Canadian mortgage bubble exposed to China “ghost collateral”

Oh dear:

In China, “linkages between the banking and shadow banking systems are also becoming more complex and opaque, increasing the underlying credit risk,” the Bank of Canada’s December 2016 risk report says. “The experience of the 2007-09 global financial crisis showed that financial stability can be threatened by vulnerabilities originating in the shadow banking sector.”

As a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called “ghost collateral” — meaning collateral that may not exist or is used continuously to secure loans for multiple borrowers.

Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.

“OSFI does not dictate what type of collateral (federally regulated banks) can accept,” spokeswoman Annik Faucher said. “Whether the borrower is foreign or domestic, OSFI (allows) financial institutions to compete effectively and take reasonable risks.”

One U.S. hedge fund manager, who did not want to be identified, said: “We all know that the ghost collateral is a huge deal, and we all know that the shadow banking and other Chinese influence in Vancouver is profound. The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money. “

Australian banks stopped accepting Chinese ghost collateral a year or so ago.

That wasn’t early enough and there will be some exposure here too.

Comments

    • FeknameMEMBER

      There is a ceremony you can do to tie a spirit to a new grave/shrine. This is often used in cases where its not known where the body is. So all we need to do is perform that ceremony within Australian bank vaults and boom, the ghost collateral will have a new home.

      Bit tricky though in that you need an item that the spirit owned in life…

    • This all sounds like utter bullshit.

      There is absolutely no way for a bank to collect on this. None.

      If Australian banks have lent on this sort of absurd basis, and there is a government gaurantee on those bad debts from the Austrlaian tax payer – I am going to go supernova on someone – just no fucking way.

      Worst part – bet these debts are backed.

      Fucking absurd.

      • @Paul
        a) There are no government guarantees on loans written by banks, that would truly be stupid
        b) There have been government guarantees on deposit funds in the past (eg post GFC), but a deposit is a loan to a bank
        c) The type of collateral being provided to Canadian Banks by Chinese Banks is generally in the form of a bank guarantee issued by the Chinese Bank. The guarantee might be backed by local (Chinese) collateral, but the credit risk is on the Chinese bank in the first instance

      • BrentonMEMBER

        @Stitches

        a) Deposits guarantee those loans, which are guaranteed by the government (up to $250k, but post bust, a limit that will likely be expanded to the moon)

        b) Those post-GFC measures are largely still in effect, with all government signals being that a guarantee is to be assumed; read recent S&P rating downgrade of all financial institutions not covered by this de-facto guarantee

        c) lol you know this how? lol even harder at ever seeing anything come out of mainland china.

      • @Stitches

        Welcome to the internet and economics – glad you could finally join us. What are you talking about ? Honestly WTF ?

        The Australian government has guarantees on deposits on upto $250k per customer per bank.

        HOWEVER Australia also has an implicit GUARANTEE on BIG 4 off shore debt – yes – money our banks have borrowed to lend out as mortgages – you are just flat out – totally wrong. Except for the part about it being really, really stupid.

        The ENTIRE discussion regarding bank levy has been centred around this very issue – NOT about the bank deposit guarantee . Again – the big 4 plus Mac have been able to borrow at lower rates from foreign lenders (hence higher profits) from the taxpayer guarantee – hence the Macrobusiness rage.

        Everything following your initial brain fart just wanders further into inanity.

        But no – its great that you have discovered the web – heaps of info. Especially on economics.

        .

      • @brenton & @paul

        Are you two actually serious? Explain how guaranteeing deposits means the same thing as guaranteeing loans; one is a bank liability, the other is a bank asset. This article is about credit quality of the banks assets, which are it’s loans.
        c) lol you know this how? lol even harder at ever seeing anything come out of mainland china.
        Ummm, from some basic research, 30 years experience in banking and some common sense- banks exchange collateral this way via bank guarantees because they can’t deal with local laws and legislation. How did you get your information?

        Welcome to the internet and economics – glad you could finally join us. What are you talking about ? Honestly WTF ?
        Thankyou! Btw, I have an Economic degree and an MBA – what are your qualifications?

        “The Australian government has guarantees on deposits on upto $250k per customer per bank”

        The article is about loan quality, not deposits (!!)

        HOWEVER Australia also has an implicit GUARANTEE on BIG 4 off shore debt – yes – money our banks have borrowed to lend out as mortgages – you are just flat out – totally wrong. Except for the part about it being really, really stupid.
        Wow, you are stretching now. an “implicit guarantee”?

        Once again, you are talking about bank’s borrowings, this article is about bank lending.

        The ENTIRE discussion regarding bank levy has been centred around this very issue – NOT about the bank deposit guarantee . Again – the big 4 plus Mac have been able to borrow at lower rates from foreign lenders (hence higher profits) from the taxpayer guarantee – hence the Macrobusiness rage.

