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What makes Canadian Banks different in this crisis? | OECD

This 21 page document reviews the circumstances prior to the crisis of Canadian Banks and other OECD Banks.  The relative abundance of retail deposits (compared to more volatile wholesale deposits)  seems to have been key for the resilience of Canadian banks, supplemented by a risk averse financial culture.

The differences from the summary were as follows – Canadian Banks were:

  1. better capitalised
  2. Capital ratios before the crisis were a key determinant of bank performance
    during the turmoil; and Canadian banks had ample capital

  3. more liquid
  4. Compared to OECD peers, Canadian banks had slightly above-average balance
    sheet liquidity

  5. enjoyed relatively more retail deposits
  6. During a liquidity crisis, access to stable funding is key to survival; Canadian
    banks had a high ratio of retail to wholesale deposits

In addition and as discussed here before, the risk tolerance in Canada is much lower than elsewhere, and this manifests across several areas, highlighted in the report.

7. Regulatory and structural factors contributed to the resilience of Canadian banks by reducing their incentives to take risks. Canadian capital requirements are significantly more stringent than Basel minima (national targets of 7 percent for tier 1 capital and 10 percent for total capital,  versus 4 and 8 percent prescribed by the Basel Accord).

Banks are also subject to a maximum assets-to-total-capital multiple of 20 (corresponding to a leverage ratio of 5 percent). Besides providing an enhanced cushion, stringent capital requirements have beneficial incentive effects: they impede rapid balance sheet growth, restrict wholesale activities, and limit foreign expansion to niches where banks have clear competitive advantage not related to low cost of capital.

Notable structural factors in Canada include high franchise values, a mortgage market characterized by prudent underwriting, and an overall prudent and conservative culture in the financial sector. Limited exposure to U.S. assets was a key additional factor behind the resilience of Canadian banks to the crisis.

Canada: Selected Issues | OECD

Written by Colin Henderson

May 22, 2009 at 20:17

Posted in Bank+of+Canada, Canada

2 Responses

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  1. In other words — we got lucky.

    In my opinion, there was no prudence, we were just slow to join the party. I suspect that if our Conservative government had been able to go thru with their plans that we would have been left patting ourselves on our backs and instead borrowing significantly and drowning in even more debt.

    benry

    May 22, 2009 at 22:03

  2. @Benry – I agree on both counts. Re prudence in banks, yes you could read that as just really slow.

    bankwatch

    May 24, 2009 at 13:38


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