The CMHC insurance layer is a fascinating distinction from the US system. While it transfers risk from lenders to taxpayers, it does create a buffer that likely contributes to Canada's banking stability. The comparison between chartered banks and second-tier institutions is particularly relevant given how trust companies evolved. One wonders if the current mortgage company sector will follow a similar consolidation path as regulatery pressures increase. Strong analysis of the systemic differences!
Not too many decades ago we had chartered banks and then we also had second level of institutions, the national trust companies that acted much like the banks. The banks were (still are) very regulated but the regulatory leash was looser for the trust companies. Ultimately, many of the national trust companies essentially went broke and/or were absorbed by other institutions, often the banks. Just as a f'r instance, one of my employees had dealt with Royal Trust for many years and she then woke up one day to find that she was dealing (same branch, staff, etc.) with the Royal Bank. It turned out that RT had burned up it's equity and RBC stepped in and saved the "Royal" name.
My point is that the second level financial institutions essentially disappeared into the big banks or simply went bust. Clearly, independent trust companies do remain in Canada but they are, as a rule, pretty nominal enterprises.
So ....
That leaves me with what I now consider the second tier financial institutions, mortgage companies. As with the old trust companies, it seems to me that the regulatory leash on these entities is less than with the banks and that leads me to speculate that they also might at some future point hit the wall. Not necessarily as a group but with some individual spectacular flame outs.
Unfortunately, many of the big banks have been indirectly - but clearly - implicated in mortgage-based money laundering operations, so I wouldn't rule out the possibility that they, too, might one day take significant hits.
Agreed, they have been found guilty - not implicated, but guilty! - in laundering. Having said that, that is more a reputational issue that attracts significant fines but is typically not something that speaks to quality of the loan book. Yes, the fines are very significant and can cause an annual earnings loss but they don't - so far, at least - result in wiping out equity entirely.
The CMHC insurance layer is a fascinating distinction from the US system. While it transfers risk from lenders to taxpayers, it does create a buffer that likely contributes to Canada's banking stability. The comparison between chartered banks and second-tier institutions is particularly relevant given how trust companies evolved. One wonders if the current mortgage company sector will follow a similar consolidation path as regulatery pressures increase. Strong analysis of the systemic differences!
There was a time, there was a time ...
Not too many decades ago we had chartered banks and then we also had second level of institutions, the national trust companies that acted much like the banks. The banks were (still are) very regulated but the regulatory leash was looser for the trust companies. Ultimately, many of the national trust companies essentially went broke and/or were absorbed by other institutions, often the banks. Just as a f'r instance, one of my employees had dealt with Royal Trust for many years and she then woke up one day to find that she was dealing (same branch, staff, etc.) with the Royal Bank. It turned out that RT had burned up it's equity and RBC stepped in and saved the "Royal" name.
My point is that the second level financial institutions essentially disappeared into the big banks or simply went bust. Clearly, independent trust companies do remain in Canada but they are, as a rule, pretty nominal enterprises.
So ....
That leaves me with what I now consider the second tier financial institutions, mortgage companies. As with the old trust companies, it seems to me that the regulatory leash on these entities is less than with the banks and that leads me to speculate that they also might at some future point hit the wall. Not necessarily as a group but with some individual spectacular flame outs.
Unfortunately, many of the big banks have been indirectly - but clearly - implicated in mortgage-based money laundering operations, so I wouldn't rule out the possibility that they, too, might one day take significant hits.
Agreed, they have been found guilty - not implicated, but guilty! - in laundering. Having said that, that is more a reputational issue that attracts significant fines but is typically not something that speaks to quality of the loan book. Yes, the fines are very significant and can cause an annual earnings loss but they don't - so far, at least - result in wiping out equity entirely.