Tom Hanson/AP
Bank of Canada Governor Mark Carney leaves his office in Ottawa, Canada.

Canadian Banks Surviving Amid Global Finance Crisis

November 12, 2008 11:01 AM
by Liz Colville
While many nations’ banks are faltering in the credit crisis, Canada’s banks have remained largely unscathed by the economic downturn.

Canadian Banks Have ‘Stepped Up’

As many Group of Seven (G7) countries, including the United Kingdom, the United States and Germany, have found themselves bailing out their failing banks with government money in recent weeks, Canada and its banks remain “solid and solvent,” Time magazine reports.

But how? For one, explains Time’s Erik Heinrich, the Canadian government agreed to insure the money it borrows from other banks, because other countries’ banks that have done this now “get a government seal of approval” and hence a “competitive advantage” over those that don’t have government backing.

Also, in the 1980s the Canadian government “decided to allow commercial banks to acquire investment dealers on Toronto’s Bay Street, the country’s financial hub,” Heinrich explains, meaning that investment dealers were subjected to the same tough regulations as commercial banks. By contrast, in the United States, investment dealers are currently “subject to only light supervision” by the Securities and Exchange Commission (SEC).

But despite Canadian banks’ stability, the Toronto Stock Exchange (TSX) has suffered as have other major exchanges. A new report from CIBC World Markets—a branch of CIBC, one of Canada’s largest banks—suggests that the “‘building blocks’ for a sustained [economic] rally are not yet in place,” Canada’s Financial Post reports.

Notably, CIBC was the only Canadian bank to lose money due to the sub-prime mortgage crisis, according to finance blog Cosmoloan. Its losses amounted to approximately $2 billion.

Opinion & Analysis: Canada’s solid economy

In the Financial Post, CIBC economist Jeff Rubin notes, “With credit and liquidity fears abating somewhat” due to government injections around the world, “concern” in Canada “is rapidly shifting to one of the other key factors clouding prospects for a heavily resource weighted TSX: the troubled global economy.”

But a survey by the World Economic Forum, an influential organization based in Geneva, Switzerland, recently ranked Canada as the “world’s soundest banking system,” a fact noted in the Time article. The survey was published in early October. Reuters reported Oct. 9 that the United States “rated only 40” just following the collapse of several major U.S. banks, behind Germany at 39 and ahead of the United Kingdom at 44. Behind Canada was Sweden, followed by Luxembourg.

The Bank of Canada’s governor, Mark Carney, suggested in a recent interview with the Financial Post that Canada’s regulatory system “could form the backbone of any new rules governing global finance that countries eventually agree on,” a suggestion echoed by Time’s Erik Heinrich.

Reference: Canadian bank regulations

Finance blog Cosmoloan runs through key laws and regulations affecting Canadian banks and credit unions, explaining that the Canadian Bank Act of 1991 has been instrumental in bank regulation. An essential clause in the Act states that, “Domestic banks are the only institutions allowed to hold and enforce security interests (mortgages) under Canadian law. The fact that only domestic banks can issue mortgages means that outside firms cannot purchase up large quantities of debt for profit.”

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