What would happen if the bank where your savings are goes bust, and the bank where your mortgage is doesn’t?

If you want a first hand account, then click here, here or here.  As horrific as a run on a bank is, this is real: my friend in Hong Kong can see the crowds from his office.  If enough people withdraw their money, it doesn’t matter how well-run or profitable a bank is, it has to close and everyone can lose most of their savings.  So this is a wake-up posting to those of us who watched Bear Stearns and Lehman go under with a hint of a “I’m so glad it didn’t happen to me” expression on our faces.  

There is nothing like a big panic for irrational reasons.  What makes this one more important than Lehman going under is that Bank of East Asia are the 3rd biggest bank in Hong Kong (that makes them global size), they have a great balance sheet, have nearly 3x the capital they’re required to have, and have no exposure to sub prime mortgages.  I.e. none of the very real issues that our banks here in Nova Scotia are currently facing. And they still got hit by a run. 

If it can happen there, with those fundamentals, don’t think it can’t happen here.  The people queuing in the street are not wealthy investors, they are hardworking professionals like you and me.  Hardworking professionals who have suddenly decided to take a day off from work, just because they’re afraid of losing everything they worked the past ten years for.  Irrationally yes, but the whole point is that it is not rational for it to happen to a large and sound bank.  What is the news going to bring next? 

As I have mentioned in a previous post, make sure that your bank has CDIC (FDIC if you are American) insurance and that your deposits are covered. It is one thing if the bank that holds your mortgage goes under, it is entirely an other if the bank where you deposit your paycheck goes under. For one thing the bank that holds your mortgage can always find someone to buy the paper as it is an asset that produces income and can be easily sold. 
This is what the average person should do: Make sure that your savings are protected while still maximizing your investment power, your capital is need in the system now more than ever, and by this I mean not under your mattress! Get ready for buying opportunities as the crisis unfolds and the opportunities present themselves news article and the best way to do this is by making sure that your personal balance sheet is lean and your debt are in the process of being eliminated. 
I am told that the Chinese word for “crisis” is the same as “opportunity”. If you think about it, one can not exist with out the other. 
Cheers,
Pat

Posted by Pat | Filed Under Blog, business | September 25, 2008 | Leave a Comment 

Glad you’re not affected by the USA mortgage meltdown? Think again!!

Are you worried because of all the instability in the U.S banking system? The sub prime melt down, foreclosures and the long list of banks closing their doors. Do you think that we are immune up here in Canada? Well we are and we aren’t, let me explain. 

Well thanks to the fact that our banks have large national branch networks, rather than where our American neighbor’s banks are mostly regional focused. We have deposit insurance (provided by CDIC) as do our American friend’s (FDIC), however that will not help the over 10,000 clients of Indy Mac Bank who have deposits or investments in excess of the insured limits. Our strength truly lies in our limited number of charted banks and our national network. 

Have there been effects here in Canada, yes there have. Just in the past year alone, several of our key alternative or sub prime lenders have either scaled back, pulled out or shut down entirely. Here is a short list and it is by no means complete, GMAC, Accredited Home Lenders, Money Connect, Xceed and just recently the involvement of our federal government pulling 40 amortization’s and dropping the 100% financing.

Now have we ever had a bank failure here in Canada? Yes we have had many, CDIC’s own website list’s at least 43 examples since 1970 but none since 1986! Even during the great depression when most of the U.S banks were closing their doors our banking institutions remained mostly intact. 


O.K, Here are the 3 things you must do to protect yourself financially!

1) Know how much CDIC will insure you for in the event of a failure? Don’t get caught not knowing!

2) If you bank with one of the big 5 charted banks, your chance of experiencing a failure is fairly slim to none. 

3) If you mortgage bank fails, keep making your mortgage payments. The loans that are on the books will be bought by another lender. Just because the above lender is no longer lending does not mean that you can get off scott free.

The fact is we’re living in a crisis, right now, and there will be both winners and losers.  Those who take action - prudently, immediately - can protect themselves.  Those who lose are most likely going to be those who thought they were safe. 

Honestly, the situation is likely to be unfolding rapidly over the next few months, and anyone who claims to have all the answers is either misguided or misleading you.  As a professional I am closely monitoring the situation - and I want to hear from you.  What are your questions?  What do you want to know? 

Ask your question by posting a comment on this blog, and I will research and reply shortly on this blog.  Everyone needs to know the answers.

Cheers,
Pat

 

Posted by Pat | Filed Under Blog, business | July 14, 2008 | 1 Comment