Bailouts and TFSAs: revisiting the credit crisis

Banks aren't the only ones who suffered

In 2008, when the credit crisis hit the news (and just before the Tax Free Savings Account (TFSA) was introduced), banks around the globe had some serious problems.

The popular belief today is Canada was an exception, but if you look at the facts, that really was not the case.

According to Bloomberg, Sprott Asset Management LP’s Bank Equity Leverage Calculations, Canada’s top five banks at the time were actually more leveraged than the top 10 banks in the U.S., with a leverage ratio of 37:1.

In simple terms what this means is if the assets held by Canadian banks had fallen in value by even three per cent, their tangible common equity would have been wiped out. So when you consider that their holdings included things like stocks, equity in U.S. financial institutions, and sub-prime mortgages, one would have to wonder what their balance sheets would have looked like at the time had the government not decided to relax the mark to market rules that would have required them to declare all of their assets at market value.

Most analysts agree that was a good decision on the part of the government given the severity of the crisis.

Canada’s banks also received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby CMHC purchased insured mortgages from Canadian banks. Next the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Also, one Canadian bank received assistance from the Canada Pension Plan through the purchase of $4 billion in mortgages prior to the IMPP program, for a total government expenditure of $114 billion — quite a sum considering the entire tangible common equity of the Canadian banks in 2008 was only $68 billion.

But that wasn’t it for the bailout. Governments around the globe also slashed interest rates to historic levels. Canada’s bank rate went from 4.75% in November of 2007 to 0.50% by April of 2009. How did this help them? By dramatically increasing the spread between what they could borrow money for, and what they could lend it out for.

For example: Canadian banks today can effectively borrow money from you by enticing you to deposit your money into a bank account. In the case of a TFSA bank account they might pay you 1.5%, for example. At the same time they can loan money out at a much higher rate, with posted rates on 5-year mortgages at 5.44%, for example.

The problem is: 1.5% in your TFSA isn’t doing you much good. But you can do something about it.

To find out more, join us Feb. 23 at 4:30 p.m. at the Qualicum Beach Civic Centre for The Tax-Free Savings Account – it’s More than a Bank Account.

To register, call 250-594-1100, or e-mail paige.renouf@raymondjames.ca, or register online at www.jimgrant.ca.

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