Who Says There Were No Canadian Bank Bailouts?

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Includes: BMO, BNS, TD
by: Mark McQueen

Institutional brokerage staff at Canada’s bank-owned investment dealers are in line for a record payday this month. And I see in my morning DTM offering that one of the justifications of this largesse is that the public pursue was not used to keep our large financial institutions afloat during the recent global financial crisis, unlike the USA or United Kingdom:

Government officials noted yesterday that the situation in Canada is very different from that in Britain, adding there was no need for a bank bailout here.

It is a matter of some national honor that Canada’s banks didn’t receive direct capital injections from the government. That much is true. But what isn’t true is that the banks survived the past twelve months without extraordinary financial support from the federal government and the Bank of Canada.

Between September 2008 and March 2009, Canadian banks reduced their holdings of domestic residential mortgages from $486.1 billion to $434.9 billion according to Bank of Canada stats, on a net basis.

Where did those mortgages go, you ask? Did 10% of Canadian homeowners sell their homes and move into rental accommodation en masse during a six month period?

Of course not. The federal government created a unique program through CMHC , specifically targeted at allowing Canadian chartered banks to move tens of billions of dollars of assets off of their balance sheets. The reason? Canadian banks couldn’t raise sufficient and/or cost-effective funding from their traditional sources - primarily other global financial institutions - and needed Crown intervention to keep the wolf from the door. By mid-November 2008, the federal government had agreed to take $75 billion of mortgages from Canadian banks.

Assuming the risk-weighting of these assets was 20%, the feds essentially put $15 billion of capital into the Canadian banks that participated in the $75 billion CMHC program. Even Finance Minister Jim Flaherty agrees:

“At a time of considerable uncertainty in global financial markets, this action will provide Canada’s financial institutions with significant and stable access to longer-term funding,” said Minister Flaherty.

How is “stable” “long term funding” from CMHC any different than the pref share offerings via the American TARP program, other than the fact that Canadian taxpayers didn’t receive any purchase warrants on Canadian bank shares as compensation? Let’s not forget, the TARP was originally designed to take assets off U.S. bank balance sheets so as to free up capital.

The Canadian government also took steps in October 2008 to guarantee medium term lending in an effort to underpin the inter-bank lending market (see prior post “Political expediency trumps free market”, Nov 3-08).

I’m all for paying teams what the market will bear (see prior post “Media new battle ground in I-bank bonus season war”, Nov 25-09). But this heads I win, tails you lose bonus madness can’t be justified by the “lack” of a federal bank bailout.

There is only a subtle distinction between injecting capital into a bank and relieving it of assets so that it can avoid a capital injection. Kind of like your Dad temporarily buying your bike from you when you ran out on money in University, and then selling it back to you six months later when you were flush from a summer job.

The notion that Canada’s “free market” took care of itself over the past 15 months is poppycock.

Author's disclosure: we own BMO, BNS and TD.