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Canadian Banks raise cheap capital

An article in the Globe and Mail this morning discuss how four of Canada's largest banks used the market turmoil to raise cheap cash.  In fact, the cost of debt for Canadian banks over the past few months (5 year paper) has dropped.  Canadian banks' funding base for 5 year debt is based off the Bank of Canada's 5 year treasury rate (the Canadian benchmark) which has declined from 2.9% to 2.15% today.    

All the money being invested in Canada is having a dramatic impact on Canadian sovereign and corporate yields.  For Canadian banks, worried about the risk of contagion -- their biggest fears are, as Rumsfeld famously described "Unknown unknowns", raising cash makes perfect sense, especially since there is strong demand for Canadian banks paper.  

Problems in the financial system can arise from unexpected directions that will surprise bankers' liquidity.  So far the markets are calm, Futures are down.  There's a bit of Fed POMO activity this morning that could make the market go north, but it remains that the is no volume in the upside, all the volume is in the downside.   To make things even more interesting, Europe is also going into meltdown...Spain announced elections in September, and CDS spreads are exploding, because everyone now recognizes that the Greek bailout announced last week is just not enough (unfortunately for the ECB and the EU leadership).

August could be very interesting (but not in Canada)

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