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 added to the mix. But again, the Canadian banking system has so far proved to be reassuringly sober and stable.

The bad banking news continued throughout the week. In a fight for its life, Credit Suisse will borrow up to $54 billion from the Swiss central bank. Eleven of America’s biggest banks have teamed up 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 Minister of Finance, brought together all of her provincial and territorial counterparts, as well as officials from the banking regulator and the Bank of Canada, for a meeting this week. After it’s over, 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 this. And so far, the Canadian situation mirrors that which followed the 2008 financial meltdown that was devastating to the banking sector in the United States. Then, as now, there was no banking crisis in Canada.

To find out what separates Canada and whether Canadians’ general smugness about their banking system is really justified, I spoke with Cristie Ford, a professor who studies banking regulation at the Peter A. Allard School of Law in India. University of British Columbia and Don Drummond, former chief economist of the Toronto-Dominion Bank and previously a senior official in the federal Department of Finance.

Both agree that one of the main differences is that the Canadian banking system has never evolved like that of the United States, where the banking system is divided among a large number of small banks.

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

Collectively, the big six banks hold 90% of Canada’s deposits, providing them with a steady stream of relatively inexpensive money to lend or invest. This dominance also means Canadians who shop around find little difference in fees or interest rates.

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

There are also regulatory differences. In the United States, the central bank manages the economy and is the regulator of the financial sector. Here, the Bank of Canada deals only with monetary policy, leaving the Office of the Superintendent of Financial Institutions to set and enforce banking rules. Mr. Drummond said he believed this separation allowed for stronger oversight. Only the biggest US banks are required to hold cash to reassure depositors – a problem with the collapse of Silicon Valley Bank – at levels similar to what regulators require of the big six Canadian banks.

Not only do Canadian banks play by the rules, but Mr Drummond said their conservative practices mean they often exceed them, for example by holding more cash than the regulator requires.

Professor Ford is not so charitable about the nature of the country’s bankers. She remembers going to conferences in 2006 and hearing senior banking executives complaining bitterly that their businesses were being held back and becoming uncompetitive globally because Canada wouldn’t compete with the states. States to relax its regulatory control.

In the run-up to the 2008 crisis, the Conservative government proposed a series of measures to deregulate the banking sector. Market turmoil quickly put an end to it.

“Canada was lucky to be late,” she said, adding that bankers had stopped complaining about the regulations and “were all extremely 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 banks’ cautious approach stifles innovation. Among other things, she noted that the country’s banks remain heavily invested in the oil and gas industry as the government tries to push forward an ambitious agenda to reduce climate change.

“Sometimes the Canadian instinct is to really pay attention to when we’re doing better than our giant southern neighbor and attribute that to our own virtue,” she said. “But it seems to me that we should really clarify what Canadian values ​​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 really should be asking is: how can Canada do as well as it can on its own terms? »

Trans-Canada

Originally from 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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