So how much of a problem does the BoM have with SIVs?  It’s on the same scale as the Israeli problem with Iran’s nuclear program.

According to the BOM’s published Q3 Supplementary Financial Information, the total Regulatory Capital of the bank is $24 B.  That’s the amount of real investor capital put into the BoM.  As previously described in earlier posts, banks inflate this asset by also counting the loans that they have made as “assets” since those loans generate interest revenue.

The total BoM’s “asset” base of $334 B includes $65 B of derivatives of which $49 B are securitized assets.  According to the Q3 Supplementary Report, 90% of the $49 B is impaired and a full $37 B is rated as having a high risk of default ( Risk weight >7%).

Prudently the BoM has reserved $735 M of capital against this risk, however, that provision will be about as effective as a fart in a thunderstorm should these derivatives prove worthless.

Given the recent signs of economic recovery, it is likely that not all of the $37 B will tank.  A risk weight of >7% means that roughly 1/2 of these loans will likely default in 5 years (1.07^6 = 1.50).  Many analysts believe that the $6 B in SIV loans made to support Link SIV and Parkland SIV are at greatest risk however.

To put the danger posed by $6 B in bad loans in perspective, the BoM’s entire quarterly revenue in Q3 was $3 B and its net income is currently approximately $1 B / quarter.

Hence, a $6 B default can cause a life-threatening liquidity crisis that would require a government bailout to prevent outright bank failure.

BMO’s Q3 results are not encouraging.  At best, the bank is treading water.

For example, despite having $413 B in assets, it’s cash position of $10.7 B is basically flat compared to the previous quarter.  Although liquidity improved by about $500 M, 80% of this was due to the fact that BMO issued $400 M in preferred shares during the 3rd quarter.

Thin liquidity is very dangerous for a bank.  A bank may crow about Tier 1 capital ratios, but it is liquidity that determines whether they stay in business or not.

BMO’s loan book is still toxic.   The sum of PCL+GIL (sick and sicker loans) is 3.3 B largely unchanged from Q2 to Q3.  PCL is Provision for Credit Losses (loans the bank admits are dead) and GIL is Gross Impaired Loans (loans that are not being paid back).  And of the loans that BMO has yet to admit are bad, according to the BMO’s own risk weights, $37 B (nearly 10% of the entire loan book) are so risky that they are statistically likely to default within 5 years.

To put this in perspective, BMO’s non-investment grade loans  is 10x higher than the amount (in total dollars) the Royal Bank has in the same risk categories.

Looking at BMO’s Canadian delinquency ratios, Q3 personal loan and mortgage delinquency ratios are unimproved in Q3 over the past 3 quarters, and credit card delinquency ratio has increased quarter over quarter for the past 4 quarters.  BMO’s US delinquency ratios have deteriorated in all categories quarter over quarter for the past 4 quarters.

Meanwhile BMO’s market share is slipping with quarter over quarter declines in Canadian personal loans, mortgages, retail deposits and commercial loans.

Overall Moody’s rates the BMO’s financial strength as B-grade risk with a negative outlook.  For the most part, BMO’s ratings by S&P, Moody’s,  DBRS and Fitch are generally one notch less than the Royal Bank’s ratings.

According to the BMO’s 2008 Financial Report, the BMO is carrying about $8.7 B in bad assets – fully half of its market capitalization:

• Bad loans total $3.7 B.  Of significant concern is that $2 B of this amount is so-called “formation of new impaired loans” – i.e. was suddenly added in 2008 alone.  Half of these new impaired loans are attributable to losses in the manufacturing sector and in US real estate.
• Collateralized debt and loan obligations total $4.5 B.  Most of this is hedged with other banks which is great in theory as long as there is no counter-party risk.  However, in October inter-bank lending actually dried up due to fear of counter-party risk!
• Subprime mortgages and asset backed securities total another $0.5 B.

The BMO also has $99 B in off-balance sheet credit loaned to its clients.  If only 10% of these default, then the total bad loans of the bank will double.  Remember Enron?

The final straw that broke Wachovia’s back was when bad debts equalled more than the paid in equity of the bank.  When that happens, the bank is insolvent.  The BMO is halfway there!  If its market capitalization falls by another half in another month, or if 10% of its off-balance-sheet lending defaults, or if some combination of these two events occur, the First Canadian Bank will be history.

