Sunday, June 11, 2017

Still no Canada banking crisis


Gee still no crisis... hmmmmmm.... so when is it going to happen debt doomsday people? I know, I know... "someday!".




26 comments:

Ryan Harris said...

I wouldn't pop the corks yet. Alot Depends on the BoC and their economic ideology. Their largest shadow bank mortgage lender, Home Capital, remains a zombie in the midst of a bank-run without access to BoC.

Noah Way said...

Canada has never had a bank "crisis" because they have a strong regulatory system to prevent it. The US has one on average every 7-8 years.

Auburn Parks said...

So because a central bank says it in a public release it must be true? The Fed also said that there was no risk of a crisis in 2008......oops

Matthew Franko said...

"also said that there was no risk of a crisis in 2008......oops"

Ok... but what if there is no crisis in Canada? What then? How would you explain that?

If there is a crisis, you have to explain why...

If there is no crisis, you also have to explain why...

Auburn Parks said...

NO Franko thats not how logic works.

I didnt make a positive claim.....YOU DID.

You are the one using the public announcement from the Bank of Canada as evidence of your claim that there will be no banking crises in Canada. I am not making a claim, Im just pointing out that Central Bank proclamations have been wrong about massive banking crises before and recently, and as such, their public statements arent trustworthy evidence of anything.

Now if you want to debate whether Central bank public proclamations are in fact reliable evidence about what is happening or going to happen in an economy, then thats fine, that would be in keeping with what my point was.

You see Im not trying to do this:

"Ok... but what if there is no crisis in Canada? What then? How would you explain that?

If there is a crisis, you have to explain why...

If there is no crisis, you also have to explain why..."

Yes it would be helpful if someone could explain why, but there is no universal reason why. People want simple answers to complex, chaotic system properties.

But there are no simple answers to something so complicated.

WHy do the incidents where a very large number of people want to sell their assets at the same time and very few want to buy thus causing a precipitous drop in asset valuations and cash flow problems leading to banking crises happen? There are many reasons why such a thing might occur, so demanding from me the one explanation demonstrates that you dont have a great grasp of the operational reality because their isnt "THE explanation" there are many different reasons and explanations because the system involves millions of separate actors.

Matt Franko said...

I'm using the article simply to point out that there is as of yet no crisis...

The system is not that complicated...

Matt Franko said...

I'm not the one proclaiming the hypothesis "stability creates instability" is some great insight...

Matt Franko said...

I made no positive claim ... I'm making a negative claim ("dog that didn't bark" ~ "CB that didn't do QE")

Matt Franko said...

Maybe Tom can referee...

Matt Franko said...

"thats not how logic works."

Systems analysis and logic are two different things.... you're not going to adequately explain this system using logic...

Auburn Parks said...

SO then do I understand your argument to be (in logical syllogism form) that:

1: QE caused the financial (or banking) crises

2: Canada did not do QE

3: Therefore Candada will not have a financial (banking) crises?

If thats true, then you are correct and my criticism irrelevant. Wish I hadnt wasted the time I did writing that comment then.

Auburn Parks said...

Systems use logic, reality is based on logic. So that comment is nonsensical.

If -> then
cause -> effect

its the foundation of the universe (at least at the macro level as the quantum world seems to be quite a bit different)

Auburn Parks said...

As far as explaining why there hasnt been or will be a Canadian banking crises, I already gave you what I believe to be the best possible answer to your question.

Financial crises occur when a very large number of people want to sell their assets at the same time and very few want to buy thus causing a precipitous drop in asset valuations and cash flow problems leading to banking crises. There are many reasons why such a thing might occur.

So what might cause such a thing to occur in Canada? I dont know, maybe we should ask a canadian? And what does QE have to do with causing the above situation? Does QE lead to a situation where there are many more sellers than buyers thus causing a collapse in valuations and thus balance sheet and cash flow deterioration? Leading to a cascade of people unable to make good on their liabilities thus reducing the value other people's assets and hindering their ability to pay their liabilities and on and on?

Interesting to think about it this way because it may just leave room (logically :) for your QE hypothesis.

MAybe like this?
So CB does large QE leading to lots of secondary portfolio shifting by banks in order to rejigger their capital \ assets \ liabilities ratios, which causes the above situation where there are many more sellers then buyers for assets leading to asset value collapse?

I havent given it much deep thought, but its interesting on the superficial level of writing this comment.

Matthew Franko said...

Should have said "no explanation using ONLY logic..."

There are also functional relationships, inequalities, etc..

Auburn Parks said...

Fair enough about the "only logic" bit, once you add that, then I agree with you 100%.

But what about the important part though wrt QE causing a major disruption to the buyer\seller equilibrium leading to the downstream effects of a banking crises?

Matthew Franko said...

Well it increases the reserve assets on the bank balance sheets and the banks as buyers of assets have to stop buying other assets to accommodate these new assets the Fed is creating... as over short periods they are only working with (effectively) fixed amount of capital...

