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How strong are the Canadian banks? Perspectives on the Canadian banking industry

According to Banking Banana Skins, which publishes a unique report that provides insight into the changing risk factors facing the global banking industry, as seen by a wide range of bankers, banking regulators and close observers of the banking scene around the world, Canadian banking executives felt the most prepared to deal with risks compared to their global counterparts ’ a testament to the relative strength of the Canadian banks.

The Canadian banking industry is held in high regard by our global counterparts, due to stability during the recent financial crisis. We’ve also seen strong growth with overall profits for Canada’s Big Six banks exceeding CA$30 billion for the first time in history. But new economic, regulatory and competitive challenges have affected the industry and many global banks have improved their position and profitability over the past few years.

So how do we compare to our global peers? Quite well, actually.

If we consider the definition of ‘Big Five Banks’, which is a term used in Canada to describe the National Bank of Canada, Royal Bank, Canadian Imperial Bank of Commerce, The Bank of Nova Scotia and TD Canada Trust, these banks dominate the Canadian banking industry. The banks’ shares are widely held, with any entity allowed to hold a maximum of twenty percent. The Bank of Montreal is considered the sixth bank, which isn’t typically included in the list of the Big Five, perhaps due to the fact that the other five banks are operationally based in Toronto.

In 1998, the Bank of Montreal proposed a merger with Royal Bank around the same time that CIBC proposed to combine with the Toronto-Dominion Bank. The banks argued that these mergers would enable them to compete globally with other financial institutions.

This would have left Canada with only three major national banks. Thus, the mergers were reviewed by the Competition Bureau of Canada which declared that negative effects (such as higher user fees and local branch closures) from the mergers would far outweigh the benefits of allowing the mergers. Ultimately, it was then Finance Minister Paul Martin who rejected both proposed mergers. The issue since has not been revisited by succeeding Finance Ministers; it has been cited as a reason that the Canadian economy easily weathered the 2007 subprime mortgage financial crisis compared to other nations, and the recognition of numerous Canadian banks on the Bloomberg 2011 list of twenty strongest large banks in the world.

In review, stringent banking regulations in Canada may be the reason for the overall economic strength enjoyed in Canada. In line with this strict banking regulation, Canada’s federal government has sole jurisdiction for banks according to the Canadian Constitution, specifically Section 91(15) of The Constitution Act, 1867 (30 & 31 Victoria, c.3 (UK)), formerly known as the British North America Act, 1867. Meanwhile, credit unions/caisses populaires, securities dealers and mutual funds are largely regulated by provincial governments.

Viva la Canada!

 

References:

http://www.pwc.com/ca/en/banking-capital-markets/banana-skins-canadian-results.jhtml

http://en.wikipedia.org/wiki/Big_Five_%28banks%29

http://www.pwc.com/ca/en/banking-capital-markets/canadian-banks.jhtml

 

 

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