A quick health test of the other Candian banks shows that they are in much better shape than the BMO:

• Royal Bank has a
  • market cap of $45.5 B which is almost 2x shareholder equity at $24.4 B.
  • yield of 5.5% which is below the peer group average for Canadian banks
• Scotiabank has a
  • market cap of $29 B which is 1.5x shareholder equity at $18.8 B
  • yield of 6.5% which is roughly equal to the peer group average
• CIBC has a
  • market cap of $18.5 B which is 1.3x shareholder equity at 13.8 B
  • yield of 7.3% which is above the peer group average (suggesting risk)
• TD has a
  • market cap of $33.4 B which is slightly more than shareholder equity at $31.6 B
  • yield of 6% which is below the peer group average.

So what does this have to do with your bank account?

From previous posts on this site, you know that banks leverage their deposits by a ratio of approximately 10:1.  So for every dollar that you leave in a bank account, the bank lends out $10. 

By dividing the total funding of GHG-producing loans by the total amount deposited, it is easy to calculate the proportion of deposits that fund GHG emissions.  Multiply that by your bank balance, and voila, you have calculated the carbon footprint of your bank account.

To simplify this, you can readily calculate the carbon footprint of your bank balance by using the onlne calculator at  ClimateFriendlyBanking.org.

You can also determine how you can trim your personal funding of GHG emissions just by switching banks! 

For example, moving $5000 from the Bank of Montreal (535 Kg of CO₂) to the TD Bank (485 Kg) will save 50 Kg in CO₂ emissions – roughly equal to parking a small car and not driving it for 9 days.

• 5,000 jobs in the wind energy sector by 2010
• 77,000 jobs in wind energy by 2020
• 18,750 jobs in geothermal energy within 2 years
• 51,000 jobs in geothermal energy systems by 2020
• 25,000 jobs in solar energy systems by 2025

This funding, which is less than 1/2 of what our banks are lending to generate fossil fuels, would install more than 12,000 megawatts of renewable energy capacity by 2020—enough electricity to entirely phase out all of Ontario’s coal plants.

These are not idle claims, the UNEP reports that Denmark created 17,000 permanent jobs within 5 years of launching a major investment program in wind energy production.  In Germany, over 45,000 people are employed in the wind energy industry.

Wind also presents a unique opportunity for a new cash crop in rural Ontario.  Farmers can lease their land to a wind developer. Or farmers can install, own and operate the turbines themselves. According to the Ontario Sustainable Energy Association, if 1/2 of Ontario’s farmers install only one 1 MW wind turbine, they could pump $4 billion through the rural Ontario economy by harvesting the wind!

Who says we have to choose between economic prospertity and a green future? 

And why are we focusing on bailing out the auto-industry when we could be replacing lost plants with green jobs?

Meanwhile the largest bank in Canada is the Royal Bank of Canada with a current market cap of $63 B and also has a “solid” Tier 1 capital ratio of 8%. Total shareholder equity is only $29 B. So far the market is expressing confidence in the “asset” quality of the bank since the market cap is greater than total shareholder equity by about 2:1.

In theory, the top 3 banks in Canada could vanish as fast as Wachovia since their total shareholder equity combined is less than the $73 B destroyed in the Wachovia collapse. The risk currently appears low as the smallest of the Canadian banks by market cap is the Bank of Montreal with a market cap of $33 B and total shareholder equity of $18 B. Not quite 2:1 but not bad – even though the BMO’s tier 1 ratio is 9.9% (stronger than RBC).

So far so good, but let’s bear in mind that a top rated capital ratio of 10% means that the bank is still 90% leveraged!  As long as deposits exist to cover this leverage, and as long as the depositors are willing to trust the bank with those deposits, the bank will be strong.

The key leading indicators of bank stability are deposit ratio and shareholder equity to market cap.   If these are insufficient – watch out!

The Tier 1 capital ratio is the total amount of “assets” managed by the bank divided by the amount of money actually invested by shareholders in the bank plus the cumulative retained earnings made by the bank. A ratio of more than 6% is considered good by international banking standards and a ratio of 8% or higher is considered “excellant”.

Since banks loan money, the debt owed to them is considered an “asset” even though in the real world it is actually a liability from the perspective of the borrower. Since it is no fun to only lend money you actually have, even though your savings deposited into the bank are actually liabilities owed by the bank to you, banks also count them as “assets” because they are used to provide the funds for the loans made.

Banks are allowed by law to lend up to 25x more than what is actually invested into the bank. If the Tier 1 ratio is 8%, then the banks actually owe 12.5x more money than is actually invested.