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Wednesday, April 3, 2013

Trouble at Canada's Big Banks? OSFI and Government Warnings

Canadians are known for being overly cautious and too polite.  Unless you give them a hockey stick….

Given this predilection for caution, Canada is also known for having stable but boring and the most reliable economy in the G8/G20 group of countries.

But is all well in the land of the midnight sun?  The Government is sending out warning signals.

In 2011, the Office of the Superintendent of Financial Institutions (OFSI) made some rather un-Canadian style comments. It was addressing the quality of the Boards of Directors sitting at Canada’s big banks.  Coming from Canada’s banking regulator, it was a shocking to hear that some banks lacked experience on their boards. Or as Stephen Jarislowsky,  CEO of Jarislowsky Fraser Ltd., said "I find that there are many directors who are extremely nice people and competent people, but very few bank directors who really know banking.”  Ouch!

This was followed in July of 2012 with further statements from OFSI raising concerns about the competencies of the boards with a particular focus on risk management. In January of 2013, OFSI again raised board the issue of the bank boards, including making improvements to the competencies of directors.

Most recently in March of 2013, OFSI publicly put the “too big to fail” label on Canada’s six largest banks.  This was surprising. Many industry observers had considered that only the Royal Bank of Canada would warrant the TBTF label.  As a result, these banks will have to maintain a larger capital buffer and be subjected to stricter regulatory oversight.

And then on 21 March 2013, Canada’s Finance Minister quietly dropped a bomb by including ‘bail-in’ provisions for Canada’s banks should they find themselves in financial trouble.  The bail-in procedures were buried on pages 144 and 145 of the budget and smothered in financial doublespeak, but the intentions are clear.  As only an economist could write, Canadians were told that there could be a very rapid conversion of certain bank liabilities into regulatory capital. Written in plain English, this means that depositor’s money could be grabbed fast to keep a bank going should it suddenly go broke. Presumably, small time depositors holding less than CDN$ 100,000 would be protected by the Canadian Deposit Insurance Corporation, but the budget does not enlighten us on this area. (See for more on this.)  

It may be cold comfort for Canadians, but the USA and the UK are making similar plans.  (See for more on this.)


Canada is not Greece or Cyprus, but sovereign and personal debt levels are a concern. Much of the so-called Canadian economic model from 2008 to 2013 has been funded though personal debt which has now risen to over 165% of income. Continuous low level interest rates mandated by the Bank of Canada has produced  a ZIRP (zero interest rate policy) which is distorting the economy and causing a mis-allocation of capital.  (See more on ZIRP and Zombies at


Canada’s ruling Conservative Party government is known to be a “banker and business friendly” outfit, so this is not an ideological attack. Indications exist that the Government and its regulators have genuine concerns about Canada’s financial and economic future.   Overall, the measures appear to be a response to internal problems (personal debt, TBTF banks, over dependence on commodity exports etc.) as well as external factors (EU ongoing financial crisis, US sovereign debt, PRC slowdown and monetary imbalances).

We are given to the impression that this is a government clearing the decks as the ship sails into a storm. 


(There remains the possibility that the Canadian government had its confidence shaken last year following a massive theft from the maple syrup cartel headquarters in Quebec.  Who knew Canada had a cartel?)


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