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Canada Banking

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PostPosted: Mon Feb 29, 2016 2:08 pm    Post subject: Canada Banking Reply with quote

Jeffrey Frankel:

Secretary Clinton has done her homework and proposes specific measures to address specific problems with the non-banks. Four examples:

• She puts priority on closing the “carried interest” loophole that currently allows hedge fund managers to pay lower tax rates on their incomes than the rest of us pay. This is a more practical step than most proposals to address the very high compensation levels in the financial sector that cause so much resentment. It would help moderate inequality, reduce distortion, and raise some tax revenue to help reduce the budget deficit.

• She proposes a small tax targeting certain high-frequency trading prone to abuse. (Sanders proposes a tax on all financial transactions.)

• She also supports higher capital requirements on financial institutions, including non-banks, if necessary, beyond those increases already enacted.

• She proposes a “risk fee” on big financial institutions that would rise as they get bigger. This is reminiscent of a fee on the largest banks that the Obama Administration proposed in 2010, to discourage risky activity while at the same time helping recoup some revenue from bailouts. It was going to be part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, but in the end three Republican senators demanded that it be dropped as their price for supporting it.

I do know that having a financial system dominated by just five large banks did not prevent Canada from sailing through the Global Financial Crisis of 2008-09 in better shape than almost any other country.



So, “Clinton has done her homework” – more regulations, taxes, and fees on top of more regulations, taxes, and fees.

Politicians can go too far micromanaging the economy to the point of stagnation.

Too many regulations, taxes, and fees can cheat borrowers and investors just as much as too few regulations, taxes, and fees.

Are we willing to pay the insurance for a risk free society?

Also, I may add, it’s harder for Canadians to buy houses than Americans – they have to wait longer and live in smaller houses.


Sure, you can make it safer for lenders with more regulations. So, you can buy a smaller house when you’re older.

Based on Census data: “The median-size U.S. house has increased in size from 1,525 square feet in 1973 to 2,491 in 2013.”

According to the Canadian Home Builders Association in 2012: “Canada-wide, new home builders responding to the latest Pulse Survey report the average size of a new single-detached house built in their market at about 1,900 square feet.”


That may be true. And, Canadian houses may be more expensive. Canada weathered the financial crisis in better shape. Perhaps, because regulations, taxes, and fees benefitted lenders at the expense of borrowers. For example:

Canadian article 2015:

“If you have a down payment of less than 20 per cent, you have to pay a hefty premium to insure your lender in case you default on your payments. The amount is usually added to your mortgage principal, which means it’s out of sight and out of mind. But it still costs you.

With a down payment of less than 10 per cent (5 per cent is the minimum), the cost of mortgage insurance rose in June to 3.6 per cent of the purchase price from 3.15 per cent. Larger down payments short of 20 per cent were unaffected and range from 2.4 per cent down to 1.8 per cent. You’ll pay provincial sales tax on those amounts in Manitoba, Ontario and Quebec. More importantly, you’ll incur extra interest charges by adding these amounts to your mortgage balance.”


You say: “PMI rules are the same in the US.”

Your own link says: “Mortgage lenders make many borrowers who don’t have 20% to put down on a home purchase private mortgage insurance (PMI) to protect the lender if the borrower is unable to pay the mortgage.”

And: “…typically the premiums for private mortgage insurance can range from $30-70 per month for every $100,000 borrowed.”


Anyway, Canadian banks get their money:

“Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This helps in allowing banks to reach a better maturity between the relevant assets (i.e. loans, mortgages) and interest income on their books, and their liabilities (deposits) and interest expense, which protects them.

Roughly half of Canadian mortgages currently retain mortgage insurance vs 30% in the U.S..

Mortgage insurance in Canada also covers the full loan amount for the full life of the mortgage. It cannot be eliminated like it can in the U.S. when the property value exceeds the mortgage balance. The higher percentage of mortgage insurance payers in Canada is thought to help stabilize Canada’s mortgage and housing markets

Private insurance companies in Canada can insure mortgages and they have the authority to approve or reject the property appraisal. This helps to give them a strong financial incentives to only approve realistic property appraisals.

Almost all Canadian mortgages are full recourse loans, meaning that the borrower (homeowner) is fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages.

Prepaying mortgages in Canada is allowed however there is much stiffer prepayment penalties (i.e. such as paying three months of mortgage interest) than in the U.S. This policy in the Canadian real estate system has discouraged the kind of refinancing that took place in the United States.

All Canadians pay the same premium based on the size of their down payment. That means even good-risk clients are charged the same as poor-risk clients.

In Canada, the entire mortgage premium is due upfront and is usually rolled into the principal of the mortgage. This means homeowners must pay the interest on their premiums.

In the U.S. most homebuyers pay their premium monthly. Thus, on average, a homeowner can expect to pay between $50 – $100 per month for mortgage insurance, courtesy of the Mortgage Insurance Companies of America (MICA) trade association. The savings on interest alone due to the monthly schedule can be significant.

Canadians are forced to purchase more coverage than one would expect they would need. First of all, mandatory insurance in Canada applies for anyone that puts down less than 25% of their down payment on a home. And second, Canadian homebuyers must purchase 100% coverage for their mortgage.

When one pulls together all these differences, it means that Canadians have greater costs and less flexibility in their mortgages.”


It’s unnecessary to break-up the large banks, because of “Total Loss Absorbing Capacity. (TLAC)”

The “Clearing House Association” seeks a balance between “systemic stability, economic growth, and a safe and sound banking system.”

And, will breaking-up the large financial institutions make that group weaker?

large financial institutions are needed to function in the global economy.


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