Canadian debt and the prospects for an upcoming banking crisis.

The propaganda you hear about the Canadian banking sector is just that – propaganda. Canadian banks are as leveraged up as there international counterparts – if not more: in fact Canadian banks have no reserve requirement whatsoever, zero. Of course you needn’t worry about your deposits in the event of a banking crisis, deposits of up to $100 000 insured by the Canadian Deposit Insurance Corporation. The CDIC doesn’t hold enough cash on hand to actually pay out the potential claims, but it does have the Bank of Canada ready to print the money up out of thin air to make you whole – with your own money. How do we know that the BoC would pony up the fiat currency? We come to the dirty little secret of Canadian Banking – the big five were bailed out just like every other bank in the world. The report in question was prepared by a left wing think tank, so we can question their motives, but the reality is that Canadian bank sector is subject to the same problems of fractional reserve banking as the rest of the western banking system.

Now what could lead to a Canadian banking crisis? Simple: exactly the same factors that led to the housing crisis in the US and Europe, namely artificially low interest rates leading to a bubble in real estate prices and unsustainable consumer debt.

You see, the Canadian housing bubble did not pop in 2007-08 like it did world-wide, and with the ZIRP policy of the BoC since then, Canadian households have managed to rack up a hell of a lot of debt. Mark Carney and the Federal Government have been issuing warnings on a regular basis to Canadian consumers to reign in their spending, but they aren’t listening. The elite are unwilling to do the one thing that would lead to a reduction in debt levels, that is, raise interest rates – two reasons jump out:

1. The Canadian Dollar has appreciated against the USD since 2008 from $.67 to roughly par. And a raise in Canadian Interest rates would necessarily lead to a further increase in value against the USD, further reducing Canadian exports to our largest trading partner, the USA .

2. Raising interest rates would put potentially millions of Canadians underwater on their mortgages, leading to – wait for it – the bursting of the Canadian real estate bubble, and the subsequent fallout in the Canadian banking sector.

And on that note, Mark Carney, head of the BoC has just pulled a Greenspan and jumped ship for the top spot at the Bank of England, the granddaddy of the Anglo-American Central Banks.

So please makes sure you don’t have your blinders on when it comes to the Canadian financial situation.

14 Responses to “Canadian debt and the prospects for an upcoming banking crisis.”

  1. AlexNorman22 says:

    The only way higher interest rates decrease the overall debt is when they push a substantial number of individuals and businesses into bankruptcy. After these entities are financially and otherwise destroyed, their advance loans are written off, thereby bringing down the nation’s debt. One can only guess why this destructive policy is advocated, rather than bringing down overall debt by the far less damaging method of gradually tightening lending requirements.

  2. s wood says:

    March 23 2013

    First, Im not an economist.
    I am an intuitive and although I apply this gift to people/helping pets and top winning dogs, I can use the gift to grasp economic ups/downs.
    I have continuted to believe that Canada is on the verge of a monetary/economic collapse for several months now.
    This bit of news is kept very quiet and I think if more people knew, it would come about far more quickly.
    When Moody's downgraded Canada's major banks Jan 28th, I knew it was validating what I sensed, except Moody's was being far too kind.
    In the mean time, all the money that was given by US taxpayers to bail out US banks three yrs ago, seem to be pointless. I sense that the US is quickly returning to its fragile banking system.
    We are all apart of the falling dominoes, and the US may not be the first to fall, we will all fall in this global collapse
    thats coming. So, keep you eyes on Canada….and not so much Cyprus.
    s. wood

  3. Ben says:

    "The CDIC doesn’t hold enough cash on hand to actually pay out the potential claims, but it does have the Bank of Canada ready to print the money up out of thin air to make you whole – with your own money."

    This is false. In the US, the government will come to the rescue. But in Canada it is only banks that must help other banks. Read the CDIC website carefully: CDIC is not backed by the Canadian government.

    • Redmond says:

      Sorry Ben, that is false.

      The CDIC is a Crown Corporation. A part of the government, and in the event that the reserves of the CDIC are not enough to cover deposits, the Bank of Canada will bail it out. End of story.

      From the CDIC website:

      "“Today, global leaders understand we must be prepared to handle the failure of a very large bank in an orderly fashion that preserves confidence in the financial system but avoids imposing a cost on taxpayers."

      "CDIC is a federal Crown corporation that provides deposit insurance against the loss of deposits with its member institutions in the event of a failure."

      What is a Crown Corporation? From Wiki:

      "Canadian Crown corporations are enterprises owned by the federal government of Canada (the Queen in Right of Canada[1]), one of Canada's provincial governments (the Queen in right of a province) or one of the territorial governments."

      • Ben says:

        Thanks for your response. This is an important issue. I still believe that Canadian depositors are not protected by our federal government's right to print money (unlike our friends in the US). For example, section 10 of the CDIC Act does not give this crown corporation to print money:

        Powers of Corporation

        10. (1) The Corporation may do all things necessary or incidental to the objects of the Corporation and in particular, but without limiting the generality of the foregoing, the Corporation may, in furtherance of its objects,

        (a) for the purpose of reducing a risk to the Corporation or reducing or averting a threatened loss to the Corporation,

        (i) acquire assets from a member institution,

        (ii) make or guarantee loans or advances, with or without security, to a member institution, and

        (iii) make or guarantee a deposit with a member institution;

        (a.1) [Repealed, 1996, c. 6, s. 23]

        (a.2) enter into an agreement with the government of a province, or an agent of the government of a province, respecting any matter relating to the insurance of deposits with provincial institutions in that province;

        (b) make any investment and enter into any transaction necessary or desirable for the financial management of the Corporation;

