Eerie Silence on Canada's New Banking Regulations

Every once in awhile, it really hits home just how little of reality is reflected in Canada's media. Toronto's business district is buzzing about new regulations handed down by the OSFI that will severely restrict bank lending in spite of our institutions' record Tier 1 capital levels. Obviously, this will have sweeping implications for the Canadian economy. In the papers? Almost nothing. A Google News search for OSFI keywords reveals exactly one semi-intelligible article, via the National Post. Here is the key concept:

"In other words, mortgage assets that are part of an NHA securitization and which in the past were off-balance sheet, will make their way onto the balance sheet of the banks -- a move that boosts their assets and by definition, their ACM.

"This creates a nightmare for regulated entities as it blows up their assets to capital multiple. Every issuer has an ACM limit that they try to operate well below but you rarely hear about," the academic added.

Given that outcome, the academic wondered why no OSFI-regulated publicly traded financial institution had commented on how this proposed change will affect their ACM. "They've obviously done the work, because IFRS has been planned for years, but they have chosen not to share their findings with investors."
New OSFI Guidelines

No wonder no one wants to talk about it. Canadian banks undergo continuous Asset to Capital Multiple ratio tests by the OSFI, and are barred from exceeding a predetermined limit established for each individual bank. Adding new mortgages to their balance sheets means that even with high Tier 1 capital levels, it will be difficult to meet the same targets that they used to. So despite commitments to lend under the stimulus plan, banks may still try to keep a tighter grip on the purse strings.

From a Suffering Canadian Patriot - Part III

The last segment of my letter is reproduced below, and it contains possibly some of my most relevent and topical ideas for creating a fairer, more equitable economy for all Canadians. In the wake of TARP, President Obama has been attempting to persuade the US banks (in alternating threatening and pleading tones) to start lending money to the citizens and small businesses whose generosity allowed them to continue existing. This is just one of the great unfairnesses that our system perpetuates, in Canada as well. Why is it allowed to continue? In my opinion, because we permit it. As you'll see at the end of my letter, a paltry service charge proposed by one of our banks led to such an outcry of citizen participation that they cancelled it. Impressive. But why did $35 prove so motivating, when billions of taxpayer dollars are at stake and we sit idly by?


From a Suffering Canadian Patriot - Part III

One year special tax credit for capital spending: The problem now is confidence and few are making any big decisions, unless they are forced into it. Make it too good to resist and finite in time and you will spark decision making that was put on hold out of general fear and the banks saying ‘no’. For larger projects now being mothballed, give government guarantees on deploying planned projects which should entice banks to participate. (Epilogue: Thank you Mr. Flaherty…great work on the home improvement idea. Only problem is that you are already helping trades with Infrastructure, so you might have a ‘carpenter’ shortage (see 6. Immigration))

Use it or lose it credit: up to a $1,500 credit for 2009 only, which in effect acts as a 15% savings card to be spent anywhere other than staples. (Epilogue: Mr. Flaherty…I think that this one is broader and does not get you into supply constraints, but I think we can all live with the above…your idea is also cheaper than mine!)

Low Income housing sales: Margaret Thatcher realized that selling government housing to the residents at prices the occupants could carry, was the way to go. George Bush thought he was doing a Thatcheresque thing when he let everyone own a home (whether they could afford to or not, and now we are all paying for it!)…I am certain that history will be much kinder to her than to him. She let people feel the pride of AFFORDABLE home ownership and with that pride came a huge bonus; with the pride of home ownership came less abuse and damage to property. Go figure - people respected their homes more when they were their homes.

This would have the added advantage of eliminating the burden to the cities of paying to maintain dumps and actually improve neighbourhoods. As an add on to this, coop housing developed by the future owners with financial assistance (and expertise) provided by the government, on surplus government lands and on 99 year land leases is an inexpensive way of providing low income housing that is not a future drain on city coffers-they must be eco friendly of course.

