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Canadian banks: Too big (for the economy) to succeed

Bay_Street

That’s a take on the popular “Too big to fail” line our US neighbours were fed by their federal government to justify the ‘massive’ government bank bailout following the US housing market collapse in 2007. The $700 billion Troubled Asset Relief Program (TARP) became US law with the Emergency Economic Stabilization Act of 2008 (PDF).

Shortly thereafter, Canada’s Prime Minister took a victory lap on US television networks to gloat about how Canadian banking regulations had prevented such a meltdown, and that Canadian banks didn’t need to be bailed out. He neglected to mention his government’s deregulation efforts prior to the economic collapse – along with the $125 Billion CMHC loan buyback program initiated by the federal Department of Finance at the exact same time as TARP. The program authorised the government to buy (back) a significant share of the then-outstanding $401.2 Billion National Housing Act Mortgage-Backed Securities (NHA MBS) – “a kind of bond for which the underlying asset is a pool of mortgage loans” guaranteed by CMHC. Sound familiar? Taking into account the size of the Canadian economy, the proposed Canadian Insured Mortgage Purchase Program (IMPP) pre-emptive non-bailout plan was bigger than TARP.

Canada’s Finance Minister recently mused about winding down CMHC mortgage insurance, just as it reached its regulated  $600 Billion insured mortgage limit. This is after the IMF’s Canadian representative suggested as much in recent weeks. The IMF is great at playing Mr. Obvious-after-the-fact. Where was it between 2006 and 2012, during which time the Finance Minister changed the mortgage insurance program rules 7 times, at one point authorising CMHC to insure mortgages for 40 years with $0 down?

We’ve neither discussed the pending housing meltdown nor Canadian banks’ role in it – and in much of the malaise afflicting Canadian households and businesses today. Not sure if it’s Finance’s cynicism or the banks’ (see recent news re BMO laying off one thousand ‘full-time-equivalent’ workers at the same time it announced record profits), but now seems as good a time as any to start a ‘Canadian banks’ series.

To focus the series, and reference a fact alarmingly few (non-bank) economists seem aware of:
4 of the top 6 publicly traded Canadian companies are banks. For context,
0 of the top 10 publicly traded US companies are banks (highest-ranking
US banks Wells Fargo and JP Morgan rank 14 and 15, respectively).

Market Cap Rank
Company Market Cap ($Billion)
1 Royal Bank of Canada  88.12
2 Toronto-Dominion Bank  75.67
3 Bank of Nova Scotia  69.37
4 Suncor Energy 49.07
5 Canadian National Railway Co. 44.21
6 Bank of Montreal  40.09
7 Enbridge Inc. 38.30
8 Potash Corp. of Saskatchewan 38.16
9 BCE Inc. 37.11
10 TransCanada Corp. 34.78

Source: Canada’s 100 biggest companies by market cap, The Globe and Mail

 

Market Cap Rank
Company Market Cap ($Billion)
1 Apple Inc. 439.39
2 Exxon Mobil Corp. 403.32
3 Google Inc. 257.40
4 Berkshire Hathaway Inc. 243.60
5 Wal-Mart Stores, Inc. 238.85
6 General Electric Co. 236.78
7 Microsoft Corp. 233.53
8 Chevron Corp. 228.01
9 International Business Machines Corp. 226.03
10 Johnson & Johnson 210.06

20 Largest U.S. Companies By Market Capitalization, The Online Investor December 11, 2013

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