives

    TD ($432 billion assets) ;
    $2.4 trillion total derivatives ;
    $2.1 trillion OTC derivatives

    BMO ($387 billion assets) ;
    $2.7 trillion total derivatives ;
    $2.0 trillion OTC derivatives

    Scotiabank ($429 billion assets) ;
    $1.3 trillion total derivatives ;
    $1.2 trillion OTC derivatives

    CIBC ($344 billion assets) ;
    $1.2 trillion total derivatives ;
    $1.1 trillion OTC derivatives

  3. Canada's real estate bubble hasn't popped, yet.

    We'll the shape of their banks when it does.

  4. If the European Banks are leveraged 61 to 1, why is the Euro worth so much more than the dollar? Obviously, it won't last much longer and the USD might even make a comeback before it crumbles along with all the other worlds fiat currency, but putting that whole argument aside, why is the EUR worth so much more right now if its Banks are so highly leveraged relative to the banks in other developed countries?

    Just a thought, but if anyone has any idea why this is, I'd like to get your take...

  5. Economic Analyst: What source did you obtain those derivatives numbers from?

  6. I don't understand why no one outside of Canada like Simon Johnson or Arianna Huffington is willing to take the Harper govt and its pitbulls like Jim Flaherty and John Baird who claim Canada and its enomourous banking oligarchy as the greatest system in the world head on. No one inside of Canada will and given we are all in single global economy George Washington, Simon Johnson or Arianna Huffington have as much of right to crictize the current Canadian govt and banking establishment as anyone.

    Good videos of current Canadian govt pitbulls

  7. I think you may be overestimating the Canadian banks. On the upside of any bubble banks balance sheets look rosy because the asset side is inflated and/or populated with loans that will not be repaid after the bubble bursts.

    Canadian banks have dumped most of the Canadian housing bubble risk on CMHC, i.e. the Canadian government and eventually the loony. They may not get hit from that side.

    However, when the bubble bursts, every other loan type will crater and non-performing loans will mushroom. An 18:1 leverage means they have 5% in reserves. This can be eaten up in a matter of months.

    An argument should be made that the Canadian banking cartel needs to be broken up to stop Canada from following the same path as the US. I personally think it is a bit too late and Canadian banks will be getting handouts from the Canadian government in a couple of years.

    I am curious to see how the Canadian multi-party parliamentary system fares in the coming crisis compared to the two party system in the US. Hopefully with a bit more backbone.

  8. Canadian banks operate as an oligopoly, and are regulated as utilities. Their exposure to the OTC derivatives market is almost exclusively on equity, and fixed income strategies -- hence marked to market on a daily basis.

    Also, as you point out our leverage is lower.


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