Canadian Banking System

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Geoffrey Jordan

The Canadian banking system is structured differently than in the United States. In the U.S., banks operate as bank holding companies. In Canada, banks follow a parent company approach, which leaves enough shares to influence management. The industry is much more consolidated than in the U.S. The Big Five in Canada control 90% of Canadian domestic banking assets, whereas, in the United States, the five biggest banks accounted for 9.7% of total American banking assets in 2002.^[1] The "Big Five", Royal Bank Of Canada (RY), Bank of Nova Scotia (BNS), Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Bank Of Montreal (BMO), dominate the remaining 14 domestic banks in terms of total assets.^[2] In fact, the 5th largest bank, Bank Of Montreal (BMO), is about 3 times the size of the 6th largest bank, National Bank of Canada (NA-T).^[3] The top five banks all ranked in the top 200 global banks by Forbes.^[4]

Canadian Banks and the 2008 Financial Crisis

The Canadian banking system has not been immune to the 2008 Financial Crisis as Royal Bank Of Canada (RY), Toronto-Dominion Bank (TD), and Canadian Imperial Bank of Commerce (CM) have written down more than C$2 billion^[5], but the Bank of Canada and Geneva's World Economic Forum acknowledge the resilience of the Canadian banking sector. In a December 2008 report, the Bank of Canada published their Financial System Review Report^[6] which explains how lower leverage and more conservative lending practices helped Canada's 19 domestic banks^[2] weather the financial turmoil. The World Economic Forum published its survey of 12,000 corporate executives in October 2008. The report showed that these head of companies ranked Canadian banks as the soundest in the world; U.S. banks ranked 40th on the list. Canada achieved a score of 6.8. 7.0 indicates a perfect score, which means banks are seen as entirely healthy and in no need of government assistance. 1.0 means the bank is in dire need of government aid due to insolvency. The U.S. scored 4.0.^[7] Canadian banks average a tier 1 capital ratio of 9.8%, which compares favorably to U.S. investment banks that average 4% and European commercial banks at 3.3%.^[5]

Canada versus the U.S. Financial Health

While Canada borders the United States, the difference in levels of consumer and national debt vary greatly. The financial health of a country's citizens impact their ability to pay debt owned by banks.

• According to RBC Economics Research in June of 2008, Canadian household debt as percentage of disposable income is 137% versus 182% in the US.^[8]

• As reported by Statistics Canada in December 2007, homeowner's equity as a percentage of total real estate assets is 70% in Canada versus 48% in the US.^[8]

• Loan delinquency rates in Canada are 0.29% compared to 2.20% in the US as published by the CBA, Mortgage Bankers' Association in July 2008.^[8]

In addition, the U.S. continues to build its trade and fiscal deficits, but Canada has had 10 consecutive quarters of fiscal surpluses, its net foreign indebtness is at the lowest level since 1945, and it has had 9 consecutive quarters of current account surpluses.^[8]