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Canada Financial Crisis

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Years of mismanagement, horrible decisions, and inflationary spending have severely damaged our economy. The Liberal government’s economic policymaking seems to be based on a confidential instruction manual, rather than studying what the market needs and what could be done to ensure consistent financial stability for all Canadians. These years of damage have all racked up to the fragile economy we face today, but this might be just the start of a catastrophic downturn. 

Trudeau knows this and is subtly attempting to brace the country for the worst that’s yet to come, but this is far from what he needs to be doing. What he needs to be doing is to immediately stop adding on to the pile of economically damaging decisions, or just simply step down and let someone more competent try to do some damage control before it’s too late. 

Stick around to find out about the economic crisis that could be looming on the horizon and what’s being done to prepare. Even with the government’s latest attempt to ward off disaster, it may not be enough to fix the core issue and things could snowball into something far worse.

The economic indicators are pointing to a potentially massive upcoming recession. Inflation is refusing to ease, driving up higher interest rates which in turn is causing Canadians to rack up unsustainable levels of debt whether through mortgages, personal debt, or other lines of credit. 

Consumer debt has already hit a new all-time high for Canada. In Q1 of this year, we reached $2.32 trillion in debt as interest rate hikes and high inflation forced more and more people to use credit to deal with rising financial burdens. 

As credit balances increase the minimum monthly payments increase, causing many to use their remaining disposable income to pay off their mortgages and lines of credit which have been particularly affected by rising interest rates.

So it’s no surprise that the average credit monthly payment increased 43% year over year while the average monthly mortgage payment also increased 15%. The situation will likely only worsen as consumers fall behind on their payments. 

Already credit delinquency has increased by nine basis points and experts expect that number to increase as their disposable income is used up. 

Obviously, the incredibly high price of water and energy has left very little remaining for Canadians to pay their mounting debt, and in many cases, it has only contributed to the debt that they have now. Some of you may remember when this woman confronted Trudeau about the incredible cost of utilities – sadly the situation has not improved over the last five years for many Canadians as the leader of the opposition was quick to point out. 

The situation is becoming increasingly dire, yet Trudeau is unable to even tell Canadians how much their mortgage payments will increase as a result of his government spending.  Trudeau is driving inflation with his policies while the Bank of Canada fights to stop it by raising interest rates. Yet the ones paying the price are regular Canadians. 

There’s been a 16% increase year over year in the number of Canadians missing their mortgage payments and household debt is now 7% higher than our GDP. This accumulation of debt can wreak havoc on the economy, causing widespread financial hardship and increasing homelessness as many can no longer afford to stay in their own homes.  

Trudeau is extremely aware of this risk, yet he is doing absolutely nothing to stop it. But the Office of the Superintendent of Financial Institutions is stepping in to prepare Canada for the financial crisis.

In December, OSFI raised the Domestic Stability Buffer from 2.5% to 3%. This buffer acts as a sort of rainy day fund to protect the banking sector by creating a capital buffer to allow our largest banks to weather “system-wide risks” and ensure confidence in our financial system.

This buffer is essentially the amount banks are required to set aside to be able to cover losses during financial uncertainties. However, OSFI raised the buffer again in June, announcing that the Domestic Stability Buffer will increase to 3.5% on November 1st – marking its highest rate since the buffer was first established.

The domestic stability buffer applies to Canada’s six largest banks: Bank of Montreal, 

Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada

Royal Bank of Canada, and the Toronto-Dominion Bank. 

If any of these banks were to fail, it would have devastating effects on the economy so the domestic stability buffer requires them to build up capital that can be used to absorb losses and encourage lending in times of trouble. Following the latest increase, the minimum amount banks must have on hand will rise to 11.5 percent of their total assets. 

This move by the Bank of Canada is a clear indicator that the banking watchdog is worried about our financial state and wants to take precautionary measures to prevent a future crisis. It begs the question, why is OSFI raising the emergency fund if they are not expecting an emergency?  

As OSFI head Peter Routledge said in a press conference, “Today’s decision reflects our assessment that financial system vulnerabilities remain elevated and in some cases have continued to increase.”

This clearly indicates that despite what Trudeau likes to say, other regulatory authorities are aware of the dangerous situation our economy is in thanks to his policies. 

As is, rising interest rates designed to fight inflation have not worked out as well as hoped. In 2022, Finance Minister, Chrystia Freeland, claimed that rising interest rates would cool the economy down while driving up unemployment rates.

Trudeau’s proposed $43 billion federal budget says the opposite. 

As a result of the Liberal government’s “half-trillion dollar inflationary deficits” over the past two fiscal years and the carbon tax which drives costs higher at every piece of the supply chain, there is no relief in sight and OSFI is very aware of the risk that poses. 

As Peter Routledge shared, “We are in a period of rising interest rates and home prices have begun to climb again. Households and corporates remain highly leveraged, making them more vulnerable to economic shocks.”

This brings us to the reason why OSFI is taking the opportunity to prepare the financial sector for impending doom. 

In March, Silicon Valley Bank triggered a banking crisis in the US as the prominent bank fell victim to a bank run. This was the third-largest bank failure in US history. 

The collapse of Silicon Valley Bank was the result of the same factors at play in Canada. The bank had long-term U.S. treasuries and agency mortgage-backed securities which saw their value dramatically depleted by rising interest rates. 

The bank’s customers were also withdrawing more money due to increasing costs – another impact of rising interest rates. In order to have enough cash on hand to meet its customers’ needs, the bank sold off some of the securities, booking a huge loss as a result of their lower value. 

This scared customers who were concerned that the bank had become unstable after taking such a hit. As fear spread, customers rushed to withdraw $42 billion in funds by the next day. 

This was a classic bank run, driven by fears of insolvency that erupted after rising interest rates made what were previously seen as safe long-term investments, risky and devalued. 

Sound familiar? It should. 

The same cracks in the banking sector led First Republic Bank to collapse over the course of the same five days as two other banks collapsed as well. 

Of course, Trudeau and his supporters will tell you that this would never happen in Canada, but both economies are being impacted by rising interest rates – except the US’s Federal Reserves finally paused their rate hikes with only 2 more expected this year. 

It’s unclear how far the Bank of Canada will go to rein in the inflation caused by Trudeau’s policies, but the Office of the Superintendent of Financial Institutions’ precautionary measures are a sign that the worst is yet to come. 

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