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Canada's banks make a terrible trade

Andrew Willis, October 9, 2008 at 11:32 AM EST

Canada's banks may have just made a terrible trade.

The federal Finance department was working on a plan that would deliver long-requested liquidity to the Canadian mortgage market. The idea was to extend the reach of the Canada Mortgage Housing Corp., a move that bank executives have lobbied for in the past. The new policy was set to be unveiled as early as Thursday.

Then the banks choose to break ranks with the Bank of Canada and the rest of the industrialized world over Wednesday's dramatic rate cut. The central banks slashed rates by 50 basis points, clearly telegraphing that they were trying to inject liquidity into a frozen system.

Most U.S. banks took their cues from the regulators, and cut their prime lending rate by 50 basis points, despite their relatively weak balance sheets.

Canada's five largest banks, moving in lockstep, choose to only cut their prime rate by 25 basis points. That kept credit spreads near historic norms - that's the gap between where banks can borrow, and where they lend to customers.

Any goodwill the financial institutions enjoyed in Ottawa seems to have gone up in smoke. In the midst of a hard-fought election campaign, Finance Minister Jim Flaherty went out of his way Thursday to say the Conservatives identify with the economic fears of citizens, and note that the banks are “solid” and “solvent.”

No new policy on mortgage funding, sensible as that might be, and no extension of the CMHC's reach. And make no mistake: Over the long term, a more liquid mortgage market, and the warm, fuzzy feelings engendered by being part of a solution to the credit crisis, would outweigh the benefits that come from an extra 25 basis point credit spread.

The gang who tried to force-feed bank mergers to Ottawa back in 1998 have shown a tin ear on government relations once again.

  1. bruno tomassini from Canada writes: In view of his record, whatever Jim Flaherty say it is not credible.

    I've more faith in banks that properly manage risk than on Jim Flaherty.

    cheers!
  2. Ingo Seibert from Richmond, Canada writes: The banks have historically been very short sighted in Canada and the market manipulation they implemented by not dropping .25 basis points is another example of it. What the banks in Canada and in the U.S. clearly fail to grasp is that its the average consumer and medium sized business that will pull our economies out of this mess. If you starve the credit worthy, respectable business or individual of cost effective credit to grow their business or buy their new home the banks are significantly driving the downside of the economy. That is not a new scenario in Canadian banks where they offer "Sunny day umbrellas" and when it rains they demand companies and individuals to return the umbrella.
    Instead of lowering dividends for a quarter or two they will keep they additional basis points to pad themselves.
    Beyond that I would hope that Mr.Flaherty can see beyond the big banks and realize that some changes to CMHC will benefit the general economy and not just the big banks.
    Instead of allowing bank mergers, Ottawa should be considering expanding banking competition. When 5 companies determine together what the lending rate in a country should be, based on their profit goals, clearly we have a problem.
  3. Winter Mute from toronto, Canada writes: hmmmm bank competition eh? well, since so many non-cad banks are becoming government owned (or so guaranteed that they might as well be), then that leads to cad banks competing with nonCanadian-govt-owned banks competing IN canada...............i don't think so

    in any case, loosening up mortgage frameworks/geometry is part of the how the usa got us all into this situation, so if CMHC/feds stand pat, that's probably not a bad thing

    so it goes
  4. Richard Bodt from Oakville, Canada writes: "THE" Bruno Tommasini? Hi guy, it's been years.
    I totally agree with your position. Most of our banks are well managed and solid. Flaherty is a politician, about 5 steps on a ladder below 2nd hand car car salesmen.
  5. Richard Bodt from Oakville, Canada writes: To Ingo Seibert and Winter Mute
    Oh yeah, lets' give 100% mortgages plus the insurance premium to "deadbeats" with a less than 680 Credit ratings. Let's just do what the U.S.A. has done. No, thank you, we are just doing fine with our banking system and C.M.H.C. guidelines.
    I am a retired Banker (35 years and last 8 years in an Executive postion) since then a Realtor.
    I really don't need C.M.H.C. loosening their guidelines (although I would make a lot more money) and know our Bank's are the best in the world.
    You will be glad we are a bit more conservative (ie. sensible) here than in the U.S.A.
  6. joe s. from Canada writes: Oh yeah, lets' give 100% mortgages plus the insurance premium to "deadbeats" with a less than 680 Credit ratings.
    ========================

    Um the Minumim for for 100% financing was a 680 score.

    They did not give "Deadbeats" 100% if they had a beacon score below 680.

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