The federal government and Canada’s big banks have long insisted that Canadian financial institutions were unique among first-world banks in not requiring a bailout during the global financial crisis — a new report argues that, in fact, the liquidity support offered to the banks did amount to a back-door bailout.
A study released Monday by the Canadian Centre for Policy Alternatives (CCPA) estimates the true extent of government support for the banks during the crisis at $114 billion. The CCPA says it examined data from the Canada Mortgage and Housing Corp., the Office of the Superintendent of Financial Institutions, the Bank of Canada, and the financial reports of the banks themselves.
It notes that, between October 2008 and July 2010, the banks relied heavily on programs provided by the Bank of Canada, CMHC, and the U.S. Federal Reserve. Both the U.S. Fed and the Bank of Canada offered short-term collateralized loans, which peaked at $41 billion and $33 billion, respectively, it says. And, it reports that CMHC, which was buying mortgages directly from the banks after they had been converted to mortgage-backed securities, purchased $69 billion worth of mortgages by the end of the program.
The report estimates that support requirements peaked in January 2009 for Bank of Montreal (BMO) and Bank of Nova Scotia in January 2009, at $17 billion and $25 billion, respectively; in March 2009, for CIBC and Royal Bank, at $21 billion and $25 billion, respectively; and, $26 billion for TD Bank in September 2009.
It says that, during the crisis, three of the big banks were enjoyed support that exceeded their market value. “At some point during the crisis, three of Canada’s banks—CIBC, BMO, and Scotiabank—were completely under water, with government support exceeding the market value of the company,” says the report’s author, CCPA senior economist, David Macdonald,” Without government supports to fall back on, Canadian banks would have been in serious trouble.”
“The federal government claims it was offering the banks ‘liquidity support’ but it looks an awful lot like a bailout to me,” says Macdonald. “Whatever you call it, Canadian government aid for the country’s biggest banks was far more indispensable than the official line would suggest.”
However, the report stresses that the government hasn’t come clean on the full value of its support, saying that its study represents estimates based on the best available data, but these estimates should be considered approximations. It calls on the Bank of Canada and CMHC to release the full details of how much support each Canadian bank received, when they received it, and what they put up as collateral.
“A healthy and resilient banking sector cannot operate under the shroud of secrecy. Details of the massive taxpayer support Canadian banks received should be released in the name of transparency and accountability,” says Macdonald, adding, “Financial sector regulation should be strengthened to prevent the need for similar measures in the future.”
Ultimately, it concludes the veil of secrecy is concealing the reality that Canada’s big banks are too big to fail.