Canada’s Strong Banking System: Benefitting Canadians
Last modified: 07 September 2011
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Fast facts
- 85% of Canadians express confidence in the Canadian banking system.1
- 92% agree that the strength of large Canadian banks is critical to the health of the overall economy.2
- The World Economic Forum has ranked Canada’s banking system as the most sound in the world, four years in a row.3
- For the past two years, Moody’s Investor Service has ranked Canada’s banking system as first in the world for financial strength.4
- 91% of Canadians are confident that their deposits are secure.5
The bottom line
Canada’s banks are well managed, well regulated and well capitalized. Our strong and resilient banking system is at the heart of Canada’s economic recovery.
Canada has a national banking system with diversified, well-managed institutions
- Canada’s banks are well-diversified organizations; investment banks are anchored by solid deposit-taking institutions.
- Canada’s system of national institutions diversifies regional risk, so a downturn in an individual economic sector is balanced. And a national system contributes to economic growth by moving funds from areas of excess deposits to regions where growth is creating demand for new credit.
- Banks in Canada make lending decisions on a case-by-case basis, extending credit to those who have the capacity to repay their loans. This prudent approach is a key reason why banks in Canada have largely avoided the problems that have plagued banks elsewhere.
- In a survey by the Strategic Counsel, 81% of respondents believe that prudent lending is a key reason Canadian banks have performed better than their international peers.
Canada has a strong regulatory system
- Canada has a streamlined bank regulatory system, with two primary regulators: the Office of the Superintendent of Financial Institutions (OSFI) for prudential regulation and the Financial Consumer Agency of Canada (FCAC) for consumer matters. In contrast, the United Stated has a complex network of different regulators.
- Canada’s Bank Act is reviewed and updated every five years to ensure the regulatory structure is keeping pace with changes in the industry.
- Canada has been recognized by the International Monetary Fund and others as having a sound regulatory system.
Canada’s banks are well-capitalized
- Banks in Canada are among the best capitalized in the world, exceeding Bank for International Settlements’ norms by significant margins. This allows banks to continue lending and provides a cushion against loan losses, which tend to increase during economic downturns.
- Banks have been strengthening their capital levels by raising new capital from investors in the marketplace.
Mortgage lending in Canada is stable and prudent
Canada’s mortgage market has several fundamental differences from the US market.
- Canada does not have the same problems with sub-prime mortgages that have been at the root of the problem in the US. In Canada, the vast majority of mortgage loans are prime.
- There are many high-risk mortgage products in the US that do not exist in Canada. These include: adjustable-rate mortgages, with unrealistically low introductory interest rates that can rise substantially; interest-only payments, where the mortgage principal is never lowered; negative amortization payment schedules, with payments that are less than the interest charged; and no-documentation lending.
- When American house prices decreased, many borrowers found that their mortgage was higher than the value of their house and unaffordable. Canadian mortgage products have not had these high-risk features and have stood the test of time as interest rates and house prices go up and down. As a result, Canadian homeowners have maintained a healthy amount of equity versus debt in their homes. In fact, overall home equity is at 72 per cent of the total value of housing in Canada; for homeowners who have mortgages, equity levels average 50 per cent.6
- Canadian lenders tend to hold the mortgages they originate. In the US the model was an "originate to distribute" model (through securitization). Canadian mortgage originators have a much greater incentive to be prudent because they directly bear the consequences of imprudent lending decisions.
- In Canada, bank mortgages with less than 20% down must be insured. This is not the case in the US.
- Canadians are careful borrowers. In June 2011, just 0.41% of mortgages were in arrears.7 The rate of arrears in the US is more than ten times higher than in Canada.
A strong and stable banking system benefits all Canadians
- As taxpayers: Canadians have not had to bail out financial institutions, inject capital into institutions, or set up public entities to buy toxic assets.
To maintain consumers’ access to credit in an environment of stalled global credit markets, the Canadian government acted to increase liquidity by buying more than $69 billion of safe, insured mortgages from the banks through the Insured Mortgage Purchase Program, which has now ended. The Canadian government expected to earn a profit from this initiative.
- As consumers: Canadians continue to have access to a banking system that is accessible, affordable and competitive.
- Canadians remain confident in the safety of their deposits, and continue to make use of affordably-priced credit. Lending to consumers has increased throughout the economic downturn.8
- As business owners: Canada’s banks remain open for business and committed to providing credit. Banks have been filling a credit gap as some other lenders have exited the market.
- According to the International Monetary Fund, “Financial conditions have tightened… but strains are considerably less severe than in other major countries, and credit growth remains solid, both of which reflect a resilient financial system.”
- As investors: Most Canadians are shareholders in Canada’s banks either directly, or through the CPP, pensions and mutual funds. Pension funds and RRSPs are key beneficiaries of the billions of dollars of dividends that banks pay each year.
The health of Canada’s banking sector means banks can continue, as always, to contribute substantially to the Canadian economy, including:9
- $8.3 billion in taxes paid to all levels of government.
- Contributed approximately 3.4% to Canada’s GDP.
- Employed 267,000 Canadians. Full-time bank employment has increased 21.5% in the past 10 years.
- Provided financing to 1.6 million small and medium-sized businesses.
- Provided multi-million dollar support for Canada's charities and not-for-profit community groups.
A strong and stable banking system is at the heart of Canada’s economic recovery.
General inquiries
1-800-263-0231 or inform@cba.ca
Media inquiries
Rachel Swiednicki, Manager, Media Relations
(416) 362-6093, ext. 220 rswiednicki@cba.ca
