In a nation dominated by oligopolies—the Big Three telcos, Big Two airlines, Big Three grocery operators—Canada’s Big Five banks stand out from the hulking pack. Over the past 15 years or so, the total assets on their balance sheets have exploded, mounting from $1.7 trillion in 2005 to $6.6 trillion as of the first quarter of 2022. All but CIBC have crossed the $1-trillion mark in terms of total assets, but it, too, is on track to join the pack sometime in the next couple of years.
When you start getting into 13-digit numbers, though, it’s easy to get confused. To put the growth in perspective, compare the banks’ assets to the size of the Canadian economy—the Big Five now hold assets equal to 2.5 times Canada’s gross domestic product. Contrast that with the U.S., where the assets of the five largest banks amount to just 40% of that country’s GDP.
Having reached the politically feasible limits of mergers in Canada, the country’s banks have expanded internationally, which has helped them bulk up. But this is also a story of Canada’s obsession with real estate. Those mortgages Canadians have been ferociously taking out to pile into the ever-soaring housing market (average national house price: $817,000 in February, up 21% in a year) are the largest single asset class the banks hold.
Canada’s banks are regularly hailed for their stability. That was the case after the financial crisis of 2008-’09, when many U.S. observers, still shell-shocked by the collapse of several major financial institutions, looked to their boring, staid northern neighbour with envy. The fact is, however, Canada’s big banks haven’t really been put to the test, since at each crisis Canadians have responded to interest rate cuts by borrowing and spending, helping to boost bank bottom lines and balance sheets.
The coming years will be telling. With inflation rising, steeper interest rates are coming, which is likely to crimp demand for houses. At the same time, the banks are being forced to defend their turf from fintech disruptors and the trend toward open banking. The Bay Street behemoths are responding with their own investments in technology, but much-needed competition for Canada’s banking oligopoly is long overdue.
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