Ironman Financial

2009-02-25T14:10:00.000-08:00

This is a piece I received from TD Bank and their Economics group discussing the banking issue in Canada. It sends a strong message that the investment world is happy with the Canadian Banking business.

TD Economics

WHY CANADA’S BANKS HAVE FARED BETTER THAN THEIR
INTERNATIONAL PEERS DURING THE CREDIT CRUNCH

February 24, 2009,

Economic Notes

• There appears to be a more risk adverse culture
in Canada running through government, the
public and banks
• Canadian banks benefited from prudent and
disciplined risk management practices
• Higher capital ratios pre-crisis and the fact that
Canada’s major investment banks were part of a
large diversified financial services institution
also played a role

In the midst of the recent global financial carnage, the
Canadian banking system has weathered the storm far
better than its international peers. Canada has not experienced
the failure of any major financial institution. While
financial losses were incurred and mistakes were made,
as evidenced by the exposure of some Canadian firms to
U.S. subprime paper, the degree of the losses experienced
in Canada have paled in comparison to those recorded in
the U.S. and European banking systems. This outcome
supports the World Economic Forum assessment in October
2008 that Canada had the soundest financial system in
the world, with a rating of 6.8 out of 7. The natural question
is why Canadian banks have fared so much better?
There are number of reasons. The most basic answer
is that Canadian banks pursued more prudent and more
disciplined risk management practices. This can be observed
by a number of trends.

Solid capital ratios

Canadian banks are regulated by the Office of the Superintendent
of Financial Institutions (OFSI). And, OFSI
was one of the first national regulators that signed on to
the Basel II capital framework. The Canadian regulator
requires the banks to have a Tier 1 capital ratio of 7%.
However, the Canadian banks view the regulatory requirement
as a minimum, and in practice the median was well
above the requirement. In December 2007, before the
credit crunch intensified the following year, the median Tier
1 capital ratio of the Canadian large cap banks was 9.6%.
This is a higher capital ratio that in many other countries.
For example, the regulator in the U.S. is the Board of Governors
of the Federal Reserve System (FRB) and it did
not sign on to Basel II. The FRB requires a bank holding
company to have a Tier 1 capital ratio of 4% if it is to be
deemed adequately capitalized. To be considered well
capitalized, a bank holding company requires a capital ratio
of 6%.
However, it should be stressed that many U.S. banks
were well capitalized heading into the financial turmoil and
most U.S. banks well exceeded the minimum require-
ment. Nevertheless, the U.S. capital ratios were below
those in Canada. For example, many of the U.S. large cap
regional and super-regional banks had Tier 1 capital ratios
of around 7.5% in December 2007. Meanwhile, a Time
magazine article from November 2008 reported that European
commercial banks had a Tier 1 capital ratio of 3.3%.

More conservative lending practices

Canadian banks avoided the adoption of the high risk
lending practices being conducted abroad. In 2006,
subprime mortgages accounted for close to 25% of all new
mortgage origination's in the U.S., while in Canada the ratio
was 5% and subprime mortgages only represented 3%
of all outstanding Canadian mortgages. Adjustable rate
mortgages (ARMs) became popular in the United States,
and the interest rate adjustment on these products is a leading
reason for the dramatic increase in mortgage delinquencies
in that country. In Canada, ARMs were never
introduced. Canada did allow greater leverage in the mortgage
market through no money down and extended amortization
mortgages, but the risk profile on these products
was much less than on new U.S. products.

Strong risk management culture

The Canadian banks stuck to their long standing risk
assessment systems. Indeed, the criteria for getting a
mortgage did not change considerably during the real estate
boom. For example, a mortgage borrower taking out
a variable rate mortgage still had to qualify on the basis of
a 5-year fixed mortgage rate. In contrast, the U.S. had a
proliferation of NINJA loans (loans with no demonstration
of income, job or assets) and when mortgage qualification
was being done it was often assessed at the low introductory
rate on the ARM.

