Analysis on Canadian Banking

Photo by Rodrigo Amorim
Photo by Rodrigo Amorim

A financial system can’t work without banks. We use bank services every day, and probably we can’t imagine life without them. However, banks don’t mean only credit cards, bank accounts, and loans. They play a significant role in the country’s economy and finance.

Banks in General

A bank is a financial institution serving as a financial intermediary. There are three main types of banks: central, commercial, and saving. A central bank is usually owned by the government and it’s in charge of overseeing commercial banks’ activities, the interest rate, the regulation of money supply, and the implementation of the country’s monetary policy. A commercial bank provides transactional, savings, and money market accounts. It processes payments (for example by internet banking), issues bank cheques and bank drafts, lends money, accepts money on time deposits, and brokerages insurance, unit trusts, et cetera. It can also underwrite bonds. A saving bank gathers savings and pays interest or dividends to savers.


Every commercial bank requires a special license to operate and is regulated by specified regulations that protect depositors, minimize the risk of disruption resulting from adverse bank trading conditions, protect banks from being used for criminal purposes, provide banking confidentiality, and direct credits to selected sectors.

Bank of Canada by d neuman
Bank of Canada by d neuman

Central Bank in Canada

The central bank is called the Bank of Canada and its headquarters is in Ottawa. It was opened in 1935 after many years of Canada not having its own central bank, during which time the main government finance operations were provided by Bank of Montreal. The central bank was created by the Bank of Canada Act (a piece of Canadian federal legislation) and was nationalized in 1938. Today, the Bank’s governor is Mark Carney, and its shares are held by the Ministry of Finance. The bank’s earnings go into the federal treasury.

Commercial Banks in Canada

The biggest Canadian commercial banks are called the Big Five, and they include the Royal Bank of Canada, with assets of $655 billion, TD Bank Financial Group, with assets of $557.2 billion, Scotiabank, with assets of $496.5 billion, the Bank of Montreal, with assets of $388.5 billion, and the Canadian Imperial Bank of Commerce, with assets of $335.9 billion. They are also international financial conglomerates and they have large international subsidiaries. The other banks form a group of smaller, second tier banks (for example, the ING Bank of Canada).

Interest Income of Canadian Banks
Interest Income of Canadian Banks

The Canadian Banking System

Banking in Canada is considered the most efficient banking system in the world. It was copied from Scotland. Canada has only one regulator, The Office of the Superintendent of Financial Institutions (OSFI), which is an agency of the Canadian government that reports to the Minister of Finance. Only credit unions are regulated by the provinces. In September 2010, the World Economic Forum ranked Canada’s banking system as the world’s soundest for the third consecutive year. “To again be named the soundest banking system in the world is positive for all Canadians. A steady and secure banking system is an important contributor to Canada’s economic recovery and long-term growth,” said Nancy Hughes Anthony, President and CEO of the Canadian Bankers Association. “While the Canadian banking industry supports the goal of stabilizing and strengthening the global financial system and the move towards improved and consistent global capital standards, it is important to ensure that banks in Canada remain on a level playing field with banks around the world.”

Canada versus the US

Canada is the only industrialized country in the world that has survived the recent crisis years without any bank failures, although its relations with the US are very close. Mark J. Perry, Professor of Finance and Business Economics, and many other economists tried to explain why and asked what the US can learn from Canada about sound banking. He stated eight main advantages of the Canadian banking system:
1. Full Recourse Mortgages – the borrower is fully responsible for the mortgage, even in the case of foreclosure. The US has a lot of recourse and non-recourse laws that are not so strict, which led to irresponsible borrowing
2. Shorter-Term Fixed Rates – the mortgage rates are renegotiated at least every five years
3. Mortgage Insurance More Common in Canada – about 50 per cent of Canadian mortgages are insured, much more than the only 15% of US insured mortgages before the crisis
4. No Tax-Deductible Mortgage Interest – home owners don’t gain any tax advantage, but homeownership in Canada is higher than in the US
5. Higher Prepayment Penalties – prepaying is not as convenient as it is in the US
6. Public Policy – the Canadian government supports low-income rental housing, not homeownership for low-income households
7. Banking System – the Canadian banking system is concentrated into the Big Five Banks, so discussions during the crisis were much simpler
8. Bank Safety – less mortgage securitization, a smaller subprime mortgage market, wide use of electronic mortgage payments, and other factors that contribute to Canada’s safe banking system

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