Did you know that Canada hasn’t had a serious banking crisis in 123 years?
In the same period when the United States experienced the 1907 bank panic, the 1930 bank runs, and the 2008 financial crisis, Canada hasn’t had a single bank collapse. If you add last week’s regional bank failures to the U.S.’s running total, then that’s four U.S. banking crises that Canada has skipped.
In this article, I will explore some key reasons why Canada hasn’t experienced a single banking crisis in the last 123 years.
Strict regulations
One of the things that Canada’s banking sector has going for it is strict regulations. Canada has always had some of the strictest banking regulations in the world, and that has served the country well.
One of the most important sets of regulations is the rules about who can enter the industry. Foreign banks have limited access. New banks have to abide by the same consumer protection rules the big banks do. There are strict limits on what percentage of a bank any one shareholder can own. These rules make it difficult for new firms to enter the Canadian banking industry.
Normally, industry concentration is considered to be bad for consumers, because it gives companies more room to raise prices. However, in an industry like banking, where too much competition can lead to smaller firms collapsing outright, it’s probably a good thing.
A concentrated market
A corollary of the point about strict regulations is a point about Canada’s market concentration. There are only 35 domestic banks in Canada, there are over 4,000 banks in the United States. Canada’s concentrated banking industry makes it easy for the government to supervise. When there are only 35 banks in a country, the government can easily keep track of all of them. A single person could easily memorize the names of 35 companies, they probably couldn’t memorize the names of 4,000. So, it’s a lot easier to supervise Canadian banks than U.S. banks.
Also, some individual Canadian banks make up a very large share of the market. Take Royal Bank of Canada (TSX:RY) for example. It has a $180 billion market cap. It has millions of customers across the country. It has an outsized role in the country’s investment banking industry. It has been in business for 170 years. This is a huge institution that, if you can ensure it doesn’t do anything irrational, will keep Canadian depositors safe.
Royal Bank has 17 million clients. If you can effectively regulate RY and its five biggest competitors, then you’ve got the overwhelming majority of Canada’s population covered. That makes Canadian bank regulators’ jobs easier.
Foolish takeaway
Are Canadian bank stocks risky?
Like any other asset, they are. But compared to most of the worlds’ banks, they’re fairly safe. All of Canada’s banks have large amounts of capital compared to risk weighted assets, most are profitable and growing, and several are successfully expanding into foreign markets. To be sure, you can expect the prices of Canadian bank stocks to come down if there’s more bad news from the U.S. or Europe. But in the long run, our banks are pretty safe.
