Canadian Banks Are Going Bankrupt
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The economy is slowing down, the FED is cutting rate like a lumberjack with his axe and the whole market is going crazy. If we go further into our analysis, we find out that Arab countries are buying notes from American banks, that global warming will be a real pain in the future and that we are ultimately going to run out of oil. You better go to Wal Mart and buy their new nuclear shelf before it’s too late! This is just another April’s fool; Canadian banks are not going bankrupt. |
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However, I did not invent what I just wrote; I heard it from many clients. They are scared of the market and now, a few of them are asking what is going to happen to my money if the bank goes bankrupt? Why are you so concerned about it? I always reply. And here we go with the cataclysmic discussion about Satan coming out of the Bear Sterns’ building smoking a cigar with the CEO of JP Morgan!
So tell me why Canadians are not going bankrupt then!
First things first, in order to go bankrupt, you need to spend more than you earn and not be able to repay your financial obligations. While the financial industry took a big hit since last fall, the major six banks still made profit last trimester. They still operate viable activities and still paying back their bills.
Second, Canadian laws were made so banks would definitely not collapse. Nobody wants to see people jumping off a building anymore. The legal environment is protecting the banks from major crashes. What would happen if we all made a mistake and a Canadian bank still goes down the toilet? Most likely the government would allow a bank fusion between two entities in order to protect the population.
On the other side, if we would let a bank goes bankrupt, it would create much more damage than we think. Before losing everything, the bank would call back all its loans in order to pay back their financial obligation. Can you imagine receiving a call from a loan officer asking for the full payment of your mortgage by the end of the week? This would engage several people to declare bankruptcy as well. A huge amount of people would lose their job at the same time and the government just couldn’t pay employment insurance for everybody. This is why they would allow such fusion.
Then again, we are far away from this sad story. Does anybody remember 2002 with Worldcom and Enron declaring that they were fooling the market for years? We didn’t have time to recuperate from the Techno bubble that we were stuck with another crisis. Several companies were going bankrupt and the whole market was about to lose confidence in all financial statements they saw.
However, starting in 2003, the market went up and investors were making big bucks for a good four years.
While all this happened only six years ago, people tend to think that this time, it is different. That this time, we are really going down and the market will never come back. I bet you that it was the same people who were losing confidence in the market back in 2002…
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April 1st, 2008 at 11:28 am
Canadian banks can’t go bankrupt unless Canadians themselves go bankrupt. That’s because banks make their money lending to other people who have money in banks. Since a bank lends many times more than they have on deposit they would really have to be greedy and incompetent to fail that badly and make so many bad loans. Hmmm, maybe it’s not so impossible
It could be possible for one or two banks to fail but not all of the banks at the same time because all the money in Canada is held in banks. If the banks failed then it means that foreigners have bought Canada.
April 1st, 2008 at 9:45 pm
Will even mergers save two flagging entities?
I mean isnt it natural, to think that even liabilities increase when you acquire a non performing unit. In times of recession, who acquires liabilities?
Unless government forces your hand to, but then will it not be detrimental to the economy at large?
Just my thoughts though!
I blog at jumpup.wordpress.com on global economics, Indian economics and investments
April 1st, 2008 at 10:08 pm
Soham;
The government could let another bank or companies in good financial standing (like Power Corporation for example) to buy a bank that has major financial trouble.
However, banks are still making profit for now so there are absolutely no worries on that side
April 2nd, 2008 at 9:26 am
I think that banks normally fail when they don’t have sufficient liquidity to conduct business, not when they are worth less than zero (i.e., when their liabilities are greater than their assets). I think that as bank assets become more and more risky in the form of bad loans or investments then they sell off those assets to convert into less risky assets. They have to do this well before the value of the assets approaches a bankruptcy low level.
Liabilities to a bank are its deposits and some short term loans from other banks or the govt. I don’t even know what other liabilities a bank might have … can’t imagine it needs to borrow any other money.
No private company would ever buy a bank that was worth a negative amount. So if a bank didn’t have enough assets to cover deposits then that bank would be irreversibly dead. Usually, however, I think that banks fail because their assets are too risky and incoming cash flow is threatened to the point that the bank is having trouble operating. Then the bank is still worth a lot except it’s all tied up. At that point all you need is another bank or company with enough cash to keep the ailing bank operating to buy it (at a big discount of course).
April 2nd, 2008 at 8:30 pm
CR;
You just made a good summary of how banks manage their business. Especially in Canada, there are rules in place so that banks can’t turn into another Bear Stearn. This is a great proof that regulation might slow down productivity but will surely ensure a more stable economic system!
April 5th, 2008 at 9:09 am
[...] The Financial Blogger says that the big Canadian Banks are going out of business. [...]
April 7th, 2008 at 10:56 am
[...] Financial Blogger thinks Canadian Banks are Going Bankrupt!! Not a good [...]
April 7th, 2008 at 2:52 pm
As a recent investor in RY, I must admit your article’s title got my attention.
I am very impressed at how well run the Canadian banks are.
Best Wishes,
D4L
August 10th, 2008 at 7:33 pm
A list of US banks that may fail and go bankrupt.
http://bankruptbanks.blogspot.com/
August 23rd, 2008 at 11:24 am
Here’s the latest financial scandal…
“Losses at Dresdner Kleinwort, the investment banking arm of German issuer Allianz, deepend in the second quarter on the back of a $1.2 billion trading hit, which comes ahead of the separation of the business from Dresdner Bank and a possible sale. The US operation, formerly headed by Craig Schiffer, posted a second quarter operating loss of $820 million, adding to a $660 million loss in the first quarter.”