February 2, 2010

Paul Krugman writes an op-ed in the New York Times, Good and Boring, lauding the resilience of Canadian banks:

Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans.

I suggest that Dr. Krugman has selected features of Canada’s system to further his domestic political arguments. The IMF has published suggestions that a critical factor is the stable deposit base of Canadian banks – which, I believe, is related to their national scope and oligopolistic position. Another major factor has been the banks’ control over the mortgage market – limited competition (no GSE’s here in Canada!) has allowed them to extract rents from hapless Canadian mortgagees, leaving much less necessity of reaching for yield. The sole Canadian bank that did fail during the crisis, Dundee Bank, failed because its lack of mortgage distribution channels encouraged it to go out on a limb provided by ABCP.

Paul Volcker testified to the Senate banking committee today:

Given strong legislative direction, bank supervisors should be able to appraise the nature of those trading activities and contain excesses. An analysis of volume relative to customer relationships and of the relative volatility of gains and losses would go a long way toward informing such judgments. For instance, patterns of exceptionally large gains and losses over a period of time in the “trading book” should raise an examiner’s eyebrows. Persisting over time, the result should be not just raised eyebrows but substantially raised capital requirements.

This is much more in line with my thinking than a flat prohibition, which will be subject to interpretation.

More generally, proprietary trading activity should not be able to profit from knowledge of customer trades.

That’s what the SEC’s supposed to be worrying about.

Mr. Volcker also noted that he had attached an essay to his official testimony, but I can’t find it!

A relatively directionless day for Canadian preferred shares, with PerpetualDiscounts losing 5bp and FixedResets gaining 1bp on moderate volume.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 3.13 % 3.83 % 28,844 20.03 1 2.0869 % 1,766.8
FixedFloater 5.62 % 3.69 % 35,458 19.36 1 0.5714 % 2,814.6
Floater 2.10 % 1.76 % 39,883 23.13 4 0.6847 % 2,189.2
OpRet 4.84 % -4.75 % 105,842 0.09 13 0.0797 % 2,322.0
SplitShare 6.34 % 3.81 % 146,621 0.08 2 -0.3917 % 2,120.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0797 % 2,123.3
Perpetual-Premium 5.74 % 5.57 % 74,172 2.21 7 0.0564 % 1,892.1
Perpetual-Discount 5.79 % 5.82 % 170,031 14.16 69 -0.0541 % 1,822.4
FixedReset 5.43 % 3.63 % 317,616 3.80 42 0.0122 % 2,178.2
Performance Highlights
Issue Index Change Notes
BMO.PR.H Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 22.59
Evaluated at bid price : 23.28
Bid-YTW : 5.67 %
CIU.PR.A Perpetual-Discount -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 20.99
Evaluated at bid price : 20.99
Bid-YTW : 5.58 %
RY.PR.A Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 20.02
Evaluated at bid price : 20.02
Bid-YTW : 5.57 %
TRI.PR.B Floater 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 21.82
Evaluated at bid price : 22.06
Bid-YTW : 1.76 %
BAM.PR.B Floater 1.29 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 15.70
Evaluated at bid price : 15.70
Bid-YTW : 2.52 %
BAM.PR.E Ratchet 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 25.00
Evaluated at bid price : 18.10
Bid-YTW : 3.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
GWO.PR.E OpRet 199,230 Nesbitt crossed blocks of 170,000 and 25,000 shares, both at 25.61.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-04-30
Maturity Price : 25.25
Evaluated at bid price : 25.65
Bid-YTW : -0.21 %
PWF.PR.I Perpetual-Discount 113,800 RBC crossed 60,100 at 24.93, then Desjardins crossed 50,000 at 24.95.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 24.51
Evaluated at bid price : 24.85
Bid-YTW : 6.07 %
RY.PR.A Perpetual-Discount 61,901 Nesbitt crossed 34,000 at 20.24.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 20.02
Evaluated at bid price : 20.02
Bid-YTW : 5.57 %
RY.PR.T FixedReset 49,200 RBC crossed 18,000 at 27.70.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.71
Bid-YTW : 3.64 %
PWF.PR.H Perpetual-Discount 48,514 Nesbitt crossed 25,000 at 24.10 and bought 22,100 from Desjardins at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-02-02
Maturity Price : 23.77
Evaluated at bid price : 24.07
Bid-YTW : 6.00 %
TRP.PR.A FixedReset 33,352 Nesbitt crossed 17,000 at 26.02.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-30
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.79 %
There were 35 other index-included issues trading in excess of 10,000 shares.

3 Responses to “February 2, 2010”

  1. JP Koning says:

    I’d agree with you that Krugman is cherry picking Canada’s financial system for examples to fit his arguments.

    But no Canadian GSEs? I see two major ones – the CMHC and the CHT (Canadian Housing Trust).

  2. jiHymas says:

    I stand corrected.

    CMHC has CAD 408-billion in guarantees ($204-billion of which is held directly) which includes Canada Housing Trust (a VIE set up by CMHC). This compares with about USD 5.4-trillion in Fannie/Freddie guarantees.

    However, the spread between the 5-year Canada and consumer mortgages is about 300bp, while the spread between 10-year Treasuries and US consumer mortgages is about 120bp (normally about 170bp).

    So the presence of Canadian GSEs hasn’t resulted in any lessening of the rent-extraction process, which is what I had in mind (although not what I said).

  3. JP Koning says:

    I got a comment out of you without having to say what a great blog this is!

    But seriously, great blog. I’m just splitting hairs about the GSEs.

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