• FREE Shipping & Insurance on Orders Over $500
    FREE Shipping & Insurance on Orders Over $500
back to top

Details still needed regarding $114 billion in Canadian Big Bank bailouts: Expert - Peter Diekmeyer (10/07/2019)

Details still needed regarding $114 billion in Canadian Big Bank bailouts: Expert - Peter Diekmeyer

July 10, 2019

Business insiders were shocked when David Macdonald, an economist with the Canadian Center for Policy Alternatives, revealed that the Big Banks got nearly $114 billion in secret bailout support after the 2008-2009 financial crisis.

The story, which was quite technical, got major attention from specialists. However, since the process provided poor sound bites, mainstream media quickly moved on.

The issue died long before the 2015 election.

Today, it’s thus hardly a surprise that global experts such as the International Monetary Fund now laud the resilience of Canada’s banks.

Yet few of those experts saw the previous crisis coming. With another election scheduled this fall, it makes sense to ask whether Canadians should bail out the big banks again should another crisis come.

“One of the biggest challenges is that we still can’t confirm which banks got what money from which sources,” says Macdonald, who estimates that RBC, Scotiabank, TD, CIBC, and BMO got an average of $22 billion each. "It’s also not at all clear whether some of the banks actually needed the cash.”

Further complicating the question is the fact that Canada’s banking system already benefits from a vast range of subsidies.


The fractional reserve system: should banks be allowed to “print” money?

The most blatant subsidy that Canadian banks benefit from is their collective ability to leverage a complicated zero reserve system to “create money” via interbank borrowing and to thus benefit from interest free loans.

John Kenneth Galbraith once said that the process through which banks operate “repels the mind".

It’s stunningly complex, and even many sector professionals themselves don’t understand it. Ask a bank teller or public relations official and all you will get is a blank look.

But the guys pulling the strings know. That’s how they get away with it.

Banning competition facilitates price gouging

The second implicit subsidy that Canada’s banks get is protection from competition. This enables them to gouge consumers by charging higher prices on almost all their services.

Private citizens, for example, are banned from starting their own banks, as is foreign competition.

Bitcoin, other cryptocurrencies and payments systems are locked out, or they are loaded with so many regulations that they cannot operate effectively.

This enables the big banks to run a quasi oligopoly. The result is that bank credit card interest rates often exceed 20%. Transferring $300 from London, New Delhi, or New York to Canada costs more than $20.

Interest rate subsidies caused by tacit bailout promise

Although most Canadians remain unaware of the fact that the Big Banks were bailed out during that last financial crisis, insiders and bank executives themselves know.

For example, Macdonald quotes then-TD Bank CEO Edmund Clark as telling investors: “What are the chances that TD Bank is not going to be bailed out if we do something stupid?”

This implicit guarantee that bank CEOs will keep their jobs and their bonuses, no matter how they act, enables them to borrow and lend at maximum capacity to just about anyone who has a pulse.

This creates vast short-term profits for the banks, with bailout subsidies that will be required later, financed by taxpayers.

Do banks deserve another bailout?

One good way to reassert controls would be to re-establish a gold standard, to deregulate financial markets, and allow the losers to fail.

That said, the question about whether Canadian banks should be bailed out is far more complicated than it appears.

While gold investors are justifiably leery, Canadians love their big banks.

The RBC, CIBC, BMO, Scotiabank, and TD are swimming in cash, much of it from loyal customers who have racked up $6.4 trillion in system debts.

Canadian governments, businesses, and consumers are not just addicted to debt, they are addicted to increases in debt.

If credit ever stopped growing for any length of time, the economy would simply implode.

Allowing Canadian banks to fail would be like putting a drug addict’s dealer in prison.

We know it’s the right thing to do. We know it needs to be done. We also know that the sooner it’s done the better. But it wouldn’t be easy.

“Unfortunately the veil of secrecy is obscuring an obvious reality,” says Macdonald. “Canada’s banks are too big to fail.”

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

Learn More

About the Author

Peter Diekmeyer has been a business writer/editor with publications such as Sprott Money News, the National Post and Canadian Defence Review and Jane's Defence for nearly three decades. He has studied in MBA, CA and Law programs but dropped out of all three after failing to convince the academics that they were wrong about everything.  Diekmeyer has interviewed more than 200 CEOs and filed reports from dozens of countries. 

His most terrifying moment came when he spoke to central bank economists for the first time and realized that (unlike politicians) they actually believed their own analysis and forecasts. 
He has been a regular contributor to the Sprott Money blog since 2015.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.