Friday, February 26, 2010

Bank Failures: 12,000 in the U.S. vs. 2 in Canada

Number of bank failures during the 1930s
United States: 9,000
Canada: 0

Number of Bank Failures during S&L crisis (1980s-90s)
United States: Almost 3,000
Canada: 2

Number of Bank Failures during the Great Recession (2007-2010)
United States: 196
Canada: 0

Delinquency Rate for Home Mortgages in December 2009
United States:

Return on Equity for the Banking Industry in 2008
United States: -15% (approx.)
Canada: +10% (approx.)

Home Ownership Rate
United States: 67.2%
Canada: 69%

What explains these significant differences between the U.S. and Canada? What is it about the Canadian banking system that allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking? Find out here at my article "
Due North: Canada’s Marvelous Mortgage and Banking System."


At 2/26/2010 10:02 AM, Anonymous DrTorch said...

Instead of comparing numbers of banks that fail, wouldn't it be more appropriate to cite the failed banks' lost assets?

At 2/26/2010 10:25 AM, Anonymous Lyle said...

Mainly Canada never had Andrew Jackson and Thomas Jefferson who thought banks were the root of all evil. Many other americans thought this as well. Big banks were seen as an enemy of freedom so they were to be squelched as much as possible. Some states like Texas had unit banking systems, 1 bank one office only (maybe a drive thru down the block...). So you are left with banks like the one mentioned a while ago here in a town of 300 in Texas running as banks ran 50 years ago.
Canada never had such a fear of banks, because they have a system nearer to the UK in financial terms (Note that before Northern Rock it had been 150 years or so since a bank run in the UK).
I agree about the recourse issue, but it should be pointed out that in 30 states mortgages are recourse. Further cash out refis are recourse even in those states, as well as seconds and HELOCS. It that the banks have decided that there is no blood in the turnip, and not gone after the borrower. I don't understand why the banks don't sell their recourse debts to collection agencies for a few cents on the dollar, as these folks do know how to collect and will take all action needed to do so.

At 2/26/2010 10:37 AM, Anonymous gettingrational said...

I enjoyed Prof. Perry's article which I found via RealClearMarkets this Friday morning. I learned that Canadian mortgage lending is much more conservative and thus a more stable housing market.

Is it true that immigrants into Canada must bring in at least $250,000 USD? I would guess that a good portion of those funds is used for a sizeable equity stake in a home. Any confirmation?

At 2/26/2010 10:39 AM, Blogger Frozen in the North said...

Canada's banking executive are far more conservative then their American counterparts.

It is the Canadian banks which recently pushed (hard) and obtained for the minimum down payment to be raised from 5% to 10% (on insured home loans), and also for all mortgage rates to be tested with mean historical interest rates -- so that the buyer could afford the home they purchase when interest rates rose. Never mind teaser rates, can they afford their homes when rates go up!

Finally, as an oligopoly, the banks are able to charge higher fees for services than US banks. We also only have five banks, imagine if the US only had a dozen or two banks -- systemic risk would rise dramatically.

But then in Canada we consider our banks near utilities, with attractive and stable dividend yields.

Finally, Canadian companies benefit greatly from the activities of American banks in our country, the 2nd largest arranger (08) of Maple Bonds (CAD denominated bonds issued in Canada by foreign companies) was Merrill Lynch.

Like many other things between Canada and the US, some aspect cannot be replicated across the border

At 2/26/2010 10:47 AM, Blogger bix1951 said...

USA GDP per capita $46,900
Canada GPD per capita $39,100

source The World Almanac 2010

ours is bigger by $7,800

At 2/26/2010 10:53 AM, Anonymous Svend said...

I'm Canadian. Here's what ya'll need to know about Canada: We're great at selling our country.

Now, here's the reality:
Acknowledging the leverage levels above, you may wonder how the Canadian banks escaped
the 2008 meltdown unscathed. The answer is that they received signifcant assistance from the
Canadian government. First, they received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby Canada Mortgage and Housing (CMHC) purchased
insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

Next, the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Finally, a Canadian Bank (that shall remain nameless) also received assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to
the IMPP program, for a total government expenditure of $114 billion.

