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. Demographics are good and the country’s diversified economy is backed by a treasure of oil, wood, gold and other natural resources.
So the experts say.
Institutional investors, relying on the work of Jeremy Rudin, Canada’s chief bank regulator, agree. In fact, Canadian financials accounted for 35.5% of the market capitalization of the benchmark exchange (NBF February).
However this façade hides major uncertainties. Key concerns stand out, which if unaddressed, could spark solvency and liquidity issues in one or more of Canada’s Big Six banks.
The fragilities can be seen in an IMF report, which calculated that Canada’s financial sector accounted for a stunning 500% of GDP in 2012. Today, the assets of the Big Six banks alone are more than double the size of the country’s economy.
Each (RBC, CIBC, Scotiabank, BMO, TD and National Bank) have been designated “systemically important,” which in turn, due to sheer size and interconnectedness, suggests that they are almost certainly “too big to fail.” That means the collapse of any one Big Bank would threaten to trigger systemic implosion.
More ominously, if Canada’s financial system, arguably the world’s best, is riddled with pores, what does that say about the US, the UK, and Japan? Let alone Italy and Spain?
Yet signs of fragility are everywhere. Consider:
Complacency following “secret” $114 billion bailout
A quick review of key metrics suggests Canada’s banking sector, which, on the surface, having largely escaped the 2008 financial crisis, has thus learned little from it.
As David Macdonald demonstrated in a paper for the Canadian Center for Policy Alternatives, Canada’s Big Banks benefited from nearly $114 billion in cash, liquidity, and other bailout help from both local and US sources following the financial crisis.
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