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1

CHAPTER 1

INTRODUCTION

Banking in Canada is widely considered the most efficient and safest banking system in

the world, ranking as the world's soundest banking system for the past three years according

to reports by the World Economic Forum. Released at October !1!, "lobal Finance

maga#ine put Royal $ank of %anada at number 1! among the world's safest bank 

and &oronto (ominion $ank at number 1).

% a n a d a *s banks, also called chartered banks, ha+e o+er ,!!! branches and almost 1,!!!

a ut o m a t e d b a n k ing m ac h in e s -$/s0 across the country.

n addition, 2%anada has the highest number of $/s per capita in the world and benefits

from the highest penetration le+els of electronic channels such as d e b it ca r d s ,

n t e r n e t b a n k ing a nd t e le p h o ne b a n k in g 2

1.1 THE BEST BANKING SYSTEMS IN THE WORLD

ccording to the sur+ey by the World Economic Forum, %anada has the world*s best

 banking system. t is followed by 3weden, 4u5embourg and ustralia. %anada recei+ed

6. out of total 7 points and topped the list. &he 8nited 3tates, which has seen a lot of big

name bank failures in the global financial crisis, has fallen down to 9!th

 place.

The Ci!eia

ccording to World Economic Forum, this report is based on findings of top e5ecuti+es.

&he e5ecuti+es handed the banks a score between 1.! -insol+ent and possibly

re:uiring go+ernment bailout0 to 7.! -healthy and with sound balance sheets0. &his report

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was released because most of the central banks in Europe, 8nited 3tates, %hina,

%anada, 3weden and

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3wit#erland slashed their interest rates in an attempt to end panic selling on the markets and

also to restore much shaken trust in the general banking system to a+oid financial meltdown.

The Be"! Banking S#"!e$ % Canada

&he main reason behind the success of %anadian banks is solid funding and conser+ati+e

consumer lending. %anadian banks are more stringent in their policies regarding the

amount of loans they can e5tended to consumers compared to other international banks.

%onsumers wanting to lend from %anadian banks are re:uired to set aside a minimum of 

7 percent for &ier 1 capital, compared with 6 percent for 8.3 commercial banks.ccording

to the %anadian banking regulator, the institutions can lend up to ! times their capital base.

&he European peers assets were almost more than ;! times their capital. n the 8.3 and

8.<, the a+erage weighted capital was more than ) times.

%anadian regulators resisted pressures from the banking e5ecuti+es to loosen the lending

restrictions, while the economy was booming. &he banks employed stricter guideline

measures for lending and were better at na+igating through the global financial crisis.

/oreo+er, most of the %anadian banks are also somewhat reluctant to lend to

homebuyer with low credit scores, which pro+ides less e5posure to mortgage defaults.

3ubprime loans account for only about ) percent of the total in %anada= while in the 8.3 it

was at ! percent where independent lenders and mortgage brokers were competing with

commercial banks to win o+er the business at the cost of attracting highrisk borrowers.

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1.& ORIGINS

$anking in %anada began to migrate in earnest from colonial o+erseas banking operations

to a local banking system with the founding of the $ a n k o f / o n t r e a l in 117. Other banks

soon followed and began business and after a lengthy appro+al process began u n r e g u la t e d

 b a n k ing  business. &hese institutions issued the only local currency notes until amendme

nts in the $ r it is h > o r t h m e r ic a c t a llowed federal and pro+incial go+ernments to begin

to introduce their own notes starting in 166. Official %anadian currency took the form of 

the %anadian dollar in 171, o+erriding the currency of indi+idual banks. &he establishment

of the $ a n k o f % a n a da in 1?;) was also an important milestone in banking and monetary

go+ernance.

(espite +arious loss e+ents -such as the 4 a t in m e r ic a n d e b t c r is is , t he collapse of  O ly m p ia

a n d @ o rk ,  E n r o n related liabilities, and the 8 . 3 . 3 u b p r im e m o r t g a ge c r is is 0 , the big

fi+e banks ha+e thus far pro+en to be safe and stable companies. For e5ample, in

securities prospectuses the R o y a l $ a n k o f % a n a da says it has paid a common share di+idend

in e+ery year since 17!, the year after it recei+ed its banking charter.

ccording to the (epartment of Finance, two small regional banks failed in the mid

1?!s, the only such failures since 1?;, which is the year A o m e $ a n k f ailed. &here were

no bank failures during the " r ea t ( e p r e s s io n compared to ?!!!B in the 83.

n the 1?!s and 1??!s, the largest banks ac:uired almost all significant trust and brokerage

companies in %anada. &hey also started their own m u t u a l f u n d a nd insurance businesses. s

a result, %anadian banks broadened out to become supermarkets of financial ser+ices.

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fter large bank mergers were ruled out by the federal go+ernment, some %anadian banks

turned to international e5pansion, particularly in +arious 8.3. markets such as banking and

 brokerage.

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&wo other notable de+elopments in %anadian banking were the launch of >" $ a n k 

o f % a n a da - which relies mostly on a branchless banking model0, and the slow

emergence of nonbank mortgage origination companies.

sur+ey conducted by the W o r ld E c o n o mi c F o r um called the "lobal

%ompetiti+eness Report of twel+ethousand corporate e5ecuti+es, in !!, concluded that

% a n a da has the best banking system in the world, recei+ing a score of 6. out of possible

se+en.

1.' Reg()a!i*n

%anada's federal go+ernment has sole Curisdiction for banks according to the % a n a d ia n

% o n s t it u t io n , s pecifically 3ection ?1-1)0 of The Constitution Act, 1867 -;! D ;1 ictoria,

c.; -8<00, formerly known as the  British North America Act, 1867 . /eanwhile, credit

unionscaisses populaires, securities dealers and mutual funds are largely regulated by

 pro+incial go+ernments.

&he main federal statute for the incorporation and regulation of banks, or chartered banks,

is the  B ank A c t - 3.%. 1??1, c.960, where 3chedules , and of this ct list all

 banks permitted to operate in %anada under these three distinct categoriesG

• S+hed()e IG $anks allowed accepting deposits and which are >O& subsidiaries of 

a foreign bank. E5amples include 2&he $ig Fi+e2 banks -as mentioned abo+e0 and

smaller second tier banks such as  > a t io n a l $ a nk o f % a n a d a ,  4 a u r e n t ia n $ a n k o f 

% a n a d a , Hr e s id e n t ' s % h o ic e F in a n c ia l and % a n a d ia n W e s t e r n $ a n k . $ecause the

3chedule banks are not subsidiaries of any foreign bank, they are the true domestic

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 banks and are the only banks allowed to recei+e, hold and enforce a special

s ec u r it y

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interest described and pro+ided for under the  Bank Act and known to

%anadian lawyers and bankers as the 2$ank ct security2.

• S+hed()e IIG $anks allowed to accept deposits and which are subsidiaries of a

foreign bank. E5amples include / E I $ a n k o f % a n a d a , % it ib a n k % a n a d a ,

A3 $ % $ a n k % a n a d a , >" $ a n k o f % a n a da a nd W a l / a r t % a n a da $ a n k . 4 ike the

3chedule banks, the 3chedule banks are incorporated under the Bank Act .

• S+hed()e IIIG Foreign banks permitted to carry on business in %anada.

