The Bankwatch

Tracking the consumer evolution of financial services

The Canadian bank model secret? | risk aversion

The general theme that the ‘Canadian Bank model’ is superior has constantly intrigued me, having been personally involved there.

Size and Diversification: They are smaller and less diversified, so some risk mitigation appears there. This is probably the biggest reason.

Number: There are only five of them, of any consequence, so a couple of regulators can do a lot of supervision there.

Loan restriction: there is a restriction on loan participation relative to capital.

Purdy Crawford/ Pan Canadian Investments: The Canadian government did presciently freeze $35 billion in derivatives back in 2007.

But no … in aggregate there is no enormous winning theme, or singular secret in Canada.  In typical Canadian form its the softly softly approach, and David Olive in todays Star sums it up nicely with this quote below.

They are just plain old fashioned ‘risk averse’ supplemented by being too small (asset size is whats important here, not market cap) to take part in large scale international risky investments.

Obama eyes Canada as bank model | The Star

As a result of their largely shunning the purchase of multimillion-dollar packages of U.S. junk mortgages, Canadian banks have earned international acclaim for their continued sound condition. But that had nothing to do with the Canadian banks’ size or diversity of functions, and everything to do with prudent risk decisions and scrupulous regulatory supervision.

Written by Colin Henderson

May 4, 2009 at 16:00

6 Responses

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  1. Colin. Don’t you think the banks were just lucky?

    From what I’ve read the banks in Canada were beginning to dip their toes into these risky holdings and that a substantial number of mortgages written and insured in Canada late 2006 onwards were high-ratio, mortgages with less than 5% down (or even 100% financed). The Conservative government was just starting to open the doors wider when all this crap hit the fan.

    benry

    May 4, 2009 at 17:29

  2. @Benry .. it could certainly be characterised as lucky. I am not actually aware about the governments role other than freezing the derivatives before they became an issue which turned out to be a good thing. I am sure some institutions were getting the idea to get into high ratio, and am aware of at least one of the big 5 in that category.

    bankwatch

    May 5, 2009 at 13:16

  3. Isn’t there six major banks in Canada?

    Matt Goulart

    May 31, 2009 at 13:08

  4. Well (as I am sure you know) there are 21 Schedule 1 Banks.

    Of those, the top 6 ranked by assets noted below. Your call if National Bank rank in the top ‘anything’.

    Official names Capitalization
    Royal Bank of Canada C$58.09 billion
    Toronto-Dominion Bank C$40.45 billion
    Bank of Nova Scotia C$34.18 billion
    Bank of Montreal C$21.01 billion
    CIBC C$19.82 billion
    National Bank C$ 6.2 billion

    Colin Henderson

    May 31, 2009 at 21:25

  5. Sorry if I offended you, I guess I came off a bit strong.

    I typically hear about the ‘big 6’ and not the ‘big 5’. Yes, National Bank of Canada is a small player there are 546 branches nationwide, of which 454 can be found in Quebec. Needless to say is that the National Bank of Canada is primarily focused in Quebec. And still should be considered, even if they are ‘smaller’.

    Well written article, I enjoyed it. I recently subscribed to your blog and I find it enjoyable, looking forward to the next article.

    Matt Goulart

    June 1, 2009 at 23:25

  6. @Matt … my apologies, and I think it was my response that was too strong – no offence taken. Sometimes my responses are dashed off too fast. Thank you for subscribing, and I really welcome your comments.

    Colin Henderson

    June 1, 2009 at 23:35


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