With these two quotes taken from various press, and summarised on the always complete Canadian Banks blog, it is clear we are entering a period of signficant mistrust amongst at least two of the Banks.

Canadian Banks & Insurance Blog

Canadian Imperial Bank of Commerce is putting its stock — and the fortunes of its shareholders — at the mercy of hedge funds and other sophisticated players because of the piecemeal way the bank is disclosing its exposure to investments in U.S. subprime mortgages and other complex securities, says a Bay Street analyst.

Also not fully explained yesterday was how CIBC, whose mantra for the past couple of years has been to de-risk the bank, got enmeshed in a variety of U.S. businesses that some other financial institutions avoided. In short, what was the culture of an organization that believed it could be an active participant in a U.Smarket with some of the smarter and major U.S. players? A partial explanation was that CIBC was in the structured-credit business, a business it deemed to be “low-risk” — while some of the others weren’t.

Canadian Banks & Insurance Blog

This announcement does not give us comfort that the headline risks that plague BMO are behind it, as we believe the bank is still exposed to more writedowns and many questions remain unanswered. Outside of these headline risks, the bank is weaker than its peers in retail banking, has more exposure to low multiple wholesale earnings, and more exposure to potential calls on liquidity if the financial services system sees more liquidity contraction.

At the core of these three points, is the earlier promise and history of risk avoidance that has now turned into an apparent willingness to take extreme risks beyond that which other Banks have done. Banks have a history of risk management, and the central tenet of risk management is to not take unnecessary risk. Presumably these risks have been taken to buoy earnings that may have been otherwise lagging in traditional bank products, but those decisions do not look so good now.

There is also the point, that some of those trusts have funds invested by some of the wealthiest Canadians, and they would not be happy to lose their investment, so to a certain extent, these Banks are caught in a classic trap of whether to satisfy analysts / markets, or customers.

The good news is that Canadian Banks are generally well capitalised, and will weather the storm over time with some careful stick handling.