Trusting the system: Canadian banks continue to stand strong (2024)

Unlike some financial institutions to the south, this country’s banks have proven their resilience and durability through financial upheaval

Trusting the system: Canadian banks continue to stand strong (1)Many people who once perceived Canada’s banking system as stodgy or risk averse finally recognized it for its prudent lending practices (Getty Images)

A financial shock jolted the United States last March when Silicon Valley Bank (SVB), the 16thlargest bank in the country with about US$209billion in assets, was shut down by the California Department of Financial Protection and Innovation. It was the second largest bank failure in U.S. history.

Just two days after SVB folded, NewYork-based Signature Bank, with more than US$110billion in assets, became the third largest bank in U.S. history to fail when that regional financial institution was seized by the Federal Deposit Insurance Corporation.

Then on May1, 2023, San Francisco-based First Republic Bank, with US$229billion in assets, displaced SVB as the second largest U.S. bank to fail, although its assets were bought by JPMorgan Chase& Co., the nation’s largest bank.

Yet in spite of this industry turmoil, a decade and a half after the2008-09 financial crisis, and with more than 560U.S. bank failures since2000, no Canadian banks have gone under in the 21stcentury. Indeed, even during the Great Depression of the 1930s when more than 9,000U.S. banks failed, none failed in Canada.

The U.S. controls about 24.6percent of the global economy, calculated by gross domestic product. Yet the Canadian banking system, in a country that represents 2.2percent of the world economy, has proven to be quite resilient, and even relatively insulated from financial crises.

“The U.S. and Canadian banking landscapes are completely different,” says Shilpa Mishra, CPA, MBA, a Toronto-based partner and managing director with BDO Canada, who is also the firm’s national leader of capital advisory.

The prevailing thought is that Canada’s banks can’t fail because the government won’t let them fail

One key differentiator is that while the U.S. system consists of thousands of mostly regional banks, Canada’s national banking system is dominated by six very large institutions—Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and National Bank of Canada—that serve individual and business customers alike.

Every one of the big banks in Canada is essentially too big to fail, and there are very high odds the federal government would step in and rescue any of them, if needed, to prevent a failure, says Alfred Lehar, an associate professor with the University of Calgary’s Haskayne School of Business. “I think the knowledge [that] the government is there also makes the banks less susceptible to any crisis,” he adds.

“A strong and stable banking sector with well-diversified, well-capitalized banks as the best defence against an SVB-style scenario,” says Mathieu Labrèche, director of media strategy and communications at the Canadian Bankers Association in Toronto. “We have that here in Canada, which is why we haven’t had a major bank fail in 100years.”

“Many people who once perceived Canada’s banking system as stodgy or risk averse finally recognized it for its prudent lending practices, diligent government oversight and sensible regulation based on two core tenets—safety and soundness,” he adds.

That has also been internationally recognized. The World Economic Forum consistently ranks Canadian banks as being among the world’s most stable, says Labrèche.

“We have a more concentrated, less competitive banking system here in Canada,” says Ing-Haw Cheng, an associate professor of finance with the University of Toronto’s Rotman School of Management. “On the plus side, I think that has contributed towards a culture of less risk taking, and thus fewer failures here in Canada. You see this, for example, on the greater reliance on deposit funding as opposed to wholesale funding, which I think was key in the2008financial crisis.”

The financial crisis was sparked by sub-prime mortgages when some U.S. banks started to lend to consumers who otherwise might have been considered high-risk. With more banks and therefore more competition for those customers many quickly found themselves overburdened and overleveraged.

In Canada there is, to some extent, more conservative lending when it comes to mortgages, he adds.

Canadian consumers also bear some of the interest rate risk associated with a mortgage, whereas in the U.S., there is less risk on the consumer and more on the bank. Canadian consumers also help to keep banks profitable by paying for things like chequing accounts, and paying greater fees than U.S. consumers, Cheng says. More concentrated regulation is another key factor that experts cite to explain stronger Canadian banking stability.

All Canadian banks are subject to a single national prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), as well as a single consumer and market conduct regulator, the Financial Consumer Agency of Canada. As a result, “we have clear lines of sight in terms of what the expectations are from a regulatory perspective,” says Alex Ciappara, vice-president and head economist at the Canadian Bankers Association in Toronto.