        Again, you are confused between banks borrowing money and lending it. You need to tie your “point” back to how any of this affects the credit quality of LOANS. I would re-read the article instead of taking pathetic cheap shots.

      • billygoatMEMBER

        @ Everyone
        Although I love the term “Peak Absurdity’ it seems to me the FIRE sector and its believers have reached a zone better described as ‘Plateaued Absurdity’

        Its not just the FIRE sector the whole community has been sucked in.
        Its a re imagining of the The Emperors New Clothes where the young boy who spoke up was first mocked then caught a hiding (smashed avocado?)
        Resonates with new laws comng in to play to lock up 14 year olds for up to two weeks with no charge – way to silence a demographic or generation for a lifetime.

        Recall a time where you mentioned any of these words in polite / impolite company: housing – ridiculous – rent – loan – expensive – overpriced – housing – bubble – crash – interest rates – immigration – foreign buyers – illegal foreign buyers etc. Were you met with: pity – outrage – disinterest – confusion or simply shut or shouted down?
        We’ve all seen on live TV when anyone mentions the elephant in the room – CHINESE – cough cough RACIST RACIST RACIST!!!!!!

        Instead of being intelligent for seeing the evidence and having the courage to state the obvious the loan voice is kicked in the teeth. Meanwhile everyone else gets naked and parties with the emperor.
        As a an economy and community we’re at the EMPERORS ORGY. We’ve been exploring personal boundaries, experimenting and having financial fun? EXCEPT as the drugs wear off some are realising they are the only ones being f$$ked….and by numerous parties. It feels less like fun and more like hurt. You marvel (half in envy) at the die hards still seemingly happily plugging away. Feeling a little sticky, you put your clothes on and go home.

  1. [email protected]

    Once again, this is an investment for the intellectually challenged from almost every perspective. The only winners will ultimately be slimey legals rummaging through the graveyards of debt

  2. BrentonMEMBER

    The comments at the bottom of the article are great too.

    Lot’s of the same rhetoric we’re seeing here:
    – Canada’s different
    – Won’t be a crash
    – World class city, everyone wants to live there (supply & demand)
    – “Heard about this bubble since 2000”
    – Progressive politics want to crash the market and ruin all those innocent property entrepreneurs

    I like the guy from the US, who held out of the US market for 3 years leading up to the GFC. Was rewarded with a brand new house at a massive discount. Also said, that in his opinion, Canada is in worse shape than the US was before the GFC (I pressed like lol)

    • Oh – here’s your money shot – and by golly – she’s a *BIG* one:
      >For example, the director of a Surrey lumber and real estate investment
      > company explained to Postmedia that his group’s business model consists
      > of pooling the real estate assets of an extended group of family and shareholders,
      > and using these homes as collateral to borrow money from financial institutions.
      > The borrowed capital is then issued in mortgages to home buyers that can’t obtain
      > financing from chartered banks.
      >
      > In another example researched by Postmedia, lending documents show that
      > controversial “crowdfunding” developers are using single-family homes owned
      > by investors in Vancouver to secure loans from subprime lenders that are active
      > in B.C. in order to fund condo developments in Vancouver and Burnaby.

      Sooooo… Let me guess… not only they have a problem with loan fraud, but, seems to me that there’s the opportunity to use the same house as collateral, for multiple “share investor” scams schemes

      • BrentonMEMBER

        bahaha, top tier lending standards would never allow this! The Canadian banking system is as solid as a rock! LOL

      • My guess is that when the tide goes out there’s gonna be a metric shitload of people caught naked…

      • Instead of expecting people to believe you just because you say so, copy a link to a credible source that describes exactly how Canadian banks a) take collateral located in China as direct security for Canadian home loans and b) don’t seem to care whether it exists or not. As I said previously, banks almost never rely on direct collateral security based in another country because of difficulties with enforcement under a completely different set of legislation. What they may take is a bank guarantee from a local bank that holds the collateral (or purports to hold collateral) on behalf of the customer. In any event, the credit risk in this arrangement is with the Chinese Bank in the first instance, not the collateral. You can argue that there is a secondary or downstream reliance on the validity of the collateral (which is correct) but this point isn’t covered in the article and comments made by you and others about government guarantees on deposits somehow underwriting “bad debts” are just plain incorrect.

  3. This is seems to be happening around in countries where macro prudentials are being enforced on the local banks by their respective CB. Hong Kong is having the same issue and the timing couldnt have been so perfect. Since the bottom in house prives from last year June as a result of intervention by HK CB (e.g. increasing deposit req), developers bend the rules by lending directly to the buyers with some offer allowing one to borrow up to 130% of the value of the flat. Other developers and non-bank financial companies followed suit and boom property prices fo up. Obviously, the money to finance these borrowing come straight from China from “somewhere”.

  4. “The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money. “

    “Australian banks stopped accepting Chinese ghost collateral a year or so ago.” But not if it’s showing up in cash, can they? How would they do that?

Leave a reply

You must be logged in to post a comment. Log in now