22
Aug
11

Are Canadian Banks in Trouble?

With the recent global debt crisis starting to become a more serious problem than originally thought, there seems to be a shadow passing over another G7 country previously regarded to be a banking safe haven (namely Canada). Is it really a banking safe haven or is it next on the banking crisis radar? Let’s look back in history to Canada when Brian Mulroney was Prime Minister. In the 1980’s two Alberta based banks Northland Bank and Canadian Commercial Bank failed after lending out millions of dollars to oil and real estate companies whom defaulted on their loans. In 1985 Mercantile Bank of Canada (based out of Montreal), at the time the 8th largest bank in Canada with $4.4 billion in assets fell into trouble.

The largest banks at the time rushed to the rescue by pumping hundreds of millions into saving the Mercantile Bank of Canada. It later got bought out by National Bank of Canada. Today, the top Canadian Banks have expanded both domestically and globally. Their residential mortgage portfolios have sky-rocketed with the recent real estate boom in Canada. They also hold on their commercial loan portfolios various facilities to most of the largest banks and financial institutions in the world and noticeably the European Union institutions that have recently been noted in the news for their problems and exposures in the European Debt Crisis. But at what cost? They have borrowed immense levels of money by creating debt to finance such huge growth.

Banks such as Scotiabank (being Canada’s most global bank) as well as others would be really negatively affected by a collapse in global banks. With Canada’s consumer debts and combined government debts (federal, provincial and municipal debts) hitting record levels domestically a bursting of the real estate bubble could be a double edged sword in their hands. Canada, once thought of as a country whose banks are much safer than America and the rest of the world has seen de-regulation in the form of loosening of lending requirements over recent years with Prime Minister Harper in power and Jim Flaherty as Finance Minister compared to when Paul Martin was Finance Minister.

The largest of the Canadian Banks RBC recently sold off it’s struggling American retail business arm Centura Bank to PNC Bank. The fact that the Canadian Banking powerhouse is exiting from the US as it’s economy struggles further is a very defensive move indicating further pain expected for time to come within the US Banking Sector. Unfortunately their Canadian counterparts BMO and TD have done the opposite and have been buying up US Banks recently to expand their market share in America at a time when the markets have caused stock values to increase dramatically compared to the crisis of 2008/2009. How will they fare if the US goes into another recession causing further strain on the US banking system?

With the 2008 collapse of Lehman brothers and AIG, Canadian banks like Scotiabank still had such financial institutions marked as highly rated safe and secure loans on their risk rating models after they became defunct. In fact Canadian banks accessed some of the TARP bailout money back in 2009 for their US arms of their business. As the European debt crisis spills over into the rest of the world, how can the Canadian Banks be saved as they would require billions of dollars of capital injections to bail them out, something the cash strapped Canadian government would have difficulty providing, especially still recovering with their finances from the precious recession in 2008/2009? Are the Canadian Banks heading into trouble?

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