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APPENDIX B

Imbalances in the Economy

 

The purpose of this Appendix is to seek answers to four questions:

  1. How do structural economic imbalances manifest themselves?
  2. Has bank-money (specifically, bank loans) been misdirected or misallocated at the top banks?
  3. Is there empirical evidence to corroborate "tacit collusion" or "conscious parallelism" at top banks?
  4. Is there empirical evidence to corroborate the occurrence of a "credit crunch" at top banks?

 

 

STRUCTURAL IMBALANCES IN THE ECONOMY
ROYAL BANK DOMESTIC LOANS VS. CANADA'S GDP

 

Plate B-1

  

LEGEND

GDP curves (top and bottom rows)

A finance, insurance, and real estate (top row: 1961-1994; bottom row: 1980-1994)
B manufacturing (top row: 1961-1994; bottom row: 1980-1994).

Royal Bank curves (bottom row)

a total mortgages + commercial real estate loans
b a + consumer instalment, credit card, and other personal loans
c b + financial institutions loans.
d1 manufacturing, 1980-1982
d2 manufacturing, 1983-1988
d3 manufacturing, 1989-1995.

  

   
Plate B-1   Structural Imbalances in the Economy: Canada's GDP vs. Royal Bank Domestic Loans

This Plate provides powerful evidence corroborating:

  1. Significant structural imbalances in Canada's economy: finance, insurance, and real estate have been favored over industrialization (top row).
  2. Substantial overinvestments and underinvestments vis--vis Canada's GDP (see bottom row and following Plate).

The contribution of finance, insurance and real estate to Canada's GDP increased -- from 17% in 1966 to 22.79% in 1994; by contrast, the contribution of manufacturing decreased -- from 30.64% in 1969 to 25.61% in 1994. At the Royal Bank (Canada largest Bank), the share of total domestic loans taken by mortgages, consumer installments, credit cards, and financial institutions loans increased substantially -- from 41.69% in 1982 to 75.24% in 1994; the share taken by manufacturing loans fell -- from a puny 3.73% in 1989 to a punier 2.37% in 1994. Data in decimal form.

Notes:
GDP percentages exclude contributions from community, business, and personal services, and from government services.
GDP and Royal Bank data are not strictly comparable.
In its annual reports, the Royal Bank disaggregated manufacturing loans data, spinning off new series; the disaggregations appear to have been triggered by increases in non-accrual loans, in previously aggregated loan categories.

Sources:
Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement 1994/1995, 1995, Catalogue 11-210, at 23-24 (GDP at factor cost, by industry, 1986 prices, Table 4).
Royal Bank annual reports (domestic loans by industry, net of specific and general provisions, as at September 30).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 

MISDIRECTED LOANS?
OVERINVESTMENTS IN REAL ESTATE. UNDERINVESTMENTS IN MANUFACTURING.

 

Plate B-2

  

LEGEND

Canada's top three banks

BMO Bank of Montreal
CIBC Canadian Imperial Bank of Commerce
RBC Royal Bank of Canada.

Loan curves

a1 RBC commercial real estate, 1980-1995
a2 CIBC construction and development, 1983-1991
a3 CIBC real estate, 1989-1995
a4 BMO real estate, 1992-1995.
d1 RBC manufacturing, 1980-1982
d2 RBC manufacturing, 1983-1988
d3 RBC manufacturing, 1989-1995.

  

   
Plate B-2   Misdirected Loans? Overinvestments in Commercial Real Estate and Underinvestments in Manufacturing, at Canada's Top Three Banks

  This and the previous Plate together provide powerful evidence corroborating the existence, at Canada's top three banks of:

  1. Cyclical variations in commercial real estate loans (top row). The duration of the last investment cycle was about 10 years (see curve a1 ).
  2. Systematic underinvestments in manufacturing (bottom row).

The extent of the economic and social consequences from misdirected loans, and possible causes of overinvestments in commercial real estate, are investigated in the following Appendixes. Loans in millions of dollars; and loan percentages in decimal form.

Notes:
Data are not strictly comparable.
In annual reports: Royal Bank disaggregated manufacturing loans; and CIBC changed its presentation of data for real estate loans. The disaggregations of RBC loans appear to have been triggered by increases in non-accrual loans in previously aggregated loan categories.

Sources:
Bank of Montreal annual reports (net loans and acceptances in Canada, excluding the general provision, and diversified commercial loans, by industry, as at October 31).
CIBC annual reports (net loans before sectoral allowance and acceptances, as at October 31).
Royal Bank annual reports (domestic loans by industry, net of specific and general provisions, as at September 30).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 

TACIT COLLUSION?
POWERFUL EVIDENCE OF "CONSCIOUS PARALLELISM" AT CANADA'S TOP THREE BANKS

 

Plate B-3
   
Plate B-3   Evidence of "Conscious Parallelism" at Canada's Top Three Banks

This Plate provides powerful evidence corroborating "conscious parallelism" at Canada's largest three banks. Signalling regarding prices (total revenue per branch) and costs (non-interest expense per branch) appears to have increased significantly after 1989, the onset of the "credit crunch" at Canada's top banks (see next Plate). Curves derived from data in annual reports.

Sources: Bank of Montreal, CIBC, and Royal Bank annual reports (interest income, other income, non-interest expenses, securities, deposits, assets; and total number of branches or service delivery units, for years ended October 31).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 

CREDIT CRUNCH AT CANADA'S TOP THREE BANKS
THE EMPIRICAL EVIDENCE

 

Plate B-4
   
Plate B-4   Evidence of a "Credit Crunch" at Canada's Top Three Banks: Cash Resources and Cash and Securities -- Per-Share, in Current and Constant (1986) Dollars, 1977-1995

This Plate provides powerful evidence corroborating the occurrence of a "credit crunch" at Canada's top three banks, starting around 1989. The credit crunch was not limited to Canada's top banks. The credit crunch at banks and trust companies can be linked to a variety of factors, including misdirected loans (excessive overinvestments in commercial real estate, and underinvestments in manufacturing and technology).

Cash resources per share fell substantially in the 1980's:

  1. At the Royal Bank, in constant 1986 dollars, by about 80.5% -- from $128.47 in 1981 to a low $25.05 in 1989!
  2. At the CIBC, by about 70.8% -- from $119.73 in 1980 to $35.01 in 1989!

In constant dollars, cash per share remained essentially flat from 1989 through 1994. The combination of misdirected loans (including overinvestments in commercial real estate) and the "credit crunch," at banks and trust companies, played havoc with the National economy. For many small businesses, the consequences were devastating. The extent of the devastations -- recession, excessive unemployment rates, economic destabilization, excessive bankruptcy rates, excessive cumulation of government and personal debts, etc. -- is depicted in the following Appendixes.

Sources: Bank of Montreal, CIBC, and Royal Bank annual reports (cash resources and securities, as at October 31); and Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/1995, Catalogue 11-210, 1995, and Statistics Canada Inquiry Line (CPI deflator).

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

  

 


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