Exploration Credits: One time super credits (better than current flow through which is quite good, but not enough for today) for exploration and working capital purchases for miners. The Junior Miners have no access to capital and have been worst hit by the equity market, making them easy prey for the ‘big boys’, many of whom are not Canadian. We will see our resources plundered by off shore interests if we do not block this tidal wave. This will activate cash, help us find more resources (to put into point 3.), be spent almost entirely in Canada and help rural communities.

Small business threshold increased to $1Million: This is the life blood of our economy. These are the people that will put Canadians back to work, keep local economies buoyant and help us flourish. Bigger companies can pick up and leave at the drop of a hat…the little guys isn’t going anywhere! (Epilogue: The Small Business Loan (SBL) is based on this but it is a scam (not intentional on behalf of the government). The banks lend to people if guaranteed by the government, the businesses are generally undercapitalized (working capital is not financeable) and a large percentage end in failure, because they are doomed from the start. The banks take the set up fees, take interest for a few years and at the first sign of trouble pull the pin and ask the government for their money back).

Nationalize the banks: I alluded to the key to the current turmoil in my introduction. I toyed with the idea of setting this out first or last and opted for the latter. This may sound like heresy or lunacy but I assure you that it is well thought out. The banks are trying to tell us that they are still lending but, at the end of the day, all their capital reserves justify the lending of more money and still remaining within the Basel accords. All the plans that are being tossed about by government are centered around trying to incentivize the banks to hopefully, “pretty please” lend. These are private Corporations that do what is in the best interests of the corporation and their shareholders and we must realize that unless we make it their responsibility, they have no obligation to our population.

Do you really think that they would rather lend to small businesses or overburdened households that they are, in effect , helping destroy, rather than stockpile funds to be able to buy pieces of AIG at cents on the dollar (read BMO). The fact is that they are hoarding cash and there can only be two reasons for that: 1) they know of troubled assets buried deep on their books (or off their books-Credit Default Swaps) and are staving off certain death. In this instance we will be forced to nationalize them in any event, so why put off the inevitable. 2) (Far more likely) They are hoarding to be able to buy troubled assets at deep deep discounts at the expense of the Canadian people.

President Obama said “I will stretch out my hand in friendship but if it is met with a clenched fist….” or something like that. If our banks take on the alternative, which is to begin lending ASAP, (they don’t get to measure…we the people do) then we can assist them by touting our status as the greatest banking system in the world around the globe.

We could assist the banks in securing large foreign depositors (in exchange for minimum thresholds which must be reinvested in Canadian businesses or industry-further stimulus). This would still position them to take advantage of the great deals they are waiting for while keeping our economy sound. Remember the “carrot” and “stick” discipline that your parents invoked. Finish your homework and you will get an ice cream…don’t and you are grounded for a week. Mr. Banker’s; Lend and we will help you…don’t and there won’t be a corporation.

(Epilogue: Every Canadian should read and understand page 16 of the budget. Our government is essentially giving the countries financial resources up to the banks in hopes that they start up the economic engine, again with ZERO guarantees. At least the Americans are taking ownership in exchange. Nevertheless we are miles ahead of the Americans in staving off further degradation of our system because of the CMHC structure but there will be a substantial cost.)

When we pay for all this we should make a real push to self finance as a nation so that no one pulls the pin on Canada. If we take on foreign debt, we oblige ourselves to others who can then dictate terms to us. I hope that the demand for Government of Canada Bonds swells!

In conclusion, it is the duty of every Canadian to help provide an environment where true change is possible and where a Leader can rise and flourish. Educate yourselves, ask questions, write your members of federal or provincial parliament, attend city hall, push back on your banks, engage in debate with your family and friends, understand what the press is really saying, question what you hear and insist on productive action for today and tomorrow. Let’s all win, as one, while helping this one suffering Canadian patriot put an end to his misery.

(Epilogue: TD Bank recently pulled back on a plan to charge $35 and increase interest rates on unsecured lines of credit. They repealed this because of the outcry by their patrons. When the people speak the powers that be must listen! Few understood that they were trying to get people to cancel their lines so that they could reduce their exposure and get to claim that it was our fault that we cancelled. Most people called about the $35…If you are willing to pick up the phone over $35 then I hope that we are all willing to pick up the phone over the future of this great nation.)

