Canada weathers U.S. troubles with a better position: observers
By David Friend, The Canadian Press
TORONTO - Canada is weathering the financial storm battering Wall Street, and it's in a far better position than the United States, because Canadian banks have played it safe and remained relatively insulated from the most treacherous factors.
Industry observers suggested Monday that while the Canadian economy isn't exactly shining these days, it's doing all right considering the troubles brewing in the U.S. financial system.
"Canada's having a bit of an economic slowdown but there's no real crisis - there's no real panic," said Julie Brough, vice-president of wealth management at Morgan, Meighen and Associates.
In the United States "you have this problem in the financial system and in the housing market, while we don't have either of those problems," she added.
On Monday, Wall Street was rattled by a weekend announcement that Lehman Brothers Holdings Inc., the fourth-largest investment bank in the U.S., had filed for bankruptcy protection. Further jitters were caused by the US$50-billion takeover of struggling Merrill Lynch by Bank of America.
Both announcements could've sent Canadian financial stocks into a freefall, but the subprime crisis that has punished American financial institutions was only a blip on the radar of local banks.
Canadian financial institutions have remained in a relatively safe zone mostly because there is a different banking structure in Canada, said Andrew Martyn, a financial stock specialist at Davis Rea Ltd.
In the U.S., there are countless banks clamouring for more business, and historically they were more than willing to give you an amazing deal in order to get it.
In Canada, banks are considered an oligopoly which means they "tend to be a little more disciplined in pricing" when it comes to mortgages, he said.
Less competition means that fewer Canadian banks were willing to hand over bundles of cash to families who probably weren't able to pay it back.
"Canada tends to be conservative," Martyn said.
"The top five banks don't have to take massive risks on their books because why should they - it's essentially a localized club."
However, Canadian banks aren't exactly immune - they've already been hammered by billions of dollars in writedowns related to the ongoing credit crisis, and have been caught up in deep pessimism after Lehman Brothers filed for bankruptcy protection.
The U.S. financial sector on Wall Street has been battered for more than a year by its link to the troubled U.S. housing market, specifically in promoting and selling so-called structured financial products that were based on subprime mortgages.
Overall, the financial services index on New York's Dow Jones has fallen more than 32 per cent since the start of the year, while the mortgage finance index is down 77 per cent.
In Canada, financial stocks felt much lesser pain and have fallen just over 12 per cent since the start of January, partly because the Canadian banks are better capitalized and dodged major exposure to troubled U.S. subprime mortgages, which triggered the collapse just over a year ago.
In the U.S., the hardest hit financial institution Bear Stearns nearly collapsed before it sold, while the CIBC (TSX:CM), Canada's worst off bank, has booked writedowns worth $7.7 billion before taxes and is still standing.
"No-one is suggesting that the instability in the financial system in any way emanates from Canada," Prime Minister Stephen Harper said on Monday.
"In fact, Canada has had a remarkable record through all of this, not just the solvency of our financial institutions but the integrity of our financial regulation."
On Monday, the TSX financial sector was down 1.9 per cent, CIBC (TSX:CM) the biggest loser with its shares down nearly five per cent at $61.11.
The drop in shares of CIBC, the worst-suffering of the banks hit by exposure to the U.S. subprime crisis, came despite a statement that it doesn't have "large exposures" to Lehman Brothers.
The Bank of Canada issued a brief statement saying it is closely monitoring global developments and welcomes the Federal Reserve's actions to support U.S. financial markets.
The bank did not disclose specific actions in Canada but said it "will provide liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets."
