Canada’s Banks: Too Big to Fail?

The latest report from the IMF confirms the importance of the top banks to Canada’s economy.

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The Motley Fool

It looks like “too big to fail” is alive and well, according to a new report from the International Monetary Fund (IMF). And this is especially true in Canada, where the top banks control a very large portion of the assets.

According to the data, Canada’s three largest banks – Royal Bank (TSX: RY)(NYSE: RY), Toronto Dominion (TSX: TD)(NYSE: TD) and Scotiabank (TSX: BNS)(NYSE: BNS) control nearly 65% of all banking assets in the country. That puts the country on par with countries like France and Spain. In the United States, that number is less than 45%. In Germany, it’s less than 40%. And in India, it’s less than 30%.

Nothing new

This should not be surprising. Canada is well-known to have a very small number of banks, with each one playing a major role in the economy. In May of last year, all of the country’s big six banks were identified as “domestic systemically important financial institutions” by Canada’s banking regulator. Although the phrase “too big to fail” wasn’t used, it was certainly implied.

Size matters

Even before last May, it has been widely known that if any of the big banks failed, it would get bailed out by the government. And that is a great advantage to have, because it means that these banks can borrow at lower interest rates.

Larger banks have other advantages too. There are a lot of fixed costs (compliance, technology, etc.) that can be absorbed more easily by a larger bank. The big banks can also serve large institutions more easily than their smaller rivals.

So what does this mean for investors?

In Canadian banking, Royal Bank and TD lead in most categories. This allows the banks to operate more efficiently than their peers, which is great for investors. Those banks remain a great foundation for any portfolio.

Foolish bottom line

Whenever the phrase “too big to fail” is thrown around, it always causes a lot of headlines. But in this case, it did not reveal anything new. Rather, it served as a reminder that Canada’s largest banks are in a great position, and that they still make a great option for most investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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