Warning: Bank Lovers Are Going To Be Heart Broken
If you have been hiding under a pile of rock for the past three weeks, you probably missed two things:
#1 There is a change of seasons happening as spring is finally coming
#2 The headwind that comes with season changes hits the markets with bad news
And banks will take the wind directly in their faces…
What Happened in Cyprus
You are probably well aware of what happened in Cyprus over the past month since it hit the first page of most financial newspapers. Long story short, Cyprus banks had serious problems mainly due to their positions in Greek debt. The country requested $10B in help to get out of this mess. After numerous “original” scenarios (such as taxing bank accounts!), the country finally decided to protect small savers and only take money from bank accounts showing a balance over $100,000 Euros.
The North American press lead by financial analysts’ comments was very fast to tell the world that the situation in Cyprus is isolated and would not be replicated here. This is a half-truth, half lie in my opinion.
What Cyprus Banks have in Common with our Banks???
he press were right, when they said this situation won’t happen to our Banks (American or Canadian). But they forgot a huge fact. There is a new trend building up in the economy. Governments have started to dictate what to do to banks and this will not stop.
The common point with banks across the world (including Cyprus’) is that governments and central banks have now become their boss. For too many years, they have closed their eyes and let the big guys of Wall Street run the show. In 2008, those same big guys looked like a bunch of kids who broke a window playing stickball. They came back crying they made a “boo-boo” and would never do it again… as long as daddy pays for the broken glass. You know the end of the story; daddy paid for the broken glass and even had to remortgage his house to foot the bill.
The story doesn’t end there as many people think. The banks thought they got out nicely once again and started to run the show again. But the Government has learned *part* of the lesson this time; it is adding a whole bunch of new rules to make sure banks don’t mess it up again. Since most governments are still paying for the casualties of 2008, they can’t afford another crash. By adding rules to prevent another crash, they might create a new one…
Governments Rules Will Push Banks to Mediocre Results in 2013-2014
In both the US and Canada, governments have changed mortgage rules. The Canadian government doesn’t know what more to do in order to slowdown the housing market and avoid a bubble. They have taken away the 40 years amortization, increased the minimum cash down to 5%, increased the rate used for mortgage pre-qualification and they even recently called banks to stop them from lowering their rates!
Banks saw these rules coming and are well aware that their profit goals won’t slow down the same way the housing market will. Their reflex was to enter a rate war. If Canadians don’t buy more houses, we will take our competitors’ share of the market!
But the government didn’t stop there. Since banks are unlikely to follow the Government’s wishes (they also have to respond to shareholders’ appetites for profits!), the new federal budget is hunting down advantageous fiscal strategy. Everybody thought the government was after the rich and business owners. But there was also a third party targeted: banks! In fact, all Canadian banks have positions in the stock market that are too tax efficient for the Government. They are legal and follow all tax rules. But the Government thought it would be a good idea to take a few bucks from the Banks… bank accounts
So on one side, the Canadian government wants to slowdown the housing market and grab more money from bank’s trading abilities. So you can already tell that Canadian banks will see their revenues hit a plateau while they must have to pay more taxes than before. Doesn’t it sound like a great scenario to you?
If World Class Banks Are Getting Hit What Do You Think Will Happen To US Banks?
Since 2009, the world has now put Canadian banks at the top of the list for security and financial stability. Governments around the world are losing their breath on the weight of their debts while they see their banks holding all the cash they need to solve their problems… Do you really think it will continue this way?
After seeing the world market approving Cyprus’ deal to save the country, it truly seems to me that, in a last resort, Governments are ready to take on banks to pay for their own problems. The thing is that the money held in banks belong to people… you and me.
Seems like daddy is going to call back his son a few years later and ask him to repay for that broken window… with interest!