Canada’s Housing Bubble- a Look at Canada’s “Conservative” Banking System

From Canada’s Housing Bubble- Déjà Vu from the Northern Side of the Border:

During the financial crisis of 2008, many praised Canada’s economy, its banks and regulators for the fact that it didn’t have the same loose lending practices that were common in the United States and therefore it didn’t suffer a similar bust. We have a different view on the matter.

In Canada, like other parts of the world such as China, Brazil, India, Australia and Israel interest rates were far from zero in 2002, when real estate speculation orgy started in different places around the world. All of these countries closed the gap in the last two years, by slashing interest rates and increasing the money supply. Liquidity brings stupidity, and with stupidity came those reckless lending standards. Canada is one more example of a place was artificially low interest rates caused its citizens, corporations, and banks to lose their mind.


Is Canada’s Banking System Conservative as Many Claim?

A good bank is not measured by its ability to make money during the good years. Any bank can do that. It is a big mistake to follow the banks that report record profits when the economy, and especially the real estate market is booming and think that the stock and earnings performance and think that those banks are well managed, According to such standards, Washington Mutual, Fannie Mae, Freddie Mac, Citigroup and others would be well managed banks with amazing risk management. However, since the fall of 2008 everyone knows that isn’t the case and that those financial institutions were not prepared for the great recession/depression that started in the years 2007-2008.

In Canada, like in the Australia, Israel, Brazil, India and other countries around the globe the housing bubble hasn’t popped yet. So the fact that they are reporting record profits while the banks in the United States and Europe are struggling is meaningless. What a prudent investor should examine is how these banks prepared for the inevitable downturn in real estate are. Are they better off than the American banks in 2008?




What Can the Equity to Total Assets Ratio Tell Us About the Canadian Banking System?


The equity to total assets ratio reflects the basic leverage of a given bank, and in aggregate – the leverage of a given banking system. After examining this ratio in the largest Canadian banks one can discover that not only are the Canadian banks not prepared for a downturn, but they are less capitalized than the largest American banks ever were!

                                                      Source: Annual and quarterly reports.




An examination of the entire banking system reveals similar results:

Source: IMF

It may come as a shock, but not only are Canadian banks under-capitalized in comparison to the American banks today, but even when comparing the equity ratios to the levels of December 2008. Remember, in December 2008 the United States was in the midst of the worst economic contraction since the great depression and the banks had already written down hundreds of billions of bad loans. The Canadian banks in December 2009 are less capitalized than those banks were and they are in the midst of a housing boom!

Another interesting point is that the Australian banks are even in worse shape than the Canadian ones! (For more about Australia’s housing bubble please go to Australia’s Housing Bubble- Past the Point of No Return)


The Canadian Banks are extremely vulnerable to a housing downturn!

The Canadian banks have equity to total assets ratio of less than 6%. That means that if their assets fall by more than 6% they will be essentially bankrupt. That is an unbelievable figure given that the American banking system collapsed under similar conditions, even though they had a much better starting point!

The share of real estate mortgage loans in the loan portfolio of Canada’s largest banks is as follows:

Royal Bank- 42%

Toronto Dominion- 31%

Bank of Montreal- 23%

Cdn. Imerial Bank- 28%

National Bank of Canada- 25%

Bank of Nova Scotia- 35%



Does Canada Have the Money to Save its Banks?

The Canadian banks will need a bailout. That is for sure. The only question is will the Canadian government have the resources to rescue them?


The total assets of the largest banks in Canada are as follows:

Royal Bank- 700 Billion

Toronto Dominion- 575 Billion U.S dollars

Bank of Montreal- 400 Billion U.S dollars

Cdn. Imerial Bank- 350 Billion U.S dollars

National Bank of Canada- 150 Billion U.S dollars

Bank of Nova Scotia- 525 Billion U.S dollars

Total- 2.7 Trillion U.S dollars.


Let’s compare that to the largest banks in the United States:

Citigroup- 1.8 Trillion U.S dollars

Bank of America- 2.3 Trillion U.S dollars

J.P Morgan Chase- 2.3 Trillion U.S dollars

Wells Fargo- 1.2 Trillion U.S dollars

U.S Bancorp- 285 Billion U.S dollars

BB&T Corporation- 165 Billion U.S Dollars

Total- 8.05 Trillion U.S dollars U.S dollars



The total amount of assets held by the six largest Canadian banks is 2.7 U.S dollars, or 168% of GDP, while in the United States it is only 57%!

What about Fannie Mae and Freddie Mac you may ask? Well let’s have a look. The total assets of Fannie Mae are about 3.3 trillion U.S dollars and of Freddie Mac are about 2.3 trillion U.S dollars.

If you add Fannie and Freddie the total assets of the 8 largest American financial institutions is still “only” 13.6 trillion U.S dollars which represents a smaller share of the United State’s GDP than the six largest Canadian banks represent of Canada’s GDP!

Please remember that Canada does not enjoy a reserve currency status and therefore will need to actually raise the capital needed in order to save its banking system. (As opposed to just printing it).

Canada will probably suffer from a weak currency when the crash comes, unlike what the U.S experienced, a fact that will keep both the central bank and government paralyzed. A fiscal or monetary stimulus may be out of the question, as is always the case when a credit collapse is combined with a collapsing currency.