Whose Banks Are Riskiest: A Surprising Answer From The BIS

Tyler Durden's picture

When one thinks of unstable, risky banking systems, the first thing that comes to mind are visions of insolvent, state-backed building - with or without long ATM lines - in China, Greece, Italy or, in recent times, Germany. However, according to the most recent report by the Bank for International Settlements, the country with the riskiest banking system is neither of these, and is a rather "unusual suspect."

As part of its latest quarterly report, the BIS looked at highlights of global financial flows, and found that after a modest slowdown in 2015, growth in both claims and international denominated debt securities resumed its rise in 2016, leaving banks even more exposed as counterparties to international issuers, especially should the world hit another "Dollar margin call" situation, where borrowers are unable to make payments on their obligations due to a surge in the global reserve currency.

However, cross-border international debt flows is just one aspect of bank riskiness. As part of a separate excercise profiling the domestic banking systems of some of the most prominent Developed and Emerging nations, the BIS looked at four distinct "risk" or crisis early warning indicators: i) Credit-to-GDP gap, or the difference in the current ratio from the long-run trend; ii) Property Price Gap, or the deviation of real residential property prices from their long-run trend, iii) Debt Service Ratio (DSR), which also is the deviation in the current DSR from the long-run average, and finally iv) DSR assuming a 2.50% increase in interest rates.

What it found is that the early warning indicators for financial crises continue to signal vulnerabilities in several jurisdictions. Here is what it found:

relative to previous readings, the set of countries showing large and positive credit-to-GDP gaps remained the same (first column). The credit gap for China remained high at 26.3% of GDP, well above the threshold of 10%.9 Canada, as well as a group of Asian countries, saw increases in the credit gap since September 2016. The size of the property price gap (second column) remains in line with historical trends in many jurisdictions, with the exception of Canada, Germany, Greece, Japan, Portugal and a group of central and eastern European countries, for which the gaps remain relatively large. However, a high reading need not indicate accelerating price growth - for Greece, Japan and Portugal, the high property price gap does not necessarily indicate vulnerabilities, as it is driven by property price growth returning to normal levels after long periods of decline.

 

The last two columns of Table 1 present two alternative measures of debt service ratios, which aim to capture aggregate principal and interest payments in relation to income for the total private non-financial sector. For most countries, debt service ratios stand at manageable levels under the assumption of no change in interest rates (third column). Under more stressed conditions - a 250 basis point increase in rates - and assuming 100% pass-through, the numbers point to potential risks in Canada, China and Turkey (fourth column). However, the figures are meant to be only indicative, and are not the outcome of a proper stress test: a rise in rates would take time to translate into higher debt service. The degree of pass-through depends on the share of debt at floating rates, debt maturities and possible changes in borrowing behaviour.

The table below summarizes the early warning indicators for domestic banking risks produced by the BIS, with data up to Q3 2016 for most countries.  But what is most surprising is which country has triggered 3 of the four "financial crisis early earning indicators", and is on the verge of tripping the fourth one as well: as we said above it's neither China, nor Greece, nor Italy or Germany, but, drumroll, Canada.

Regular readers are well-aware that Canada is very touchy when anyone suggests that its banks may not be... in pristine shape. Good luck brushing it off, however, when the source is none other than the central banks' central bank.

Source: BIS

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Paper Boy's picture

Bitcoin, Banks & The Final Dis-intermediation - This Time They Can't Cheat Death.

(A must watch video!)

https://www.youtube.com/watch?v=kOOOWAB3xQg

Looney's picture

 

If Canadistan’s banks go nipples up, they can always ask ISIS for a bailout.  ;-)

Looney

johngaltfla's picture

Canuckistan's biggest problems are the shale oil companies and USD vaulting up in value.

They can not afford either and their banksters will collapse once Montreal, Vancouver, and Toronto real estate goes tits up.

evoila's picture

they just asked for a stress test for a 50% drop in housing prices. sounds like 2007 to us, except they can see the train coming.

litemine's picture

When the Energy East pipeline goes to the Ocean and the OilSand Oil reaches world Markets, (hopefully after value added refining) our trade with the USA will lose the deficit we hold now.....Our Dollar will stay low not wanting to hold $US. which will fail. Gold/Silver should make a comeback as an Honest Savings vehicle. Cash.

Verniercaliper's picture

USD going up works for them....lowers cost of production on tar sands

johngaltfla's picture

Why? We don't need the tar sand oil, we're just buying it due to contractual obligations. USD only works in the short term, the other problem is that the Canadian people can NOT afford the upkeep on their US properties with a higher USD and hence will be forced to liquidate in AZ, CA, FL, etc. Florida can handle it, but the other markets? Not so much.

actionjacksonbrownie's picture

Not too sure about isis, but they are pretty cozy with the ukies, so there's that...

robertocarlos's picture

That's because this country is Jew owned and run. And Jews want Ukraine for some reason.

