1. Does Canada Deserve Gold? The Financial Crisis: Canada and the US Compared

2. 1.The Financial Crisis: Canadian and US Experience Compared 2.Why Did Canada’s Mortgage Market Experience Differ? 3.Why Did Canada’s Financial Institutions Do Better?

3. 1.The Financial Crisis: Canadian and US Experience Compared

8. GDP in recent recessions (peak to trough) CanadaUS 1982-2.9-1.9 1991-2.1-0.2 2007-3.7-3.8

9. ABCP Crisis August 2007 Collapse of ABCP market $34 billion of non-bank sponsored ABCP frozen $80 billion of bank sponsored ABCP supported by sponsors

11. Impact on banks Change in market cap December 2006 to December 2008 Canada (Big 6) -44% US 10 largest -61% US 10 largest -67% (adjusted for mergers)

13. Support measures for banks Increased size and frequency of Purchase and Resale Agreements (PRAs) with banks New credit facilities including a term PRA and a Term Loan Facility for participants in the high value payments system Broadened range of collateral that included asset-backed commercial paper and non-mortgage holdings on a temporary basis The Canadian Lenders Assurance Program to insure new issues of unsecured wholesale debt by financial institutions up to 120% of wholesale debt or 20% of deposits on an optional basis Purchase of up to $75 billion of insured mortgages by Canada Mortgage and Housing Corporation (a government institution).

14. 1.The Financial Crisis: Canadian and US Experience Compared 2.Why Did Canada’s Mortgage Market Experience Differ?

15. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy

16. Was there a difference in monetary policy? Fed Funds (US) vs Overnight Rate (Canada)

17. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy 2.Quality of Mortgages 1.Loan-to value ratios

18. Distribution of Mortgages by Loan-to-Value Ratio LTV ratioUnited StatesCanada 200520072006 0-80%79.178.184.8 80-90%9.09.78.8 90-100%6.46.91.5 100%5.55.34.9 Source: James MacGee, “Why did n’t Canada’s housing market go bust?” Federal Reserve Bank of Cleveland, Economic Commentary (September 2009).

19. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy 2.Quality of Mortgages 1.Loan-to value ratios 2.Tax treatment

20. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy 2.Quality of Mortgages 1.Loan-to value ratios 2.Tax treatment 3.Market practices

22. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy 2.Quality of Mortgages 1.Loan-to value ratios 2.Tax treatment 3.Market practices 3.Default Experience 1.Recourse

23. Default conditions under recourse and non recourse Non Recourse: Default when H < M Only if PV (H) - PV(R) - C - Q > 0 Recourse Default when H < M Only if PV (P) - PV(R) - C - Q – A > 0 H = house value, M = mortgage value, R = rental value of house, C = cost of moving, Q = option value of investment in house, A = other assets

24. Why Did Canada’s Mortgage Market Experience Differ? 1.Monetary Policy 2.Quality of Mortgages 1.Loan-to value ratios 2.Tax treatment 3.Market practices Default Experience 1.Recourse 2.Mortgage Insurance

25. Why Did Canada’s Mortgage Market Experience Differ? Conclusion Less encouragement to mortgage finance Recourse makes borrowers less likely to default High LTV loans likely to be insured – must be if held by financial institutions 90% of securitizations are insured 70% of insurance provided by government agency and rest has government guarantee

26. 1.The Financial Crisis: Canadian and US Experience Compared 2.Why Did Canada’s Mortgage Market Experience Differ? 3.Why Did Canada’s Financial Institutions Do Better?

27. Why Did Canada’s Financial Institutions Do Better? 1.Nature of business

28. Why Did Canada’s Financial Institutions Do Better? Nature of business Canadian mortgage market

29. Why Did Canada’s Financial Institutions Do Better? Nature of business Canadian mortgage market Reliance on wholesale funds

30. Reliance on non-depository funding Depository funding (% of all funding) CanadaUS >70BNSWaMu 65 - 69CIBC,TD, BMO, RBC 60 - 65Wachovia 50 - 59Cap1, JPMorgan <50BofA, Citi (37.8)

31. Why Did Canada’s Financial Institutions Do Better? Nature of business Structure of investment banking

32. Why Did Canada’s Financial Institutions Do Better? Nature of business Structure of investment banking Regulation

33. Why Did Canada’s Financial Institutions Do Better? Regulation Canadian liquidity facilities

34. Why Did Canada’s Financial Institutions Do Better? Regulation Canadian liquidity facilities Capital requirements and leverage ratios

37. The Financial Crisis: The Canadian Experience Conclusions