The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘Canada

Bank of Canada notes consumer credit remains a risk

Despite the general view that Canada and its banks is in relatively better condition that international peers, down side risks remain, and are relatively unchanged since Jun 2009. This statement sums that up, and introduces a key point about this crisis and how little has been done to prevent re-occurrence.

Bank of Canada Financial System Review

Despite notable improvement in funding markets, funding and liquidity constraints remain an important area of vulnerability. Should a negative shock occur, such as a renewed downturn in the global economy or a loss of investor confidence, funding and liquidity pressures would likely reappear relatively quickly. Improvements in central bank liquidity facilities since the onset of the crisis and ongoing initiatives to support the resilience of core funding markets should help to limit the impact on the overall financial system. “Improving the Resilience of Core Funding Markets” (p. 41) discusses such issues

The Review confirms bank balance sheets have improved modestly, but that consumers have worsened. The concern for consumers is the underlying concern in this report, and their increased debt loads.

On Banks:

The leverage of Canadian banks, already low relative to that of their international peers, has fallen further since June, owing largely to an increase in their capital base from retained earnings. Nonetheless, given their key role as intermediaries between savers and borrowers, Canadian banks remain exposed to the risk of a marked deterioration in economic conditions.

On Consumers:

In the June 2009 FSR, the Bank judged that, since the onset of the recession, the risk that substantial credit losses on Canadian household loan portfolios could be a source of stress for the broader financial system had increased, although it remained a low-probability risk. This was illustrated by a stress-testing exercise to assess the effect of a hypothetical increase in unemployment on the financial health of the household sector. While arrears and bankruptcies have continued to rise since June, the start of the economic recovery has reduced the likelihood of this risk materializing in the near term. However, it remains a key source of vulnerability over time, given that the debt-to-income ratio is at historically high levels.

Written by Colin Henderson

December 10, 2009 at 12:36

Posted in Uncategorized

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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.


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?)


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



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

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Non Cash Growth as a barometer of Payment Innovation

CapGemini have come out with their World Payments Report – 2009 [pdf 60 pages]. Lots of statistics, but the one that leapt out at me is this.


Japan stands out as a growth leader, despite being a mature economy.   Certainly their growth potential is large given the traditional consumer cash economy, but I have to look at the North American lowly 5% and wonder that lack of innovation in payments is not a driver. Certainly there remains lots of cash transactions to convert to payments but nominal innovation in the works to migrate to electronic.  The report notes that cash in circulation continues to growth in the Eurozone.

There is an interesting section reviewing the payments innovation in Asia, and a chapter devoted to summarising the state of SEPA.



Written by Colin Henderson

September 10, 2009 at 09:06

Posted in Payments, SEPA, US

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Canadian Banks have a Productivity Gap relative to the US

Following up on the previous post covering the Bank of Canada’s view that Canadian Banks do not have a productivity gap [pdf 19 pages] relative to US Banks, here is the basis for that contention within a 2006 report.

The conclusion copied here in whole is in my view, woefully misleading and contradictory. It reads to me like someone with political motivations has turned facts into something that meets policy objectives. Analysis to follow.

This work examines the efficiency and productivity of Canadian and U.S. banks in three ways.

First, we compare key performance ratios and find that (i) the average Canadian bank employee produces more assets than the average U.S. bank employee, and (ii) in terms of producing net operating revenue, Canadian and U.S. bank workers are similarly productive.

Second, we investigate whether there are economies of scale in the cost functions of Canadian banks and a sample of U.S. BHCs. We find larger economies of scale for Canadian banks than for the U.S. BHCs. This suggests that Canadian banks are less efficient with regard to the scale of their operations and would have more to gain in terms of efficiency benefits from becoming larger.

Third, we measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic
best-practice institution). We find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs, and that they have moved closer to that efficient frontier over time.

Overall, these results do not suggest relative efficiency or productivity gaps in the Canadian banking industry. On the contrary, Canadian banks compare generally favourably.

Finally, as noted above, legislative and regulatory changes have benefited efficiency in Canadian financial services. This shows the importance of removing any remaining restrictions that inhibit competition and efficiency, but provide little (or no) benefit in terms of financial soundness.

Some facts from their report:

  • Expense ratio Canada – 67 cents per dollar of revenue
  • Expense ratio US – 59 cents per dollar of revenue
  • Assets per employee Canada – $6.1M
  • Assets per employee US – $4.1M
  • operating revenue per employee US/ Canada same at $0.3M

This from the report:

Our analysis indicates that the difference in the expense ratios can be currently attributed to a higher labour cost component (wages and benefits) at Canadian banks. However, this differential does not imply disparities in productivity, which concerns how much output is produced per unit of input (typically, labour).

Relevance to Bankwatch:
Translation. Bank of Canada views Canadian Banks as productive by taking the narrow view of relative employee output. However that view excludes the overall budget of banks that includes real estate, and technology. The latter points explain the overall expense disparity per dollar of revenue earned at a significant 8 cents.

In other words productivity is a measure of investment not of employees. That is the entire point of automation. This further explains the contradictory point in he Tim Lane Kingston speech that wrote off StatsCan concerns for Canadian Bank productivity.

