Quantifying The Big Five Canadian Banks' $114 Billion Bailout
“…we have not had to put any taxpayers’ money into our financial system in Canada, nor do I anticipate that we’ll be obliged to do so.”
—Jim Flaherty, Minister of Finance
“Without wanting to appear arrogant or vain, which would be quite un-Canadian... while our system is not perfect, it has worked during this difficult time, I don’t want the government to be in the banking business in Canada.”
—Jim Flaherty, Minister of Finance
“It is true, we have the only banks in the western world that are not looking at bailouts or anything like that...and we haven’t got any TARP money.”
—Stephen Harper, Prime Minister
With such propaganda statements, bordering on patriotism, uttered by various Canadian politicians, it is no wonder that last summer Zero Hedge got into hot water with virtually every Canadian media outlet (see here and here) for daring to suggest that Canada's banks are not quite as stable and well capitalized as public rhetoric makes them seem. The narrative goes that Canadian banks were so rock-solid, they needed no public bailouts. Today, in an extended report by the Canadian Center for Policy Alternatives we get a slightly different perspective on what really happened in the 2008-2010 period.
From the report:
The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.
However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their CEOs, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.
It should be noted that the “Extraordinary Financing Framework” was prepared to spend up to $200 billion to aid the banks and other industries. In other words, while the sums reported in this report are enormous, there were even more funds to be disbursed if the banks needed them.
In other words, just like US, European and ROW banks, Canadian banks were just as mortal, just as susceptible to bank runs, and just as fragile as everyone else in this globally interconnected financial regime. And the reality is that just as we disclosed last August when we pointed out to the abnormally low capitalization ratios of Canadian banks, which served as the initial domino for a firestorm of media criticism and vitriolic displaced patriotism, should the same Big 5 Canadian banks suffer impairments of more than just a few percent, their entire equity buffer would be impaired. No accounting gimmicks would mitigate this: no RWA assessment, no mark to myth - if the inbound cash flows on the left side of the balance sheet are impaired, the ability to fund outflows on the right side will be crippled as well.
This was the basis of our caution. The response however confirmed that far more than simple math, when it comes to Canadian banks there is almost an irrational patriotic component involved, which forces many to ignore the simple math and to hope (probably the closest word to describe the sentiment) that nothing wrong can happen to the local financial sector.
So in order to get some clarity, we have selected several excertps from the CCPA report, as well as some fact-based charts and diagrams for everyone's elucidation:
It was the collapse of Lehman Brothers that started the massive support for Canadian banks from both American and Canadian governments, as shown in Figure 1. Massive loans from the liquidity programs of the U.S. Federal Reserve and the Bank of Canada provided the bulk of the initial support for the big Canadian banks.
However, it was the third support from CMHC’s Insured Mortgage Purchase Program (IMPP) that did the heaviest lifting. In contrast to the loans of the first two programs, CMHC was providing direct cash infusions to Canada’s banks, although it took longer to ramp up. The program provided its first cash to the banks in October 2008.
Within four months’ time, Canada’s big banks requested and received a whopping $50 billion in cash in exchange for mortgage-backed securities. By March 2009, government supports to Canada’s banks peaked at $114 billion. At this point, support for Canadian banks was equivalent to 7% of Canada’s 2009 GDP. That support represents a subsidy worth about $3,400 for every man, woman and child in Canada.
By late-2009, the U.S. Federal Reserve began to wind down its support for Canadian banks. The Bank of Canada’s support for Canadian banks continued until the spring of 2010. Interestingly, the global financial crisis subsided by the end of 2009, but CMHC cash injections to Canada’s big banks didn’t wrap up until April 2010. The recession appeared to be behind us but Canada’s big banks were still taking cash from this federal program in the fall of 2010.
By February 2010 and July 2010, all of the U.S. Federal Reserve and Bank of Canada loans had been respectively repaid. While these funds were repaid in full, it is clear that the banks benefitted enormously from public financing when private funds were unavailable. In addition, had the rapid and enormous deployment of public funds not been available, most, if not all, Canadian banks would have encountered serious difficulty.
And the best one:
h/t Ben Rabidoux