Regular legislative reviews also take place, typically about every seven years. The government and industry examine the legislative foundations of the banking system and raise questions about whether and what changes are required in order for Canadian banks to stay durable and resilient, says Ciappara.

However, regulation in the U.S. is “a bit more fragmented,” says Cheng. For example, even at the federal level there are different authorities, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and, in certain cases, the Office of the Comptroller of the Currency (OCC), he notes.

Especially during the2008-09banking crisis, “banks in the U.S. could pick and choose which regulator they wanted. There were instances where a bank didn’t like the regulations of one particular regulator, and they moved to another,” says Ciappara.

Moreover, some financial institutions in the U.S. aren’t subject to certain regulations because of their size, says Rajesh Vijayaraghavan, an assistant professor of accounting and information systems at the University of British Columbia’s Sauder School of Business in Vancouver.

For example, banks with assets between US$50billion and US$250billion are subject to less stringent capital and liquidity requirements than banks with assets in excess of US$250billion, he elaborates. Mishra notes that over the past couple of years, prior to its demise, SVB had successfully lobbied the U.S. government to roll back regulations such that they were not required to conduct stress testing or regularly review their liquidity coverage ratio.

There are, says Mishra, three major factors that have insulated Canada’s banks from the financial crises that have emerged in the U.S. with bank failures in2008and2023.

Trusting the system: Canadian banks continue to stand strong (2)There have been more than 560bank failures in the U.S. since the2008 financial crisis, but none in Canada (Illustration by Matthew Billington)

First is a much more conservative regulatory regime in Canada with a strong focus on interest rate risk management, balance sheet management and liquidity risk management. “The issue that occurred with a lot of the bank failures south of the border had to do with two things—interest rate risk management, and liquidity risk management, which are tightly regulated in Canada,” explains Mishra.

The second reason is that Canadian banks have much more robust capital requirements than other parts of the world, so even if there is more pressure on the value of Canadian banking assets, they have a lot of capital available to provide a buffer against those losses.

Third, Canadian bank deposit and lending comes from very diverse sectors, whereas, for example, Silicon Valley Bank was heavily focused on the technology sector.

Ciappara adds that Canadian financial institutions were less highly leveraged than their international peers in the pre-2008financial crisis period. This reflected the fact that Canada had a regulatory cap on leverage at an asset-to-capital ratio of 20 to 1. As a result, major Canadian banks had an average asset-to-capital multiple of around 18 in2008, while the comparable figure for many U.S. investment banks was over 25, and numerous European banks were well over 30.

Further, “with the reforms coming out of the global financial crisis, global regulators instituted a regulatory cap on leverage just as OSFI had done before the crisis,” says Ciappara.

“We have strong levels of capital. Not only does OSFI set a minimum target, banks exceed that target. That was the case going into the financial crisis, and that’s the case right now,” he adds.

Mishra expects that the coincidence of the U.S. bank failures and the unprecedented speed with which they occurred will result in changes to both regulation and supervision. Those could include a re-evaluation resulting in tighter capital requirements and stronger liquidity risk management, and possibly tighter supervisory frameworks.

She predicts that U.S. regulators will also enhance and expand stress tests involving deposit analysis and customer behaviour analysis, as well as how bank security portfolios match with deposit characteristics.

In the week following the collapse of SVB, and subsequent fall of Signature Bank, the largest 25domestic banks in the U.S. recorded an inflow of US$120billion in deposits, while small domestic banks had an outflow of US$108billion.

But since then, according to Federal Reserve Board statistics, both large and small banks have experienced outflows, although smaller banks have seen a significantly larger decline.

Between February2023and April2023, seasonally adjusted deposits at all domestic banks dropped by US$402.7billion. The 25largest domestic banks recorded a decrease of US$168.3billion (41.8percent), while deposits with the rest of the domestic institutions collectively declined by US$234.4billion (58.2percent).

It is hard for the U.S. to emulate the national Canadian banking structure because its current structure is so different, with many counties within states across the country, says Vijayaraghavan. “There are many counties in the U.S that do not have one of the large banks’ presence in it. A household in the county might have to bank with only a small, very regional bank,” he elaborates.

