The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘bank of canada

Bank of Canada joins other Central Banks is calling for caution


In the regular Monetary Policy Report the Bank of Canada keeps their focus on a low interest rate environment right through 2010.

On inflation the view is mixed …

The main upside risks to inflation relate to the possibility of a stronger-than anticipated recovery in the global economy. A stronger global recovery would be transmitted to Canada via trade, financial, confidence, and commodity price channels. There is also the risk that Canadian domestic demand could be more robust and have a more sustained momentum than projected.

On the downside, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. Another important downside risk is that the global recovery could be even more protracted than projected if self-sustaining growth in private demand, which will be required for a solid recovery, takes longer than expected to materialize.

Worldwide consumer demand rejuvenation is not assumed in the near term …

Vigorous and coordinated fiscal and monetary policy stimulus in the G-20 economies, including a wide range of measures to support the fl ow of credit, have been sustaining aggregate demand, but evidence of self-sustaining private demand remains modest. Necessary adjustments on both the real and financial sides of the global economy are under way, and will involve a significant and protracted rotation of global demand, as well as deleveraging by U.S. and European banks, households, and firms.

Canadian consumer confidence is very real estate focussed due to affordability.

consumer_confidence_canada_2009

On capacity …

After reviewing all the indicators of capacity pressures and taking into account the weakness in potential output associated with the ongoing restructuring in the Canadian economy, the Bank judges that the economy was operating about 3 1/2 per cent below its production capacity in the third quarter of 2009, in line with the July projection.

This chart is worrisome though, begins to sow seeds of doubt. Consumer credit is growing but business credit is lagging. Consumers are increasing mortgage debt but not purchasing ‘things’ – (sound familiar – 2007?)

Consumer_credit_growth_2009

On money supply enormous growth, but suggestions the money is being parked – i.e. low velocity of money suggesting low prospect of near term inflation.

The monetary aggregates have continued to grow strongly. In the three months to August, the narrow aggregate M1+ grew at an annual rate of 18.2 per cent, while M2++ grew by 7.0 per cent. It is diffi cult to assess the implications of monetary expansion for economic activity, since the demand for money is likely to be abnormally high in an environment of very low interest rates and tight credit conditions. The continued robust growth in narrow money reflects the desire of both households and firms to keep money in liquid assets until it is clear that the economic recovery is taking hold. Consistent with our base-case projection, the growth in money balances is expected to gradually decline over time.

On GDP – this is a very clear depiction that consumer spending has been replaced by government spending, and that won’t change consequently until 2011. The other factor also noted here is that currency shifts and changes in imports/ exports will be the real next thing that determines each country’s economy

GDP_components_2009

global_growth

On consumer confidence 2 …

In the wake of a short, severe recession, and with residual economic uncertainty, the personal savings rate remains elevated over the projection horizon.

Monetary Policy Report Oct 2009 mpr221009.pdf

Written by Colin Henderson

October 22, 2009 at 22:35

Posted in economy

Tagged with , , ,

The Canadian bank model secret? | risk aversion


The general theme that the ‘Canadian Bank model’ is superior has constantly intrigued me, having been personally involved there.

Size and Diversification: They are smaller and less diversified, so some risk mitigation appears there. This is probably the biggest reason.

Number: There are only five of them, of any consequence, so a couple of regulators can do a lot of supervision there.

Loan restriction: there is a restriction on loan participation relative to capital.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But no … in aggregate there is no enormous winning theme, or singular secret in Canada.  In typical Canadian form its the softly softly approach, and David Olive in todays Star sums it up nicely with this quote below.

They are just plain old fashioned ‘risk averse’ supplemented by being too small (asset size is whats important here, not market cap) to take part in large scale international risky investments.

Obama eyes Canada as bank model | The Star

As a result of their largely shunning the purchase of multimillion-dollar packages of U.S. junk mortgages, Canadian banks have earned international acclaim for their continued sound condition. But that had nothing to do with the Canadian banks’ size or diversity of functions, and everything to do with prudent risk decisions and scrupulous regulatory supervision.

