The Bankwatch

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

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

2. more liquid

Compared to OECD peers, Canadian banks had slightly above-average balance
sheet liquidity

3. enjoyed relatively more retail deposits

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