Megan Brooks
The Canadian banking system is dominated by six large institutions that serve both individual and business customers. While it is not impossible for a Canadian bank to fail, experts agree that Canadian banks are significantly less vulnerable to failure than banks in the US. Since 2001, there have been zero bank failures in Canada compared to 563 in the US. Canadian banks have much more robust capital requirements than other parts of the world, and their assets are more diversified. Additionally, the Canada Deposit Insurance Corporation (CDIC) insures eligible deposits of up to $100,000 per account held at member institutions, protecting customers from losing their money in the event of a bank failure.
| Characteristics | Values |
|---|---|
| Possibility of Canadian bank failures | Unlikely but not impossible |
| Canadian bank failures since 2001 | 0 |
| US bank failures since 2008 | 560+ |
| Reasons for Canadian banks' stability | Conservative regulatory regime, strong focus on interest rate risk management, balance sheet management, liquidity risk management, robust capital requirements, diverse deposit and lending sources, lower leverage, strong leadership, supervision by respected authorities |
| Canadian banks' resilience to severe economic downturns | Major banks would incur significant financial losses but remain resilient and maintain capital levels above the regulatory minimum |
| Canadian banks' average asset-to-capital multiple in 2008 | 18 |
| US investment banks' average asset-to-capital multiple in 2008 | Over 25 |
| Deposit insurance | Canada Deposit Insurance Corporation (CDIC) insures eligible deposits up to $100,000 per account |
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What You'll Learn
Canadian banks are less vulnerable to failure than US banks
Canadian banks are significantly less vulnerable to failure than US banks. In fact, there have been zero bank failures in Canada since 2001, compared to 563 in the US. The Canadian banking system is different from the US system. Canada has 28 domestic banks compared to over 7,000 in the US. The biggest six banks in Canada, including the Royal Bank of Canada and the Toronto-Dominion Bank, have been designated as Domestically Systemically Important Banks (D-SIBs) and collectively control more than 85% of domestic assets. This concentrated market means that these banks tend to work together, reducing entry-level risks and costs.
Canadian banks are also well-regulated, with the federal regulator, the Office of the Superintendent of Financial Institutions (OSFI), responsible for bank regulation and oversight. OSFI's regulations include prudential, governance, and risk requirements, as well as capital, liquidity, and leverage requirements. D-SIBs are required to maintain an additional capital buffer, further contributing to the stability of the system.
Additionally, deposits in Canada are protected up to $100,000 by the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation that insures deposits in the event of financial institution failure. Since its establishment in 1967, CDIC has protected over two million depositors, ensuring that no one loses their insured deposits.
While it is important to note that Canadian banks are not entirely immune to failure, especially in the context of a severe economic downturn, they are broadly resilient. For example, during the 2007-2008 global financial crisis, Canadian banks emerged relatively unscathed compared to their US counterparts. This resilience can be attributed to the strong capital position of Canadian banks and their ability to set aside funds to deal with credit losses.
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Canada's conservative regulatory regime
Canada's banking system has proven to be well-regulated by the Office of the Superintendent of Financial Institutions (OSFI). Unlike the United States, where regulatory jurisdiction is fragmented, OSFI has jurisdiction over a broad list of financial institutions, including banks, trust and loan companies, insurance companies, and other financial institutions. OSFI's mandate is to "ensure that financial institutions are regulated [...] so as to contribute to public confidence in the Canadian financial system".
Canada's bank regulatory requirements apply equally to all banks in Canada, regardless of their ownership structure or whether they are owned by Canadians or non-Canadians. Banks in Canada are also well-capitalized, with high Tier 1 ratios relative to banks in other countries. For example, at the end of the third quarter in 2008, these ratios ranged from 9.47% to 9.81% compared to other global banks that were in the 6%, 7%, and 8% range.
The Canada Deposit Insurance Corporation (CDIC) is a federal Crown corporation that exists to protect eligible deposits to member financial institutions against their failure. Since its establishment by Parliament in 1967, there have been 43 financial institution failures affecting over two million depositors. However, no one lost a single dollar of insured deposits. Deposits of up to $100,000 (including principal and interest) across seven different categories are insured.