Prudent regulatory oversight

The Canadian regulatory system and Government of
Canada policy has also served the nation well. OFSI provided
prudent oversight. Moreover, the Government of
Canada did not push for imprudent lending practices like in
some jurisdictions abroad. In the United States, the Community
Reinvestment Act encouraged higher risk mortgage
lending. Fannie Mae and Freddie Mac, the two U.S. government
sponsored enterprises in the mortgage sector, also
pushed hard to expand home ownership and may have
contributed to higher risk activities. The U.S. government
also allows mortgage interest deductibility, which deters
homeowners from paying down their mortgages as quickly
as possible. It should be noted, however, that mortgage
insurers in Canada did influence lending practices by opting
to insure no-money down and extended amortization
mortgages. But, as mentioned above these were lower risk
than some of the international practices and the Government
of Canada has since eliminated insurance on no money
down and 40-year mortgages.

More risk adverse behaviour by households

Canadian homeowners were also more cautious in the
their activities. Canadians were less inclined than Americans
to draw down on the equity in their homes. The more
conservative behaviour of both lenders and borrowers has
resulted in a more modest rise in mortgage arrears.

Canadian investment banks part of a larger diversified
financial institution

The structure of the Canadian financial system also
provided some important stability. In the late 1980s, the
Government of Canada allowed commercial banks to ac-
quire investment dealers. This set off a wave of mergers
and acquisitions, with the result that no large independent
dealers were left. So, the investment banks in Canada
folded into a larger diversified institution. Investment banking
takes inherently more risk than retail and commercial
banking, so the combination allowed the former to benefit
from the lower risk balance sheets of the latter. In the
United States, some have argued that the U.S. investment
banks were only lightly regulated. The U.S. investment
banks also had very low capital ratios that averaged around
4%. When the dust settles from the recent financial turmoil,
it would appear that independent U.S. investment banks
will be a thing of the past.

Conclusions

These are the results and facts. The practices in Canada
stand in sharp contrast to those in the U.S., Europe and
elsewhere. It is more difficult to pinpoint why. Why has
the regulatory environment been tougher in Canada? Why
have Canadian banks had tougher risk management cultures?
Why have Canadian households chosen to taken on
less leverage? All of these aspects likely intertwine in a
virtuous circle. There appears to be a more risk adverse
culture in Canada running through government, the public
and banks. One feeds off another. It may be instrumental
that Canadian banking is relatively dominated by a fairly
small number of large banks that have been in business for
a very long time – most dating back in one form or another
since prior to Confederation. Perhaps this long history deters
actions to boost short-term profits at the expense of long term
risk.

Crazy Inflation

2008-08-11T10:57:00.000-07:00

If you think inflation is high in Canada, I pulled this from the paper last week.

Zimbabwe's ravaged currency is to be revalued, slashing 10 zeros off all prices and values. Hyperinflation has destroyed savings and reduced the economy to subsistence levels, with bricks of banknotes needed for even basic transactions. The Zimbabwean dollar was worth more than the American greenback at Independence 1980, but Robert Mugabe's misrule has seen it plunge to a point where one U.S. dollar is worth around 100 billion Zimbabwean dollars, and accelerating up. Officially, inflation is running at 2.2million percent a year, but independent economists estimate it is far higher. Last week, a packet of local biscuits cost $489 billion. A teacher at a private primary school earned $485 billion a month. Bread was costing $200 billion a loaf, a can of Coke $600 billion, a plate of rice and chicken $800 billion, a beer $1.8 trillion and a local ride in a shared minibus $2 trillion.

If I had to pay $1.8 trillion for a beer, I'd have to move.

My Crystal Ball

2008-08-08T10:07:00.000-07:00

Markets have been on a downward slide for much of the summer and till we see some resolve in the U.S. it might be some time before we see improvement. Having said that this saying has stood the test of time. "Buy Low and Sell High". I don't know where we are in the current market cycle but I do know we have come down a long way and it's starting to look alot like Christmas. I've attached an article from Don Connelly a powerbroker in the U.S, he seems to wrap it up in a nutshell.