E5amples include $ a n k o f m e r ic a , % a p it a l O n e , % r e d it 3 u iss e a nd ( e u t s c h e $ a n k 

" . 8nlike the 3chedule and 3chedule banks, the 3chedule banks are >O&

incorporated under the  Bank Act and they operate in %anada, usually within the

country's largest cities -being & o r o n to ,  / o n t r ea l, % a lg a r y a nd a n c o u + e r 0 , under 

certain restrictions mentioned in the Act .

&he bank regulator is the O f f ic e o f t h e 3 up e r in t e n d e n t o f F in a n c ia l n s t it u t io ns -  best

known as OSFI 0, who*s authority stems from the  Bank Act . &he financial groups are also

go+erned by regulatory bodies -bank regulators, securities regulators, insurance regulators,

etc.0 in each country in which they operate.

1., REGULATORY CHALLENGES

$anks in %anada come under the pur+iew of two regulatorsG &he Office of the

3uperintendent of Financial nstitutions -O3F0 for prudential regulation and the Financial

%onsumer gency of %anada -F%%0 for consumer matters. E+ery fi+e years, %anada*s

$ank ct is re+iewed and updated to stay abreast of industry changes. Regulations and

regulatory compliance ha+e been key to the %anadian banking industry, enabling it to

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remain strong and stable. Aowe+er, the mo+e forward impact of regulatory changes

worldwide is a big concern for banks in

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%anada. s they enter international markets, %anadian banks will be more e5posed to global

turmoil and conditions that are in a state of flu5 due to economic troubles, worries

of so+ereign debt and stringent regulations. dCusting to the regulatory changes will re:uire

transformation of business operations that could slow growth and cause tradeoffs to be

made between risk and profitability.

&he key for %anadian banks will be to na+igate changes that will ha+e an impact on their 

 business operations, models, systems and profitability, as regulators continue to introduce

and implement new measures to ensure transparency and stability to the banking system.

$anks, therefore, must effecti+ely manage their resources while complying with regulations,

which calls for retooling and in+esting in & systems to ensure compliance and competiti+e

ad+antage. /o+ing forward, this type of in+estment will put additional pressure on

 profitability and operational efficiencies.

1.) &E%A>O4O"@ %A44E>"E3

&he sound business practices of %anadian banks helped them weather the global financial

storm effecti+ely compared with banks from other nations. "oing forward, technology will

 play a key role for these banks to achie+e the balance between compliance and growth.

&he $ig 3i5 ha+e in+ested J)). billion between 1??6 and !!? in technology to

 pro+ide their customers with secure, accessible and con+enient banking systems.

n+estments, especially on the compliance and reporting front, can be e5pected to

grow as %anadian banking regulators mandate early adherence with new regulations.

$asel will re:uire banks to pay more attention to integrating data sources and using

newer data modelling techni:ues. 4i:uidity reporting is another area in which

 banks will need to in+est

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significantly. &hey will also need to ensure they ha+e a robust & infrastructure to deal with

data integrity and usability.

4egacy moderni#ation is a maCor challenge for the %anadian banking industry. >ewer banks

are using & to attract new customers and impro+e their le+el of ser+ice. /ore established

institutions face a difficult time deploying new technologies, as a maCor portion of their 

 businesses is supported and run on legacy systems. %elent, a prominent research

house, predicts that a significant percentage of & budgets in the future will be allocated to

maintaining legacy systems ./odernday inno+ations such as ser+iceoriented architecture

 based systems and cloudbased technologies can help alle+iate upgrade e5penditure

challenges. Recently, 3cotiabank signed up for a cloudbased software as a ser+ice -3aa30

solution to replace its multiple legacy trade and supply chain applications for its global

trade ser+ices.&hese kinds of systems pro+ide an efficient way of allocating capital, in

which the bank pays only for computing resources that are actually used, while pro+iding a

means to :uickly enter new markets and offer new and inno+ati+e ser+ices. &he call for 

replacing legacy systems is a longstanding need. %anadian banks need to address this with a

slow and steady, incremental approach, since these heritage systems are per+asi+e

across business lines= it is too risky to replace them all at once. %ompetition for customers

in the ultra competiti+e %anadian banking market also calls for newer technologies to

achie+e market and mind share. "i+en the state of banking and the economy, taking a

middle path is the best approach for banks that want to conser+e capital and maintain

operating margins o+er the short term.

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CHAPTER &

-AST -ACTS ABOUT THE CANADIAN BANKING SYSTEM

1. >umber of bank branches across %anadaG 6,!), of which appro5imately ,1!!

are rural and small town branches.

. >umber of banks in %anadaG !.

;. >umber of transactions logged at bankowned $/s in %anada -!10G 9 million.

9. >umber of online banking transactions completed with the si5 largest banks in

%anada in !1G );.7 million.

). %anadians are careful borrowers, and mortgage arrears in %anada remain +ery low -

in fact, as of Kune !1; only !.;1L of bank mortgages are in arrears0.

6. &a5es paid in %anada in !1 -by the si5 largest banks0G J billion.

7. $anks contribute appro5imately ;.1L to %anada*s "(H.

. &a5es paid worldwide in !1 -by %anada's si5 largest banks0G J1!. billion.

?. mount banks and their subsidiaries paid in salaries and benefits in %anada in !1G

J!. billion.

1!. n !1, banks employed 7),! %anadians and industry employment has

increased by 19.9L o+er the past ten years while fulltime industry employment

has increased by ).9L o+er the same period.

11. >umber of people employed by %anadian banks in other countries in !1G 1!,79!.

1. Hercentage of senior managers with the si5 largest banks who are women -!110G

;;.;L. Women constitute 6).;L of the workforce at %anada*s si5 largest banks

-e5cluding subsidiaries0.

1;. $anks pro+ide financing to some 1.6 million small and mediumsi#ed businesses.

19. mount si5 largest %anadian banks spent on technology in !1G J7.7 billion.

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1). mount si5 largest %anadian banks spent on technology from !! to !1G

J6!.9 billion.

16. (i+idend income paid in !1 by %anada*s banks to shareholdersG J1.6 billion.

17. %anada*s $ank ct is re+iewed and updated e+ery fi+e years to ensure the regulatory

structure is keeping pace with changes in the industry.

1. Hercentage of %anadians who gi+e banks a good performance rating when it comes

to being stable and secureG 7L.

1?. Hercentage of %anadians that ha+e a fa+orable impression of banks in %anadaG 6L.

!. Hercentage of %anadians who trust banks to protect the pri+acy of their

 personal information and transact ionsG ;L.

1. M1 N %anada*s ranking by the World Economic Forum for the soundest banking

system in the world, -a ranking achie+ed si5 years in a row0.

. &he World Economic Forum has ranked %anada*s banking system as the most

sound in the world, fi+e years in a row.

;. $anks employ 7),!!! %anadians. Fulltime bank employment has increased ).9L

in the past 1! years.

9. $anks contributed appro5imately ;.1L or J); billion to %anada*s "(H.

). $anks paid J1.6 billion in di+idends -!10 to shareholders.

6. $anks pro+ide financing to 1.6 million small and mediumsi#ed businesses.

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CHAPTER '

CANADIANS DOMINATE WORLDS 1/ STRONGEST BANKS

$anks from % it ig r o up n c . - % 0 in the 8.3. to $ >H H a r ib a s 3 - $ >H0 in France are racing

to shed assets and raise money ahead of new global capital rules that start taking effect in

!1). For %anadian lenders, these mo+es ha+e created the opportunity to go on a shopping

spree. %anada*s si5 largest banks ha+e spent J;7. billion since !! on about 1!!

ac:uisitions at home and abroad, $loomberg /arkets maga#ine reports in its Kune issue.

