Rebound coming?
The entire Canadian financial sector has being tanking lately on treats of a US default causing systemic risks to our Banking system. The following article from today's Financial Post both confirms these potential hazards and states the contingency plan that would take place If such an event occurred.
Moody`s has already stated that it would leave the AAA rating
on the US debt for the time being, but shift its outlook to negative.
I am betting that by Tuesday/Wednesday most of this crisis will have passed and like in Jan/09 Our entire financial sector will have been over sold and a screaming BUY!. Comments please?
’s banks ready for trouble
Barbara ShecterJul 29, 2011 – 6:36 PM ET| Last Updated: Jul 29, 2011 7:07 PM ET
As heated negotiations over the U.S. debt crisis come down to the wire Canada’s investment dealers are buzzing with “game” scenarios aimed at measuring the potential impact of something that was unthinkable only a few weeks ago.
A U.S. debt default would most certainly hit Canadian financial institutions, driving up funding costs and cutting into their earnings.
But even the prospect of the most powerful economy in the world losing its gleaming triple-A credit rating has Canadian dealers hedging their portfolios and ensuring their channels for borrowing are as open and diversified as possible, said Ian Russell, chief executive of the Investment Industry Association of Canada.
“The dealers are ensuring that they’re well-protected and insulated against all the negative scenarios,” Mr. Russell said late Friday as Canadians headed into a long holiday weekend ahead of crunch day for the U.S. on Aug. 2.
Moody’s Investors Service provided some muted relief late Friday when the debt ratings agency indicated it would leave the triple-A rating on U.S. debt in place for the time being, but shift its outlook to negative. The Moody’s action assumes that the U.S. government will make debt repayments at priority at the expense of other obligations, and did not rule out a later downgrade.
Rival ratings agency Standard & Poor’s has already warned that it may cut the rating even if the debt ceiling is raised — if there is no accompanying credible plan to cut the deficit.
An outright default of debt, though much less likely, would be much more serious for Canadian firms due to a global “spillover” effects, Mr. Russell said, adding that institutions are running scenarios including the effect of seized markets, such as the the inter-bank lending market ose that govern inter-bank lending. These effects were last seen during the wrenching financial crisis of 2008.
Canada’s insurance firms and pensions are also potentially vulnerable to the situation in the United States, with the former exposed through invested assets and the latter restricted in the types of investments they can hold due to an over arching rule that plan administrators must act prudently when investing pension funds.
Manulife Financial Corp., Canada’s largest insurance company, has the highest proportion of U.S. treasury exposure relative to total invested assets among a group of 11 North American life insurers, according to Scotia Capital Inc.
In a note published Friday, Scotia analyst Joanne Smith said Manulife’s U.S. treasury holdings totalled about $19.3-billion in the first quarter of 2011, which equated to 9.7% of its $198.6-billion in total invested assets.
A ratings downgrade would result in the insurance company having to increase its reserves against the investment, Michael Goldberg, an analyst at Desjardins Securities, said in a note to clients. A one-notch adjustment would be immaterial, he said. But the increase in reserves required would rise with a steeper downgrade.
It appears that how financial institutions deal with the potential fallout from the unfolding situation in the U.S. is largely being left in the hands of individual firms, rather than through the kind of co-ordinated efforts seen in the United States.
“Each financial institution has different levels of exposure to different types of risks that may arise. Consequently they have different business strategies to manage these risks,” said Rod Giles, spokesman for Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions.
“Risk management is a responsibility of the board and senior management of an institution…. Financial institutions are keenly aware of the possible consequences and outcomes that may result [and] it would be up to each institution to prepare for and respond to risks that may affect their business,” Mr. Giles said.
Officials at other regulators and government agencies said they are in frequent contact with financial institutions to ensure they are prepared for potential risks or shocks to the system that might arise if rates or trading levels were to spike suddenly.
“We have contingency mechanisms in place,” said Claude Breton, senior manager of public affairs at National Bank. “We have what’s needed by regulators to face any kind of situation.”
Dale Alexander, a spokesperson for the Bank of Canada, said the central bank also has “contingency plans and tools at its disposal” to respond to market disruptions.
Tense negotiations were continuing late Friday as politicians in the United States tried to hammer out a compromise on spending cuts and raising the debt ceiling.
For Canadian financial institutions, a default would likely translate into higher borrowing costs as rates spike, leading to thinner margins and lower earnings, said Mario Mendonca, a bank analyst at Canaccord Genuity in Toronto.
It “could also hurt trading revenue in a big way” if traders pull back,” Mr. Mendonca said.
In the United States, reports this week suggested the Federal Reserve was providing guidance to banks on specific matters including payments and collateral if the U.S. debt ceiling is not raised. And on Friday, it was reported that the U.S. government is preparing Wall Street firms for the possibility it may have to delay or cancel a major round of bond sales if Congress doesn’t raise the borrowing limit by Aug. 2.
Royal Bank of Canada is this country’s only bank that is primary dealer in the United States and participates in auctions that disseminate U.S. debt into the broader market. Officials at RBC declined to comment Friday on whether the Canadian bank has been involved in these co-ordinated efforts.
However, a spokesperson said RBC “continually” performs stress testing to ensure it is “prepared to address worst-case situations.”
Craig Alexander, chief economist at Toronto-Dominion Bank, said is not surprising that Canadian banks are making contingency plans for a variety of plausible outcomes.
“Obviously Canadian financial institutions would be impacted by both the financial and economic environment arising out of the various scenarios,” he said, adding that up until a few weeks ago it was assumed that the debt ceiling would be raised.
“It would be natural for financial institutions to consider contingencies if one of the more negative scenarios were to play out,” he said. “The problem is that the outcome is determined by politics, which is unpredictable.”
With files from Eric Lam and Jonathan Ratner
Posted in:FP Street, InvestingTags:Investment Dealers, Inv