The Possible Effects of Deregulation, Leverage and Systemic Risk on Canada’s Economy

3 06 2011

Key Concerns

Deregulation of the financial industry has caused more harm than good.
Deregulation within the financial industry has let banks and companies lower the interest rates and made it easier for companies to take out huge loans that they knew was almost impossible to pay off.
In terms of the deregulation of banks within the financial sector in Europe, the financial market has gone nowhere but downward. The deregulation has contributed to the extremely low interest rates for taking out loans. There are massive amounts of loans that industries and governments are taking out even though they know it is almost impossible for them to pay it back, such as Portugal, Ireland, Italy, Greece and Spain.

    More info on Deregulation in these articles:

The Problem with Deregulation
Does Financial Deregulation Work? A Critique of Free Market Approaches
Banking Deregulation in Europe

The governments were using leverage to finance themselves which accumulated a lot of debt over time and made it impossible to pay back the banks. Since all the banks in the European financial industry are very interconnected, if one bank goes down it causes uncertainty and panic it will reduce the inner bank lending which is at the heart of systemic risk.

Statistics and Evidence

1. Credit now represents 47% of RBC`s banking revenue, compared to the previous 30% five years ago. Click here for more.

2. The Canadian prime rate declined by more than 10% between 1990 and 2010, which decreased inflation. Click here for more.

3. Trading and market sensitive revenues grew by more than 15% for two decades. Click here for more.

4. Greece`s debt totals more than 150% of its GDP. Click here for more.

5. Following the European government’s lending Greece money, their unemployment rate increased to 15%. Click here for more.

Looking at the above statistics, it becomes apparent that many government banks are using the leverage strategy to try to come out of debt, but with this process comes very high systemic risk. This systemic risk was shown in the European governments, and can also transfer over to Canada.

Effects on Canada and Solutions

The situation in Europe will affect everyone in the world including Canada; however there is nothing Canada can do to solve this problem except make sure this doesn’t happen in our country. Furthermore, we should make sure that Canada is prepared when the impact of the European financial crisis reaches us. This potential recession should not affect Canada as much as the US recession because we export a lot more goods to the US than to Europe. However, we should expect our exports to decline if the European banks get bailed out.

We should also see an increase in imports because the Canadian dollar will go up and it will be cheaper to purchase foreign goods. Canadians should also expect a spike in interest rates if the European governments that borrowed from the banks default on their loans. The defaults will cause uncertainty in the financial markets causing the interest rates to go up. In the long run we should make sure that regulations on government borrowing don’t loosen up. If they do we could face similar problems to Greece where we have too much debt and can’t pay it off. In conclusion, the collapse of the euro will affect Canada and the rest of the world. That’s why the best thing Canada could do is prepare for another recession.

Oil reaches $ 104

6 03 2011

This year oil raised up to a price of $104.91 per gallon which is an all-time high for the world. The reason for this is the very unstable situations all over the middle east. The world is anticipating the rise in oil to get even higher so people are trying to buy lots today. This is an example of supply and demand changes, as there are a lot less producers of oil, the prices will go up. This changes the price equilibrium.