We and our %anadian competitors are only able to do that because we ha+e some

fle5ibility as a result of our strength,P says "erald /c%aughey, chief e5ecuti+e officer of 

%anadian mperial $ank of %ommerce, which bought KH/organ %hase D %o.*s minority

stake in asset management firm merican %entury n+estments last year. O+er the longer 

term, this should actually help to maintain the strength of the %anadian banking system and

its competiti+eness.P

% $ % - %/ 0 was >o. ; in $loomberg /arkets* second annual ranking of the world*s

strongest banks, followed by three of its %anadian ri+alsG & o r o n to ( o mi n io n $ a n k - & (0-  >o.

90,  > a t io n a l $ a n k o f % a n a da - > 0 -  >o. )0 and R o y a l $ a n k o f % a n a da -  >o. 60, thecountry*s

largest lender. $ a n k o f > o + a 3 c o t ia r  anked 1th, and $ a n k o f / o n t r e a l wasnd.

 >o other country dominated the list as did %anadaG &he nation of ;9.7 million people

has only eight publicly traded banks, two of which are regional lenders. Only three 8.3.

 banks K H / o r g a n % h a s e - K H / 0 - >o. 1;0, H >% F in a n c ia l 3 e r + ic e s " r o up n c . -H > % 0

->o. 170 and $ $ D & % o r p.  - $$ & 0 ->o. !0 made the top !. Four European banks were

includedG two from 3weden and one each from the 8.<. and 3wit#erland.

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'.1 01// BILLION OR MORE

For the ranking, they considered only banks with at least J1!! billion in assets. &hey

weighed and combined fi+e criteria, comparing &ier 1 capital with riskweighted assets, for 

e5ample, and nonperforming assets with total assets. &ier 1 capital includes a bank*s cash

reser+es, outstanding common stock and some classes of preferred stock, all of which

combine to act as a buffer against losses.

$anks that posted an annual loss for last year or that failed go+ernment stress testsweren*t

eligible for consideration.

%anadian banks in+oke their strong capital le+els, the country*s conser+ati+e lending culture

and strict regulatory o+ersight under a single super+isor as reasons for their showing. &he

super+isor re:uires %anadian banks to hold a higher le+el of capital than do international

standards.

/aCor banks around the world follow the rules of the $asel %ommittee on $anking

3uper+ision an arm of the $ank for nternational 3ettlements, based in $asel,

3wit#erland, that draws banking regulators from 7 nations to set standards for lenders. &he

committee issued its first internationally accepted ca p it a l g u id e li n e s in 1?.

'.& BEYOND BASEL

&hose rules, known as $asel , focused on credit riskG the possibility that borrowers might

not pay back their bank loans. &he committee re:uired banks to hold total capital, at least

half of it in &ier 1 capital, e:ual to at least percent of their riskweighted assets.

%anada*s regulator, the O ff ic e o f t h e 3 up e r in t e nd e n t o f F in a n c ia l n s t it u t io ns % a n a d a , has

gone beyond those le+els in its re:uirements, a stance that has shielded lenders from some

of the financial follies that undermined other global banks, especially in !!. s far back 

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as Kanuary 1???, O3F sent a letter to %anadian banks telling them to set aside at least

1!

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 percent of total capital as a cushion for losses. do not think it was popular at the time,P

says Kulie (ickson, O3F*s superintendent. &hat*s where ha+ing a super+isor with a pretty

clear mandate allows you to take those unpopular decisions.P

'.' ECEEDING RE2UIREMENTS

&he %anadian regulator also set criteria on the :uality of banks* assets, re:uiring them tohold

7) percent of their capital in e:uity. When the crisis erupted, we reali#ed we had stuck to a

fairly basic rule, which was that the bulk of &ier 1 capital had to be in e:uity,P (ickson

says. &hat turned out to be +ery, +ery important.P

3ome of %anada*s lenders elected to e5ceed O3F*s re:uirements. n+estors critici#ed

$ a n k  o f > o + a 3 c ot ia - $ >3 0 ,  %EO R ic h a r d W a u g h says, for holding too much cash. 3o

many people in 1??? and !!1 saidG Q3cotia, you*+e got e5cess capital because you*re way

abo+e $asel, way abo+e O3F. @ou should do stock buybacks and e5tra d i+ id e n d s , *P Waugh

recalls in an inter+iew at an annual in+estor meeting in 3askatoon, 3askatchewan. We said,

Qt*s not e5cess, because it was getting 1 percent return on capital, which was a +ery good

 place, and our shareholders would ha+e had a difficult time rein+esting elsewhere.*P

Waugh credits the high returns to profits spread e:ually among four main businessesG global

wealth management and domestic, international and wholesale banking.

'., INTERNAL MODELS

3ince 1?, the $3 has further tweaked global rules. &he !!9 $asel accord set more

guidelines on how to address and :uantify the risks of a bank*s assets allowing them to

use internal models, for instance.

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nd in !1!, regulators rewrote the rules again to address shortcomings that arose out of the

financial crisis. &he group will re:uire banks to hold 7 percent of their assets as core

reser+es,

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or e:uity core &ier 1 capital, by !1? when the latest rules known as $asel are

fully implemented. $anks will be re:uired to ha+e minimum &ier 1 capital of 6 percent

starting in

!1).

While ha+ing strong capital is crucial, %anadian banks will prosper only if they can e5pand

their reach, Waugh says. $ecause if you don*t grow, you*re going to e+entually ha+e some

issues on capital and strength,P he says. 3cotiabank has units in about )! countries and is

looking in particular at 4 a t in m e r ic a a nd sia, says Waugh, who*s also +ice chairman of 

the Washingtonbased n s t it u t e o f n t e r n a t io n a l F in a n c e.

E34anding in !he U.S.

%anadian banks spent J19.9 billion last year on ac:uisitions, many of them aimed at

growth in the 8.3. Aa+ing conser+ati+e capital standards in %anada going into the

downturn clearly was a competiti+e ad+antage,P &( $ank %EO E d m u n d % la r k says. Ae says

%anada*s second biggest bank was ferocious at managing li:uidity.

&( $ank has accelerated a 8.3. e5pansion strategy that %lark began in !!9. n !!,

the bank took o+er %ommerce $ancorp of %herry Aill,  > e w K e r s e y , in a J7.1 billion

transaction that helped gi+e the %anadian lender 1,9 branches in the 8.3. today more

than the 1,1)! it currently has in %anada. &(*s green logo is now a common sight on the

streets of > e w @ o r k , where it aims to become the city*s thirdlargest lender by number of 

 branches within four years, and in $oston, where its name adorns the &( "arden, home to

the $oston %eltics basketball team and $oston $ruins hockey team.

'.5 6ONCE%IN%A%LI-ETIME OPPORTUNITY

We were in there and saidG QWe ha+e a onceinalifetime opportunity. 4et*s take ad+antage

of it,*P %lark says. &oronto (ominion one of four banks globally to boast the top

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aa longterm debt rating from /oody*s n+estors 3er+ice added further to its 8.3.

clout last

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year when it ac:uired auto lender %hrysler Financial %orp. from %erberus%apital

/anagement 4H.