Written by Colin Henderson

May 4, 2009 at 16:00

Memo to BofC | Canadian lesson ought to be benefit of early co-operative action – not “it began outside … “


I have to take issue with this statement by the Bank of Canada Deputy Governor made this morning to the House of Commons Standing Committee on Finance.  Without a full and proper understanding of the crisis, how can our leaders be exepcted to appropriately address it.  In particular this is central bank advice to the House of Commons.  Yes a global solution is required, but no it begain inside all countries borders, and here is the Canadian experience followed at this blog.

Opening statement by Pierre Duguay Deputy Governor of the Bank of Canada to the House of Commons Standing Committee on Finance

Because the crisis we are facing is global in nature and began outside our borders, most solutions must be found at the international level. …   I would note that there has been a great deal of interest worldwide in the resilience of Canada’s financial institutions in the face of the global economic crisis. Unlike their counterparts in other major economies, Canadian banks have not been materially affected by the financial crisis.

To state that the global problem began outside our (Canadian) borders is just incorrect.  I imagine his defense of that statement would be to make the point that the sub prime crisis was American. But that statement belies the now understood nature of the problem being derivatives and SIV’s that were assessed in mathematical terms with improper understanding nor accounting for risk.

The global problem of derivatives which are still over $600 trillion exists because those instruments were a result of real assets being dissected into different components and repackaged as new instruments that bore no resemblance of, nor clear line of sight to the original asset.  This is well known now, and to suggest that world market passed Canada by, is disingenuous at best.

All countries had banks participating in the international money market investing in securities they did not understand and Canada is not exempt from that fact.  Back when I started counting the extent of the problem when frankly few acknowledged it publicly (early 2007), Canadian banks were north of $6bn in write offs associated with sub prime and other very high risk investments, such as the 3/4 billion natural gas speculation at BMO.  CIBC though led the way with $3bn of sub prime losses at that point.  In July of 2008 Dundee Securities painted CIBC as a takeover candidate.  I have since lost track of the sub prime losses in Canada, but they have not gone down.

Then there was the Pan Canadian Investments arrangement orchestrated by Purdy Crawford on behalf of the Bank of Canada (yes, the place where Duguay works) and Government of Canada, whereby some $31 Bn in derivatives, involving secondary players in Canada, were removed  from the financial system and sheltered in an arrangement that ensured no immediate demand for payment on the Canadian banking system would occur.  This was a visionary move taking place in 2007, and before the extent of the world crisis was understood.  But those $31 bn do exist, and I believe Canada could have had its own “Lehman Brothers” crisis in 2008 had that action not occurred in 2007, and being wrapped up in January 2009.  Pages 1 & 2 of this pdf prepared by Pan Canadian and hosted on the E&Y site, highlights the direct involvement of the banks, including $21 bn of it relative to CDS (Credit Default Swaps).

So to say Canadian banks were not materially affected is something of a glossing of the facts.  A better approach for the speech would be to focus on Canadas natural conservative tendencies, early action to address problems,  foresight etc.

Canada took conservative and early action to prevent becoming embroiled in the fiasco being played out in US and UK particularly whereby even Lloyds, that bastion of risk adversity is on brink of full government ownership.  With Debt to Equity ratios ranging from the excellent TD at 14 :1 to CIBC at 25 :1 Canadian banks are on average in better shape now than many others around the world, assuming their bad debts allowances are reasonable and assets well valued, however at the lower end care and watchful eyes are required to ensure stability.

All this to say that Canada is not exempt from the roots as well as the woes of the crisis, and there are lessons to be learned from early action, and proactive work between the government, the central bank and the banks’ – lessons that the US could learn, rather than their naturally adverserial approach.  But lets not pretend we are being dragged into someone elses problem and unwillingly help to fix it.

Written by Colin Henderson

March 5, 2009 at 15:39

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