In a speech to shareholders, Scotiabank head Rick Waugh said, “It’s up to the banks themselves – not government or regulators – to manage our risks and advise our customers appropriately.”
It’s hard to call this statement anything but delusional. It was graphically shown in the United States banks frequently don’t do a go job managing risks these days. Lehman Bros. went bankrupt and most of the other banks had to get bailed out when the property bubble burst down there.
I don’t think anyone would claim that Scotiabank and the other big five banks aren’t too big to fail and wouldn’t be bailed out if they where about to go under. Their implied government backing has been one of the secrets to their success. Therefore, the claim that government shouldn’t be managing the bank’s risks, especially when Canada is still in a property bubble of its own, is ridiculous.
There are some things that make Canada’s situation less troublesome then it was in the United States. First it is much harder to abandon your mortgage in Canada then it is in the US. The other problem was that the bad mortgages where just the tip of the ice burg. There real money was lost on the derivatives where many insurance policies where taken out on each mortgage that paid off it the mortgage was foreclosed on. Many of these insurance policies where taken out by people who anticipated the crash, often by the vary investment banks who where selling to mortgages to investors.
When the crash happened and the foreclosures started not only did the home owners and mortgage holders lose money. The groups providing the insurance, like AIG, lost many times more money because there where multiple insurance policies on each mortgage. In fact the insurance provides lost so much money they wouldn’t have been able to pay it off so even the people who had the insurance lost money.
Back to Soctiabank, maybe if the CEO promises to surrender every dollar of his family’s assets and all future income above a minimal amount if his bank should ever need a bail out, it would almost be enough to convince me to allow the bank to manage their own risks, except the humans have an uncanny ability to underestimate risks so frequently, even that wouldn’t be enough.