$ a n k o f / o n t r e a l - $/ O 0 , %anada*s fourthlargest lender, also ramped up its presence in

the 8.3. by buying /arshall D lsley %orp., a /ilwaukeebased bank, last year for J9.1?

 billion. Hrior to that, its main 8.3. asset had been the small %hicago based Aarris $ank 

franchise it bought in 1?9.

Royal $ank has also been acti+e. n pril, it agreed to buy the )! percent of R$% (e5ia

n+estor 3er+ices 4td. it didn*t already own from $an:ue nternationale a 4u5embourg

3 for about %J1.1 billion -J1.1 billion0 in cash.

s they fle5 their muscles with ac:uisitions, %anadian banks may face tougher times ahead.

%onsumer lending is slowing this year. R$% %apital /arkets predicts that %anadian bank 

 profits will rise 7 percent in !1, slightly more than half the 1; percent rate in !11.

'.7 STOCKS OUTPER-ORM

%anadian bank stocks ha+e outperformed those from south of the border. n the four years

ended on (ec. ;1, the 3tandard D Hoor*s&3I %omposite % o mm e r c ia l $ a n ks n d u s t r y n d e 5

-3 & %$ > < 0 that tracks %anada*s eight traded banks rose 9. percent compared with a )6

 percent decline for the 9member < $ W $ a n k n d e 5 - $ < I 0 , w hich includes the biggest

8.3. banks.

%anadian banks ha+en*t been completely immune to the woes faced by their counterparts in

the 8.3. and Europe in recent years. %$% had more than %J1! billion in

writedowns following the 8.3. mortgagerelated financial crisis of !!7, more than any

other %anadian bank. %$% also was one of the first to rebuild its balance sheet, selling

%J.?9 billion of stock nine months before 4ehman $rothers Aoldings nc. collapsed and

markets sei#ed up.

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3till, writedowns at %anadian banks were a fraction of the J.! trillion taken by

financial companies worldwide.

&here*s no reason for %anadian banks to become smug, the country*s banking regulator 

says. %omplacency is a real danger for %anada,P O3F*s (ickson says. &he bar is always

rising in risk management, and if you become complacent, you may say you*re doing

a good enough Cob and you don*t really ha+e to change anything.P

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CHAPTER , 8BIG

-I9E8 BANKS

n e+eryday commerce, the banks in %anada are generally referred to in two categoriesG 10

the fi+e large national banks and 0 smaller second tier banks -notwithstanding that a

large national bank and a smaller second tier bank may share the same legal status and

regulatory classification.

&he fi+e largest banks in %anada

areG

•  R o y a l $ a n k o f % a n a da

•  & o r o n to ( o mi n io n $ a n k 

•  $ a n k o f > o + a 3 c o t ia

•  $ a n k o f / o n t r ea l

•  % a n a d ia n m p e r ia l $ a n k o f % o mm e r c e

 >otable second tier banks include the & $ F in a n c ia l,  > a t io n a l $ a n k o f % a n a d a ,  the

4 a u r e n t ia n $ a n k , the ( e s Ca r d ins " r o up - technically not a bank but an alliance of c r e d it

un io n s 0 , A3 $ % $ a n k % a n a d a , and >" $ a n k o f % a n a d a . &hese second tier organi#ations are

largely %anadian domestic banking organi#ations. nsurance companies in %anada ha+e also

created deposittaking bank subsidiaries.

8nlike the smaller %anadian banks, the $ ig F i+e a re not Cust %anadian banks, but are instead

 better described as internat ional financial c o n g lo m e r a t es ,  each with a large %anadian

 banking di+ision. n fiscal !!7, R$%'s %anadian segment called 2Hersonal Financial

3er+ices2 -the segment most related to what was traditionally thought of as retail banking0

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had re+enue of only % (J),! million -or .6L0 of a total re+enue of % (J,96

million. %anadian

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retail operations of the $ig Fi+e comprise other acti+ities that do not need to be operated

from a regulated bank. &hese other acti+ities include mutual funds, insurance, credit cards,

and brokerage acti+ities. n addition, they ha+e large international subsidiaries. &he

%anadian banking operations of the $ig Fi+e are largely conducted out of each parent

company, unlike 8.3. banks that use a holding company structure to hold their primary

retail banking subsidiaries.

%anada's ) largest banks ha+e been designated as too big to be allowed to fail for the

country by the federal regulator, meaning they will be subCect to more stringent capital

re:uirements and super+ision.

&he Office of the 3uperintendent of Financial nstitutions said the designation stems from a

framework issued by the $asel committee on banking o+ersight in October that set

out guidelines for assessing domestic financial institutions.

8nder the O3F re:uirements, the $ank of /ontreal, $ank of >o+a 3cotia,

%anadian mperial $ank of %ommerce, >ational $ank of %anada, Royal $ank of %anada

and &oronto (ominion $ank will be subCect to an additional one per cent capital buffer for 

risk, meaning they will ha+e to hold more assets in reser+e to protect against a sudden run on

deposits.

&he banks will need to ha+e a common e:uity tier 1 ratio of eight per cent as compared

with se+en per cent for smaller, less important financial institutions as of Kan. 1, !16.

2&he measures are designed to limit the likelihood that a maCor bank would encounter 

distress or failure that could negati+ely impact the %anadian economy or ta5payers,2 O3F

head Kulie (ickson said in a news release.

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n >o+ember, the Financial 3tability $oard updated its list of international

financial institutions that were assessed too big to fail, but none of the %anadian banks made

the grade.

Aowe+er, O3F said the banks are systemically important to the %anadian economy by

+irtue of their si#e, interconnectedness, substitutability and fle5ibility.

n its e5planation, O3F said a bank's distress or failure is more likely to damage

the %anadian financial system or economy if its acti+ities comprise a large share of 

domestic banking acti+ity.2

t noted the si5 biggest banks account for o+er ?! per cent of total banking assets in %anada

and that 2the differences among the largest banks are smaller if only domestic assets are

considered, and relati+e importance declines rapidly after the top fi+e banks and after 

the si5th bank ->ational0.2

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Band" ("ed :# !he :ig ;i<e :# $a=* ;inan+ia) "e<i+e

R*#a) B a n k 

*; Cana d a> R B C?

T * * n!* %

D* $ in i*nB a n k > T D?

B a n k *; N*<a

S + * ! ia > B NS?

B a n k *; 

M * n! e a)> B M O?

Cana d ian

I $ 4 e ia )

B a n k *; 

C* $ $ e + e> C I B C?

@ear Founded

169 A a lif a 5 ,

 > o + a 3 c o t ia

1?))= $ank of &oronto1)7 and(ominion$ank 16? & o r o n to ,O n t a r io

1; A a lif a 5 , > o + a3 c o t ia

117 / o n t r ea l,u e b e c

1?61=% a n a d ia n$ a n k o f % o mm e r c e167 and  m p e r ia l $ a n k o f % a n a da17) & o r o n to ,

O n t a r ioOriginal

 >ame/ e r c h a n t s '$ a n k o f A a lif a 5

$ a n k o f & o r o n to ,( o mi n io n$ a n k 

$ a n k o f > o + a3 c o t ia

$ a n k o f / o n t r ea l

% a n a d ia n$ a n k o f % o mm e r c e a nd m p e r ia l $ a n ko f % a n a da

Aead Office & o r o n to ,O n t a r io

& o r o n to ,O n t a r io

& o r o n to ,O n t a r io

& o r o n to ,O n t a r io

& o r o n to ,O n t a r io

Harent legalname

R o y a l $ a n k o f % a n a da

& o r o n to ( o mi n io n$ a n k 

$ a n k o f > o + a3 c o t ia

$ a n k o f / o n t r ea l

% a n a d ia n m p e r ia l $ a n k o f % o mm e r c e

"roup brand R$% & ( $ a n k F in a n c ia l" r o up

3 c o t ia b a n k " r o up

$/ OF in a n c ia l" r o up

% $ %

%anadianretail

 banking

R$ % R o y a l$ a n k 

& ( % a n a da& r u s t

3 c o t ia b a n k  $/ O $ a n k o f / o n t r ea l

% $ %

8.3. retail banking

R$ % $ a n k S>oteG 3oldin Kune !11

& ( $ a n k   >one A a rr is $ a n k   >one m ic us$ a n k ' s micusF3$ Coint+enture

/arketplace$ank3afeway3elect $ank 1???!!

