Why Canada’s Banks Remain ‘Stable and Resilient’

If inflation and rising interest rates weren’t enough to cause anxiety about the global economy, bank failures or near-collapses have been added to the mix. But once again, Canada’s banking system has, so far, looked reassuringly sober and stable.

The bad banking news continued through the week. In a fight for its life, Credit Suisse will borrow up to $54 billion from the Swiss central bank. Eleven of the largest American banks have come together to inject $30 billion into San Francisco-based First Republic Bank.

[Read: Credit Suisse to Borrow as Much as $54 Billion From Swiss Central Bank]

[Read: Wall Street’s Biggest Banks Rescue Teetering First Republic]

Here in Canada, Chrystia Freeland, the finance minister, gathered all her provincial and territorial counterparts this week, as well as officials from the banking regulator and the Bank of Canada, for a meeting. After it ended, she said in a statement that “The federal government can assure Canadians that our financial institutions are stable and resilient.”

There is little dispute about that. And so far, the Canadian situation mirrors the one that followed the 2008 financial collapse that was devastating for banking in the United States. Then, as now, there was no banking crisis in Canada.

To find out what separates Canada and if Canadians in general presumption about your bank system is really justified, I spoke with Cristie Ford, a professor who studies banking regulation at the Peter A. Allard School of Law at the University of British Columbia and Don Drummond, a former chief economist at Toronto-Dominion Bank and formerly a senior official at the Federal Treasury Department.

Both agree that a key difference is that Canadian banking has never evolved like that of the United States, where banking is distributed among a large number of small banks.

“We have six big banks in Canada; it’s a highly concentrated industry, some might say it’s oligopolistic,” Professor Ford said, adding that dominance limits competitive options for customers. “They all benefit from having a good base of fee-paying depositors, which allows them to be extremely profitable businesses.”

Collectively, the Big Six banks hold 90 per cent of Canada’s deposits, providing them with a steady flow of money at a relatively low cost to lend or invest. That dominance also means that buying Canadians find little difference in fees or interest rates.

The strong income from these fees and interest, Drummond told me, creates an “inherent bias in being relatively safe.” The healthy profits generated by their market dominance, he added, made it unnecessary for Canadian bankers to boost profits through risky ventures like the subprime mortgages that were at the center of the 2008 American crisis.

There are also regulatory differences. In the United States, the central bank manages the economy and is the regulator of the financial industry. Here, the Bank of Canada deals only with monetary policy, leaving it to the Office of the Superintendent of Financial Institutions to set and enforce banking rules. Mr. Drummond said that he believed this separation made for stronger oversight. Only the largest US banks are required to keep cash on hand to reassure depositors, a problem with the collapse of Silicon Valley Bank, at levels similar to what regulators require of Canada’s Big Six banks.

Canada’s banks don’t just follow the rules, Drummond said their conservative ways mean they often exceed them, for example by keeping more cash than the regulator requires.

Professor Ford is not so charitable to the nature of the country’s bankers. He recalled being at conferences in 2006 and hearing top bank executives complain bitterly that their businesses were slowing down and becoming uncompetitive globally because Canada would not measure up to the United States in relaxing its regulatory control. .

During the run-up to the 2008 crisis, the Conservative government proposed a series of steps to deregulate banking. Market turmoil quickly put an end to that.

“Canada was lucky to be late,” he said, adding that bankers stopped complaining about regulation and “acted terribly proud of their great wisdom and prudence.”

There are costs to Canada’s banking stability. In addition to the lack of competition, Professor Ford said that the banks’ approach to security stifles innovation. Among other things, he noted that the country’s banks remain heavily involved in the oil and gas industry at the same time that the government is trying to advance an ambitious program to reduce climate change.

“Sometimes the Canadian instinct is really to look for those moments where we do better than our giant neighbor to the south and chalk it up to our own virtue,” he said. “But it seems to me that we really should clarify what Canadian values ​​are at stake and think about how best to promote those values; not just say, ‘Well, we’re better than the Americans.’ The question we really should be asking is: How can Canada do as well as possible on its own terms?

A native of Windsor, Ontario, Ian Austen was educated in Toronto, lives in Ottawa, and has reported on Canada for The New York Times for the past 16 years. Follow him on Twitter at @ianrausten.

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