Originally posted at Sprott Money March 23, 2016
The shouts of warning are finally starting to come out from official bodies. Since the collapse of the oil and gas market, we have been writing about the fact that we haven't seen the worst yet.
As I have previously written, Canada and Russia are two countries that have been absolutely devastated by the crashing oil markets. The oil and gas crash has racked the Canadian economy and resulted in massive layoffs in the industry and those that support it. Yet the ripple effect has yet to take full effect and the corresponding regulatory bodies are just starting to take notice.
The Canadian banking sector, along with the Commodities sector, constitutes a massive part of the Canadian economy. Therefore, it is not surprising to learn that the former is now controlled by the latter and in a major way.
Alarm bells are ringing as growing unease settles across the Canadian banking sector. They know that defaults are coming in a massive way. Most people employed in the commodities sector enjoyed large incomes and therefore they splurged on large and expensive toys to go along with their income, as many people do. Unfortunately, this means another thing - large loans, which are becoming more and more unlikely to be repaid.
The Wall Street Journal is now catching up with this reality as well. In a recent article they highlighted that the Canadian banking sector is horribly under-funded in the face of this growing crisis and points out that Canada's banking regulators are even taking notice.
"Canada's banking regulator is urging the country's major banks to review their accounting practices to ensure they have sufficient reserves as the commodity-price collapse takes a toll on the economy."
"We want them to take a good look at their accounting practices," said Superintendent of Financial Institutions Jeremy Rudin. "They should support loss-absorbing capacity and the ability to manage through difficult times in general," he added.
Regulators are taking notice and for good reason. The amount of exposure that the Canadian banking sector has to the flailing oil and gas markets is massive, equating to roughly C$107 billion!
People should be even more startled by the fact that this industry is nowhere near starting up again, even if prices were to recover tomorrow. It would take time to rehire and restart the production that has been shut down.
This current reality means that this ticking time bomb is set to explode in the hands of the Canadian Banking sector and thus cause a ripple effect across the Canadian economy and undoubtedly across the highly intertwined Western banking structure.
Could Canadian banks be the next spark that lights the match? Will this economic situation be the catalyst that sends us plummeting into the next major financial crisis? It is incredibly possible yet unknown. Sadly, the world is facing many scenarios that could cause similar turmoil.
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