HRClinton's picture

More likely that they'll trade their bygone Can-do attitude for a Chin-do attitude.

True North?  Strong & free?  How much longer? 

litemine's picture

Be carefull. Not allowed to state that fact.

orangegeek's picture

Leave it to the Canadian marxists to poke themselves in the eye.

GunnerySgtHartman's picture

Marxists have a way of doing that to themselves.  ;-)

In.Sip.ient's picture

Yes, Canadian Banks are just as shaky as

many others.  However, most do not understand

the extraordinarily incestuous relationship

between the Gov't of Canada and what are

referred to as "chartered banks" in Canada.

 

Factor in the "assets available" and condition

of the balance sheet of "guaranteeing governments",

and you can appreciate that the BIS stuff is not

quite what it seems.

 

Soph's picture

True.

 

The Canadian condition is a magnitude more pronounced than what we saw in the US in 2008, when the Fed and US Gov raced to bail out the banks.

Canadian chartered banks are far more intertwined with the federal government and BoC. Each could be complete, total piles of shit and impload 8 ways from Sunday and it would be largely menaingless in its ultimate affect to the Canadian economy, or more importantly its ciotizens...the feds and BoC would be there bailing long before anything serious came of it.

There is no real capitalism in Canada...it's a flavor of socialism and the banking sector, if the shit were to EVER hit the fan there, becomes simply an extension of the federal and provincial balance sheets.

It might look ugly, but it'll never amount to anythng.

Seriously, nothing to see here, move along.

In.Sip.ient's picture

"Flavor of Socialism" ... er... not quite.

What's it called when the Gov't and Corporations

collude in the market place... Mr. Mussolini???

The banks are a "regulated monopoly".

 

And the reason you'll see no impact in Canada, is

because Canada can simply order all gold production

sold to the Bank of Canada... in fact that legislation

is already in place to be activated "when and if".

The central bank gold vaults would be at their historic

levels in about 2 years... Not many jurisdictions can pull

that off.

 

OTOH, come back in about 30 years, when failed states

litter the landscape... and I wouldn't be in Canada ... then !

 

cesar's picture

What would the value of the CAD $ be when they are trying to buy all this gold? Not going to be today's prices.

oilmaker70's picture

As the dollar goes up gold goes down. When the dollar collapses gold and silver goes crazy. Canada has sold all our gold. All of it. If I am a gold producer in Canada(?) At a 65 cent dollar I will tell you to take a hike. I live in Vancouver. Most of the people here could not write a cheque for $500. They have $5000 a month mortage payments and earn $6000. The Chinese have moved on. I have more gold than this country will ever have.

jus_lite_reading's picture

I have to disagree with this assessement. IMO, Australisn banks are the highest risk right now... just sayin. You will come back to this post soon.

In.Sip.ient's picture

Wouldn't quibble.

Read my comment re Canada's gold position further in this thread.

I beleive Australia would be another country that could pull that off.

 

RaoulDuke66's picture

Couldn't agree more. Their massive exposure to the government-championed Australian housing bubble is ubiquitous, the majority of the loans are shown to be sub-prime (as soon as anyone scratches the surface), the underlying assets are cross-collatoralized death-traps which fall apart after a few years, and ownership is concentrated in the hands of a small number of "investors" who suck up annual income losses in the hope that somone else will come along and go into even more debt to purchase their 'savy investment' for a capital gain. What could possibly go wrong, it's different this time, and who could have seen it coming?

logicalman's picture

Concerning the relationship you refer to.....

https://www.youtube.com/watch?v=bmL4Qfj_vCA

refers to a court case started by COMER (Committee on Monetary and Economic Reform)

https://www.youtube.com/watch?v=xlJiJxPEz9g

https://www.youtube.com/watch?v=Z9qiMdczC_k

these two are presentations prepared by a guy I know. I've worked with him on these for quite a while.

Look up the word 'windbill'.

 

ChinaWildMan's picture

Canada is the canary in the coal mine. What do I mean by this, well it's largest trading partner is the USA and the Canadian condition is a result of a decline in the economy in the USA. 

demi urge's picture

Not that surprising.

Harper bet the farm on Tar Sands. It was a terrible, terrible, terrible bet.

 

 

litemine's picture

Trudeau doesn't help giving CAN$ away when there are people at home that need help. He acts like a Hoolywood Puppet.

