Canada's banks: Admired worldwide for their management - and cash

In My Financial Career, Canadian humourist Stephen Leacock famously recalled how nervous Canada's banks made him.

"When I go into a bank I get rattled. The clerks rattle me; the wickets rattle me; the sight of the money rattles me; everything rattles me. The moment I cross the threshold of a bank, I become an irresponsible idiot."

Ninety-nine years later, it's the banks that have been rattled, although not so much the ones that once unnerved Leacock. Even the president of the United States has high praise for Canada's banks.

"In the midst of the enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system and the economy in ways that we haven't always been," Barack Obama told CBC News. 

Canada has just 21 domestic banks. More than that, 25, folded in the United States last year. Fourteen U.S. federally insured institutions have already failed this year. While most of Canada's big six banks' profits are down, they're still making money.

U.S. banks lost $26.2 billion in the last three months of 2008, the first quarterly deficit in 18 years, as the housing and credit crises escalated.

Rising losses on loans and eroding values of assets "overwhelmed" banks' revenue in the fourth quarter, the U.S. Federal Deposit Insurance Corporation said.

'This plan will require significant resources from the federal government —  probably more than we've already set aside.' — U.S. President Barack Obama

The FDIC believes U.S. bank failures will cost the deposit insurance fund more than $40 billion over the next four years. No Canadian bank has received any cash from government (although Ottawa has extended its program to buy mortgages from the banks at a faster rate than they could sell them on the open market).

The FDIC says 252 banks were in trouble at the end of 2008, up from 171 in the third quarter. Late last year, the World Economic Forum rated the U.S. behind Namibia on its list of sound banking systems. Canada was number 1.

Obama anticipates a new $750 billion bank bailout this year, more than doubling the direct infusion of taxpayer money into the financial sector. In a recent address to the U.S. Congress, he admitted "this plan will require significant resources from the federal government — and, yes, probably more than we've already set aside."

Hopes American consumers might eventually spend their way out of this recession were dealt another blow by figures from the banks. Americans are SAVING more. Total bank deposits increased in the October-December period by $307.9 billion, or 3.5 per cent — the largest rise in 10 years.

The Obama administration has proposed more than doubling the $700 billion bank bailout passed by Congress last October that has provided aid to Citigroup Inc., Bank of America Corp. and hundreds more financial institutions of all sizes.

'British banks are best owned and managed commercially and not by the government.' — Alistair Darling, U.K. finance minister

Then there's the thrifts, the savings and mortgage providers made famous in the film It's a Wonderful Life. But there's nothing wonderful about them in the latest quarter. The Office of Thrift Supervision announced a loss of $3 billion US.

Two of the biggest bank failures in US history occurred last year and involved thrifts; IndyMac collapsed in July and cost the federal deposit insurance fund $10.7 billion and Washington Mutual fell in September, with around $307 billion in assets, the biggest U.S. failure ever.

U.S. banks and thrifts in the third quarter suffered a 94 per cent drop in profits to $1.7 billion US, from $27 billion US in the same period in 2007. The institutions wrote off nearly $28 billion US in loans as uncollectible during the July-September quarter.

There are about 8,000 banks operating in the U.S. and when they get in trouble, they look to the FDIC to help bail them out. It can help them restructure, or sell what it can, but essentially it takes responsibility for bad assets that no one else wants. While nationalizing banks is tremendously controversial (a "public-private investment fund" is the administration's preferred name) in the U.S., that's basically what happens every time the FDIC gets involved.

But there are some banks the FDIC doesn't have anywhere near enough cash to help out.

So, the U.S. government crept even deeper into the banking business last month with its third rescue attempt at Citigroup. It reached a deal that gives the government a 36 per cent stake in the struggling bank. It also extended $45 billion US to Bank of America. But it all pales compared to what the U.S. government has done for American International Group. AIG isn't a bank as such — but it insures them. Washington feels its failure would be more catastrophic than a major bank failure and has made about $180 billion US available to AIG, but its losses keep coming. This week, it posted a $62 billion quarterly loss. Quarterly loss.

This creeping nationalization isn't confined to the United States.

In Britain, the government has taken an 84 per cent control of the Royal Bank of Scotland, guaranteed about $62 billion US in toxic assets and strongly suggested the former chief executive give up his 650,000-pound-a-year pension. 

As well, the U.K. government developed an Asset Protection Scheme to insure eligible banks against huge losses, possibly putting the government on the hook for more than $712 billion US worth of risky assets.

London also nationalized the banks Northern Rock and Bradford & Bingley last year, but does not wish to be in the banking business.

"British banks are best owned and managed commercially and not by the government," said the Finance Minister Alistair Darling. "The future of the U.K. as a financial centre and the future of the economy and thousands of jobs depend on being able to run banks commercially."

'I bank no more. I keep my money in cash in my trousers pocket and my savings in silver dollars in a sock.' — Stephen Leacock, humourist

HSBC, Europe's largest bank by market value, reported a 70 per cent drop in 2008 profits. It cut 6,100 jobs as it licks its wounds from losing about $14 billion.

Three of Iceland's banks are in receivership, Germany's Dresdner bank has just posted a $4.9 billion US loss, and Hungary's prime minister says eastern and central European banks need a $291 billion US aid package to restructure their foreign-currency debt, or there could be dire consequences. 

"We should not allow that a new Iron Curtain should be set up and divide Europe," Ferenc Gyurcsany told reporters. "In the beginning of the '90s, we reunified Europe; now the challenge is whether we will be able to reunify Europe financially." The European Union rejected the plea for aid.

Japan's major banks didn't suffer much subprime damage — but their clients did. As a result, the banks have taken heavy losses as share prices fall.

"I bank no more," Stephen Leacock wrote in 1910. "I keep my money in cash in my trousers pocket and my savings in silver dollars in a sock."

In 2009, much of the world might think that was pretty good advice. Although there are many, many worse places to have money than rattling around in a Canadian bank.