Before the crisis, it took only 2% reduction of asset value to wipe out capitals of the international banks – said Mark Carney, Governor of the Bank of Canada. To protect the financial institutions from a similar disaster in future the international authorities have cranked up the requirement of Capital Reserve Ratio up to five times the previous requirements.
How To Handle Big Failures – Stop Privatising Gains And Socialising Losses:
This has been a big issue since last recession. As result there has been a slow and steady attempt to push Basel-III on the banks by the regulators. Probably we are better off doing it slowly than try to rush.
The issue of job is still a chilling factor for the economy. You can never know – what is a healthy employment number but the current 7.3% is still high.
Another important statistics often overlooked is the labour participation ratio. Probably fewer than 70% participation is not good enough to boost the market.
The serious problem lies in the youth participation which needs to be dealt with as early as possible. Overall the trend is not very optimistic in the Canadian labour market.
Agathe Côté (in another speech) said that serious shock like the one in 1990′s will double the number household loans in arrears.
Canadian Debt, Mortgage and Housing:
According to the Governor – there are increasing signs of overbuilding and overvaluation in segments of the real estate market. This is due the increasing dependence of our economy on household expenditure and housing activity.
As a result the government took actions to curb household borrowing and over-heated housing. The only concern here is that hopefully they had planned to boost other contributors to the GDP. Other than natural resources no other sector has shown signs of life yet.
After the regulation change it is likely the financial sector will get hit too. Q3-2012 result is not going to be an easy one for the banks in Canada. Housing will not be too far away from them. They are already getting hit from this turmoil.
He did warn about this looming issue from – attempt to curb the household debt growth – saying – Even though desirable, eliminating the household sector’s net financial deficit will eventually leave a noticeable $50 billion gap in our economy over two years. This gap can only be sustainably filled by additional exports and business investment.
The problem with this is – till our product importing countries (including the emerging-market) recover from their own financial problem they won’t be able to help much.
Risks From Household Debt:
In another speech, Agathe Côté, Deputy Governor of the Bank of Canada, spoke about the risks from the elevated household debt. She said that – those with a debt-service ratio equal to or higher than 40 per cent are the most vulnerable and their numbers are raising.
An increase in the interest rate in the future will render those 6% (now) of the population very vulnerable as their debt will raise significantly.
As of today we are living in a very fragile financial environment. Household spending are showing signs of slow down and housing has stalled.
We have to wait for the optimism to return in the market and so far the news around are not telling any story of that.