Saturday, December 27, 2008

Flaherty/Carney vs. Bankers

As discussed previously, Jim Flaherty and Marc Carney will be meeting with Canada's major banks to discuss tight credit conditions. Flaherty/Carney contend that the Banks have more than enough capital to satisfy risk management requirements and therefore should be lending more in order to stimulate the economy. The Banks in turn argue that they are already lending at a prudent level and that tight global credit conditions and elevated default risk are to blame for lower loan volume and the higher cost of capital.

What does the data say? Let's have a stroll through the weeds.

The table below shows the year-over-year change in loans to individuals from table C7 of the Bank of Canada's Banking and Financial Statistics:

Loans to Individuals

to purchase securities autos renovations total
2007 I 5% 5% 12% 9%

II 6% 4% 12% 9%

III 8% 5% 15% 9%

IV 1% 7% 17% 13%
2008 I 0% 8% 20% 15%

II 1% 10% 24% 15%

III 1% 26% 30% 16%

Thus far, personal loans have continued to increase, at least through the third quarter. I would guess that auto loans and borrowing for renovations will fall off in Q4 2008, but clearly banks are not withholding credit from households.

On the other hand, private business lending has fallen year-over-year by about 2%. Not too dramatic considering tight credit conditions throughout 2008. The table below shows lending activity to some important Canadian sectors:

Loans to Canadian Businesses

Financial Mining Energy Forestry Const. Mfg Total
2007 I 28% 128% 41% -13% 18% -3% 17%

II 37% 172% 50% -12% 15% 1% 13%

III 33% 65% 38% -10% 16% -6% 14%

IV 83% 9% 21% -7% 20% -2% 14%
2008 I 35% 12% 0% 0% 19% 0% 12%

II 23% -6% -28% -8% 18% -5% 4%

III 7% -14% -17% -8% 13% -6% -2%

Not surprisingly, lending to commodity producers fell dramatically in the second half of 2008 and lending to weak, over-leveraged, or disappearing manufacturing and forestry sectors continued to decline. Construction and real estate development loans were strong until the third quarter, but I would expect lending to that sector to slow in Q4 and into 2009.

So who does the data side with in this argument? I'd certainly like to see the Q4 data, but absent that, it seems that the banks are already lending where they should, and cutting back in sectors where there is enhanced default risk due to a deteriorating economy.

Until I hear a better articulated argument from either the BoC Governor or the Finance Minister, I'll side with the Banks.


geoff said...

I agree with you. When I looked at the available data I wondered what Finance and the BoC were talking about. Unless something else is going on to which only the 2 institutions are privy to, I'll take Flaherty's statement about the banks as "dumb" politics for masses feeling the pinch of maybe tighter credit card limits and general bank hating. But Carney's statement has me a bit mystified. Could he be getting political or just maybe not wanting to contradict the Finance Minister when confidence in officials is likely a good thing.

Shock Minus Control said...

That is what has me puzzled as well. Carney is a pretty bright guy, but the data just doesn't seem to support what he and Flaherty are saying.

Anonymous said...

Dear Shock Minus Control,

What are your thoughts on the DARP strategy for economic prosperity? We have been reading some materials on the Divested Asset Repurchase Program, and think it could be just what the doctor ordered.

Sincerely, GSHMP (Graduates of Schools with Higher Math Programs)

Shock Minus Control said...

My understanding of the DARP strategy is that it was concocted by fools with too much time on their hands. The principal author of the plan is especially suspect.