Ciappara says that with more than 4,000banks, and facing increasing regulation, the U.S. still has a long way to go to move toward a Canadian-style system where investors and depositors are relying so heavily on the larger banks.

In contrast, there is a high degree of trust and brand recognition in Canada’s national banks, which is important in times of crisis. Depositors are not going to be running to the bank and pulling their money out because they trust their institution, says Ciappara.

“Canada’s banks are tested and trusted. They’re strong and durable, and we’ve seen that time and time again. Think of the last three external shocks—[the financial crisis of] ’08-’09, the pandemic, 2023. Tested and trusted is our brand here,” says Labrèche.

“Canada really is a paragon of safe banking,” he stresses.


Learn more about whether Canada’s banking system is as solid as it is said to be and how central banks are coping with high inflationand other external and internal pressures.

Trusting the system: Canadian banks continue to stand strong (2024)


Trusting the system: Canadian banks continue to stand strong? ›

“Many people who once perceived Canada's banking system as stodgy or risk averse finally recognized it for its prudent lending practices, diligent government oversight and sensible regulation based on two core tenets—safety and soundness,” he adds. That has also been internationally recognized.

Why Canada's banks remain stable? ›

Collectively, the Big Six banks hold 90 percent of Canada's deposits, providing them with a steady stream of relatively low-cost money to lend out or invest. That dominance also means that Canadians shopping around find little difference in fees or interest rates. Strong revenue from these fees and interest, Mr.

Are Canadian banks safer than US banks? ›

The only difference is that the Canadian banks have a larger share of loans. This is one of the main factors that makes them safer than American banks, even the larger ones. The Canadian financial system and the American financial system aren't really that different.

Are Canadian banks doing well? ›

The Canadian banking system is renowned for its stability, with only two small regional banks having failed in the last century,2 and most of the Big Six have a history of paying dividends that stretches back more than 100 years.

Why trust is still the strongest word in banking? ›

Hard to build and even harder to regain once lost, trust may just be the most powerful five-letter word in banking today. If we narrow it down, trust falls into two categories: delivering consistently exceptional and personalized customer experiences, and protecting customers and their data from cyberattacks.

How strong is Canadian banking system? ›

Canada's financial system is one of the safest and strongest in the world. This is due in part to effective financial sector policy, regulation and supervision, liquidity support, deposit insurance, recovery and resolution strategies and consumer protection and financial education.

How stable is the Canadian banking system? ›

Financial System Review—2022

The Canadian financial system remains resilient, but vulnerabilities have become more complex and risks have grown. The Bank is carefully watching households' high levels of mortgage debt, as well as the risks associated with a price correction in Canada's housing market.

Why Canadian banks are safer than US banks? ›

Also, the assets to capital ratio in Canada is much lower than that of the U.S. (18:1 versus the U.S. norm of 25:1). The political climate around bank regulation is also different in Canada. Politicians are generally more inclined towards enforcing the rules, and bankers know that they should expect close scrutiny.

Are Canadian banks at risk of failure? ›

The World Economic Forum consistently ranks Canadian banks as being among the world's most stable, says Labrèche.

How solid are Canadian banks? ›

The World Economic Forum consistently ranks Canada's banks among the world's safest. Competent regulators have overseen stress tests, tightened lending standards and delinquency rates are low.

Why are Canadian banks secure? ›

Strong banking system: Canada has a highly regulated and stable banking system that is considered one of the soundest in the world. The country's major banks are well-capitalized and have a strong credit rating, which means that they are better equipped to withstand economic shocks and other challenges.

Why is Canada's economy so stable? ›

Canada is a wealthy nation because it has a strong and diversified economy. A large part of its economy depends on the mining of natural resources, such as gold, zinc, copper, and nickel, which are used extensively around the world. Canada is also a large player in the oil business with many large oil companies.

Why are Canadian banks better? ›

Canada's banks were built to last.

If you want to keep your money safe, there are few better places to put it than in the Canadian financial system. While other countries have dealt with unexpected bank failures, Canadian banks continue to withstand those pressures.

Why are Canadian banks stronger than US banks? ›

However, in terms of overall stability, Canada's banking system is widely regarded as more solid than the United States' banking system. This is due to a variety of factors, including stricter lending standards, more conservative risk management practices, and a stronger regulatory environment.

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