The US subprime mortgage crisis is only one of several financial predicaments Canadian Banks are finding themselves in.Why does this concern Canadians?Canadian Banks have been investing in foreign markets, markets that are not subject to the same guarantees required for domestic banking.
They have done this several ways, either by takeover of foreign banks, investment brokers, and other financial businesses.This of course is done through any number of means to raise capital that can range from bond issues to leveraged buyouts.The problem is that they are losing money in these ventures.In the process of losing money they are taking charges (write offs) on their financial statements that are placing them in or near loss positions.
This may seem to be a yawn to many people but Canadians need to realize that it is Canadian money that is being lost.Canadian investors are losing money on these ventures as soon as a financial institution has to accept that loss.The real problem is that the banks are not subject to Canadian regulation when operating in foreign countries but they are responsible to shareholders for the losses they incur as a result of their foreign investment.
Another problem most Canadians are likely unaware of is the regulation of Foreign Investment in Canada.Previous to July of 2005 investment in Canadian Pensions and Retirement Savings was required to have 70% Canadian content. With the repeal of those laws, foreign financial groups were free to invest in Canadian Funds.What happens when those investors encounter financial problems themselves and need to liquidate their investments to cover losses?
Consider the situation of UBS AG, Switzerland’s largest bank.They had to take a $US 13.7 billion write-down to cover their losses in the subprime market. As a result, their shares dropped to half and they were forced to borrow from sources outside Switzerland in order to maintain their operations.If this can happen to one of the world’s most secure banks, where does that leave Canadian Banks, investors and depositors?These are not losses covered by the CDIC (Canada Deposit Insurance Corporation.)
As this banking crisis deepens there is sure to be more fallout and people getting hurt; depositors and investors alike.In order to protect one’s savings it is probably best to seek financial advice from someone in the business who can steer your savings to a safe return on investment.