Jason Evdoxiadis
Toronto, Ontario, Canada

From a Suffering Canadian Patriot - Part II

I've always been a deeply pragmatic person. Although I have an economics background, I don't live in an academic ivory tower - I live in the (in my opinion) far more exciting reality of our financial system. As such, I believe that critical analyses are of limited use without prescriptions for how to do things right. Part II of my letter follows, further outlining my views on how to save our ailing economy - and prevent future catastrophes.


From a Suffering Canadian Patriot - Part II

There are glimmers of hope that our politicians have made some headway in visionary thinking. If we speak out and create an environment conducive to a true leader, we will discover who has this potential. And I'll emphasize that we need LEADERS… not another round of self-serving political animals. Citizens please engage!


1. Bolster Credit Unions and some trusts: By opening financial windows to these facilities and enhancing their status, they create real competition for the Oligopoly that we now call a financial system. Enough said…Monopoly bad…Competition good. Not to mention they will be more nimble and efficient than the Crown Corporations the government is looking to expand.

2. Debt Rollover Moratorium: The government needs to step in and legislate an immediate moratorium on all short or long term debt rollover, until other measures take hold. (Epilogue: They are trying to do that with enhancement of the BDC, CMHC and EDC, but these will be too slow). There is a lot of money sitting and lurking in the shadows waiting to pray on those that are forced to beg because they are unfortunate to be renewing debt at this time. If the ‘money’ knows that they won’t get to prey on the unfortunate, they will look away from the ‘prey’ and begin putting their money back in circulation. Obviously, short term provisions by the government will be necessary for those loans that simply must be rolled over, but if someone is making their payments, they should not be destroyed.

3. Create a reverse value add tax: For far too long we have been shipping our raw materials out of the country while adding very limited value. We are searching for ways to stimulate job creation and the jobs are sitting there waiting for the taking. The more that raw materials are processed, the lower the tax gets until it becomes a tax incentive once certain value add has been achieved. This will take time as oil (for example) can be refined and then shipped, but building more refineries will take years and dollars. As long as the corporations are taking steps towards being able to add concrete value, the government can freeze said tax, provide access to capital and other incentives or guarantees to assist in this process. We create jobs immediately while building the infrastructure that people will be able to work at, (productively) for decades.

4. Forget auto (and other tired industries): Demand for cars is far less than capacity and will get worse as people cannot afford to keep replacing cars like Elizabeth Taylor replaces husbands. The world needs our resources and intellect, not our cars! Their needs to be a subsidy here as their will be a transition, but not a subsidy as proposed. Reduce workers hours (thus auto output) but continue to pay them while they retrain/reeducate and help them make the
transition to the better long term jobs being created by point 3 and below. The line worker should not suffer but must adapt to change.

5. Immigration: This country was built on the backs of immigrants but our needs change. Our government is taking steps to put immigrants to work in a more efficient fashion and to be more selective; for that I applaud them. It does, however, boggle my mind that they still insist on resisting working more closely with industry. After all, who knows the current and future needs better than the industries themselves? It is great that they bring in a ton of skilled trades- carpenters for example. They are qualified in their field and thus require less training, but what if we have too many carpenters already? I am not suggesting cuts or quotas but in this environment we need to be better at assessing and adjusting to needs of our economy.

I pause here to address the elephant in the room that few are talking about. When one invests, some of the investment is for today and some is for the future. We will soon be entering the biggest demographic shift in modern history. The Baby Boomers are nearing retirement and there are realities that we will be faced with that, if not addressed today, will be insurmountable tomorrow. The balance of my piece is for the future and predominantly with this theme in mind. It promotes spending today for a better tomorrow.

