Title: Strong and dependable
Sub-title: Canada’s banking system is emerging from the financial crisis looking better than ever
Two years ago this week, central banks around the world finally tangibly admitted what almost everyone else had long suspected. At that time (in August of 2007) those coordinated efforts by U.S., Japanese, European and many other monetary authorities, which pumped tens of billions of dollars into the system, (the first effort of this scale since the September 11th terrorist attacks) said more about the ongoing financial crisis than any bureaucrat’s speech. It was serious, and if nothing were done, the economy threatened to slip into depression.
Those central bank actions turned out to be just the tip of the iceberg. Since then, governments have printed or pumped literally trillions of dollars into the global economy, and only now are economists saying a recovery might be under way.
The cost to the financial sector stemming from the global credit crisis was huge and its full extent may not be known for years. Several American financial institutions, including AIG, Countrywide Financial, Fanny Mae, Freddy Mac, Bear Stearns, Lehman Brothers, Citigroup, Goldman Sachs and many others, either declared bankruptcy, were forced to reorganize or were bought out. Similar events occurred in Europe and England. One country has thus far escaped untouched from this debacle: Canada.
A wealthy country, with a conservative banking system
So what made Canada so special? “Our financial system is one of the soundest in the world,” said Mark Carney, governor of the Bank of Canada, in a speech earlier this year, which neatly summarize the situation. If anything, Carney was being modest. Last year, the prestigious World Economic Forum ranked Canada’s banking system as the world’s soundest.
There are several reasons for the success of Canada’s financial system. Ironically, much of it relates more to the country’s inherent wealth and the conservatism of its citizens and regulators than it does with the skills of our banking sector managers. As a natural resource economy, rich in gold, oil, land, timber and almost anything else you’d care to name, Canadians have had it far easier than almost anyone else in the world. As a result, both businesses and ordinary citizens here do not have to take as many risks as those in other countries in order to build their wealth.
Furthermore, more equitable wealth distribution initiatives here, such as free medical care and low cost universities, means that Canadian households are able on average to put up far larger down payments on the real estate that they buy. As a result, public pressure here to force governments to allow banks to adopt laxer lending guidelines has been close to non-existent.
No sub-prime loans, mean better capitalized banks
That meant when the credit crisis hit, Canadian banks had far fewer sub-prime loans on their books than did U.S. banks. As a result, outstanding loans tended to be easier to collect. According to the Canadian Bankers Association, as late at this May, only 0.38 percent of Canadian mortgages were in arrears. South of the border, Deutsche Bank recently predicted that half of all U.S. homeowners are expected to owe more than their house is worth by 2011, up from 26 percent earlier this year.
The fact that they are holding less bad loans, means that Canadian banks are far more stable. In fact the Canadian Bankers Association claims that Canadian banks are the best capitalized in the world. This makes investors far more willing to lend to and invest in them. On top of that all, the Canadian Deposit Insurance Corporation insures all deposits in qualified Canadian banks up to a maximum of $100,000.
That is by no means to say that Canadian banks are perfect. For example small business stakeholders regularly complain that our banks are so big and well capitalized, that they have little or no incentive to pay attention to that sector. The large size of Canadian banks and the corresponding diminishing of competitive pressures has also led to a wave of branch closures in smaller communities, which has led to a vast increase in the number of “one bank” or even “no bank” towns.
That said, on balance while not perfect, Canada’s banking system seems to have served the nation well in recent years.
Let’s just hope that its positive record will continue for a long time to come.
Peter Diekmeyer is Bankrate.ca’s economics correspondent.
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