Trusting Bureaucrats and Politicians Will Cost You Money

Before the financial crisis in Cyprus, the Cypriot president assured voters that the government would never seize their bank deposits.

Then guess what happened?

On April 4, CMR asked if the Canadian government would have a Cyprus-like response to a banking crisis, as was implied by the language of pages 144-145 of the new budget.

The government is trying to assure us now that they won’t steal your deposits to prop up an insolvent bank. Yet Mark Carney himself wouldn’t rule out the possibility.

“Canadian institutions have substantial unsecured debt obligations in the wholesale market and as well as other classes of capital, and they have substantial capital as well, so once you stack all of that up, regardless of whether one would look to reach into it … it’s hard to fathom why it would be necessary,” the Bank of Canada governor said.

“Hard to fathom”? That is not exactly what I’d call “comforting language.” Especially because this is from a guy who is wrong nearly every time he opens his mouth.

He admitted the queue of capital buffers for banks would likely include some types of deposits, but did not elaborate.

Yet Carney also referred to a response from Flaherty’s office, which stated:

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime. Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.”

“Nothing to do with consumer deposits.” Okay.

Remember Rockwell’s Law: always believe the opposite of what state-officials tell you. If they say you have nothing to worry about, then you should start worrying.

But let’s say for the sake of argument deposits are supposed to be excluded from any proposed “bail-in” scenario. What is the bank going to do? Canadian banks are capitalized about as well as Lehman Brothers before things went bad.

Consider TD. They have $818 billion in assets. They have $768 billion in liabilities. Very little equity is available to withstand losses in asset value or income. All the big Canadian banks are like this. A tremendous amount of special reserves need to be put aside to withstand even a 10% drop in the value of a Canadian bank’s assets.

There will be more crises. Canadian banks cannot survive a crisis without a government bailout. Don’t take any comfort in anything coming out of Ottawa and the BoC.

— Read more about this story at CBC —