Canadian Banking System

The Canadian banking system is generally considered to be one of the safest in the world.^[1] According to Global Finance magazine's annual listing of the world's safest banks based on their credit ratings, eight Canadian banks ranked in the top 40 in 2019, including those ranked 11 through 13. Canadian banks captured the top six positions in the ranking of the safest banks in North America.

Regulation

One of the main reasons that the Canadian banking system is considered so safe is that it's heavily regulated, especially compared to its southern neighbor, the United States. Banks and all financial institutions—including insurance companies, trust and loan companies, and 1,200 private pension plans—are regulated by the Office of the Superintendent of Financial Institutions (OSFI), which is an independent agency of the Canadian government.

OSFI says its "goal is to balance competitiveness with financial stability," and it also notes that its "supervision approach is risk-based,"^[3] which accounts for the large number of Canadian banks on the list of the world's safest banks year in and year out. "A properly functioning, efficient financial system in which Canadians can place their trust and confidence is essential to Canada's economy," OSFI says.^[3]

In the U.S., by contrast, banks are regulated by a variety of federal regulators, including but not limited to the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, in addition to individual state regulators.^[4] Insurance companies are generally regulated at the state level.^[5]

While American bank regulators are certainly focused on risk, they are also concerned about other things, such as competition, privacy, anti-money laundering, banking access, and consumer protection, relative to their Canadian counterparts.^[6]

Also unlike in the U.S., bank regulation in Canada is more focused through one agency, OSFI, which is not involved in setting monetary policy. That's the purview of the Bank of Canada, which doesn't regulate banks. In the U.S., by contrast, the Fed performs both functions.

Small Number Of Banks

Another major difference between the Canadian and American banking systems is the sheer number of institutions and their respective market shares, even taking into account the vast difference in population size between the two countries. The U.S. population is about nine times that of Canada.^[7]

According to the FDIC, there were 4,718 individual banks in the U.S. in 2018.^[8] In Canada, there were only 86 banks, according to OSFI. That does make the Canadian industry easier to oversee.

Types Of Canadian Banks

There are three types of banks in Canada:

• Schedule I: Domestic banks that accept deposits that are insured by the Canadian Deposit Insurance Corporation (CDIC).
• Schedule II: Foreign bank subsidiaries that take deposits insured by the CDIC.
• Schedule III: Branches of foreign banks that conduct banking business in Canada. These branches are subject to certain restrictions.^[9]

The "Big Five" Canadian Banks

The banking industry in Canada is heavily concentrated among five large banks. The "Big Five" banks ranked by assets in Canadian dollars as of 30 January 2020 are:

• Royal Bank of Canada (RBC), CAD$1.48 trillion
• Toronto-Dominion Bank (TD), CAD$1.46 trillion
• Bank of Nova Scotia (Scotiabank), CAD$1.2 trillion
• Bank of Montreal (BMO), CAD$879.7 billion
• Canadian Imperial Bank of Commerce (CIBC), CAD$672.1 billion^[1]

Based on total domestic bank assets of CAD$6.8 trillion, according to OSFI, that would give the Big Five a market share of about 85%.

How Do These Banks Compare To The U.S.?

By comparison, the five biggest banks in the U.S.—JPMorgan Chase, Bank of America, Wells Fargo Citigroup and U.S. Bank—had combined assets of about US$8 trillion. That gives them a market share of about 47%, based on total combined industry assets of US$16.9 trillion, according to the Federal Reserve.

That concentration among a small number of large players in Canada has both positives and negatives for the financial system as well as consumers.

With so few players, the Canadian banking business is less competitive than the U.S. industry, which makes pricing on some consumer financial products, such as fees and interest rates, more expensive for Canadians than Americans for basically the same products. But as OSFI states, it tries to "balance competitiveness with financial stability."^[3] In the U.S., regulation may tilt more toward fostering competition.

Relationships between Canadian banks and their regulators also tend to be "more collegial" than those in the U.S.^[6] The relatively few number of Canadian banks is largely due to the regulatory regime, which favors a small number of large institutions.

However, given their large size and the relatively small size of their home market, the Big Five tend to have large international units. RBC, TD and BMO have large U.S. subsidiaries, while Scotiabank has carved out a niche for itself in Latin America.^[6]

Credit Unions

In addition to banks, Canada also has 241 credit unions that serve more than 5.8 million members, or about one in five Canadians. Most of them are located in Quebec—where they are called Caisse Populaires (people's banks)—and British Columbia. Provincial governments, not the federal government, are responsible for regulating credit unions and guaranteeing their deposits. For example, in Ontario, credit unions are regulated by the Financial Services Commission of Ontario and deposits are insured by the Deposit Insurance Corporation of Ontario.

Separately, Desjardins Group is one of the largest financial institutions in Quebec, with 238 Caisse Populaires and more than seven million members, most of them in Quebec and Ontario. Its first Caisse was founded in 1900 by Alphonse Desjardins, a journalist who is generally considered to have founded the credit union movement in North America.

Desjardins Group is the sixth-largest financial institution in Canada, although it trails the Big Five by a wide margin. It had CAD$313 billion in assets as of 31 December 2019, less than half of CIBC's CAD$672 billion, the smallest of the Big Five.^[1]

Summary

Canada's banking system is considered one of the safest in the world, with its largest banks consistently ranking among the soundest as well. The safety of the industry is largely the result of a strict regulatory environment, which emphasizes risk control, and the size of the industry, with just 86 banks, compared to nearly 5,000 in the U.S. The "Big Five" banks dominate the Canadian industry, with an 85% market share, which restricts competition. Credit unions are also popular, mainly in Quebec and British Columbia, but their market share is small.