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Four years after the financial crisis, Canada's financial sector has never been bigger. Is that something to be proud of or something to fear?
Finance, defined as economic output of banks and insurers, is bigger in both absolute and relative terms. The industry generated 6.65 per cent of gross domestic product in Canada in June, the latest month for which Statistics Canada provides a detailed breakdown on its web site. That's well up from the 6.1 per cent level produced by finance in January of 2006. Over that time, finance's economic output has risen almost 17 per cent.
Banks in Canada have been expanding at home and abroad, increasing their loan books and looking for acquisitions. Canadians continue to have an appetite for financial assets, driving business at brokerages.
It all adds up to more activity in the sector. So does the fact that finance is bigger relative to other industries represent any sort of warning sign, perhaps of excess risk, or point to undue "financialization" of the Canadian economy that poses a threat to the country's health?
History shows that there's no specific level at which alarm bells should go off.
Sure, some of the countries with the biggest financial sectors relative to GDP faced some serious problems in the crisis.
U.S. finance as a percentage of GDP rose to 8.3 per cent in 2008. The U.K. and Ireland were even higher. Yet Australia's level was highest of all, and its economy and financial system have had little trouble.
And at the other end of the scale, Spain, Italy, Germany and France all had financial sectors relative to overall GDP that were smaller than Canada's in 2008, at levels below 6 per cent. And each of those countries has significant problems with their banks, which are spilling over to damage the rest of their economies. (Here's a Bank of England study on the topic with a chart on page 234 that lays out the numbers ) So it seems clear that the share of financial activity relative to the economy, on its own, doesn't tell you much.
If the level of financial activity doesn't give a clear signal, perhaps the growth path does. And what jumps out there is that Canada's financial sector is no longer growing by leaps and bounds relative to the rest of the economy. In fact, finance's share of the economy has largely plateaued in the past three years.
The size of the sector (banks and insurers) was rising sharply in the months approaching the credit crisis, jumping from 6.1 per cent of GDP in January 2006 to 6.48 per cent in January 2007. Then, as markets started to freeze and investors began to panic, the sector's growth as a percentage of the overall economy stopped. But by the beginning of 2009, the sector was hopping again, rising to 6.59 per cent of GDP in January 2009 and 6.77 per cent in June 2009.
Since then, the percentage of economic growth generated by financial firms has generally stayed a little below that level. That may suggest that finance and the rest of the economy have reached a sort of equilibrium for the time being. Over the long term, it doesn't make much sense for finance, a business that is supposed to support overall economic growth, to consistently grow faster than the rest of the economy.
The fact that the growth rates have now largely synched up suggests that finance is doing its primary job of helping other areas of the economy grow.
To be sure, there are certainly some concerns about the health of Canada's financial institutions, as evidence by a recent downgrade on six lenders by Standard & Poor's. Fierce competition, stretched borrowers, and reduced profits may well pose problems.
But finance's share of the economy is not flashing any warning signs.