Productivity is a measure of inputs (expenses) and outputs (revenue). Any narrower view does a disservice to the country and the Banks, covering over potential areas for concern. Banks in Canada cover a large geography with relatively small population and while internet adoption is high the related savings in real estate and technology efficiency have yet to be achieved.

Written by Colin Henderson

August 29, 2009 at 17:25

Posted in economy

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The Canadian Economy Beyond the Recession | Bank of Canada

In this talk at Kingston last Tuesday, Tim Lane, Deputy Governor Bank of Canada lays out a quite lucid view [ 9 pages] of the opportunities and challenges facing Canada in recovery.


  • labour productivity and output is the fundamental challenge that existed before and will continue post recession
  • the size of the working population is to decrease significantly for demographic reasons, and neither immigration nor baby boomers remaining longer in the workforce will significantly alter that prediction
  • the financial services industry is critical to Canada at 20% of the economy
  • Canadian producivity has been dropping because of insifficient investment in technology and lack of innovation. Productivity is further hampered by por re-allocation of capital and labour across industries and this is exacerbated by the recession. Think auto employees in Oshawa having to move to mining in the prairies.
  • The financial services sector productivity is described as particularly worrisome:

How productive is the Canadian financial services sector? Data from Statistics Canada point to a possibly worrisome trend. Productivity growth in this sector has declined from an average of 2.8 per cent per year in the 1990s to just over one-half per cent in this decade.

  • Lane goes on to effectivley dismiss that StatsCan assessment with based on a BofC 2006 survey. I located the referenced BoC paper, and will review that later. It is also attached below. I note it is 3 years old, and thats an odd comparison to a 2009 StatsCan survey.

That said, if we compare Canada with the United States, our own research suggests that generally, the productivity of Canadian banks compares favourably with the productivity of U.S. banks.

Relevance to Bankwatch:
All in all the main concerns are the labour market, overall productivity, the financial services sector, and potential for inflation; he counters the latter with the Banks capability for Quantitative Easing which Canada has largely not employed yet.

recovery canada aug 2009 tim lane kingston r090828e.pdf
canadian bank productivity 2006 research_1206.pdf

Written by Colin Henderson

August 29, 2009 at 16:54

Posted in economy

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Consumer mindsets in North America have shifted permanently with regard to finances

After my last post, I thought it better to follow up with some facts to support my contention that this economic recovery is L shaped in Canada and US.  This is not meant to be an economic projection, and I leave that to the professional economists.  However in terms of planning, banks ought to consider the high probability of a scenario where the reduction in economic activity will level off but hardly see growth in the near future.  This will be driven by consumer confidence and frankly their financial circumstances.

If we go back to the root cause of the recession it remains this;   a dramatic drop in consumer asset values resulting in leverage that is too high.  Layer in the concern about job security, and the real increase in unemployment, we must look carefully at ability to manage the debt based on current income, and the effect of that on the business of banking.

Here is the ratio of debt to disposeable income in Canada and US at end of 2008. [source: CGA Association Canada & Federal Reserve Bank of San Francisco]

Canada              US

%                                  136.5%             130%

The first surprise is that Canadians are more highly levered than Americans.  The CGA report makes these points amongst others:

… prospects of improving households’ financial situation in the near future are low. A balanced approach to spending, saving and paying down debt may be a desirable feature of households financial behaviour in the near future.

Hardly earth shattering stuff but the consequences remain that strategies need to account for this new consumer mindset in North America for the next few years.

Written by Colin Henderson

June 22, 2009 at 14:47

Canada and India develop regulation proposals for G20

Deep in the Harper transcript this little gem indicating Canada and India have been working on the framework of a proposal for the G20 to consider on financial regulation.

Transcript: Stephen Harper interview

As you know, Canada has co-chaired with India the working group on future financial regulatory reform. We have a very good report which I think will gain consensus. Essentially, we did come down on that one in kind of a middle-ground position we hope will get the support of both the United States and Europeans and others. And that is, that we actually think it is important that you have strengthened system of national regulation as opposed to an international system of regulation. Canada’s own case is proof that a strong system of national regulation can in fact work.

A quick search uncovered this from Reuters that pointedly makes no mention of Canada but appears to fit the bill of being a recommendation outline.  It is very sappy and toothless though, e.g.

  • The financial stability forum and International Monetary Fund should create a way for key national financial authorities to meet foreign counterparts regularly to assess systemic risks to the global system.
  • All systemically important financial institutions, markets and instruments should be subject to an appropriate degree of regulation and oversight. Large complex financial institutions require particularly robust oversight.

Anyhow I finally located the full doc here is the in very draft form.  Here is the Table of Contents.


The conclusion is not complete, however the commentary and lead up are very relevant.  More later once I get through it.

Local copy – pdf. g20-enhancing-sound-regulation-and-enhancing-transparency

Written by Colin Henderson

March 31, 2009 at 22:43

Posted in Uncategorized

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For the record – State Leader interviews before G20 – Financial TImes

Written by Colin Henderson

March 31, 2009 at 21:17

Posted in Uncategorized

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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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