I came across this old post in the COMER list which illustrates
exactly the topic of an earlier thread on Sanet, where I pointed out
that in a banking system with a reserve requirement of 10%, the system
can lend an amount 9 times larger than actual deposits. If the reserve
requirement is 5%, it can lend out 19 times as much. And if the
reserve requirement was just 1%, it can lend out 99 times as much.
This number is called "leverage".
According to the post below, Canada since 1993 had NO such reserve
requirement at all, so the Canadian banking system has been lending
out money up to 300+ times actual deposits.
Where did these extra money come from? The banking system simply
ER9912-#1A CAT Scan of Monetary System Warns of Malignant Growth
Leverage of Chartered Banks in Canada
Year Total Assets Legal Tender Leverage
1939 $3,396 $269 12.60
1946 7,233 653 11.10
1971 40,286 2,489 16.20
1980 252,933 6,568 38.50
1990 588,895 8,767 102.10
1996 992,544 3,356 291.90
1997 1,336,085 3,728 358.00
1998 (06) 1,365,766 3,762 363.50
1998 (09) 1,456,965 3,600 404.70
1999 (01) 1,394,967 3,763 370.00
1999 (06) 1,392,984 3,893 358.00
Sources: Bank of Canada Statistical Summary for Early Years and
Bank of Canada Review
For some years now we have monitored a statistical ratio that is
the best possible approach to a CAT scan of our banking system. It
is literally screeching a warning of big trouble ahead.
It is the ratio of Canadian banks assets over the cash (legal tender) in
their possession. We call it the Indicator. It reveals the effect
of first the reduction of the statutory reserves that banks had to
hold with the Bank of Canada that used to be 10% of the deposits
they accepted, and finally the complete abolition of this
requirement that took place in 1993. And with that proceeded the
systematic deregulation of banking so that banks could gamble
their heads off secure in the knowledge that they had long since
become too big to be allowed to go bust.
What is notable is that for the first time since we started tracking
this ratio in 1996, the leverage of our banks' assets over the cash
held by them has started to decline. We first picked up this decline
from 404.7 in September 1998. 1998, of course, was the year of the
East Asian meltdown.
That was picked up with a considerable time-lag for two reasons. The
rules of the Office of the Superintendent of Financial Institutions
allow the banks in reporting their assets to use the historic costs of
these rather than their current market value. However, the market
value surfaces under two circumstances: a) if the asset becomes
worthless; b) if the bank comes to hold 20% or more of the issue of a
given security issued or other asset. That occurred notably in the
case of the Bank of Nova Scotia when it increased its interest in
Mexican and Chilean banks to over 20% when its original smaller
investment had gone sour.
Given the downward trend of Canadian bank shares, our Indicator has
become an increasingly valuable statistic that our government is
foolhardy to ignore.
Editor-Publisher, Economic Reform
Copyright (C) 1999 COMER. May be reproduced with proper
"Economic Reform" is the monthly journal of the Committee on
Monetary and Economic Reform (COMER), a Canada-based publishing
think-tank. Annual subscription, 12 issues, is $30.
245 Carlaw Avenue
Toronto ON M4M 2S6
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