Chapter 3: Canadian Banks and the North American Housing Crisis
James A. Brox INTRODUCTION 1 This chapter examines the recent performance of Canadian banks in light of the recent North American housing crisis. The extent of the spread of the housing crisis to the Canadian housing sector is analyzed, and the resulting impacts on the Canadian banks’ balance sheets are studied using information from the Canadian financial flow matrix as published by Statistics Canada. The chapter shows that while there has indeed been some spillover from the United States into both the housing and banking sectors, these effects are much more modest than those in the US. Some policy issues with respect to tax and regulatory structure are discussed in conclusion. The subprime housing crisis and the meltdown in the American banking sector has had an impact on Canadian banks and on the Canadian economy in general. However, as of mid-2009, no Canadian bank has failed, none has required a financial ‘bailout’, and all appear to be profitable. The Bank of Canada has injected liquidity into the economy to ease pressure on the banks, but there has been no major change in financial regulation as a result of the crisis in the US and elsewhere. Recently the International Monetary Fund (IMF 2009, 16) reported: ‘Canada’s financial stability amid the turbulence bears testimony to effective supervision and regulation. Rigorous limits on leverage and targeted capital ratios well above Basel standards have helped to avoid vulnerabilities’. Reasons for this assessment are given as: ● ● Stringent capital requirements: Solvency standards apply to banks’ consolidated...
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