"One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis … [It's] shown itself to be a pretty good manager of the financial system in the economy in ways that we haven’t always been here in the United States," President Obama said.
Thanks in part to the near-decade-long commodities boom, Canada looks to be in better shape than most countries.
The northern nation has had 12 consecutive years of budget surpluses. Its national pension system has been overhauled, and its healthcare structure, funded by taxes and accessible to all, runs at 9.7% of gross domestic product (GDP), versus 15.2% in the United States.
Also, Canadians tend to be somewhat more conservative than Americans. Though they can’t brag about being the biggest savers around, they do sock away for rainy days at two-to-three times the American rate of 1% of disposable income. And they’ve had the good sense to avoid the insanely irresponsible "no-money-down," or worse yet, "negative amortization" mortgage shenanigans.
Due to centuries old bilateral trade between the two nations, and now the North American Free Trade Agreement (NAFTA), it has long been an accepted "truism" that when the United States sneezes, Canada catches cold.
At first glance, that makes sense, as roughly 75% of Canadian exports are destined for the United States. But in reality, those tend to be concentrated in the manufacturing sector, and exports to America equate to less than 15% of Canada’s total economic output.
But where Canada has really shone is in its banking system. Except for some minor, limited exposure, Canadian banks have not suffered a single failure throughout the financial crisis that’s been gripping much of the rest of the world.
In fact, last year, the World Economic Forum ranked Canada’s banking system as the world’s safest. America’s banking system, by comparison, ranked 40th.
The beauty of Canada’s banking system is that it is essentially an oligopoly. That is, five large banks dominate, creating a core that’s rounded out by a handful of smaller banks and credit unions, which tend to concentrate regionally.
So why are Canadian banks so much healthier than their worldwide counterparts?
To begin with, while hefty fees imposed by Canadian banks chafe consumers, they also help keep the institutions flush with capital. And better capitalization helps the banks maintain better asset-to-capital ratios.
The asset-to-capital, or leverage ratio, of Canadian banks is about 18-to-1. Some larger American banks have ratios double that, and still other European banks find themselves at an untenable 60-to-1.
Despite sizable operations in the United States, a more conservative mindset at the management level kept Canadian banks mostly out of the subprime mortgage debacle. And that minimal exposure helped avoid damage to their credit risk profiles.
Average capital reserves for Canada’s largest banks - also known as Tier 1 capital (common shares, retained earnings, and non-cumulative preferred shares) - to risk-adjusted assets is at 9.8%. For comparison, U.S. federal bank regulators require a minimum of 7%. Commercial banks in the United States are close behind that level, but investment banks (until they essentially disappeared) averaged 4%. The average capital reserves of Europe’s commercial banks are an anaemic 3.3%.
Laws were modified in the late 1980s, allowing Canadian banks to acquire investment dealers. The catch, though, was that they’d have to follow the more-stringent regulations that commercial banks are subject to. That turned out to be a blessing in disguise. In sharp contrast, Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) had faced only lenient oversight from the U.S. Securities and Exchange Commission (SEC).