DON CONNELLY’S CRYSTAL BALL

I keep a crystal ball in my bedroom closet. Occasionally, I drag out that ball and get a glimpse of what’s going to happen down the road. I took such a look this morning and saw what lies in store for us over the next ten years.
I know you are contemplating investing your hard-earned money in the stock market and I know you are afraid of the unknown. So let me tell you what’s going to happen and then you tell me how you feel about putting your money at risk.
In my crystal ball I see the United States losing control of the one thing that for 85 years served as a powerful reminder of the strength of the U.S. in the Western Hemisphere.
My crystal ball shows the U.S. bombing a country in Europe in an effort to halt ethnic cleansing.
I know from my crystal ball that over 100 top US public companies, including Exxon, Royal Caribbean, Rockwell International, Warner-Lambert, Teledyne, and United Technologies will plead guilty to multiples crime adversely affecting shareholders.
Health care fraud alone will cost Americans $100 billion to $400 billion a year.
I see a savings and loan scandal costing investors between $300 billion and $500 billion. The Attorney General will call this scandal the “biggest white collar swindle” in history.
My crystal ball shows nearly 200,000 US troops being deployed in an act of war.
We will experience one of the worst stock market crashes ever. In less than three years, the stock market will plummet 38%. (10th Worst Stock Market Crash: Date Started 1/15/2000. Date Ended: 10/9/2002. Total Days: 999. Starting DJIA. 11,792.98. Ending DJIA: 7,286.27. Total Loss: -37.8%)
I’m stunned, but I see the U. S. being attacked by foreigners on its home soil.

Unfortunately, One of America’s largest cities will be hit by one of the world’s worst natural disasters ever. The total economic impact will be $150 Billion.

Sadly enough, we will witness the worst mass murder in US history.

I hate to say it, but gasoline prices will go through the roof, skyrocketing more than 100% in the next 10 years. (1/6/97 = $1.41. 9/05 = $3.13. = +$1.72 = + 122%)

Unbelievably, home prices will leave the average American reeling more so than the price of gasoline. (1995 = $92500. 2005 = $213900. = +$121,400 = +131%)

Sadly, household bankruptcies will reach an all time high in the millions of households.

We will continue to be the wealthiest country in the world, but nearly everyone will be up to his neck in debt. Consumer debt will top $2 Trillion or more than $10,000 per household. If mortgages are included, consumer debt will top $9 Trillion. The bank’s best customer will no longer be the guy who can pay off his loan. He’ll be the guy who never pays off his loan, but continues to pay his ongoing fees.

My crystal ball shows more than half of all U. S. marriages will end in divorce, and the number one cause of divorce is financial pressures.
Incredibly, the White House will be rocked by sex scandal and The President of the United States will be impeached.
Compelling evidence will be put forth that the entire computer revolution might crash. It is proven by experts that this crash will mess up the bank accounts so you may not get the right amount of money back when you withdraw money. The lights will fail and factories will shut down across the country. To fix this problem, experts will determine that it will cost the United States $300,000,000,000 to $600,000,000,000.
Would you invest your hard earned money under those circumstances?
Oh. I forgot to tell you. The date on my crystal ball is 1997!!!!

December 31, 1996: 6549
April 24, 2007: 12,354
5805 points or up 89%

And if you knew in advance just one of the events I just mentioned and chose to wait until things got better, you would have missed one of the all time great rallies.

What did we lose control of after 85 years? The Panama Canal

What European country did we bomb? Yugoslavia

Where were U.S. troops deployed? Iraq

When was the United States attacked on its home soil? September 11, 2001

What natural disaster hit what city? Hurricane Katrina and New Orleans

Where was the mass murder? Virginia Tech

Who was impeached? Bill Clinton

What was the supposed computer disaster? Y2K

Welcome to my blog Ironman Financial Inc.

2008-08-08T09:59:00.000-07:00

Good day everyone, finally I have started to input data into my blog. This is not as simple as one might think, you actually have to spend some time to think about what you want to say, so here it goes.
I would like to see this blog as a spot where one goes to get my views on current market conditions. Remember that these are my views and every situation is different, what applies to you might not apply to someone else and vise verse. Most of the time, I will be generalizing on this blog and of course if you have a specific concern you'll need to contact me and we can chat one on one.

Check back often as I hope to add new thoughts regularly.

Mike Bock

Welcome to Ironman Financial's new blog.

2008-05-05T15:03:00.000-07:00

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