The Canadian Centre for Policy Alternatives (CCPA) a Canadian think tank, just recently issued a report claiming that there had in fact been, a secret bailout of the big five Canadian banks by the federal government.
The report titled “Big Banks Big Secret” estimates that financial support for the Canadian banks reached $114 billion at its peak in 2009.
A key note to remember about the report is that much of the information is not publicly available; as a result some of the data presented below is simply an estimation by senior economist David MacDonald of the CCPA.
The $114 billion in financial support was obtained through three sources of government aid;
1.) U.S. Federal Reserve,
2.) The Bank of Canada,
3.) Canadian Mortgage Housing Corporation (CMHC).
Each of the three sources of government aid is assessed further below.
U.S. Federal Reserve
First, attention is given to the amount of support the Federal Reserve gave to Canadian banks.
As the report notes, since the start of the financial crisis in late 2007, the Federal Reserve took steps to increase the amount of liquidity available to institutions through the discount window. The discount window is a generic term that refers to the Federal Reserve’s lending programs (i.e. TAF, CPFF).
Since many banks were reluctant to borrow at the discount window out of fear, the U.S. Federal Reserve created the Term Auction Facility (TAF) program.
The TAF (Term Auction Facility) was the most heavily accessed program of the Federal Reserve and unlike the Discount Window, the information regarding how much the Canadian banks (and other foreign banks) borrowed, was kept secret until 2010 when it was revealed through the acts of information request by enterprising journalists.
In the TAF program the U.S. Federal Reserve provided Repos, otherwise known as repurchase agreements, which are not entirely different from short-term collateralized loans.
These collateralized loans such as long-term government bonds or mortgage backed securities were what the Canadian banks provided the U.S. Federal Reserve with in exchange for cash albeit with interest attached.
The table below shows the breakdown of the emergency loans given to the big five Canadian banks from 2008-2009
|Bank||TAF loans||Total TAF||Approx. total bank assets||Borrowed as % of assets|
|CIBC||10||$5.3 billion||$295 billion||1.8%|
|BMO||12||$6.9 billion||$369 billion||1.9%|
|TD||19||$27.5 billion||$489 billion||5.6%|
|Scotiabank||51||$27.8 billion||$426 billion||6.5%|
|Royal Bank||55||$43.6 billion||$595 billion||7.3%|
The “TAF loans” represents the number of times each bank went to the TAF for loans, and the “total TAF” represents the total funding received from the TAF program.
The “approx. total bank assets” refers to the total banks assets on the banks balance sheet and the “borrowed as % of assets” figure shows how much each bank borrowed, in proportion to its assets. As you can see, RBC borrowed loans worth over 7% of its total assets.
To enhance the liquidity of the commercial paper market during the 2008 financial crisis, the Federal Reserve also established the Commercial Paper Funding Facility (CPFF) in October 2008.
Not to be confused with TAF which is described above, the CPFF provided term commercial paper to U.S. issuers of commercial paper such as Canadian banks that had subsidiaries in the U.S. The CPFF was accessed by BMO, RBC, and ScotiaBank.
For further information regarding the Fed Reserve funding of Canadian banks visit the Fed Reserve Website.
Bank of Canada (BOC)
Similar to the U.S. Federal Reserve, the BOC also had several programs designed with the intention to offer financial support to the Canadian banks.
The most widely used program was the Term Purchase and Resale Agreements Program (TPRA) which loaned cash to the big banks with repayment periods ranging up to a year. This program was very similar to the CPFF found in the U.S.
Another program known as the Term Loan Facility issued by the BOC, allowed Canadian banks to receive loans by using non-mortgage loans (i.e. car loan, credit card loan) as collateral after a 40% reduction. This essentially means the banks took a 40% haircut otherwise known as a write-down.
Macdonald claims that unlike the break-down of the aid given by the U.S. Federal Reserve, the financial support offered by the BOC is far less transparent.
Macdonald states further that a breakdown of how much aid each bank received and when and what each bank used as collateral is kept secret despite several access to information requests dating back to 2009.