For reference, the entire
tangible common equity of the Canadian Banks in 2008 was $68 billion. Can you put two and two
together? The Canadian government injected a sum through mortgage purchases worth more than
the entire tangible common equity of the Canadian banking system! On top of that, the Bank of
Canada provided more than 50% of the tangible common equity of the system in emergency liquidity
facilities. Mark Carney, Governor of the Bank of Canada, acknowledged this, albeit in an indirect way: “Policy-makers had to do many unpalatable things to save the economy from the fnancial system – a fnancial system that begged for mercy.”

OK. Great "conservative" system. Then what happened?:

Ah, right. What I meant to say is "Canada's banking system is more conservative".

At 2/26/2010 10:55 AM, Blogger Prent Rodgers said...

You said the following which seems contradictory:

1. "Home mortgage interest has never been tax-deductible in Canada"

2. "Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation"

How is paying down your mortgage a tax-free investment if you have to pay it in after tax dollars? The appreciation may be tax exempt, but not the payments.

At 2/26/2010 10:59 AM, Anonymous Anonymous said...

Mainly Canada never had Andrew Jackson and Thomas Jefferson who thought banks were the root of all evil.

If my choices are between having had Thomas Jefferson and Andrew Jackson or having the Canadian banking system, I'll side with Jefferson every time.

At 2/26/2010 11:01 AM, Anonymous morganovich said...

that's an interesting piece.

i'd love to see some comparative data on lending standards and the credit scores of borrowers between the two countries.

another model that fared reasonably well through he crisis was the "danish" model. banks make mortgage loans, but are not allowed to securitize them. they then issue bonds on the bank itself to cover them.

this allows for easy duration matching (assuming no prepayment) and keeps the banks honest, as they will face the results of their lending decisions.

all this said, i suspect that absent the disturbingly high participation of quasi governmental actors in the US (freddy, fannie, indy) and their distortion of pricing in both lending and MBS's through a sort of arbitrage of their tacit governmental guarantees (which turned out to be an accurate perception).

absent those entities putting their imprimatur onto the MBS's and getting them ratings they didn't deserve, the whole cyclone of bad lending would not have had enough liquidity to sustain it.

that said, CRA would have hammered banks either way. forcing private companies to lend below cost to an incredibly risky population was always going to cause problems.

it seems to me that the best answer is to get government out of the lending and lending standards businesses entirely.

banks choose to whom they lend and at what rate. further, a given loan can be secured by just the house or by the full estate and future earnings of a borrower depending on the contract. the latter format would have lower rates and possibly lower down payments. all tax preferencing of mortgage interest needs to be phased out.

At 2/26/2010 11:06 AM, Anonymous Anonymous said...

Does Canada have mark-to-market accounting?

At 2/26/2010 11:11 AM, Anonymous Lyle said...

To answer Prent Rogers. If you reduce the principal of your mortgage you reduce the interest payment due. Say for example you have a 6% mortgage, then you get a 6% tax free return on any pre-payments. Of course this assumes you do intend to pay the house off.

At 2/26/2010 11:44 AM, Blogger Frozen in the North said...

The Canadian banking system would not work in the U.S. It works for Canadian because we are a small economy (1/10 of the U.S.) and because of our proximity to a large and very free financial system that helps control customer fees.

As a Canadian the last thing I would want to see would be for the U.S. to adopt our banking system. We would loose the competitive aspect your bring to our market. This is a purely selfish reason, but its a reason nevertheless.

Anonymous 11:06

There is no Level 3 assets (Toxic waste) in Canada, everything is marketed to market.


Liquidity is not a loan,as the Bank of Canada purchased asset at their then market value. By the way the Bank of Canada's balance sheet has been shrinking fast recently, from a peak of $40 billion to $27 billion in January 2010 (historical avg $10 billion)

If there is a house price correction in Canada -- house price here are back to their 2008 levels, there would be losses for the banks, and CMHC which guarantees the at risk mortgages. A very important topic here I assure you.

When the money market seized what was the Bank of Canada to do? Assets were good (no toxic assets were sold the the BoC), all the bad assets (U.S. MBS stayed in the hands of the banks and investors). By the way, the Canadian banks all took their mark to market hits on these toxic assets in Q4/2008 and Q1/2009 -- that's why bank profits for Q1/10 (Jan 10) were 4 times what they were in 2009.

