Risk in Canadian Financial System

In a previous post on Canadian Financial Risk, I reported on commentator Bob Chapman’s assessment. He had said that Canada has a very solvent financial system; has always been very conservative; and that while the US and Europe are headed for a significant crisis, the magnitude of its effect on Canada should be about half of what they will experience. I expressed doubt that Canada’s isolation is really guaranteed.

Another financial commentator outside the mainstream, Zero Hedge, has reiterated his warning about the Canadian financial system. He seized upon last week’s Barret Capital incident as a case in point: the Investment Industry Regulatory Organization of Canada has investigated the Toronto firm and partially barred it from trading. (The Toronto Star story of Tue Jan 17, for example, gives details of the allegations and outlines the results of the first hearing.)

Readers have responded caustically, pointing out the systemic implications, as did Zero Hedge author Tyler Durden. He said the story comes “courtesy of sleep Canada whose ‘banks are all fine’ ” (17 Jan 2012) and goes on to explain how the incident “fits into the scenario analysis conducted in the MF Global aftermath” – his own analysis, that is, wherein he states: “Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant, yet which have all the same if not far greater risk factors as MF Global.” (07 Dec 2011).

I say he reiterated his warning, because going back to 18 Aug 2011, Zero Hedge set out a chart showing that 6 Canadian banks are on the list of all those having a tangible common equity of 4.15% or less.  [TCE: “A ratio used to determine how much losses a bank can take before shareholder equity is wiped out.” ~Investopedia.com.]. Some readers protest that he didn’t use fair or complete measures; others rejoin that the CDN banks’ derivatives exposures are excessive and risky.

I discuss implications next post.

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