So in the context of your "buyer/seller equilibrium" yes the banks can no longer be buyers of existing financial assets or even creators or new financial assets until they can place more capital on their balance sheets... this takes a while....

So in the GFC, if say Lehman Bros. needed liquidity in September, even if they had plenty of good collateral if they went to their bankers and said they needed a short term liquidity loan their bankers would have had to turn them down as the Fed was swamping the bankers left side with 100s of $B of reserve assets via the QE...

So Canada has been avoiding this (ie QE) so has Australia and their govts have not had to go in and intervene in some sort of "crisis" so far...

There is no coordination between the parties wrt policy...

Matthew Franko said...

If they end up doing "The Coin" its going to have some sort of similar effect as they will be adding reserves without offsetting issuance of USTs... will have a short term effect of retarding or preventing growth in bank credit...

Auburn Parks said...

All very plausible and interesting, thanks for your perspective and thoughtful commentary. Wish we had more knowledgeable people engaged to help flesh out the added details and dynamics that you and I are ignorant about seeing as we are not personally involved in capital management and banking.

Auburn Parks said...

Do you think that the interest rates themselves have a role in this process? Obviously bank spreads are always going to be there (i.E. if the FFR is 10% the banks will charge 14% for loans if the FFR is 5%, they'll charge 9%, and w ZIRP, they are still getting roughly similar spreads of about 3%), but might there be some impact on the dynamics of asset income?

Like there are two ways to make money off assets, interest or appreciation. when interest income is in the 10% range then asset appreciation becomes much less important (very hard for assets to appreciate at 10% plus rates for very long, after all someone has to pay that increased fixed cost in the price pipeline) vs the reverse situation at zirp where nobody is getting any interest income and the only gains come from appreciation?

So might this playout in the ecosystem as there being much less cushion on Bank balance sheets? Asset depreciation is less ruinous when you're getting 10% income flows on the asset?

Auburn Parks said...

Or maybe to frame it in a different way. Would there be any appreciable differences to this QE - bank dynamic if the Fed was paying 8% IOR instead of .25% but they still executed the QE asset swap?

Auburn Parks said...

Actually, why would there be any difference, all the higher IOR would do is pump even more reserves onto the banks balance sheets even faster. Instead of that $100 billion a year in Fed "profits" going to the Tsy account, they and many many more reserves would instead be going to the banks. So that might actually accelerate this whole thing (assuming that your dynamic is the operative one).

Matthew Franko said...

they might not be able to pay 8% IOR without "bankrupting" themselves as the Fed has to receive portfolio income in order to operate... if they are locked in to longer term USTs then they couldnt raise any faster than the Treasury yield curve would be seen to do...


"we are not personally involved in capital management and banking. "

We can always be free to comment on those institutions from an academic perspective... we are either correct or incorrect... I dont see the people there coming up with anything that looks correct imo...

Auburn Parks said...

well sure, from the POV of actual political options the whole question is moot, but what about the question in and of itself. Assume away the Fed operating profit paradigm that they are currently under. After all we are exploring the merits of your hypothesis not the political environment of what may or may not be possible. So lets keep the conversation on that level, becaausee if we bring in political realities then we may as not talk about anything at all since none of our ideas or concepts are currently politically viable.

Im not saying we dont have the right or the ability to comment on those areas, we do and we are commenting on it right now. but what we dont have is a deep first hand knowledge of the actual mechanics in practice. It was in this sense that I wish we had more knowedgable\experienced banking people to help fill in our ignorance gaps.

Matt Franko said...

I think we should bring in the political realities in order to be able to make predictive statements that turn out to be accurate...

This is what I am attempting to do here with my statement that Canada will avoid a GFC type crisis...

This how you obtain technical credibility... MMT doesn't have a lot of technical credibility ... all they have is a competing concept which this "competing concept" approach is NOT working ...

Matt Franko said...

"knowedgable\experienced banking people"

I know people there and it is very compartmented... I don't think they have people there looking at their industry in a macro systemic way .... maybe there are people at the ABA but I doubt at the individual depository institutions...

snowball1205 said...

When Canada’s social program benefits like universal health care are considered, Canada’s debt to income levels are below the United States. This is partly due to Canadians paying off their mortgages faster than their U.S. counterparts. Statistics Canada says 43% of Canada’s homeowner households are mortgage-free. Additionally, most Canadians are cautious about using credit, and this is reflected in Canadians being among the world’s heaviest debit card users. Similar to US households, Canadians have recently begun paring down their debts and deleveraging across the board.

Moreover, the household debt level cited by the IMF is measured compered to disposable income.That does not portend well for consumption (household demand) because households are up to their eyeballs. However, in terms of stability it DOES NOT take into account assets. Measured in relation to assets or net worth, the household debt level is falling, and has been since the beginning of 2010. Asset values have increased more than total debt between 2010 and 2015 (6.9% per year, on average, compared with 4.8%). Based on this measurement, the debt ratio of Canadian households was not significantly higher in 2015 than in 1990 (16.9% in 2015, compared with 16.7% in 1990). The same observation can be made if we measure the household debt ratio relative to net worth.