Overall, Americans should stay well away from our banking system. It would be toxic to your economy, and it would hurt ours -- I like my free ride.

At 2/26/2010 2:33 PM, Blogger Steamboat Lion said...

Mark, suggest you do some research on the banking system and mortgage market in Australia - almost every feature you describe about the Canadian situation is the same, and as far as I know there's been no bank failures in Australia during the GFC either...

At 2/26/2010 3:05 PM, Blogger John Thacker said...

"Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation"

How is paying down your mortgage a tax-free investment if you have to pay it in after tax dollars?

That's the reason that it's a tax-free investment-- mortgages are treated like everything else. In the US, since the mortgage interest payments are tax-exempt, paying down your mortgage means using taxable dollars to decrease a tax deduction.

In Canada, if you could only earn 5% on your money normally, then it makes sense to pay off your 6% interest mortgage. In the US, it might now, since you'd be better off investing your money and keeping your mortgage balance high, since it really costs you less than 6% on net (after tax).

Thus, the US system discourages paying down one's mortgage.

At 2/26/2010 3:37 PM, Blogger PeakTrader said...

The bank's gain is the borrower's loss.

At 2/26/2010 4:06 PM, Blogger PeakTrader said...

I wonder how many Canadians were able to buy a house without a job, extract a large amount in equity within a few years, refinance at lower rates more than once within a few years, lock-in a low 30-year rate, etc.

At 2/26/2010 4:43 PM, Anonymous Terrence said...

PeakTrader said "I wonder how many Canadians were able to buy a house without a job, extract a large amount in equity within a few years, refinance at lower rates more than once within a few years, lock-in a low 30-year rate, etc."

Zip, zero, nada.

And if a Canadian mortgage holder walked away from the house for any reason, they STILL hold the mortgage.

I think Australia is much the same as Canada, in these areas.

At 2/26/2010 5:31 PM, Anonymous Macon said...

OK, now that article you linked to was your best work ever!

The only point with which I disagree is MBS. Those are fantastics products for improving liquidity in mortgages and spreading risk IF they are packaged, rated, and priced properly.

When you have underlying mortgages which are based on prudent lending standards and good underwriting, MBSs are probably the safest and best yielding investments you can make.

The problem with MBS is that when underlying mortgages are not safe and sound and the risk/price not properly assessed, then it spreads uncertainty throughout the economy.

Good work!

At 2/26/2010 5:39 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

Well, I agree but...

"less securitization" is the elephant in the room.

US lenders securitized debt and sold it to a rabidly hungry global capital market looking for yields.

The RMBS were rated AAA by Moody's, S&Ps, Fitch.

As long as lenders could sell RMBS, they would loan, and make money on the transaction, not on holding the mortgages. The lenders did not care who they lent to--the risk was sent downstream to RMBS buyers.

It may be a Canadian reg. that limits securitization. I don't know. Does anybody?

A needed reg? Maybe require issuers hire ratings agencies through a pool. That is, they do not pay the rater directly. When they pay directly, the pressure is on the rater to give a rating the issuer wants. In other words, hold your nose and give it a AAA.

As it stands, our capital markets have been damaged. Who will belive a AAA rating anymore? That means more perceived risk, and higher capital costs.

At 2/26/2010 9:50 PM, Blogger PeakTrader said...

Terrence, I also wonder if Canadians can live in their houses without paying the bank for a year or two?

At 2/26/2010 11:49 PM, Anonymous Terrence said...

PeakTrader asked: "
Terrence, I also wonder if Canadians can live in their houses without paying the bank for a year or two?"

I really, really doubt it; the bank would foreclose on the house after several months I think. But, the former home "owner" would still carry the mortgage.

I am not sure what would happen if they went into bankruptcy. In any case, they would never own another house, at least not if they needed a mortgage to get it.

I think it is also harder to go into bankruptcy in Canada than in the USA.

At 3/03/2010 10:24 PM, Anonymous John said...

it is plain wrong that canada is the only industrialised country in the world not to have a bank failure (off the top of my head New Zealand and Australia are two others)

your lazy or deliberate incorrect statment of fact undermines your argument

poor form

At 3/03/2010 10:33 PM, Blogger Mark J. Perry said...

John: Please check this link saying that "Canada is the only industrialized nation in the world without a single bank failure in the current economic downturn."


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