I didnt take too long to start to get to the bottom of the Bank of Canadas startling news about two major changes last November to the bond and mortgage holdings of Canadas chartered banks . 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
2011 was a topsy year in the markets, especially for consumer and investment banks. While most banks lost considerable amounts of their market capitalization, (most) CEO salaries and earnings were on par with previous years.
Most commercial customers demand net 30 to net 60 day payment terms for their purchases. It’s a basic rule of business if you want to make commercial sales you need to offer credit terms. But this is a very delicate challenge. If your credit policies are lenient, you will improve sales but hurt profitability (because of non payments). On the other hand, if your credit policies are too strict, you will lose sales. In an ideal world, you want to offer credit to customers that deserve it and deny credit to those that don’t.