Canadian Mortgage Housing Corporation (CMHC)
Macdonald states that the CMHC also provided financial support for the Canadian banks via the Insured Mortgage Purchase Program (IMPP).
The IMPP program allowed the Canadian banks to sell their mortgage backed securities to the CMHC in exchange for cash.
Since much of the details surrounding the CMHC support to the big banks are kept secret, the information regarding the support cannot be 100% accurate.
Author David MacDonald took the average of the 4 quarters before and the average of the 4 quarters after the CMHC program and he noted the changes in the Canadian banks with all other variables held constant.
In the case of CIBC, MacDonald found that 4 quarters before the IMPP program was launched, CIBC was selling on average $375 million worth of new mortgages per quarter.
After the IMPP program had been established in the fourth quarter of 2008, the number of mortgages that were sold at the CIBC increased from $375 million to almost $3 billion (in Q4 of 2008) and to over $6 billion (in Q1 of 2009).
MacDonald states that it is possible that foreign investors bought up massive amounts of mortgages from the banks during this time period. However, Macdonald claims the most rational explanation for the increase in mortgage sales would probably be due to the implementation of the IMPP program.
Below is a graph from Macdonald’s report showing the CIBC’s mortgage securitization history. As you can see, during the fourth quarter of 2008 (Q4) and the first quarter of 2009 (Q1), CIBC’s mortgage securitization rose sharply coinciding with the launch of the IMPP program that occurred in October 2008.
CEO Raise Amidst the Crisis
Macdonald raises an interesting point when he tracks the compensation of the big five CEO’s throughout the financial crisis.
The chart below summarizes the increase in compensation of the CEOs of Canada’s big five banks from 2008 to 2009. Information from this graph was taken directly from Macdonald’s report.
As the graph shows, the CEO of CIBC had a compensation of $6.3 million and after 2009 it rose to $6.7 billion. In a more extreme case the CEO of TD was making $11.2 million in 2008 and in 2009 his pay jumped up to $15.2 million.
With CEO compensation rising several million dollars one cannot help but wonder if some the government aid required by banks was not used for liquidity support but rather to inflate the wallets of already wealthy CEOs.
Sadly, most of the information surrounding the aid support received has not been released to the general public. The next section will address the possible reasons the BOC and the Canadian government have to withhold aid information.
Secrecy and Transparency
MacDonald repeatedly states that the Canadian public is kept in the dark about the financial support given to the big banks.
The key question we need to ask is: Why is there so much secrecy surrounding this issue?
Macdonald argues that one reason for the high level of secrecy surrounding bank support is because if the public were aware of the support, additional pressure would be placed onto weaker banks.
Macdonald further suggests that depositors (i.e. Canadians) and counter-parties would be reluctant to do business with the big banks if they knew how much liquidity the banks required.
We see a similar situation in the United States. During the financial crisis, the Fed Reserve offered support to financial institutions through the discount window.
Even with this support however, many of the banks were reluctant to take out loans from the discount window out of fear that their borrowing would become public knowledge and negatively impact consumer confidence.
Macdonald calls for more transparency about the support given to the banks and advocates complete disclosure given to the public about the support that the BOC and CMHC has given to the big banks
Macdonald even says,
A healthy and resilient banking sector cannot be based on secrecy; it must be based on transparency and a willingness to learn from the past. Details of Canada’s massive support from 2008 to 2010 should to be released by CMHC and the Bank of Canada in the name of transparency and accountability.
Macdonald also advocates for stronger regulations of the financial sector in order to prevent banks requiring the liquidity in the first place.
Despite Macdonald’s recommendations for stronger financial regulation, Canada has long since been on a path towards deregulation. For more information regarding the deregulation in Canada refer to the Part 1 in the series on financial deregulation in Canada.
Alternatives Point of View
Is it a bailout if the banks pay the loans back? This is the question many critics ask.
A critique against Macdonald’s report on the big banks is presented below.
