Tuesday, June 29, 2010

Waiting for the shoe to drop (a Big Six failure, that is)

I have mentioned several times here, and I am still amazed, that we Canadians still seem to be so darn complacent about the "safety" of our financial institutions.   While there are statutory limits to how much risk can be carried against a bank or trust company's capital the fact is that the Big Six and the Mouvement Desjardins still do have major investment and insurance arms as well as trust companies under their wings.

While they are technically separately incorporated from the banks which own them (and in the case of the trusts and mortgage companies, are also separate members of deposit insurance, allowing Canadians to increase their protected deposits sometimes by a factor of up to five) there is really no longer any such thing as the "four pillars" -- the idea that banks, trusts, brokerage houses and insurance companies neither truck nor trade with each other, aren't allowed to go into business together, are not even allowed to acknowledge that the others even exist.

And of course, there is no protection from those who have their savings stolen by scam artists.

We've seen how some investment houses in the states, really "investment banks" have had to, during the economic crisis, reincorporate as a "regular" bank taking commercial and retail deposits so the US government will cover their customer's assets in case of disaster (to avoid a repeat of the Bear Stearns debacle).   With some really clever paperwork, our banks here could do the same to cover their brokerage houses' customers.

We haven't had a major failure here since 1996 at the federal level, although at the provincial level there seems to be a credit union that is seized about once every six months.

However, in the last few years, we've become quite heavily invested in the States, as our banks have picked up bargains -- either smaller banks willing to sell, or "failed" (really seized) banks for pennies on the dollar.   A new customer base, new local markets.   The benefit -- the new customers have access to a much wider branch and dealer network.   The downside -- far greater risk in case too many people default.

It's just a matter of time.   Our banks may be "safer" but they are not one hundred percent safe any more than "safer sex" does not equate with one hundred percent safe sex (i.e. abstinence).   It will happen sooner than we think.   And while deposit insurance will ensure the vast majority of deposits are safe, there could also be a panic run by those few but many who do not understand the concept of insurance nor want to.

Maybe then the idea of a supertax or a transactions tax will then make sense.   Of course, it will also mean even less competition as six go down to five or even four.   Then Harper, or whoever is in power, will have to explain how our system is safe or competitive.

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