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Does Canada Deserve Gold? The Financial Crisis: Canada and the US Compared

Does Canada Deserve Gold? The Financial Crisis: Canada and the US Compared. The Financial Crisis: Canadian and US Experience Compared Why Did Canada’s Mortgage Market Experience Differ? Why Did Canada’s Financial Institutions Do Better?.

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Does Canada Deserve Gold? The Financial Crisis: Canada and the US Compared

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  1. Does Canada Deserve Gold?The Financial Crisis: Canada and the US Compared

  2. The Financial Crisis: Canadian and US Experience Compared • Why Did Canada’s Mortgage Market Experience Differ? • Why Did Canada’s Financial Institutions Do Better?

  3. The Financial Crisis: Canadian and US Experience Compared

  4. GDP in recent recessions(peak to trough) Canada US 1982 -2.9 -1.9 1991 -2.1 -0.2 2007 -3.7 -3.8

  5. ABCP Crisis August 2007 Collapse of ABCP market • $34 billion of non-bank sponsored ABCP frozen • $80 billion of bank sponsored ABCP supported by sponsors

  6. Impact on banks Change in market cap December 2006 to December 2008 Canada (Big 6) -44% US 10 largest -61% US 10 largest -67% (adjusted for mergers)

  7. Support measures for banks • Increased size and frequency of Purchase and Resale Agreements (PRAs) with banks • New credit facilities including a term PRA and a Term Loan Facility for participants in the high value payments system • Broadened range of collateral that included asset-backed commercial paper and non-mortgage holdings on a temporary basis • The Canadian Lenders Assurance Program to insure new issues of unsecured wholesale debt by financial institutions up to 120% of wholesale debt or 20% of deposits on an optional basis • Purchase of up to $75 billion of insured mortgages by Canada Mortgage and Housing Corporation (a government institution).

  8. The Financial Crisis: Canadian and US Experience Compared • Why Did Canada’s Mortgage Market Experience Differ?

  9. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy

  10. Was there a difference in monetary policy?Fed Funds (US) vs Overnight Rate (Canada)

  11. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy • Quality of Mortgages • Loan-to value ratios

  12. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy • Quality of Mortgages • Loan-to value ratios • Tax treatment

  13. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy • Quality of Mortgages • Loan-to value ratios • Tax treatment • Market practices

  14. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy • Quality of Mortgages • Loan-to value ratios • Tax treatment • Market practices • Default Experience • Recourse

  15. Default conditions under recourse and non recourse Non Recourse: Default when H < M Only if PV (H) - PV(R) - C - Q > 0 Recourse Default when H < M Only if PV (P) - PV(R) - C - Q – A > 0 H = house value, M = mortgage value, R = rental value of house, C = cost of moving, Q = option value of investment in house, A = other assets

  16. Why Did Canada’s Mortgage Market Experience Differ? • Monetary Policy • Quality of Mortgages • Loan-to value ratios • Tax treatment • Market practices • Default Experience • Recourse • Mortgage Insurance

  17. Why Did Canada’s Mortgage Market Experience Differ? Conclusion • Less encouragement to mortgage finance • Recourse makes borrowers less likely to default • High LTV loans likely to be insured – must be if held by financial institutions • 90% of securitizations are insured • 70% of insurance provided by government agency and rest has government guarantee

  18. The Financial Crisis: Canadian and US Experience Compared • Why Did Canada’s Mortgage Market Experience Differ? • Why Did Canada’s Financial Institutions Do Better?

  19. Why Did Canada’s Financial Institutions Do Better? • Nature of business

  20. Why Did Canada’s Financial Institutions Do Better? Nature of business • Canadian mortgage market

  21. Why Did Canada’s Financial Institutions Do Better? Nature of business • Canadian mortgage market • Reliance on wholesale funds

  22. Reliance on non-depository funding

  23. Why Did Canada’s Financial Institutions Do Better? Nature of business Structure of investment banking

  24. Why Did Canada’s Financial Institutions Do Better? • Nature of business • Structure of investment banking • Regulation

  25. Why Did Canada’s Financial Institutions Do Better? Regulation Canadian liquidity facilities

  26. Why Did Canada’s Financial Institutions Do Better? Regulation Canadian liquidity facilities Capital requirements and leverage ratios

  27. The Financial Crisis: The Canadian Experience Conclusions

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