At this time.....Knowledge is King and he will lose bigtime next election.

 

 

arby63's picture

He isn't acting. He harbors a lot of estrogen.

robertocarlos's picture

He's a faggot with a beard.

oilmaker70's picture

Did that faggot grow a beard? He describes himself as a "comic book superhero" with leftist, globalist, radical feminist tendencies. I believe he has the right to say what he wants, he doesn't think I deserve the same.

cesar's picture

Throughout most of our history Canada's economy has been disproportionately dependant on resources & exports to a single market i.e., the USA. Its not a Harper problem!

FYI, in the past year Justin Trudeau has approved all of the same pipeline projects that his predecessor supported (except one).

Trudeau has done NOTHING to address the most urgent problem of Canada's housing bubble which is apparent to the whole world excluding Justin Trudeau!  Maybe he is too busy reading all of his flattering Canadian press coverage & taking selfies.  However I suspect that might change in due course.

oilmaker70's picture

Do you think he will try to blame the collapse on Donald Trump? The banks will not take the blame.

TheVillageIdiot's picture

Interesting article, and as a Canadian, find it very useful information. Some logic incongruencies in determining stability of other jurisdictions, but find it quite instructive... 

Does this measurement include the wholly owned US operations of Canadian banks? IE TD Bank USA, Harris Bank etc.?

 

GreatUncle's picture

This is like who is holding the biggest pile of shit.

Doesn't do it for me.

One thing is for every CB will follow the path of Japan until it crashes.

peippe's picture

when you call your currency 'loonies' & 'toonies' you get everything you deserve.

Bernie Madolf's picture

Never mind I reread

U4 eee aaa's picture

Yet the banks are making tens of billions of dollars per quarter on a population of about 35 million. And everyone thinks everything is peachy up here. I can't believe people are so willing to throw their money at these junior squids.

Thanks for this. I'm about to send this to about a half dozen canucks

logicalman's picture

An interesting snippet.

The biggest holders of Canadian banks' shares are EACH OTHER!

rf80412's picture

Isn't that true of all banks?  Isn't that why everyone was afraid of cascading [cross] defaults and contagion in 2008?  Isn't that why the bailouts were "necessary": to plug the holes created by the financial industry imploding on itself?

Radical Marijuana's picture

ouroboros of incorporated robbery

That is more than merely a "snippet!"

Albertarocks's picture

Even more so in the USA.  In fact I'm certain that is a global phenomenon.

oilmaker70's picture

Here's something to add to that. I am a senior getting old age pension-automatic bank deposit from the Gov't of Canada now is deposited and itemized(Vancity)as a "digital credit". As in digital cash. Turn up the heat, the frog is getting cold.

Yukon Cornholius's picture

The Canadian system needs a reset. Boomers and chinamen with fake wealth can finally pay their dues.

I am a Man I am Forty's picture

All I know is when the shit hit the fan in 2008 and 2009 the Canadian banks were by far the tallest midgets in the room in the western world.

cesar's picture

True because Canadian banks did not invest heavily in subprime mortgages. 

But now that every house in Toronto, Vancouver and surrounding communities is valued > $1million who do you think is holding most of the mortgage on these properties? Do you know what % of Banks' loan portfolio is residential mortgages?? Over the past tem years Canadians now owe almost double on their credit cards - their income didn't double. Canada's household debt ratio is 5th highest in the world but that will only matter in a recession and then it will really matter!

Canadian politicians are being quiet about all of this because they don't know what to do & they sponsored all these ultra low rates.  Ever hear little Justin Trudeau say the word Bubble??

I think its time you had a wake up call!!

Nobodys Home's picture

The One Bank influenced China to blow a Canadian bubble so they can rape Canada too?

oilmaker70's picture

We have officially been in a recession for 2 years. The Chinese money has moved to cheaper cities in the world. I think we will hear the pop sometime this year. I can feel the heat-inflation is back, energy prices everwhere in the country rising continually by the month, interest rates are going up, stagnant wages, almost worthless dollar-hanging out in starbucks is not a sign of prosperity. I believe these people will wake up, but it will be in the middle of a nightmare.

The Wizard's picture

What about the BIS? If it is a private central bank of central banks, why is it in such good shape?

Implied Violins's picture

...because it plans to survive the coming crisis and emerge as the new One World Bank in charge of the new One World Currency? Or will that be the BRICS, which would then just be the BIS under a shiny new name change?

oilmaker70's picture

They are lying. I am a senior who has been trying to live on 0% interest rate since 2006.Look up austerity. Death to the banksters. How can a bank with a 65 cent dollar be in good shape? Maybe like the job numbers-creative mathematics.