By Brandon Green,
Feature Writer for Strategic Wealth Preservation
New Canadian bank “bail-in” regulations, which we regard as a stealth “bail-out” plan, came into effect in late September, almost without notice in the mainstream media.
That’s in part because the country’s financial institutions maintain a great international reputation, stemming from their performance following the 2008 global meltdown.
“As of global financial system was engulfed in crises, only one set of banks in Europe and North American stayed untouched: Canada’s big five lenders,” notes the Economist magazine. “They were largely untouched by the madness and kept turning profits.”
We believe none of that is true.
Not only were Canadian banks bailed out during the last meltdown, all indications are that the government is preparing to do so again. Worse, this time investor’s savings will be under considerable threat.
About the proposed bail-ins (bailouts)
First, a couple of points to bear in mind about Canadian banks.
As author James Rickards notes in his book The Death of Money, banks, including Canadian financial institutions, go to great lengths to obscure their activities*.
Their most important tool is use of jargon like “Quantitative Easing,” “monetary aggregates,” and “Tier I capital ratios” which nobody understands, and which put readers to sleep.
This plays out in the complicated new regulations published by Canada’s Office of the Superintendent of Financial Institutions, which even long-time OSFI staffers don’t understand.
Officially, the new regulations are being marketed as “bail-in,” provisions. These, experts say, will gradually lead to the creation of a whole new category of bonds that liquidators can seize, should the banks become insolvent.
This, in turn is supposed to make depositors’ money much safer should anything go wrong.
However a quick read through the lines suggests that the new Canadian regulations, which are being mirrored in other G-20 countries, are actually being implemented, in part, to give politicians cover the next time they bail-out the banks.
The secret Canadian bank bailout
Yes, according to a Canadian Center for Policy Alternatives report, The Big Banks’ Big Secret, Canada’s big banks were in fact bailed out of the last financial crisis to the tune of more than $100 billion.
They were just more secretive about it than the Americans.
To give an idea of how much money that is: $100 billion equates to more than Canada spent on its entire defense budget … for the past five years!
True, critics argue that Canada’s banks now have a much higher loss absorbing capacity. Furthermore, large segments of the country’s mortgages are guaranteed by the Canada Mortgage Housing Corporation, and borrowers can’t just walk away from their debts, like they can in many U.S. states.
Signs of real worry
Yet there is real cause for worry. For one, Canada’s housing market, despite some recent corrections, remains at worryingly high levels, as measured by price to rents and price to income ratios.
Worse, Canadians are in terrible financial shape; household debt rose to 169% of total income during the second quarter of 2018. That’s worse than it was in the United States prior to the subprime mortgage crisis.
That weakness appears to extend throughout the system. According to Statistics Canada, total consumer, business and government debt in Canada totalled $6.1 trillion at the end of the second quarter. That’s $169,000 per Canadian or $677,000 per family of four.
Investor savings are at risk
Canadians have some protection (on paper) should the country’s entire banking system collapse again. For one, although the Canadian Deposit Insurance Corporation and the Canada Mortgage Housing Corporation would almost certainly be bankrupted, government will print the money needed to bail-out both institutions.
However holders of the new “bail-in” bonds, mostly mutual funds and pension plans will take huge hits.
Many Canadians won’t see this directly, because few study their pension statements. However pension-plan bankruptcies, which are increasingly common in the United States could make their way north.
Furthermore, for the new bail-in regulations to take effect, banks’ common stock would also have to be first wiped out.
This provides a strong signal that the Canadian government’s next bank bail-out will deal a huge hit to stock investors, as the financial sector traditionally accounts for more than 30% of the market capitalization of the broader indexes.
Finally, although the CDIC does insure some Canadian bank deposits, the money that the government will need to print could spark considerable inflation, which in turn could greatly reduce the real value of those funds.
So where does gold fit into all of this?
We try not to give investment advice. However anyone who bought a gold coin in 2008 and put it in his wallet, will still find it there. It will also still be there ten years from now, long after the coming financial crisis is over. But money you invest in Canadian banks?
That’s a coin toss.
* For example Canada’s “Office of the Superintendent of Financial Institutions” (OSFI) regulations are known as the Total Loss Absorbing Capacity (TLAC), Capital Adequacy Requirements (CAR) and Leverage Requirements guidelines. These are all so complicated and jargon-filled that even seasoned investment professionals can’t explain them.
Brandon Green oversees business development and economic research at Strategic Wealth Preservation in the Cayman Islands.
This article was originally posted in the Strategic Wealth Preservation Blog and copied here with permission of the author.