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Bank run on Canada’s largest alternative home lender could potentially lead to systematic run on all banks

Bank run on Canada’s largest alternative home lender could potentially lead to systematic run on all banks

One of the biggest warning signals that went primarily under the radar leading up to the 2008 banking collapse and financial crisis was the run on Northern Rock bank in the UK a year earlier.  And while the British exchequer was able to mollify the public through a series of emergency measures to stop the run, it was a foreshadowing of the bursting of the Western housing bubble, and was close to ground zero for what would take place in the European and American banking systems.

Image result for northern rock bank run

Fast forward to 2017.

Last week saw the collapse of Canada’s largest mortgage lender, Home Capital Group (HCG), and the subsequent run on the institution by depositors.  And in a interview on April 30 by one of HCG’s largest shareholders, this loss of confidence by account holders could potentially spread to every bank in Canada and cause a nationwide run to pull money out of the system.

With the bank run at Home Capital Group hitting a crescendo on Friday, when in one day 36% of the liquidity at Canada’s largest non-bank lender escaped through the front door, and only an emergency rescue loan yielding over 20% has prevent a liquidation at HCG so far, suddenly some are wondering if the dreaded “C” word is applicable to what Bloomberg has dubbed “one of the world’s strongest financial systems.”

The word in question is contagion, and the party casually bringing it up is Mawer Investment Management, one of HCG’s largest former investors. Jim Hall recalculating the odds of a contagion widening across one of the world’s strongest financial systems.

According to Bloomberg, Mawer CIO Jim Hall is recalculating the odds of a contagion widening across the Canadian financial system.

“The probability has gone from infinitesimal to possible — unlikely, but possible,” said Hall, chief investment officer of the Calgary-based money manager, in an interview Saturday. “If depositors or bondholders start to lose faith in their banks, well then that becomes systemic.”

Mawer is not waiting to find out either way: the company which oversees more than C$40 billion in assets, sold about 2.8 million shares, or a 4.3 percent stake, in Home Capital in the past week, joining another Calgary-based money manager, QV Investors Inc., in exiting its investment amid the imbroglio consuming the Toronto-based lender.

Speaking to Bloomberg, Hall said that in his view, the odds that woes at Home Capital – which had C$20.5 billion in assets at the end of 2016, and whose C$15 billion home-loan book represents about 1% of Canada’s C$1.45 trillion mortgage market – spread through Canada’s financial system are low, “despite a growing chorus of voices speculating such fears in a nation gripped by an overheated housing market and runaway home prices in two of its three biggest real-estate markets: Vancouver and Toronto.” – Zerohedge

Just as with Northern Rock, Home Capital Group’s problems are more than likely to be painted over by government or central bank intervention.  However, the world is once again facing their 2006-07 moment in the housing market as not only are global housing prices at levels not seen since before the bursting of the previous housing bubble, but consumers across the board are completely tapped out and are no longer looking for home ownership as a primary goal in their standard of living.

Kenneth Schortgen Jr is a writer for The Daily Economist, Secretsofthefed.comRoguemoney.net, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.


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