        (c) act as liquidator, receiver or inspector of a member institution or a subsidiary thereof, when duly appointed as such and appoint qualified and competent persons, whether employees of the Corporation or not, to carry out any or all of the functions of the Corporation under the appointment of the Corporation;

        (d) assume the costs of a winding-up of a member institution when the Corporation is appointed to act as a liquidator in the winding-up, or assume the costs of the receiver when the Corporation is appointed to act as such and charge those costs to the Accumulated Net Earnings of the Corporation;

        (e) guarantee the payment of the fees of, and the costs incurred by any person as, the liquidator or receiver of a member institution when that person is appointed as such and charge any amounts paid under the terms of the guarantee to the Accumulated Net Earnings of the Corporation;

        (f) acquire assets of a member institution from a liquidator or receiver thereof;

        (f.1) acquire, by way of security or otherwise, shares and subordinated debt of a member institution and to hold and dispose of those shares and subordinated debt;

        (g) make an advance for the purpose of paying a claim, against a member institution for which the Corporation is acting as receiver or liquidator, in respect of any insured deposit and of becoming subrogated as an unsecured creditor for the amount of the advance;

        (h) make or cause to be made such inspections of a member institution as may be authorized under this Act or a policy of deposit insurance;

        (i) acquire, hold and alienate real and personal property;

        (i.1) settle or compromise any claim by or against the Corporation; and

        (j) do all such other things as may be necessary for the exercising of any power of the Corporation.

        • Redmond says:

          Hi Ben

          Thanks for the clarification, but you don't seem to understand the key points.

          1. The CDIC is a crown corporation, a part of the Federal government.
          2. Banks pay an insurance premium to the CDIC.
          3. The funds paid to the CDIC form the basis of the funds that would be used to make the depositors whole.
          4. in the event of a major banking crisis, the CDIC would not have the finds on hand to make the depositors whole, much as the FDIC did not have the funds. they only hold a small percentage of the total deposits of Canadians.
          5. There are 800 billion dollars in deposits in Canada and the CDIC as 2.2 billion in cash and investments.
          6. therefore the BoC, not the CDIC would print money and make the depositors whole.

          Let me know if you have any questions.

          • Ben says:

            Except for your last point, I agree with you: "therefore the BoC, not the CDIC would print money and make the depositors whole."

            I don't see anything on the CDIC website or in the CDIC Act which mandates that the BoC must make good on the debts of the CDIC (which the BoC would presumably do by printing money). As I see the situation, legally speaking, the BoC could walk away.

          • Redmond says:

            Hi Ben

            Well, Since the BoC has already shown that it is willing and able to bail out the Banks, I don't see why they would not do it again.

            The Canadian Banking sector is highly concentrated into the big five, and the government would surely not want potentially millions of voters to be wiped out in a bank collapse.

            They are politicians after all. Money is no object, since it is not their money.

          • Redmond says:

            You do know that the BoC is 100% owned by the federal Government, right?

          • Redmond says:

            I did some additional research, and it looks like the federal Government recently increased the ability of the CDIC to borrow money

            The Budget Implementation Act, 2009, increased CDIC’s borrowing limit to $15 billion from $6 billion, with such amount adjusted annually to reflect the growth of insured deposits. As at January 1, 2012, CDIC’s adjusted borrowing limit was $18 billion
            http://www.cdic.ca/CDIC/FinRpts/Documents/AR2012/

            I wonder who would have 18 billion to loan the CDIC?

            From WIki:

            The CDIC is also authorized to borrow up to $17 billion if necessary from the federal government or the financial markets, and may request further funds from Parliament.

  4. Matt says:

    I've stopped trying to figure out how this is all going to play out. There's lots of debt out there, but whats going to be the catalyst to a collapse? I think we're still years away from any real crisis.

    • Redmond says:

      Hi Matt – thanks for your readership

      I certainly agree, we could be years away from a collapse – 10 years of stagnation would be a no brainer, we have already endured 4.

      When it comes to mortgages, it might be a slow motion crunch – if the number of Canadians who hold adjustable rate mortgages is fairly small, then any rise in interest rates would only affect mortgage holders when their contracts are up for renewal, which might be 5% of the market in any given year etc.

      At the same time, when these sorts of things happen, they can happen very quickly, as witnessed in the tech and housing bubbles.

      I think the point is to be aware of the risks inherent in our system, and plan wisely for the future – be open to opportunities and keep yourself out of debt, if only for the fact that it is better to build your net worth rather than pay the bank interest.

      and when it comes to relying on the government for essential services, understand there are long term structural debt problems, and many "Public" pension systems are underfunded. the Federal government may have a relatively low debt to income ratio, but the provinces are all drowning in debt – so expect a combination of services cuts and tax increases in the future. Add to that privatizing of various government monopolies such as the LCBO in Ontario – incidentally announced as part of the PC platform in the next election.

      Tax increases have already occurred Ontario – for instance under the cover of "protecting the environment" eco-fees were introduced – I recently bought a small LCD tv at future shop and when the eco-fee was added to the bill I was paying an over 20% sales tax.

      I'll be taking my TV purchases to another jurisdiction in the future.

  5. scarlett says:

    Canadians are debt zombies. Lazy and drunk on government fiat toilet paper like every other nation. The BoC will get another Goldman Sachs operative, as Carney will head to the Rothchilds City of London. The Canadian fun has just started. Buy physical gold and silver.

  6. Jerry says:

    No one outside the Mises circle of followers is paying any attention to what the BoC is up much less the Fed. Mention it and you'll be greeted with a blank stare. I've been through the roller coaster of interest rates before. We probably won't see high interest rates for a while yet until the inflation rate becomes obvious to every man on the street. It will probably take 20% or higher before there is action. Carney jumping ship is just a hint of trouble on the horizon. JMHO. Take it for what's worth.

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