While the report claims there has been a bailout, others argue it was simply another form of liquidity support to help during the 2008 financial crisis.
While it is true the Bank of Canada and the U.S. Federal Reserve initiated several programs designed to offer liquidity in the form of loans, most of the loans have been paid back with interest as well.
Macdonald even states in his report,
By February 2010 and July 2010, all of the U.S. Federal Reserve and Bank of Canada loans had been respectively repaid
From a governmental standpoint, the Canadian and U.S. government made a profit off the liquidity support so the taxpayers did not bailout anyone.
There is also the CMHC to consider. Macdonald reports that the CMHC, through its IMPP program bought $69 billion dollars’ worth of mortgage backed securities from the big five banks.
This was essentially a direct cash “infusion” given to the banks that had freed the mortgage securities from the banks’ balance sheets in the form of much needed capital.
Others argue that $69 billion given to the banks will be repaid as the mortgage backed securities the CMHC had bought matures slowly overtime. Macdonald includes a statement from the CMHC in his report;
It is estimated by the CMHC that “that most of the money injected in 2008–09 will be repaid between 2012 and 2014.
This means that the Canadian government will not receive the $69 billion dollars at the present time, but rather over time as the mortgages mature.
There is a counter-argument to this: The reasoning is if the real estate market were to crash or if the market were to undergo a 15% (hypothetical) correction, then the Canadian government would be significantly affected because it is now carrying the risky mortgages.
By analyzing the current issue we can see that a true bailout had already occurred in the U.S.
Below you will find the differences between the U.S. and Canadian bailouts.
In the case of the U.S., the treasury had been given the power to buy mortgage backed securities from financial institutions across the country. The power given to the U.S. treasury came under the form of the Troubled Asset Relief Program (TARP). The problem with TARP was that the U.S. treasury had bought toxic mortgage backed securities while at the same time as providing their banks with liquidity.
The end result of TARP had been that the big commercial banks had made the U.S. tax payers foot the bill for the toxic assets on the bank’s balance sheets.
Of course in the case of Canada, the situation did not occur here but that is not to say that it is impossible.
Macdonald claims that had the Canadian banks not received financial support from the CMHC, Bank of Canada and the Fed Reserve they would have been “underwater”.
Even further Macdonald wrote,
Total support for CIBC was worth almost one and a half times the value of all the company’s shares in March 2009. In fact, almost every day from mid-January 2009 and the end of April, CIBC was completely “underwater,” receiving support worth more than the value of the company.
As you can see from the diagram, what is apparent is that out of all the big five Canadian banks, the CIBC received its peak support in march 2009 with a support value of 21 billion and this constituted to 148% of the companies value which essentially proved they were underwater.
While it may not have been a “bailout” in definition, what would have happen if the Canadian banks were unable to repay the support they had received from the Federal Reserve, the Bank of Canada and the CMHC?
Given the nature of “too big to fail” banks, sooner or later Canada would be in a position to have to bailout its big banks. This notion of “too big to fail” was a symptom exacerbated by the deregulation of the financial industry in Canada that took place over the last few decades.
Whether you choose to call the bank support a “bailout” or “liquidity support”, one thing becomes very clear. Without the support of the CMHC, BOC and the Federal Reserve it becomes difficult to imagine how Canadian banks would remain solvent especially when considering banks such as CIBC that received support worth far more than the value of their own company.
There is no doubt in Macdonald’s mind that the Canadian government worked hand in hand with the U.S. to provide bailouts to the big five banks. As a conclusion to his report Macdonald forwards several recommendations he would like to see in the future;
– A banking sector free from secrecy
– Increased transparency by the Bank of Canada
– Additional research used to strengthen financial regulation
– Prevent the need for “bailout” of Canadian banks in the future
What Macdonald is most concerned about was the lack of transparency regarding the bank support in Canada. In order to prevent future bailouts and draft stronger regulation (particularly in the financial sector) we need the public to become aware of the support and act upon this awareness.