How Canadian Banks Survived the Subprime Meltdown (Essay Sample)

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How Canadian Banks Survived the Subprime Meltdown
Introduction
In the second half of the 20th century, the economic crisis was associated with the historical dynamics and the capitalist finance contradiction. Compared to the crisis of the seventies, this crisis did not emanate from profitability crisis due to production. It was characterized by inflation that impacted negatively on those who had financial assets. It destabilized the role of the dollar currency. The innovation in finance must have deepened due to the social deepening of capitalism during this period (Robert 17). Risks related to the integration of investment, trade and production was influenced by the increase in the securitized financial market coupled with the American finances being internationalized.
The global economy was so complex that the risk insurance provided was without capital accumulation that would have had a little restriction. Finance infiltrated into the society thus integrating savers, debtors, and investors. The integration of the investors was through mortgage for private housing, pensions that were private and consumer credit. Also, the witnessed chain of financial crises was due to volatile competition for the global finance. The containment of the predicament required the involvement of states in the attempt of providing the correct antibiotic or remedy (Tony 3).
Goals or objectives
Background
During the 2007/2008 financial crisis, the Canadian banks weathered the storm in comparison to other banks in other countries. It left more questions than answers as financial experts tried to dissect into the operations of the Canadian markets. The government did not bail out these banks and ironically the banks still made profits during the crisis. It is for this reason that this essay seeks to not only identify Canadian banking aspects but also validate the aspects or reasons that significantly contributed to the stability of the banks during the crisis (Tony 3).
The origin of the crisis is associated with the United States after which it spread to other nations. Canada had endured far less pain during the economic crisis than their neighbors such as the United States. It approximates that six largest banks in the country had lost close to $11.7 billion which was relatively insignificant in comparison to those experienced in the international arena. Banks such as Citigroup had written off subprime losses that amounted roughly close to $ 39billion of which $ 20 billion were incurred in the previous years before the crisis (Robert 17).
The US real estate industry had exposed Canada to losses of especially credits. Moreover, these write-downs at the numerous big lenders affected the Canadian banks due to lack of liquidity in the international market arena. All these were associated with the poor crediting of mortgages in the US. Admittedly, Canadian ability to dodge the financial crisis perplexed since they had depended to some extent on the US in terms of trade and investments due to the interconnection of the financial market (Vikram 3).
One of the factors that contributed to the financial crisis is the collapse of the Lehman Brothers. The huge amount of taxpayers finance was used to bail out the situation. Besides, the effects were still felt five years after the crisis in that the GDP of many rich countries were still low per (Robert 16). The financiers especially the Anglo-Saxon who claimed to have done away with the risks had lost track. The central bankers and other regulators, on the other hand, accommodated the folly. The financiers faulted in that the year before the crisis in that there were series of irresponsible and irrational lending of mortgage in America. Loans were provided even to those creditors with a poor history of payment. The fragility of the financial systems must have been illuminated and exposed by the series of reactions because the American housing system was turned. Moreover, investors were not guaranteed protection (Tony 5).
The other factor was the failure of the regulators to anticipate and keep economic imbalance in control besides the lack of proper and appropriate oversight of the financial institutions. They had let the Lehman Brothers go bankrupt. The bankruptcy of the Lehman Brother caused fear and panic in the market. Trust on lending had subsided exponentially (Tony 4).
Central banks especially the European Central Bank did not put limitations on the periphery by assuming that current account imbalances were insignificant in the monetary union. Central bankers did little to remedy the situation that was characterized by the increase in the housing and credit. They would have combated this by the increasing the interest rates or by lowering the maximum loans in the value of the ratio to the mortgages. Moreover, the central bank had the leverage of demanding banks to save more capital (Kirkham 4).
In general all these factors emanated from poor modeling of situations that were unable to comprehend not only the perverse and the predictable but also the implications of the structures of incentives that had been created. The models were faced the challenge of understanding the economics behind securitization, systematic risks, and the inability to provide estimates of small events based on probability (Tony 5).
Implications of the crisis
Methodology
Source of data
The data that was used in the project was obtained from the five major top banks of Canada as well as other fifteen banks in the country. The five major banks were: the Royal Bank of Canada, the Bank of Montreal, the Bank of Nova Scotia, Toronto-Dominion, and Canadian Imperial Bank of Commerce. The other fifteen banks were Citizens Bank of Canada, B2B Bank, Bridgewater Bank, CFF Bank, Continental Bank of Canada, CS Alterna Bank, Canadian Tire Bank, Canadian Western Bank, National Bank of Canada, Pacific and Western Bank of Canada, Manulife Bank of Canada, President's Choice Bank, Rogers Bank, Laurentian Bank of Canada, and First Nations Bank of Canada. The other sources of data were retrieved from the United States Banks. The origin of the financial crisis was perceived to have originated from the US. The banks in the US were: the Bank of America, the Citigroup Bank, the Bank of New York Mellon, Wells Fargo Bank, and JPMorgan Chase Bank (Jordan and Lategan 87).
The type of data used
The main method of data collection employed was the use of interviews and questionnaire. The questionnaire contained both the open-ended questions and closed-ended questions. The open-ended questions were required in situations that required further and deeper insights of information under investigation. On the other hand, the closed-ended questionnaires were specifically oriented to certain banking phenomenon. The illuminated methods are qualitative methods of data collection that encompass interaction with individuals or group of individuals directly. The setbacks of these methods are that they are time-consuming and very expensive. However, they were chosen and preferred to other methods since the qualitative approach of data collection is far much richer and provide deeper insights of the phenomenon under investigation (Jordaan and Lategan 87).
Several native students with financial education background were recruited for the sole purpose of conducting these interviews. Those who were to be interviewed were the CEOs and at least two members of the board of directors of all the banking industries illuminated above. Moreover, before the interviews were conducted, those who were interviewed were contacted and appointments made. They were made after consenting to participate in the research (Jordaan and Lategan 87).
Data quality control
To ascertain that the data the interviewers provided to be authentic, they were provided with the recording gadgets that were to be used to verify the authenticity of their interviews. Falsification of data is tantamount to data being skewed hence deviating from the true reflection that is intended to be brought in the light. The collected data were then sorted into an orderly pattern to provide meaningful insights of the financial crisis (Jordaan, and Lategan 87)
Analysis
The method of analyzing qualitative data was the use of qualitative data analysis (QDA).
Finding of the analysis
There are numerous factors that are perceived to have contributed to Canadian stability. One of these factors is the existence of the best prudential regulator of the bank. OSFI as the national regulator that was headed by Julie Dickson was mandated to prudential regulation. The OSFI alongside banks works aggressively in a flexible manner that enables anticipation, prediction and mitigation of risks. It is tasked with not only providing guidance and interpreting the guidance but also with to ensuring that there is compliance with the guidance. OSFI approach of supervision of the internal practices of the banks played a major role in their success. In Canada, banks are expected to run the institutions right while in other nations such as the US, the institutions are embedded with the responsibility of meeting the country's rules. Payment oversights, settlement of systems, lender resort functions, and monetary policies are responsibilities of the Canadian banks (Dave 4).
The second factor to the stability is related to the ratios of capital assets. The capital of the Canadian banks was relatively lower in comparison to other national banks in the US before the financial crisis. However, through the OSFI they were expected to be adequately capitalized. The third factor is the imposition of the leverage caps. Of all the G7 countries, only Canada and the US levy leverage caps on their banks. OSFI in its definition of assets incorporated a couple of off-balance sheets which included the derivation of credit (Tony 4).
The...