The Prudent And Robust Canadian Banking Industry

The prudent and robust Canadian Banking Industry is the subject of admiration abroad. Since the onset of the global financial crisis, both Moody's Investor Service and the World Economic Forum have respectively ranked the robust Canadian Banking Industry as the first in the world for financial strength and the most sound in the world. Unlike many foreign banks, Canadian banks have not required injections of public capital. This Canadian industry has made Canada the only G7 country to not need the recourse of a government bail-out in order to survive the financial crisis. Unlike their American counterparts, Canadian banks are well capitalized, have been demonstrably better regulated and better managed. They have proven this as their American counterparts have stumbled and have been propped up by the Federal Government.

Unlike the fragmented regulatory framework in the US, Canada has a single regulator, which monitors bank operations and nips problem spots early. The regulatory policies are reviewed every half decade to keep in step with changes. There are twenty-one domestic banks with the six largest having over ninety percent of all domestic bank assets. The largest banks are Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank, Scotiabank and the Toronto Dominion Bank. All of these banks are well capitalized.

The first Canadian bank was the Bank of Montreal founded in the year 1817, which also started the first domestic currency to replace foreign currencies which were acceptable legal tender in Canada at the time. Subsequently new branches were established in other cities. It inaugurated a feature of Scottish banks where a few banks with large capital maintained numerous branches. This feature is shared by the majority of the big six, which has also been a factor in their resiliency in the face of economic stress. Their national range enables transfers of capital from regions with varying economies. These banks also have different types of business lines.

Today, it is believed the financial systems elsewhere are already beginning to move toward the Canadian approach with higher capital holding requirements and more diversified companies. The unique aspects of the Canadian banking system has allowed Canada to better withstand the recent financial crisis than the United States. The Bank Act of 1991 divides banks operating in Canada in three schedules. The Schedule I banks are allowed to accept deposits that are not a subsidiary of a foreign bank. Schedule II banks are a subsidiary of a foreign bank allowed to accept deposits in Canada. The Schedule III banks are foreign banks which can do banking business in Canada.

Generally, management practices have been more conservative in Canada. Both the banks and their customers have an aversion to excessive risk-taking. A culture of fiscal prudence has avoided embracing risky practices. Thus, by April 2009, American mortgage holders were 17 times more likely to be behind in their mortgage payments than those in Canada.

Despite the deterioration of global economic conditions, Canadian banks have been profitable. In 2008, five of the six largest reported a profit and all of the six reported profits for the first quarter of 2009. By August 2009, Canadian banks were breaking profit records in the midst of a recession. Royal Bank of Canada and National Bank of Canada actually produced higher profits than ever before. The relatively conservative risk appetite of Canadian banks has been a boon. Even though loan losses are expected to continue their rise in the near future, a more conservative culture has protected banks from large losses. They did not get involved in a major way in subprime mortgages and they have avoided heavy participation in more exotic and risky financial instruments. Being more cautious, well diversified geographically and across retail, wholesale and wealth management business lines has become their advantage and source of strength.

It has been said that the Canadian system can teach others to be more stable and resilient. But, this is another example of this quality being exhibited by the banks generally once again. In the Great Depression, when 9,000 American banks failed, not even one failed in Canada. During the Savings and Loan Crisis, two small banks failed for the first time since 1923. But, in America, nearly 3,000 failed. Meanwhile, while the number of banks failing is rising in America, Canada is the only industrialized country without a single bank failure.