Why Canada’s Banks Remain ‘Stable and Resilient’

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 come out, so far, looking reassuringly sober and stable.

The dismal banking news continued through the week. In a fight for its life, Credit Suisse will borrow as much as $54 billion from the Swiss central bank. Eleven of the largest American banks joined together to infuse $30 billion into First Republic Bank, which is based in San Francisco.

[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 of 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 was over, she said in a statement that “The federal government can assure Canadians our financial institutions are stable and resilient.”

There’s little dispute about that. And so far, the Canadian situation is mirroring the one after 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’ general smugness about their banking system is actually warranted, 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, the former chief economist for Toronto-Dominion Bank and, previously, a senior official in the federal Department of Finance.

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

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

Collectively, the Big Six banks hold 90 percent of Canada’s deposits, providing them with a steady stream of relatively low-cost money to lend out or invest. That dominance also means that Canadians shopping around find little difference in fees or interest rates.

Strong revenue from these fees and interest, Mr. Drummond told me, creates an “inherent bias to be relatively safe.” The healthy profits generated by their market dominance, he added, made it unnecessary for Canadian bankers to boost earnings through risky ventures like the subprime mortgages that were at the heart of the U.S. crisis in 2008.

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

Not only do Canada’s banks follow the rules, Mr. Drummond said that their conservative ways mean that they often exceed them, for example, by holding more cash than the regulator requires.

Professor Ford isn’t quite as charitable about the nature of the country’s bankers. She recalled being at conferences in 2006 and listening to senior banking executives bitterly complain that their businesses were being held back and becoming uncompetitive globally because Canada would not match the United States on easing its regulatory control.

During the lead-up to the 2008 crisis, the Conservative government proposed a series of steps to deregulate banking. The market turmoil swiftly brought an end to that.

“Canada was lucky by being late,” she said, adding that the bankers stopped grumbling about regulation and “were all acting awfully proud of their great wisdom and prudence.”

There are costs to Canada’s banking stability. In addition to lack of competition, Professor Ford said that the banks’ play-it-safe approach stifles innovation. Among other things, she noted that the country’s banks remain heavily vested 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 to really look out for those times when we do better than our giant neighbor to the south and to attribute that to our own virtue,” she said. “But it seems to me that we should really clarify what the Canadian values are that are at stake and think about how best to advance those values; not just say: ‘Well, we’re better than the Americans.’ The question we should really be asking ourselves is: How can Canada do as well as it possibly can on its own terms?”

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

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