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