6. Government Hiring Freeze: With taxpayers retiring at a quicker pace than they are being replaced, we will not be able to afford to sustain an already overblown government sector. Certain sectors will be more in need while others are already overkill to begin with and so it must be, on balance, frozen with some sectors shrinking (through attrition hopefully) and others growing, all the while driving efficiency. Just because it is government does not mean it has to be inefficient.

7. Government employee bonus pool: I think that we are agreed that we are all better off if we are more efficient. What better place to start then rewarding our government employees and managers to find better, smarter and cheaper ways of doing the same thing. But what is in it for them? We have many brilliant public sector employees but they have never been encouraged (and in fact would often end up punishing themselves if they changed, improved or saved).

Imagine what would happen if we gave bonuses (say 2% of savings) to our public sector? And what of those people in jobs that they know are redundant or overkill…wouldn’t they be happy to show their bosses how to eliminate their post if they, say, were guaranteed ½ their salary (in addition to what they can make in the future) until 65 as well as their pension together with full transition pay and free training? Some ideas will require capital.

It's a great place for our government to start stimulating spending would be by approving, and paying for, long term government sector projects that show guaranteed returns. If you are borrowing at 3%+/annum and investing in projects today that will pay/save you 10%+/-/annum, you get to improve, stimulate spending now and make/save money in the process! A similar (but modified) approach to our medical system is also desperately required.

The associations need to start recognizing that change is necessary now to make the transition to an aging population as certain changes need decades to achieve and we are running out of time. A great doctor (and we have the best in the world) does not necessarily make a good manager. Let’s also promote prevention to stimulate the economy for now, and provide benefits in the future.

Earlier I mentioned that what we had to offer the world was our plentiful resources and Intellect. Points 8, 9 & 10 will be dedicated to those.

National Think Tank: We need to find better ways of encouraging the exchange of thought and ideas and of putting them into practice. The Israeli’s propelled themselves into the arena of thought, and thus prosperity, by creating a National Think tank that was in the pure R&D side of the equation. Thereafter private capital was brought in to bring thought to action.
(Epilogue: Genome Canada, which funds large science projects, was shut out of funding in the budget…are we going backwards?)

8. National Idea Bank: If you gave me a room of 1,000 of the brightest minds in the world or 33 Million people, excluding those 1,000, and asked me which group would come up with the better ideas, I would have to pick the 33 Million. How often have you had a great idea that you simply didn’t know how to bring to reality, who to trust/approach with it, and whether someone was already doing it? We should create a secure government site that is there to listen to your ideas, pick those ideas that are deemed by the Think Tank to warrant further work, and advise on and finance the deployment of the idea (bring private dollars to the table). This is thought to action!

9. Structured Student Loan Program: We need more doctors, nurses, scientists, engineers and business minds to insure Canada’s long term viability and ultimate prosperity. (I am not saying that we should wipe out Philosophy or law but we need to put resources where they are needed more). The reality is that those professionals are not created over night. I suggest working with the colleges and association to insure they make spots available and to provide 100% loans for those studies. The loans are ultimately forgiven if the graduate dedicates 5 years in Canada to a related field. Our armed forces do it…why not replicate the idea!

10. Eco-Infrastructure: This is necessary and a great way of stimulating action now. The money cannot be spent on bottomless pit, impossible to operate once finished projects or on roads to nowhere. We need research labs, schools, hospitals, long term care facilities, retirement residences and add-value projects (point 4).

Two things; if it doesn’t make the list herein (or compliment the list such as a road or bridge to the lab, school, hospital etc.) then it is simply a plan C project that shouldn’t be entertained. Secondly, it must be eco friendly. Remember we are doing this for our kids and grand kids. You wouldn’t build a building out of stone and mud just because concrete is a little more expensive. We will more than pay for the added expense, over time, by reducing utility consumption and exporting our advances in this arena to the rest of the world, all the while making the Canada of tomorrow a better place.

From a Suffering Canadian Patriot - Part I

There's a newspaper clipping from The Globe and Mail taped to one of the metal filing cabinets in my office. The headline reads, "Housing Market Spurs Worries of Crash Landing." The article is dated August of 2006.

