does canada deserve gold? the financial crisis: canada and the us compared
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Does Canada Deserve Gold?The Financial Crisis: Canada and
the US Compared
1. The Financial Crisis: Canadian and US Experience Compared
2. Why Did Canada’s Mortgage Market Experience Differ?
3. Why Did Canada’s Financial Institutions Do Better?
1. The Financial Crisis: Canadian and US Experience Compared
Canada/US Housing Prices 1999-2009
0
50
100
150
200
250
Year
1999 =
100
Canada
US
Mortgage delinquencies: Canada/US
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Canada -arrears
US defaults
US 30 day arrears
Unemployment: Canada-US
0
2
4
6
8
10
12
Un
em
plo
ym
en
t R
ate
(s
.a.)
Canada US
Real GDP: Canada - US
96
97
98
99
100
101
102
103
2007/0
3
2007/0
6
2007/0
9
2007/1
2
2008/0
3
2008/0
6
2008/0
9
2008/1
2
2009/0
3
2009/0
6
2009/0
9
2009/1
2
2007/0
3 +
100
Canada
US
GDP in recent recessions(peak to trough)
Canada US
1982 -2.9 -1.9
1991 -2.1 -0.2
2007 -3.7 -3.8
ABCP Crisis
August 2007
Collapse of ABCP market
• $34 billion of non-bank sponsored ABCP frozen
• $80 billion of bank sponsored ABCP supported by sponsors
Impact on banks
Change in market cap December 2006 to December 2008
Canada (Big 6) -44%
US 10 largest -61%
US 10 largest -67%(adjusted for mergers)
Support measures for banks
• Increased size and frequency of Purchase and Resale Agreements (PRAs) with banks
• New credit facilities including a term PRA and a Term Loan Facility for participants in the high value payments system
• Broadened range of collateral that included asset-backed commercial paper and non-mortgage holdings on a temporary basis
• The Canadian Lenders Assurance Program to insure new issues of unsecured wholesale debt by financial institutions up to 120% of wholesale debt or 20% of deposits on an optional basis
• Purchase of up to $75 billion of insured mortgages by Canada Mortgage and Housing Corporation (a government institution).
1. The Financial Crisis: Canadian and US Experience Compared
2. Why Did Canada’s Mortgage Market Experience Differ?
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy
Was there a difference in monetary policy?Fed Funds (US) vs Overnight Rate (Canada)
0
1
2
3
4
5
6
7
Mar-
00
Mar-
01
Mar-
02
Mar-
03
Mar-
04
Mar-
05
Mar-
06
Mar-
07
Mar-
08
Rate Canada
US
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy
2. Quality of Mortgages 1. Loan-to value ratios
Distribution of Mortgages by Loan-to-Value Ratio
LTV ratio United States Canada
2005 2007 2006
0-80% 79.1 78.1 84.8
80-90% 9.0 9.7 8.8
90-100% 6.4 6.9 1.5
100% 5.5 5.3 4.9
Source: James MacGee, “Why did n’t Canada’s housing market go bust?” Federal Reserve Bank of Cleveland, Economic Commentary (September 2009).
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy
2. Quality of Mortgages 1. Loan-to value ratios
2. Tax treatment
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy2. Quality of Mortgages
1. Loan-to value ratios2. Tax treatment3. Market practices
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy2. Quality of Mortgages
1. Loan-to value ratios2. Tax treatment3. Market practices
3. Default Experience1. Recourse
Default conditions under recourse and non recourse
Non Recourse:Default when H < MOnly if PV (H) - PV(R) - C - Q > 0
RecourseDefault when H < MOnly if PV (P) - PV(R) - C - Q – A > 0
H = house value, M = mortgage value, R = rental value of house, C = cost of moving, Q = option value of investment in house, A = other assets
Why Did Canada’s Mortgage Market Experience Differ?
1. Monetary Policy2. Quality of Mortgages
1. Loan-to value ratios2. Tax treatment3. Market practices
• Default Experience1. Recourse2. Mortgage Insurance
Why Did Canada’s Mortgage Market Experience Differ?
Conclusion• Less encouragement to mortgage finance• Recourse makes borrowers less likely to
default• High LTV loans likely to be insured – must be if
held by financial institutions• 90% of securitizations are insured• 70% of insurance provided by government
agency and rest has government guarantee
1. The Financial Crisis: Canadian and US Experience Compared
2. Why Did Canada’s Mortgage Market Experience Differ?
3. Why Did Canada’s Financial Institutions Do Better?
Why Did Canada’s Financial Institutions Do Better?
1. Nature of business
Why Did Canada’s Financial Institutions Do Better?
Nature of business
• Canadian mortgage market
Why Did Canada’s Financial Institutions Do Better?
Nature of business
• Canadian mortgage market
• Reliance on wholesale funds
Reliance on non-depository funding
Depository funding
(% of all funding)
Canada US
>70 BNS WaMu
65 - 69 CIBC,TD, BMO, RBC
60 - 65 Wachovia
50 - 59 Cap1, JPMorgan
<50 BofA, Citi (37.8)
Why Did Canada’s Financial Institutions Do Better?
Nature of business
Structure of investment banking
Why Did Canada’s Financial Institutions Do Better?
• Nature of business
• Structure of investment banking
• Regulation
Why Did Canada’s Financial Institutions Do Better?
RegulationCanadian liquidity facilities
Why Did Canada’s Financial Institutions Do Better?
RegulationCanadian liquidity facilities
Capital requirements and leverage ratios
The Financial Crisis: The Canadian Experience
Conclusions