Submitted by RJH Adams (as a comment)

Comment on the crisis (global financial crisis) has focussed mostly on the US despite this being a global event (and, arguably, it was a French bank that truly kicked things off). You follow that trend. Yet in Barbados, most of the commercial lending system is sourced in Canada. Much play was made locally of a World Economic Forum survey (opinion-based) in October 2008 that ranked Canada first for the ‘soundness’ of its banks.

It makes sense to critical examine that view. That was originally why I was looking at the BIS data referred to above – for the large bulk of the private lending in Barbados is from Canadian banks. Unfortunately, Dennis scuppered the line of thought somewhat with that ‘co-mingling’ point.

Nonetheless, it is curious that the big 5 Canadian banks were all levered as high as their top 10 US counterparts in 2008 (and are much more so today) and yet are, allegedly, so sound. When I say ‘levered’, I mean how much tangible equity (the owners’ money if you like) supports tangible assets. The US banks today are levered at around 20:1 meaning $1 of owners’ money compared to $20 of tangible assets. (down from 35:1 last year). The Canadians are at about 30:1 (vs 37:1 last year).

The fundamental accounting identity is Assets = Liabilities + Owners’ Equity. This being so, a drop in tangible asset value of around 3% would effectively wipe out the Canadian bank owners’ equity (as would a 5% drop for the US). Unless one has very understanding creditors.

And when it comes to bailouts the Canadian are up their with the best of them: their ‘sound’ Big 5 banks received equally mind-boggling aid (in proportional terms) from their government as their US peers: $69bn of mortgage purchases and $45bn of ‘liquidity assistance’.

Some context:

the entire tangible equity of the Canadian banks last year was $68bn – so they have received well over 160% of that in assistance.  I call that an extraordinary price for a ‘sound’ system to pay. So how is it that the US gets all the attention locally? The explanation is not, I think, simply asset quality. It seems more that international media like to tackle the absolute scale the US represents. Local media and comment appears frequently to follow at the expense, in this case, of a relevant Barbadian context.

For all the gross faults of the US system, the moral questions and so on it would be misguided to draw comfort from the fact that we rely on a different nation for our own private credit.  Although somewhat optimistic for Barbados (on the US/UK labour data especially) over the next 24 months it is a fragile optimism. Maybe sovereign bonds will be a pothole as you seem to imply; but looking more dangerous to my mind is the size of likely undisclosed losses on commercial property portfolios held by the major US, UK – and Canadian – banks.