It wasn’t by chance that Canada’s banks remained relatively unscathed three years ago when many of their counterparts in the United States and Europe were collapsing under the weight of the global financial crisis.
In essence, says Larry Pollock, president and CEO of Edmonton-based Canadian Western Bank, it was largely thanks to a well-regulated banking system in Canada that has traditionally adopted a more conservative approach than in some other countries.
“Canadian banks are not big risk takers, and they tend to be quite well capitalized and less levered in global terms,” says Pollock. “This has helped them to withstand shocks to the global financial system far better than many banks in the U.S. and Europe.”
The World Economic Forum has ranked Canada’s banking system as the most sound in the world for four years in a row.
Pollock adds that the structure of Canada’s housing market further insulated Canadian banks from the troubles that swept across the U.S.
“Unlike the U.S., mortgage payments in Canada are not tax deductible, which was one of the main triggers for the crisis in the U.S. I don’t believe we are facing a housing bubble in Canada, which means we will not face a similar situation to that in the U.S.,” says Pollock.
Canada’s conservative approach to banking is being seen again with the early implementation of the next round of global regulatory changes that are included in what is known as Basel III – the third round of banking reform in the Basel Accords, which were formulated in response to the deficiencies in financial regulation that became apparent in the 2009 global financial crisis.
Pollock says by getting ahead of the regulatory deadline, Canada’s banks will have stronger capital bases and be better positioned to withstand future global shocks.
He also points out that the new rules will compel banks to focus on areas that attract less capital, such as lower-risk lending and fee-based financial services.
“Banks are already ramping up their focus on fee-based business and reducing the risk exposure on their balance sheets. This is important because it allows banks to look for new ways to increase value for shareholders rather than be distracted by fighting fires that could result from undertaking higher-risk initiatives,” says Pollock.
It’s not that Canadian banks have struggled to raise capital. Their solid performance over the past few years has been reflected in higher share prices and increased dividends to shareholders. For example, Canadian Western Bank recorded 16 per cent loan growth last year and followed it up with four per cent loan growth in the first quarter of 2012. “Our outlook remains quite optimistic, particularly in Western Canada where we do most of our business,” adds Pollock.
However, that doesn’t mean that CWB and Canada’s other banks will not face challenges in the months and years ahead.
For example, the transformation of Canada’s economy, which is seeing a bigger share of GDP shifting from Ontario and Quebec to the growing economies of the western provinces, will put pressure on the country’s banks to help fund some of the large development projects in the region, particularly because less capital will be coming in from foreign lenders than in past years.
“Meeting the more stringent Basel III capital requirements has posed certain challenges for Canadian banks,” says Pollock. “But in the end, the time and resources required to implement the new regulations will help strengthen the foundation that has secured Canada’s place as the world’s most stable banking environment.”