Other maCor internationalretail

 bankingoperations

R$ % R o y a l$ a n k o f% a n a da andR$ & & -%aribbean

 branches0

3 c o t ia b a n k  n t e r n a t io n a l

F ir s t % a r ib b e a n

Hr i+ a t e

 b a n k ing

R$ % W e a lt h

/ a n a g e m e n t

& (

W a t e r h o u s eHr i+ a t e

3 c o t ia H r i+ a t e

% li e n t " r o up

$/ O A a r r is

Hr i+ a t e$ a n k in g

% $ % H r i+ a t e

$ a n k in g

19

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$anking

% a n a d ia nm u t u a lf u n ds

R$ % F u n d sand H AD>F u n ds

& ( / u t u a lF u n ds

3 c o t ia / u t u a lF u n ds

$/ O/ u t u a lF u n ds and"u a r d ia n

" r o up o fF u n ds

% $ % / u t u a lF u n ds

8 . 3 . m u t u a lf u n ds

& a m a r ac k F u n ds

%anadian brokerage

R$ % ( ir e c t n + e s t in g andR$%( o mi n io n3 ec u r it ie s

& (W a t e r h o u s e

3 c o t ia / c 4 e o d $/ O n + e s to r 4 in eand $ / O

 > e s b it t$ u r n s

% $ % n + e s to r ' sE dge and % $ % W oo d"u n d y

8.3. brokerage

R$ % W e a lt h/ a n a g e m e n t

formerlyR$% (ainRauscher 

& ( m e r it r a de

-9)L0

$/ O A a r r is n + e s to r 

3 e r + ice s

nternational$rokerage

W e s t n d ie s3 to c k b r o k e r s4 im it e d

& (W a t e r h o u s e-8<0, &((irectn+estingnternational-480

%anadianinsurance

R$% n s u r a n c e

& ( n s u r a n c e

3 c o t ia n s u r a n c e

$/ O 4 if e % $ % % r e d ito r  n s u r a n c e, % $ % & r a + e l n s u r a n c e

8.3.insurance

R$% n s u r a n c e

& ( n s u r a n c e

%apitalmarkets

R$ % % a p it a l/ a r k e t s

& (3 ec u r it ie s

3 c o t ia % a p it a l $/ O% a p it a l/ a r k e t s

% $ % W o r ld/ a r k e t s

/aCor c u s to d ia l

o p e r a t io n s

R$ % ( e 5 ia-Kune 7,

!1, R$% purchasedtheremaining)!L from(e5ia0

% $ % / e llo n-)!L0

Hreciousmetals

3 c o t ia / o ca tt a

20

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1

,.1 ROYAL BANK O- CANADA >RBC?

•  %anada*s largest bank by assets and market capitali#ation with broad leadership in

financial ser+ices.

•  leading di+ersified financial ser+ices company in >orth merica.

• 11th largest bank globally based on market capitali#ation-10, with operations in

96 countries.

•  !,!!! full and parttime employees.

•  /ore than 1) million clients worldwide

1. Pe"*na) @ C*$$e+ia) Banking

•  &he %anadian market leader continuing to gain profitable market share.

•  R$% is the largest and most profitable retail bank in %anada= named $est $ank in

 >orth merican and %anada.P

•  maCor %aribbean $anking "roup with branches in ! countries and territories.

• 8.3. crossborder banking for %anadian clients and 8.3. Wealth

/anagement clients.

•  $road suite of products and financial ser+ices to indi+idual and business clients

&. Wea)!h Manage$en!

•  leading global wealth and asset manager.

•  &op 6 "lobal Wealth /anager by assets.

• Ranked M1 in %anada in both retail asset management-;0 and high net

worth market share.

• n+estment, trust, banking, credit and other wealth management and

asset management solutions.

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'. In"(an+e

•  market leader with a broad suite of products and strong distribution.

• %anadian market leader in li+ing benefits and one of %anada*s largest

 bank owned insurance companies.

•  chie+ed highest e+er marks for 4ikelihood to RecommendP and Ease of 

(oing $usinessP.

• 4ife, health, home, auto, tra+el, wealth accumulation solutions as well

as reinsurance solutions

,. In<e"!* @ Tea"(# Se<i+e"

• specialist pro+ider of global custody, fund administration and

asset ser+icing to institutional in+estors.

• 4eader in cash management, correspondent banking and trade finance

for financial institutions worldwide.

•  Funding and li:uidity management for R$%

5. Ca4i!a) Make!"

leading >orth merican in+estment bank with select global reach

•  1!th largest global in+estment bank by net re+enue.

• $est n+estment $ank in %anada across E:uity, (ebt and /D for

6th consecuti+e year.

• %orporate and in+estment banking, e:uity and debt origination

and distribution, and structuring and trading.

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,.&TORONTO DOMINION BANK 

&he &oronto(ominion $ank is a %anadian m u lt in a t io n a l banking and

f in a n c ia l s e r + ic e s corporation head:uartered in & o r o n to .  t is the s ec o n d la r g e s t b a n k 

in %anada by m a r k e t ca p it a li#a t io n  and based on assets, and is the si5th largest bank 

 branch network in >orth merica. %ommonly known as TD and operating as TD Bank 

G*(4, &he bank was created in 1?)) through the merger of the $ a n k o f & o r o n to and t h e

( o mi n io n $ a n k , which were founded in 1)) and 16?, respecti+ely.

&he bank and its subsidiaries ha+e o+er 7?,!!! employees and o+er 1? million

clients worldwide. n %anada, the bank operates as & ( % a n a da & r u s t and ser+es more

than 11 million customers at o+er 1,1)! branches. n the 8n it e d 3 t a t es ,  the company

operates as & ( $ a n k -the initials are used officially for all 8.3. operations0. &he 8.3.

subsidiary was created through the merger of & ( $ a n k n o r t h and % o mm e r c e $ a n k , and

ser+es more than 6.) million customers with a network of more than 1,;!! branches in the

eastern 8nited 3tates.

&he company is ranked at number 6 on the F o r b e s " lo b a l !!! !1!  listing. nOctober 

!!, the company was named in the listings of % a n a d a ' s & o p1!!

E m p lo y e r s in  M a c ean ! s and " r ea t e r & o r o n to ' s & o p E m p lo y e r s by  the

T o r onto Sta r. Furthermore, in February !11, it was named one of %anada's top 1!

employers by the F inancia " o s t.

