Behind the Numbers

Canada’s Secret Bank Bailout

April 30th, 2012 David Macdonald · 7 Comments · Economy & Economic Indicators, Poverty and Income Inequality

The conventional narrative about the performance Canada’s big banks during the financial crisis goes as follows: while American banks bet heavily on sub-prime real estate and had extensive shadow bank holdings, Canadian banks did not.

However, the details of exactly how much each Canadian bank received, when they received it, and what they put up as collateral, has remained locked away at CMHC and the Bank of Canada.  Not even Access to Information requests have been able to free this information.

Today, the CCPA released my report, The Big Banks’ Big Secret, which provides the first public estimates of the emergency funds taken by Canadian banks. The report bases its estimates on publicly available data from CMHC, the Office of the Superintendent of Financial Institutions, US Federal Reserve, the Bank of Canada, as well as quarterly reports from the banks themselves.

In this study, I estimate that—at their neediest—Canada’s banks had received $114 billion in support, a figure equal to 7% of the size of Canada’s economy in 2009.

This is equivalent to $3,400 for every man, woman and child in Canada.

It is almost 10 times more than the auto bailout, for which Canadians put up $14 billion and for which the loan portion has been repaid.

During the financial crisis, Canadian banks accessed three separate programs from both the Canadian and U.S. governments. Canadian banks received $33 billion dollars (converted to $CDN) through the U.S. Federal Reserve programs. At the same time, they also accessed $41 billion at the peak of the crisis through a nearly identical Bank of Canada loan program. Finally, they received $69 billion selling mortgages to CMHC for cash. These peaks occurred at different times.

Canada’s Big 5 banks drew on government support programs for an extended period, from October 2008 through June 2010.  In other words, Canadian banks continued to rely on government supports for one and a half years, well after the financial crisis had subsided.

The largest recipients of aid were Scotiabank, Royal Bank and TD Bank. They received an estimated $25-26 billion at their peak. CIBC received somewhat less money, an estimated $21 billion at peak. BMO received an estimated $17 billion. Most of these peaks, except for TD, occurred in the early months of 2009. TD peaked much later in September 2009. (see charts below)

The banks are very different sizes in terms of market capitalization. Royal is the biggest and BMO is about a third of the size of Royal, so I’ve adjusted the figures for the size of the banks.

On the relative side, three of Canada’s biggest banks, Scotiabank, Bank of Montreal and CIBC, received estimated peak support that at some point was equal or greater than the value of the company itself.  That is to say that at some point during the financial crisis, it would have cost less money for the Canadian and U.S. governments to have bought every single share in these companies than to provide them with support. (see charts below)

CIBC in particular received estimated aid worth at peak 1.5 times the value of the company, it spent the better part of the first three months of 2009 underwater.

The federal government claims it was offering the banks ‘liquidity support’, but it looks an awful lot like a bailout to me. Whatever you call it, government aid for the country’s biggest banks was far more substantial than the official line would suggest.

It is worth noting: over the entire aid period, Canada’s banks remained profitable, reporting $27 billion in total profits between them, and the CEOs of each of the big banks were among the highest paid Canadian CEOs. Between 2008 and 2009, each bank CEO even received an average raise of 19% in total compensation.

In the US, they called these sorts of programs bailouts, in Canada we call them backstops. In the US, they have released the full details of the support, in Canada those details remain secret. It is time for the government to come clean with the actual figures of how much support each bank received, when they received it, and what they put up as collateral.

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7 Comments so far older updates

  • Sheamus Patt

    Great detective work, and a very informative read.

    It left one question in my mind. The report reveals that CMHC was a major source of the extra “liquidity” being offered the banks, to the tune of many billions of dollars per year. Where did it get the money?

  • David Macdonald

    Thanks for the comment. CMHC got the money from the federal government which got the money by floating more federal bonds. So government doesn’t count this as an expenditure, as they did with the auto loans, as so it doesn’t show as an increased deficit in 2008 and 2009. However, it does show up as a massive increase in government debt over that period. Although in fairness they now have mortgages in their asset column

  • Laura Barker

    As Canadians, we can no longer take pride in our supposed role as world peace keepers; next, with Kyoto, crumbled our role as protectors of the environment; and now more evidence of betrayal by our government as they dance to the tune of their corporate masters and lie about it around the world and to us. Thank you for this research.

  • Judy Kennedy

    I’ll echo Sheamus’ remarks in offering congratulations, David, for your investigative work.  This report merits the top-of-the-news treatment it received this week.

    Reading the section of the 2009 budget document covering Harper’s assistance to financial institutions I note that the EFF funding reached $200 billion. This is three times the per capita amount paid by US citizens at that time for bank bailouts, as noted in the Time magazine article of February ’09.

    How could Harper, et al. now say your findings were unfounded?  That much of EFF funding went to acquire mortgages which have returned $1.2 billion does not offset the fact that these mortgages are of questionable security. Nor are they redeemed by being guaranteed.  Guess who the guarantor is! The taxpayer of course!

    I hope you will now comment on the implications of and the fallout from these bailouts, David, particularly as banks’ profits and bonuses continue to soar all the while. Debt audit commissions are quite popular in Europe these days.

  • Morley Gorsky

    In The Economics of Money, Banking and Financial Markets/Chapter 9 Financial Crises and the Subprime Meltdown.pdf 4th Canadian Edn., there appears the following statement “… 32.5% of the Canadian money market , of which $80 billion was bank-sponsored,” and was redeemed by the banks when the market for non-bank sponsored ABCP froze in 2007. The process as described, as follows: “the
    market was divided into those ABCP conduits that could honour their obligations (bank-sponsored) and those that could not honour their obligations (non-bank sponsored). In the case of bank-sponsored ABCP, the Big Six banks took back onto their balance sheets significant amounts of their own sponsored ABCP.”

    In your paper, you state, at p. 33:
    “In the case of the CMHC IMPP program, Canadian banks bought their
    own mortgage-backed securities and retained them. Once CMHC announced
    it was going to buy massive amounts of mortgages, the banks then sold their
    mortgage-backed securities to CMHC.”

    My question: Is there any relationship between the ABCP sold to CMHC by the banks and the $80 million of ABCP brought back on to the banks’ books, referred to in the quotation from The Economics of Money, Banking and Financial Markets?

    Morley Gorsky
    Professor Emeritus
    Faculty of Law
    University of Western Ontario

  • David Macdonald

    Morley,
    There isn’t any connection per se between the mortgages that CMHC purchased in 2008-2010 and the ABCP debacle several years earlier. ABCP was non-mortgage loans, like say car loans and leases, whereas CMHC purchased Mortgage backed securities. So the types of loans that investors or CMHC was purchasing were different

  • Brian Zunnst

    I think that the problem is not the bail-out itself. After all, these emergency funds were not provided as a blank check for the banks and part of them was already paid back. More problematic is the lack of transparency around this event. The economy is now slowly recovering, according to Bloomberg new jobs are being created and also outlook of real-estate market are according to the article Why Canada Shouldn’t be Afraid of Subprime Crisisquite good. But sooner or later another crisis will inevitably come and we should ensure that policies we will then use will be transparent and clear.

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