SECURITIES AND HOUSING FINANCE IN CANADA AND THE GLOBAL FINANCIAL CRISIS

ANIKET BHUSHAN

THE NORTH-SOUTH INSTITUTEACKNOWLEDGEMENTS: FORD FOUNDATION, COMMONWEALTH SECRETARIAT, IDRC

Ottawa WorkshopJune 8th and9th

Introduction • Canadian experience: securities and housing finance • Major differences: market structure, therefore regulation• Four propositions• Direct lessons limited, broad themes:

• authorities on top of situation; • Decisive, swift, aggressive, less politicized; • more comprehensive reg. setup; • beyond regulation role in structuring market (CMHC)

• Contextualizing Canadian experience: failsafe? Missing pieces?

Market Structure Securities • Bank-driven concentration: Bank Act 1987 banks, own/run

investment and stock brokerage (Big 6 dominant)• Largest market for mining capital raised (2008)• Cross-listing, proximity to US• Prop trading, investment imp source of bank profit,

diversification Housing & Housing Finance (HF)• Bank-driven concentration: Bank Act 1992, post late80s-crisis

allowed take over mortgage trust/loan companies • Sophisticated, well-regulated, ‘boring but effective’• High affordability and ownership rates • Small subprime; securitization govt. (NHA-MBS) dominated

Govt. backstopped securitization Canada/US comparison: Securitization in

Mortgage Market

010203040506070

2004 2005 2006 2007 2008 Q2/2009

(% o

f tot

al m

arke

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Canada US

Data: US Federal Reserve System and Bank of Canada

Regulation Securities • Provincially based (13 regulators), CSA, SRO (IIROC),

OSFI oversight (prudential); FCAC (conduct) • Principles based, outcomes-focused approach (but

comprehensive guidance) • Moving to national regulator Housing, housing finance • CMHC (securitization-1987; MI) , FCAC• Lender bias• Tax incentives and foreclosure • Govt. backed securitization

Four Propositions• Epicenter (housing finance and interaction with wider

finance sys) fundamentally different• Principles based approach works well with market

structure; but ABCP clearly shows similar flaws • Disciplined learning from past experiences • Domestic-ness: limited financial integration, particular low

exposure to (changing) and competition from US

Canada in global debates• TBTF: all our fin. Inst. TBTF and with time concentration

increased in banks; made sys more conservative/prudent • Volker/Glass-Steagall: (1987on) absorption of

investment/brokerage into banks increased stability; prop big part of bank strength (approx. 20% op-profit)

• Shrinking/taxing finance: sector already large contributor to taxes by G20 standards, and small

• No bailout: asset purchase/lending (IMPP, BoC) $114bn (i.e. 1.5x tangible common equity of 5 banks), 48% used

• Capital requirements: increasing risk-weighting on mortgages

Key Lessons • Race to the top: higher standards good for markets and

competitiveness of players (but structure helps –domesticness, proximity to US, yet low competition)

• Authorities on top of situation: • Aggressive, decisive, depoliticized response (CMHC cap 350-

600bn; IMPP, CMB liquidity)• More comprehensive setup: FCAC, FISC, CMHC• Coordination key: FISC (emphasis on learning, frequent exchange) • Approach fits structure: principles-based, self-regulation (small no.

of big players); higher level reg. discretion• Govt. structures market (CMHC securitization, MI, CMB)• Continuous markets philosophy

Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense -Simon Johnson, The Canadian Banking Fallacy(Baseline Scenario)

“Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?”-CEO TD Bank, Feb 2009 to investors

Missing pieces? Transferability of Canadian experience • How many other systems this bank-dominated? • What other as isolated from international competition? • How many other govt. willing high level support• What would bank-dominated stability look like without

government support? • Easy time dealing with higher risk end of spectrum: hold govt.

guaranteed mortgages or sell to govt. backstopped securitization • Is the system more leveraged than we think?

• TCE to assets Canada-5 more levered than top US (more than post-crisis Citi)

• How much credit to good risk mgmt, robust systems?

ABCP clearly shows similar flaws

Consumer leverage