Canada's Financial System: How Is It Still Stable in This Crisis? 15 comments
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The IMF Country Report for Canada published Friday offers some unique perspectives on the reasons for the stability of Canada’s financial system since the credit crunch began. There have no been no failures of financial institutions, no large scale bailout of banks and the financial system did not undergo severe systemic pressures like it did in the U.S. and UK. In this post, let's review some of the key points from this report.
1. Sound Supervision and Regulation: Regulators follow some of the best practices with respect to supervision of institutions including the new Basel principles for banking supervision. As a result writedowns by Canadian banks have been much smaller when compared to major-peer countries as shown in the chart below.
Click to enlarge
2. Strict Capital Requirements: Canadian banks’ Tier 1 Capital Ratio exceeds 7% which is higher than the 4% that required by the Basel Accord.
As of February, 2009 the Tier Ratios of the six large banks are as follows:
Click to enlarge
3. Leverage ratio: This is limited to just 5% of total capital or up to 20% maximum. U.S. banks on the other hand are allowed up to 33% based on their strength and sophistication.
4. Conservative lending policies: Canadian banks like their customers exhibit low risk tolerance and have very conservative lending policies. Also their domestic retail market is profitable and stable unlike in the US.
5.Conservative Residential Mortgage Markets: In the US, 25% of all mortgages are non-prime and 60% of mortgages are securitized. In Canada these numbers are just 5% and 25% respectively. In addition most of the mortgages in Canada have Loan-To-Value [LTV] ratios of below 80%.
6. Periodic Regulatory Reviews: Since the financial sector is ever-changing with innovations and globalization, the federal authorities in Canada review the financial regulations every 5 years. It is not clear if a similar process exists in the U.S.
7. Cooperation among regulatory agencies: Officials of the various government agencies such as the Office of the Superintendent of Financial Institutions [OSFI], Finance
Canada, Bank of Canada [BoC], Canada Deposit Insurance Corporation [CDIC], and the Financial Consumer Agency of Canada meet regularly as part of the Financial Institutions Supervisory Committee [FISC] to discuss and exchange regulatory information. In the U.S., agencies such as the Office of Thrift Supervision [OTS], FDIC, Federal Reserve, etc. usually operate independently of one another. Inter-agency cooperation is non-existent for the most part.
8. Proactive response to financial strains: Federal authorities are proactive when it comes to dealing with financial strains to the system. The 2009 budget contains many provisions to support stability in the financial system.
As a result of the above reasons, all the top five Canadian banks have become strong and powerful among the banks in North America.
Click to enlarge
For example, the above table shows that Royal Bank of Canada (RY) had a market cap larger than Bank of America (BAC) on April 1, 2009. And all five banks were well ahead of Citibank (C). Citibank used to have a market above $200B only a few years ago. Now if not for the government bailout, the bank would have failed. Some experts like Mark Patterson have said that many large U.S. financial giants are technically insolvent.
Overall despite being very close to the U.S. in terms of financial and economic linkages, Canadian banks have so far shown remarkable resilience during this crisis.
Source: Canada: 2009 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion, May 2009, IMF
Disclosure: Long all five Canadian Banks listed in the US markets
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This article has 15 comments:
The big 5 should continue to hold their own if they can resist for the moment the temptation to buy up what appear to be US bargain acquisition targets. They are all looking and shopping but I would think the dust needs to settle in the US a little more before any big plays go forward. I like Canadian Banks and part of their strength is that they have kept some distance from many of the US banks risky shenanigans.
Hopefully they don't blow it by investing in some of those financial assets before the balance sheets are cleansed a little more first.
The true strength of any system is best shown when it is under stress. During the bubble times of 2003-2007 there were a lot of talk about the Canadian banks being hindered by stricter rules and regulations. In late 2007 everyone started to agree that it wasn't such a bad thing after all. I hear a lot less talk about de-regulating the Canadian banking system now.
Size matters, US at 300 M versus Canada's 30 M population, has the effect of everybody "knowing" someone. The principle of 'doing the right thing' is still respected. Fear of being found out and ostracized by society carries over into the business sector. Case in point - we are still investigating an ex-Prime Minister for "wrong doing" more than 15 years after the fact!
Sadly, as an American, I very much doubt that. Unbridled greed and utter lack of accountability still dominate our boardrooms. Until we tie their pay hikes to their average worker's wages and bonuses to the 5 year average stock price, don't expect it to ever change.
Apologies in advance for the rip roaring inflation that's bound to clobber you and all our trading partners in a few years.
On May 25 10:57 AM cameroni wrote:
> The Canadian Government got a few things right as it turns out. They
> would not give a stamp of approval to the major Canadian banks merging
> and they have kept insurance separate from finance and banking.
>
>
> The big 5 should continue to hold their own if they can resist for
> the moment the temptation to buy up what appear to be US bargain
> acquisition targets. They are all looking and shopping but I would
> think the dust needs to settle in the US a little more before any
> big plays go forward. I like Canadian Banks and part of their strength
> is that they have kept some distance from many of the US banks risky
> shenanigans.
>
> Hopefully they don't blow it by investing in some of those financial
> assets before the balance sheets are cleansed a little more first.
In any event, I haven't even heard of a case of a homeowner walking away from their property although I'm sure there must be a few. Prices haven't crashed far enough to make it necessary for the most part.
On May 25 11:15 AM Donald Ingram wrote:
> Unlike the US home buyers, Canadians are not allowed to, nor can
> they walk away from their mortgages. Their financial obligations
> follow them.
> Size matters, US at 300 M versus Canada's 30 M population, has the
> effect of everybody "knowing" someone. The principle of 'doing the
> right thing' is still respected. Fear of being found out and ostracized
> by society carries over into the business sector. Case in point -
> we are still investigating an ex-Prime Minister for "wrong doing"
> more than 15 years after the fact!
Good summary and I would concur with all your eight points.
As a former Canadian citizen, I would venture to add perhaps a possible 9th point. Back in the eighties, I recall there was a magazine article jokingly comparing American and Canadian life-styles in the most "common" kind of cars they would drive, and it postulated, by support of then statistics, that the "average" Canadian would and could afford a Ford Pinto, compared with something like a Pontiac or a Buick Century for the American counterpart. Perhaps that would shed some light about the subtle differences between these two most wealthy neighboring countries in the world.
And so my point is that there seems to be less temptation for going overboard in leveraging assets, to the point of being akin to gambling, which in my view was actually what happened in our debacle (Bursting of the Bubble is the right word).
Teutonic
When the question was asked "how did they do it?", and when the answer was given by Fareed Zakaria as "they use common sense".... it was never spoken of again in American media. According to
On May 25 02:40 PM bbowen7 wrote:
> It is surprising that all of the US government's discussions of the
> problems in the banking sector have not mentioned Canada as having
> some good ideas. National arrogance?
Well, they are better !!!
A little anekdote: Ordering a soft drink in Winter in US with "NOOOO ICEEE" is simply impossible, they will put ice in your glas.
I got onto air Canada, was tired, did not want to ask for no ice, stewardess gives me my jiuce and asked me "with or without ice"
And this easy tale followed me through Canada.