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,.' BANK O- NO9A SCOTIA

&he Bank *; N*<a S+*!ia , commonly known as S+*!ia :ank , is the t h ir d la r g e s t b a n k in

%anada by deposits and m a r k e t ca p it a li #a t io n .  t ser+es some 1? million customers in more

than )) countries around the world and offers a broad range of products and

ser+ices including personal, commercial, corporate and in+estment banking. With

assets of 

J7)9 billion, 3cotia bank shares trade on the & o r o n to and  > e w @ o r k s to c k e 5 c h a n g e s .

S+*!ia:ank is one of >orth merica's premier financial institutions and the

most international of %anadian banks. We pro+ide personal, commercial, corporate and

in+estment banking ser+ices to indi+iduals, small and mediumsi#ed businesses,

corporations and go+ernments in more than )! countries around the world, and coast to coast

across %anada.

n today's comple5 financial ser+ices market, success belongs to companies that can balance

inno+ati+e technologies with a personal touch. &he S+*!ia:ank "roup pro+ide these

 balances by 2putting people first.2 While technological ad+ances are making routine banking

transactions increasingly con+enient and efficient, S+*!ia:ank employees are focused

on constantly building stronger, deeper relationships with their customers in a human,

straightforward and knowledgeable way.

&he bank was incorporated by the 4 e g is la t i+e s s e m bly o f > o + a 3 c o t ia o n /arch ;!,

1;, in Aa lif a 5 , > o + a 3 c o t ia, w ith W il lia m 4 a w s o n -177N190 ser+ing as the

first president. &he bank mo+ed its e5ecuti+e offices to &oronto, Ontario, in /arch 1?!!.

3cotia bank has billed itself as 2%anada's nternational $ank2 due to its ac:uisitions

 primarily in 4atin merica and the %aribbean, but also in Europe and ndia as well.

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$>3 nstitution >umber -or bank number0 is !!. &he company ranked at number ? on

the F o r b e s " lo b a l

!!! listing in !1 and is currently under the leadership of R ic h a r d E . Wa u g h who ser+es

as

%EO and $rian Horter, who ser+es asHresident.

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,., BANK O- MONTREAL

&he Bank *; M*n!ea), -commonly BMO in either official language0, or BMO

-inan+ia) G*(4, is one of the $ ig F i+e banks in % a n a d a.  On  Kune ;, 117, K o h n

R ic h a r d s o n and eight merchants signed the rticles of ssociation to establish the $ank of 

/ontreal in a rented house in / o n t r e a l, u e b e c . &he bank officially opened its doors for 

 business on >o+ember ;,

117, making it %anada's oldest bank. n %anada, the bank operates as BMO Bank o# 

 Montrea and has more than ?!! branches, ser+ing o+er se+en million customers. &he

company also has substantial operations in the % h ic a go area and elsewhere in the 8nited

3tates, where it operates as  B M O $a r r is B an k. $ / O % a p it a l / a r k e t s is $/O's in+estment

and corporate banking di+ision, while the wealth management di+ision is branded as $/ O

 > e s b it t $ u r n s.

&he company is ranked at number 1)! on the F o r b e s " lo b a l !!!list.

,.5 CANADIAN IMPERIAL BANK O- COMMERCE

&he Canadian I$4eia) Bank *; C*$$e+e -F r e n c h G  Ban%ue Canadienne Im&'riae

de Commerce0, commonly CIBC, is one of %anada's chartered banks, fifth la r g e s t by

deposits. &he bank is head:uartered at %ommerce %ourt in & o r o n to , O n t a r io .

&he bank's two strategic business units, %$% World /arkets and %$% Retail /arkets,

also ha+e international operations in the 8n it e d 3 ta t e s,  the % a r ib b e a n , s ia a nd the

8 n it e d < ingd o m . "lobally, %$% ser+es more than ele+en million clients, and has o+er 

9!,!!! employees. &he company ranks at number 17 on the F o r b e s " lo b a l !!! listing.

%$% was named the strongest bank in %anada and >orth merica, and the ;rd strongest

 bank in the world, by $ lo o m b e r g / a r k e t s maga#ine, in /ay !1.

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CHAPTER 5

, CANADIAN BANKS ON TOP 1/ LIST O- WORLDS STRONGEST

Four of %anada's biggest banks ha+e landed among the top 1! in a global ranking of the

strongest banks, although two of them ha+e seen their rankings slip from last year.

ccording to data compiled by $loomberg /arkets maga#ine, %$%, Royal $ank,

3cotiabank and &( were ranked ;rd, 9th, 7th and th, respecti+ely, on the

 publication*s annual ranking of the world*s strongest and safest lenders.

$loomberg /arkets maintains a list of global banks with at least J1!! billion 83 in assets.

&his year, 7 firms made that cutoff.

&he maga#ine then ranks the lenders based on fi+e broad categories, including the si#e

of their capital reser+es, the amount they keep on hand to co+er bad loans, the

 percentage of their assets that are inefficient or considered Qnonperforming* and the

amount they take in deposits.

mong the %anadian banks. Royal $ank and 3cotia saw their ranking impro+e, while%$%

and &( slipped. n &(*s case, the bank slipped from 9th in the world toth.

particular source of strength for %anadian lenders is how big their &ier 1 capital ratiosare.

&hat*s the financial term for a lender*s cash reser+es and how many of its own shares itowns

 T both of which are +aluable assets to ha+e act as shock absorbers if and when the

economy hits a rough patch.

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E+ery year, our stress tests tell us we*re stronger than the pre+ious year,P &oronto

(ominion bank president Ed %lark told the maga#ine. @ou don*t ha+e to go out on the

risk cur+e to look after the shareholder, and it*s a foolish bet to do that,P he said.

lthough they continue to compare fa+ourably internationally, %anadian banks aren*t

immune to the signs of slowdown in the global and domestic economies. Ratings agencies

/oody*s and 3DH each downgraded their outlooks for most of %anada*s maCor lenders late

in the year. nd official data shows %anadians* debt loads continue to tick alarmingly high,

a trend that could make the banks who loaned out all that debt +ulnerable.

nother eyeopening placement on the list is 8.3 lender %itibank. $loomberg/arkets

ranked merica*s biggest lender in fiftho+erall.

%iti*s presence so high on the list is significant because it wasn*t that long ago T !! to

 be precise T that the bank was sa+ed from bankruptcy thanks to a J9) billion 83 bailout

from the 8.3. go+ernment.

%iti was dis:ualified from $loomberg*s rankings as recently as last year because it failed

the 8.3. Federal Reser+e*s socalled stress testP of banks that may be +ulnerable to

financial shocks.

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CHAPTER 7

THE BENE-ITS

%anada*s banks ha+e been rated the soundest in the world, fi+e years in a row. Why does

this matter to %anadiansU When we ha+e banks we can depend on, we can plan ahead, take

ad+antage of opportunities and know that our banks will be there when we need them.

7.1 STRONG AND STABLE BANKS BENE-IT ALL CANADIANS

3ince %anada*s first bank opened its doors almost !! years ago, banks ha+e played N and

continue to play N a central role in financing much of %anada*s growth. %anada*s financial

ser+ices sector is an essential contributor to the country*s economic growth and well

 being. n !1, the banking sector contributed J); billion to the %anadian economy, and

they paid

J1.6 billion in di+idends to shareholders and that includes indi+idual %anadians who hold

shares through their pensions and their retirement funds.

Why does this matter to %anadiansU

1. He)4ing Canadian" "a<e ;* e!ie$en!

/illions of %anadians count on retirement sa+ings products offered by %anada*s banks

to

 plan for their future.

