Did the banks just find $10.4B of new earnings? part 2

I didn’t take too long to start to get to the bottom (somewhat) of the Bank of Canada’s startling news about two major changes last November to the bond and mortgage holdings of Canada’s chartered banks (see prior post “Did the banks just find $10.4B of new earnings?” Jan 8-12). According to the helpful IR department of one of the Canadian banks:

These changes are principally the result of the adoption of IFRS by the Canadian banks as of November 1.

As a result of IFRS, all of the mortgages sold under the Canada mortgage program came back on the banks’ balance sheets. In addition, any mortgage-backed securities related to these programs and held by the banks were no longer classified as government bonds but as mortgages under IFRS.

Kinda makes sense; a mortgage is a mortgage, after all. Why did it take IFRS to force this disclosure?

Now, you might not have known that the Canada Mortgage Bond program was the formal name for a CMHC securitization product for financial institutions that was used for “capital relief”. I may have referred to it by another name (see prior post “Canadian bank bailout total touches $186 billion” Dec 2-10), which made me very popular with Canada’s Occupy Wall Street supporters when they stumbled across the post, and used it to make their point all over Twitter. During the last two years, CMHC also managed as part of Canada’s Economic Action Plan a liquidity facility called the Insurance Mortgage Purchase program or IMPP which enabled financial institutions to sell mortgages to CMHC – again another angle on capital relief for our oligarchy friends.

It would appear that IFRS has brought an end to some pretty interesting balance sheet management tactics. Who knew that a government bond wasn’t actually a government bond when tallied on the Bank of Canada website? More interesting is the fact that bank assets grew by $180 billion ($260B of “new” mortgages against an $81B drop in bond holdings) in November; what did that do to everyone’s leverage ratios?

MRM