Have Canadian Banks Played It Too Safe

“Canadian banks have never really been known as powerhouses in terms of size, profits, innovation, or anything else. The one thing we have always been—and probably always will be—is prudent”

By Victoria Chau, Staff Writer

In the midst of the subprime debacle that resulted in the global financial crisis (beginning some three years ago), Canadian banks were hailed as the forerunners of banking systems everywhere. Ranked first in a survey by the World Economic Forum in 2008, Canada was declared to have “the soundest banking system” while the United States and Britain were ranked No. 40 and No. 44 respectively.

However, now that we have established our banking system is sound, Canadian banks should be taking great strides to take advantage of this position and place themselves more competitively on a global scale.

Canadian banks have never really been known as powerhouses in terms of size, profits, innovation, or anything else. The one thing we have always been—and probably always will be—is prudent.

This isn’t necessarily a bad thing, as it’s the reason why Canadian banks did so well during the economic crisis when the larger and more competitive banks the world over failed and looked toward government bailouts. Yet, whenever the global economy does well, Canadian banks are left behind and miss out on the big profit party.

That is not to say that Canadian banks have not proven that the system itself is sound, and that much of this security is rooted in a sense of conservatism. However, the conservatism of the Canadian Banking system was merely a cloak that postponed a crisis, but it would never have entirely averted it. Had the crisis occurred a year or even a few months later, even the system’s conservatism would have succumbed to the same bleak realities that the rest of the world wallowed in.

All that has happened in this past recession does not mean that Canadian banks are the best in the world; it merely means that we were conservative enough not to take the huge risks that our global counterparts did and consequently did not fall in the same holes. Therefore, as it stands, Canadian Banks are in an advantageous position as global financiers look towards Canada as a secure and financially sound place to invest their funds.

Canadian banks are experiencing historically high yields while banks worldwide are insolvent and are relying on their respective governments as a crutch. The solvency of Canadian banks can be attributed to the conservative measures that the Office of the Superintendent of Financial Institutions (OSFI) and the banks themselves have placed on their capital restrictions.

As a result of these measures, Canadian banks have enjoyed capital reserves that on average are two times higher than those in the United States and three times higher than those in the European Union.

These good times for Canadian banks should mean that they’re out there looking for good deals and bargains on smaller and more regional banks worldwide so that they can continue to expand. This should, of course, continue to be done according to the more conservative nature that is the core of the Canadian banking system.

However, we haven’t seen much movement from Canadian banks in terms of acquiring new sources of revenue. Mainly, the banks have been revelling in the stagnant global limelight that had been previously pointed south of the border as the world reveres our prudence.

The profit structure of Canadian banks are much different than their American counterparts. Canadian banks earn a lot more revenue from service charges and fees from their everyday customers, whereas American banks look towards making investments and profiting from those decisions.