For some time prior, I had been shouting into the wind - at colleagues, friends, business associates - that the American economy was destined for a fall, and that there was no doubt that Canada would be dragged along into the abyss.

When I read that article, I knew the decline was imminent - "There's your pinprick, boys," were my exact words, as I recall. I also knew that there were steps that could be taken by our government, regulators and financial institutions to buffer us against a broader economic collapse. Although that would have taken discipline, prudence and foresight.

Perhaps like all Cassandras, I was a little before my time. Not much - maybe a year at most. And when it hit, it hit hard. Over the next few years, I watched as first real estate, then nearly every facet of our financial system - inextricably linked to the American, and wider global economies - was sucked into the maelstrom.

The article I mentioned is strategically positioned on the cabinet directly across from my desk. I see it every day - I need to see it every day - it's an inescapable reminder of the fact that Canada did not need to endure the trials of the past few years. It happened through the failure, corruption and willful blindness of our leadership - both government and business.

The letter posted below was passed throughout my network and out into the broader Toronto business community. It was written from my heart - as one who loves his country, has faith in the potential of our financial system, and watched the last few years with utter frustration. In it, I describe the climate that led to our inaction in the face of danger, and outline a platform for positive, intelligent change. Here's a spoiler - it starts with each Canadian citizen expecting a hell of a lot more from our politicians.


From a Suffering Canadian Patriot
January, 2009


Dear Citizens and Leaders,

I am writing to you as a suffering Canadian patriot. I am suffering because I am watching my beloved country being ruled by ‘politicians’ amongst gross apathy of the citizenry. I say ‘politicians’ because it is the name I give to those that rise to the top in smooth waters and do little or nothing of consequence.

They brilliantly retain power by establishing a false sense of security and by maintaining the status quo with 'band aids' rather than planning for the future, all the while ruling through and by popularity polls.

The waters of this global ocean we swim in, though indeed murky, did not need to enter our harbour. The global recession currently embroiling us is not a 'made in Canada' phenomenon but stems from the inaction, self interest and failure of our so-called politicians to root out the real issue - one which has put us on a collision course with the eye of the storm.

Our banks were given a license to print money and have been reaping the $1 billion rewards ever since. Because of sensible regulation (over numerous administrations) our banks were recently ranked the best in the world by the World Bank, yet they have virtually turned the taps off to Canadian businesses - the true lifeblood of our economy.

Mr. Flaherty (and Mr. Carney) both recognized the issue and did attempt to stand up to the banks, but their growls quickly turned to forced yelps. We now have our budget and “have met our commitments to the G20”. I would ask my fellow Canadians to learn how to read between the lines, but how can they when even the media is asleep at the switch. I will read it for you. In that statement we were told that because the American’s overspent, practiced fraud for a living (the corrupt few), plundered and replaced brand new BMW’s weekly that we, the Canadian people, now have to pay.

Billions and trillions have been tossed around like nickels and quarters are fed to the change jar and so I forgive everyone for not being overwhelmed. The $84 Billion deficit the government is intending to run is a tab that your children and grandchildren will have to pay… with interest! It is also an understatement of the true bill, as they have already opened a window of $200 billion, and growing, to the banks.

Stand up and be heard, or I assure you that your children’s future will be spent over the coming year or two on a bottle of tequila, some cheap perfume and at the proverbial slot machine…it will feel good for a while, but I assure you we will be left with a giant and permanent hangover.

This is not entirely the fault of our leadership, but is predominantly ours as citizens. In calm seas we demand very little of consequence from our politicians and spend little or no time holding them to task for anything other than who they sleep with and what they may or may not inhale.

Bold action is impossible in such an environment. If there has ever been a time in the past 50 years that we have needed leaders, today is the day. If there has ever been a time that the population is ready, this is the time. There are definitely leaders in our public ranks, but we as citizens need to step up and give these leaders a chance to lead, in the manner with which we need to be led today.

To be continued...