| Questions And Answers About Canadian Banking Industry |
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| Written by Chris Gordon |
| Wednesday, 27 October 2010 19:22 |
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The Canadian banking industry is being eyed with appreciation by foreign observers. Its financial strength has been ranked the best in the world and the most sound. Unlike foreign banks, public capital has not been injected into Canadian banks.
The Canadian banking industry is being eyed with appreciation by foreign observers. Its financial strength has been ranked the best in the world and the most sound. Unlike foreign banks, public capital has not been injected into Canadian banks. Canada has a single regulator for its banks, the Office of the Superintendent of Financial Institutions, which keeps a close watch on their operations and can spot problems early and influence the banks to avoid certain risks. The financial regulatory framework is reviewed every five years, keeping policies relevant in a constantly evolving market. In the U. S., by contrast, the regulatory system is fragmented allowing things to fall between the cracks. Canada has twenty-one domestic banks, but the six largest hold more than ninety percent of the assets in the domestic banking class. The six largest banks are Royal Bank, Toronto Dominion, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada. All the domestic banks have capital backing their loans and investments that far exceeds the minimum requirements of international or national regulations. They also exceed capital requirements of both national and international standards by significant margins. The first Canadian bank was the Bank of Montreal founded in the year 1817, which also started the first domestic currency to replace foreign currencies which were acceptable legal tender in Canada at the time. Subsequently new branches were established in other cities. It inaugurated a feature of Scottish banks where a few banks with large capital maintained numerous branches. This feature is shared by the majority of the big six, which has also been a factor in their resiliency in the face of economic stress. Their national range enables transfers of capital from regions with varying economies. These banks also have different types of business lines. The identifying features of the banking system with its higher capital holding requirements and more diversified companies has allowed the banks to better withstand the stresses of the global financial crisis. Banks operating in Canada are divided into 3 types under The Bank Act of 1991 that divides them according to 3 schedules. Schedule I banks are domestic banks that are not a subsidiary of a foreign bank. Schedule II banks are a subsidiary of a foreign bank. The Schedule III banks are foreign banks permitted to do banking in Canada. Management practices are not prone to risk taking. Banks and their customers are generally risk-averse. This culture of prudence prevented their embrace of risky activities that weakened American banks. American mortgage holders are behind on their mortgage payments to a far greater degree than Canadian borrowers. Canadian banks have so far remained profitable despite the worsening global condition. Five of the six reported a profit in 2008 and all reported profits in the first quarter of 2009. They fared well during the latter part of 2009 as well. The Canadian system, it has been said, can show others to be more stable. But, this characteristic has been demonstrated earlier as well. Nine thousand banks failed in the US during the Great Depression. But, none on the Canadian side. During the more recent Savings and Loan Crisis, just two small banks failed which were the first since 1923. In America, however, nearly 3,000 failed. As the number of failing American banks keeps rising, Canada has avoided bank failure. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. To get a list of Canadian financial institutions visit this guide to banking in Canada. |