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Canadian Banking Industry FAQ

Wednesday, October 20th, 2010

The Canadian banking industry is being eyed with appreciation by foreign observers. Its financial strength has been ranked the best in the world and the most sound. Unlike foreign banks, public capital has not been injected into Canadian banks.

There is one primary ban regulator, the Office of the Superintendent of Financial Institutions, unlike the fragmented system of the US. The regulator monitors operations to nip developing problems early. The regulatory approach is reviewed two times in a decade to keep up with the business climate. Altogether, there are twenty-one banks; but the six largest contain most bank assets. They are the Bank of Montreal, the Canadian Imperial Bank of Commerce, the National Bank of Canada, the Royal Bank, Scotiabank and Toronto Dominion. All have capital exceeding both national and international standards by a substantial margin.

The Bank of Montreal founded in 1817 was the first domestic bank. It established new branches in other cities to start a trends still a feature of the largest banks. This feature was than a characteristic of banks in Scotland, where large capital banks maintained many branches. This feature of the big six has also contributed their resiliency during times of economic stress. The national nature facilitates capital transfers amongst regions to accommodate economic cycles. They do more than retail servicing and their various business lines protect them from weaknesses in individual lines of activity.

The identifying features of the banking system with its higher capital holding requirements and more diversified companies has allowed the banks to better withstand the stresses of the global financial crisis. Banks operating in Canada are divided into 3 types under The Bank Act of 1991 that divides them according to 3 schedules. Schedule I banks are domestic banks that are not a subsidiary of a foreign bank. Schedule II banks are a subsidiary of a foreign bank. The Schedule III banks are foreign banks permitted to do banking in Canada.

Generally bank management practices are more conservative in Canada, driven by more risk-averse decision makers and their more risk-averse consumers than those in America. Canadian banks are prudent lenders, while Canadian individuals have been generally prudent borrowers. This culture of financial conservatism has helped the financial community avoid engaging deeply in high risk ventures like sub-prime lending that led to the current crisis in other countries. Hence, by April 2009, seven per cent of American mortgage holders were at least 30 days behind in their payments. This amount was 17 times the 0.4 per cent of Canadian mortgage holders who were in the same position by then.

Canadian banks have remained profitable in the present period. Only one of the six did not report a profit in 2008 and all reported profits in the first quarter of the following year. They have also fared well during the rest of 2009.

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.

How to find a reliable bank in Canada? Learn more about banks in Canada here.

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