&. Making "$a)) :("ine""e" a ea)i!#

(ependable banks also allow dreams to flourish when opportunity knocks. /ore than 1.6

million small businesses look to banks for the money they need to grow and business loans

help to create Cobs.

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'. S(44*!ing #*(ng Canadian" !* "(++eed

$anks understand the role that they ha+e in contributing to a positi+e future for 

%anada. From helping %anadians better manage their money to impro+ing the financial

literacy of youth, to student loans= banks can be depended upon to pro+ide what people need.

,. Being 4a! *; !he +*$$(ni!#

$anks employ o+er 7),!!! %anadians across the country and we*re good customers

too. nd banks and their employees are among the country*s most acti+e corporate donors

supporting the arts, sports, culture, music, health and the en+ironment.

7.& THEY PRO9IDE WHAT PEOPLE NEED

/ore than ?! per cent of %anadians feel positi+ely about their bank. &his e5ceeds what you

find for other ser+iceoriented industries and it*s been on the rise o+er the last twenty years.

• %anadians +alue the stability and soundness of our banks with 1 per cent

of %anadians belie+ing that %anada*s banks are more stable than other banks around

the world. nd for a good reason. %anada*s banks came through the recent

global financial crisis without any ta5payer funded bailouts, there were no bank 

failures and they continued to lend. nd it*s why the World Economic Forum, for 

the fifth year in a row, said %anada*s banks are the soundest in the world.

• %anadians +alue the safety that banks pro+ide in terms of financial transactions

and personal information with ; per cent of %anadians seeing banks as doing a

good Cob of protecting their personal information and transactions.

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• %anadians +alue the added con+enience and choice in how they bank with 76 per 

cent rating the performance of banks as good when it comes to introducing

technologies that impro+e the con+enience of banking.

• %anadians see the +alue in ha+ing banks that are profitable with 1 per 

cent understanding that, like any company that has shareholders, banks ha+e to focus

first on pro+iding good returns to those who own their shares.

7.' THEY PLAY BY THE RULES MANAGE RISKS SENSIBLY AND

HA9E A STRONG REGULATORY SYSTEM

%anada*s banks are well managed, well regulated and well capitali#ed. We play by the rules

and our national banking system is a key strength. $y di+ersifying regional risk, a

downturn in an indi+idual economic sector is balanced since funds can be mo+ed from

areas of e5cess deposits to regions where growth is creating demand for new credit.

$anks in %anada are also among the best capitali#ed in the world, e5ceeding $ank 

for nternational 3ettlements* norms by significant margins. &his allows banks to

continue lending and pro+ides a cushion against loan losses, which tend to increase during

economic downturns.

nd %anada has been recogni#ed by the nternational /onetary Fund and others as ha+ing a

sound regulatory system. Our streamlined bank regulatory system has two primary

regulatorsG the Office of the 3uperintendent of Financial nstitutions -O3F0 for prudential

regulation and the Financial %onsumer gency of %anada -F%%0 for financial consumer 

matters. n contrast, the 8nited 3tates, for e5ample, has a comple5 network of different

regulators. nd

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%anada*s $ank ct is re+iewed and updated e+ery fi+e years to ensure theregulatory

structure is keeping pace with changes in theindustry.

nd %anadians ha+e a strong track record when it comes to paying their mortgages. 4ess

than half of one per cent of all mortgage holders with the country's largest banks ha+e gone

more than three months without making a payment. &his number has been stable for more

than two decades, in times of high and low unemployment, high and low interest rates, and a

strong or weak %anadian dollar.

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CHAPTER D

WHAT HELPED CANADAS BIG BANKS WEATHER THE

-INANCIAL CRISIS

&he littlediscussed safety net that helped the big banks through the financial crisis was

their complete, mastersoftheworld dominance o+er the daytoday financial affairs of 

almost all %anadians.

When the banks need re+enue and profits, they simply ha+e their clients supply it. nd

so they did in !!7, as the crisis began to take shape, and for years afterward.

4et us recount the ways, starting with the repricing of +ariablerate mortgages. $eforethe

crisis, these mortgages were a+ailable at your lender*s prime rate minus a discount as largeas

!.? of a percentage point. t the height of the crisis, +ariablerate mortgages were being

sold with a markup o+er prime of one to 1.) of a percentage point. 3ince then, the discount

has gradually returned and is now at roughly !.9 off prime.

case can be made that fi5edrate mortgages would also be lower if precrisis pricing was

used. (ata from %anada /ortgage and Aousing %orp. shows that in the 7.) years prior to

the crisis, posted fi+eyear fi5edrate mortgages were priced at .99 percentage points on

a+erage abo+e the yield on the fi+eyear "o+ernment of %anada bond. &oday, the gap is

around ;. points, down a bit from peak le+els but still higher than it was.

(iscounted mortgages are also more e5pensi+e than they might ha+e been, precrisis.

&hey used to be sold at roughly one percentage point abo+e the fi+eyear %anada bond=

today, the gap is more like 1.6 points for a welldiscounted mortgage.

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&he homee:uity line of credit is one more e5ample of higher costs as a result of the crisis.

AE4O%s, as they*re called in the banking world, used to be a+ailable at prime. &oday,

the rate for these widely used borrowing tools is prime plus !.) to prime plus one. Rates on

unsecured credit lines N where you don*t pledge your house as security N ha+e also risen.

$anks made the argument that the crisis forced them to pay higher rates to raise funds for 

lending to clients, and that this cost had to be reflected in higher borrowing costs. Aa+en*t

things calmed down by nowU

&o some e5tent, yes. $ut mortgage planner (a+id 4arock said banks ha+e come under 

tighter regulations in the past few years that continue to play a role in higher 

lending costs. %ustomers ha+e still come out ahead, he argues. &he Vinterest rate discount

we*+e enCoyed because of the crisis has far outweighed the marginally increased costs that

lenders ha+e for the most part passed on to consumers.P

&he crisis was a stressful time for the banks, and they took it out on their customers in a

+ariety of ways. One bank had the bright idea, Cust as a recession was asserting itself,

to charge people a J;) inacti+ity fee if they left their unsecured credit line unused o+er a 1

month period. &he fee was later cancelled after some embarrassing publicity.

nother gift of the crisis was one bank*s decision to bump up its credit card interest rate by

fi+e percentage points if a customer missed two consecuti+e minimum payments.

E+en today, the banks continue to get tough with customers about borrowing. 3ome ha+e

started to adCust the interest rates on credit cards and other lending products according to a

customer*s credit record. Heople who pay on time see no change, or a token rate cut. &hose

struggling with debt get loaded down with higher interest rates.

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 >ot all changes in the banking business ha+e been negati+e. n an effort to create pools of 

money they can profitably lend out, the banks ha+e embraced the highinterest

sa+ings account. &hanks to competition between banks, interest rates in these accounts are

in the low

1percent range. &hat*s tiny by historical standards, but decent when compared to oneyear 

term deposits and bond yields.

&he consulting firm /cay and ssociates says that sa+ings deposit rates are 7) per cent

higher than they were fi+e years ago, with much of the cash coming out of money market

mutual funds. E+en after recent fee cuts, money market funds are only producing returns

around !.) per cent.

Financially, %anada*s banks are in strong shape right now. Hrofits are rich, shares ha+e been

rising in price and di+idends are being cranked higher on a regular basis. &ake a moment to

admire the turnaround. @ou helped pay for it.