Additionally, Canadian financial institutions have a conservative culture that pervades all aspects of the banking business, from lending to trading. This cultural phenomenon, combined with strong regulation, has contributed to the relative stability of Canadian banks.
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The Canada Deposit Insurance Corporation (CDIC)
The CDIC insures eligible deposits, including savings accounts, term deposits, and GICs, up to a maximum of $100,000 per insured category at each member institution. This coverage extends to deposits in foreign currencies and those with terms greater than five years. Additionally, CDIC serves as the resolution authority for Canada's largest banks and has tools to assist or resolve failing member institutions.
The resilience of the Canadian banking system was demonstrated during the COVID-19 pandemic. While there were declines in employment and economic activity, banks were able to maintain their stability and absorb credit losses. This resilience can be attributed to the banks' stronger capital position and precautionary provisions for credit losses.
CDIC membership is crucial for deposit insurance. Scotiabank, for example, offers eligible deposit insurance through the CDIC for specific products, while its Scotia Mutual Funds are not insured by the CDIC or any other government deposit insurer. It is essential for depositors to understand how CDIC works and confirm the CDIC membership of their financial institutions to ensure their deposits are protected.
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Canada's banks have strong levels of capital
Canadian banks have much more robust capital requirements than other parts of the world, so even if there is more pressure on the value of Canadian banking assets, they have a lot of capital available to provide a buffer against losses. During the pandemic, the capital buffers of Canada's largest banks increased as earnings outpaced the distribution of dividends, and banks built up high reserves in anticipation of potential future loan impairments.
The strong capacity of banks to generate internal revenues, or pre-provision net revenue, adds to their capital ratios. Canadian banks start from a position of high profitability, typically posting returns on equity greater than 15% in normal times. They also operate under a highly diversified model with significant retail and commercial lending operations, capital markets operations, wealth management arms, and insurance businesses. This diversification helps ease the impacts on earnings when a particular business line is struggling.
Canada's regulatory framework also plays a role in ensuring banks maintain strong levels of capital. The Office of the Superintendent of Financial Institutions (OSFI) mandates banks to maintain higher capital buffers during good times through its Domestic Stability Buffer (DSB). Regular legislative reviews also take place, typically about every seven years, where the government and industry examine the legislative foundations of the banking system and consider any necessary changes to ensure the resilience of Canadian banks.
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The Big Five's larger share of loans
Canada's banking system is dominated by six major institutions, often referred to as the Big Five. These banks serve both individual and business customers and are considered "too big to fail". The federal government would likely step in to rescue these banks in the event of a crisis, as per Alfred Lehar, an associate professor at the University of Calgary's Haskayne School of Business.
The conservative regulatory environment in Canada also contributes to the stability of the Big Five. Canadian banks are subject to stringent capital and liquidity requirements, with a regulatory cap on leverage at an asset-to-capital ratio of 20 to 1. These requirements ensure that banks maintain strong levels of capital, providing a buffer against potential losses.
Furthermore, Canadian banks have demonstrated prudent risk management over the years, particularly during the global financial crisis. They have also set aside significant funds to cover potential credit losses, further strengthening their financial position.
While no banking system is entirely immune to failures, the Big Five's larger share of loans, combined with robust regulatory oversight and risk management practices, makes them relatively safer. Their stability contributes to the overall resilience of Canada's banking system.
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Frequently asked questions
Canadian banks are significantly less vulnerable to failure than banks in the US, according to experts. There have been zero bank failures in Canada since 2001, compared to 563 in the US. However, it's not impossible for a Canadian bank to fail, and an economic slowdown could bring about more bank failures globally.
Firstly, Canadian banks have much more robust capital requirements than other parts of the world, so they have more capital available to provide a buffer against losses. Secondly, Canadian banks are tightly regulated when it comes to interest rate risk management and liquidity risk management. Thirdly, Canadian bank deposits and lending come from diverse sectors, rather than one niche sector.
The Canada Deposit Insurance Corporation (CDIC) would step in to protect eligible deposits. The CDIC insures deposits up to $100,000 per account held at member institutions.
