If inflation and rising interest rates weren’t enough to cause concern about the global economy, bank failures or near-collapses added to it. But again, Canada’s banking system has so far proven reassuringly sober and stable.
The gloomy banking news continued throughout the week. IN fight for his life, Credit Suisse will borrow up to $54 billion from the Swiss central bank. Eleven of America’s largest banks have merged infusion of 30 billion dollars to First Republic Bank, which is based in San Francisco.
[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 finance minister, gathered 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 was 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 that. And so far, Canada’s situation mirrors that of the aftermath of the 2008 financial collapse that devastated banking in the United States. Then, as now, there was no banking crisis in Canada.
To find out what separates Canada and if the general of Canadians complacency about their banking system is indeed justified, I spoke with Cristie Ford, a professor who studies banking regulation at the University of British Columbia’s Peter A. Allard School of Law, and Don Drummond, a former chief economist at Toronto-Dominion Bank and formerly a senior official at the federal Treasury .
Both agree that one key difference is that Canadian banking has never developed like that in the United States, where banking is spread among a large number of small banks.
“We have six major banks in Canada; it’s a highly concentrated industry – one might say it’s oligopolistic,” Professor Ford said, adding that dominance limits customers’ competitive options. “They all benefit from having a nice base of depositors who pay fees, which allows them to be extremely profitable businesses.”
Together, the Big Six banks hold 90 percent of Canadian deposits, giving them a steady supply of relatively cheap money to lend or invest. This dominance also means Canadians shopping nearby will find little difference in fees or interest rates.
The strong income from these fees and interest, Mr Drummond told me, creates “a natural bias to be relatively safe”. The healthy profits generated by their market dominance, he added, meant that Canadian bankers did not have to boost profits through risky ventures such as the subprime mortgages that were at the heart of the 2008 U.S. crisis.
There are also regulatory differences. In the United States, the central bank controls the economy and is the regulator of the financial industry. Here, the Bank of Canada only cares about monetary policy, leaving the Office of the Inspector General of Financial Institutions to set and enforce banking rules. Mr Drummond said he believed the separation led to stronger oversight. Only the biggest U.S. banks need to have cash on hand to appease depositors — a problem with the collapse of Silicon Valley Bank — at levels similar to those required by regulators from Canada’s Big Six banks.
Not only do Canadian banks follow the rules, but Mr. Drummond said their conservative ways 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 recalled being at conferences in 2006 and listening to senior bank executives complain bitterly that their businesses were being held back and becoming uncompetitive globally because Canada would not match the United States in loosening regulatory control.
In the run-up to the 2008 crisis, the Conservative government proposed a number of steps to deregulate banking. Market turmoil quickly put an end to that.
“Canada was lucky to be late,” she said, adding that bankers had stopped grumbling about regulation and “everyone was acting terribly proud of their great wisdom and prudence.”
It costs the stability of Canadian banking. As well as a lack of competition, Professor Ford said banks’ “play-it-safe” approach was holding back innovation. Among other things, she noted that the country’s banks remain heavily involved in the oil and gas industry, while the government is trying to push through an ambitious program to curb climate change.
“Sometimes the Canadian instinct is really to look at the times when we’re doing better than our giant neighbor to the south and chalk it up to our own virtue,” she said. “But it seems to me that we should really get clear about 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 should really be asking is: How can Canada behave as well as it can on its own terms?
Trans Canada
Born in 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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