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CHAPTER

WHY CANADA CAN A9OID BANKING CRISES AND U.S. CAN.T

3ince 17?!, the 8nited 3tates has suffered 16 banking crises. %anada has e5perienced #ero T 

not e+en during the "reat (epression.

t turns out %anada can thank the French for their stable system, according to a p a p e r by

%olumbia 8ni+ersity*s %harles %alomiris, presented at the tlanta Fed*s !1;

Financial /arkets %onference.

When it became a $ritish colony, the maCority of %anada*s population was of Frenchorigin

 T and the French inhabitants hated the $ritishgo+ernment.

3o to keep the colony firmly within the Empire, $ritish policymakers steered toward

a go+ernment structure that would limit the power of the FrenchmaCority while also gi+ing

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%anada more and more selfgo+ernment. &he e+entual result was a highlycentrali#ed

federal

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go+ernment which controlled economic policy making and had builtin buffers for banker 

interests against populist forces, the paper argues.

&hat antipopulist political system T known in political science as liberal

constitutionalism or liberal democracy T is a key ingredient in %anada*s stable banking

track record, /r. %alomiris contends in his paper, which is a summary of a much longer 

 book he*s written with 3tephen Aaber due out in 3eptember. &hat*s because this kind of 

 polit ical system makes it difficult for polit ical maCorities to gain control of the banking

system for their own purposes, the authors contend.

Hopulist democracies like the 8.3., on the other hand, tend to create dysfunctional banking

systems because a maCority of citi#ens gain control o+er banking regulation that steers

credit to themsel+es and to their friends at the e5pense of the citi#ens that are e5cluded

from the banking system, he said.

&he contrast between the 8.3. and %anada was part of /r. %alomiris broader argument that

dysfunctional banking systems T which are by far the norm rather than the e5ception

around the world T are the result of political factors.

Whether societies ha+e dysfunctional banking systems is really not a technical issue at all.

t*s a political issue,P /r. %alomiris said at the conference, introducing his premise as we

do know how to a+oid dysfunctional banking but that we make political choices N you

might e+en say consciouslyP not to ha+e functional banking systems for most of the

modern era in most countries of the world.

&he history of the 8.3. banking system is one in which the go+ernment forms partnerships

with different interest groups at different points in history, and those coalitions Cointly

influenced the way the banking system was regulated, /r. %alomiris argues.

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n populist democracies, such as the 8nited 3tates, the regulation of banking is used as a

 political tool to fa+or some parties o+er others. t is not that the dominant political coalit ion

in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate

instability as the price for obtaining the benefits that it e5tracts from controlling banking

regulation,P he writes in his paper.

$acking up their argumentG Only si5 countries N including %anada T ha+e been crisis

free and at the same time ha+e banking systems that pro+ide abundant credit. &hree of these

 N 3ingapore, /alta and Aong <ong N are small, islandbound citystates where

the homogeneity of the population makes it politically difficult to create losers. &he other 

three N %anada, ustralia and >ew Xealand N all share histories of liberal democracy.

/r. %alomiris argues that in the 8.3., a coalition that emerged in the 1??!s of 

go+ernment, big banks and acti+ist consumer groups came helped fuel the housing crisis.

Regulatory changes opened the door to a wa+e of mergers and ac:uisitions that created

today*s megabanks. $ut banks still had to get appro+al N usually from the Federal Reser+e

 N to complete those mergers and outside groups were able to weigh in on the wisdom of the

deal as part of the Fed*s decisionmaking process.

%ommunity groups, with the %linton administration*s encouragement, used the Fed*s

appro+al process to e5tract binding concessions from banks to loosen underwriting

standards for poor, urban communities N concessions to which the Fed agreed, /r.

%alomiris argues. &he banks had to apply the looser standards to e+eryone. &hat helped fuel

an e5plosion in poorly underwritten mortgages that contributed to the depth and se+erity of 

the housing crisis, he contends.

ll in all, /r. %alomiris* theory is a bleak one for the ability of financial reform efforts

to

make much of a difference.

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3mart economists with their regulatory ideas are sort of dead on arri+al,P he said.

Holitical coalitions will decide T not whether you*+e got the right R model T Vbut

whether a banking system is going to be set up with rules that will lead it to be stable and

ha+e abundant credit or not.P

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CHAPTER F

CONCLUSION

For all the recognition that the %anadian banking industry recei+es, it operates in a

limited and insular market. &he industry*s mo+e outside %anada for growth will e5pose

 banks to global economic challenges, as well as a slew of regulatory compliance challenges.

&he industry can o+ercome these obstacles by le+eraging its strong banking system,

 built on plain+anilla products, limited e5posure to riskier businesses and products, as well

as a strong focus on longterm returns and customer ser+ice.

nother strength is that the go+ernment offers no incenti+es for consumers to take on higher 

debt, resulting in prudent borrowing. &he (oddFrank ct began mandating stresstesting to

measure the health of banks following the global economic crisis, but O3F, the %anadian

 banking regulator, has been administering stress tests e+en before the crisis took place. &his

 places %anadian banks in a strong position to contend with new challenges and

opportunities.

Emerging technologies such as analytics, social media, mobile de+ices and cloud computing

will play a greater role in the coming years. s the millennial generation grows in si#e and

influence, demand for ser+ices that make use of these tools and techni:ues will play

a significant role in determining growth and pecking order. 3ocial media is already pro+ing

to be a critical platform to appeal to +arious segments of customers. ccording to the K(

Hower 

!11 %anadian Retail $anking %ustomer 3atisfaction 3tudy,? more than 6!L of 

retail banking customers use social media, and among those who use social media for 

 banking purposes, 9L say they do so to discuss their banking e5perience or inform their 

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 bank of a r ser+ice issue. s more and more consumers use online and mobile banking

ser+ices, it will be

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imperati+e for banks to consider how they can integrate these technologies and tap into

their power to support and grow their businesses.

Regulations and economic conditions worldwide remain a cause for concern. $anks today

are re:uired to deal with more stringent capital, li:uidity and risk management

re:uirements. n such a scenario, impro+ing operational efficiencies and gaining additional

ground by utili#ing their e5isting competiti+e ad+antages will determine which banks will

succeed in the future.

Canadian :ank" i)) d* e)) :#

• /aintaining the fine balance of meeting growth targets while complying with

more stringent regulatory re:uirements.

•

(i+ersifying into markets and related businesses with strong growth potential,

while applying the e5perience gained in their home markets.

• Effecti+ely dealing with the economic, political, cultural and regulatory hurdles

in markets where they operate.

•  (e+eloping and pro+iding inno+ati+e products and solutions.

recent "lobal %EO sur+ey by Hricewaterhouse%oopers says that 7L of banking and

capital market %EOs belie+e that inno+ation will lead to operational efficiencies= 69L

 belie+e that & in+estments will help them tap into new marketing and transactional

opportunities.

chie+ing operational efficiencies with smart use of technology and thirdparty ser+ices to

keep focused on ac:uiring, retaining and delighting customers.

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&he %anadian banking industry weathered the global financial storm. n fact, no %anadian

financial institution re:uired a go+ernment bailout.

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"i+en their strong fundamentals, track record and operational strategies, %anadian banks are

well positioned to tap into new growth opportunities. $ut this can only happen if they can

:uickly and costeffecti+ely upgrade their legacy systems and apply historically solid risk 

mitigation strategies to e5pand into new geographies and offer ancillary products that will

enable them to incrementally impro+e their top and bottom lines.