Just days after the Bank of Canada announced no change to its benchmark lending rate in March, turmoil gripped global financial markets as the collapse of two major US institutions raised questions about the stability of the banking sector. But did you know that Canada hasn’t had a serious banking crisis in 123 years?
However, in that same period of time, the United States (U.S.) experienced the 1907 bank panic, the 1930 bank runs, and the 2008 financial crisis. If you include recent regional bank failures in the U.S. running total, then four U.S. banking crises have occurred. Canada has not had a single bank collapse.
Here are some key reasons why:
Canada’s banking sector has strict regulations. One of the most important sets of regulations is the rules about who can enter the industry. Foreign banks have limited access. New banks must 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.
A Concentrated Market
An outcome of the strict regulations is a point about Canada’s market concentration. There are only 35 domestic banks in Canada. As a comparison, 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 memorize the names of 35 companies, they probably couldn’t memorize the names of 4,000.
Some individual Canadian banks make up a very large share of the market. For example, the Royal Bank of Canada has a $180 billion market cap, has been in business for 170 years, and over 17 million clients across the country. This huge institution has an outsized role in the country’s investment banking industry that will keep Canadian depositors safe.
Overall, if you can effectively regulate the Royal Bank of Canada and its five biggest competitors, then you’ve got most of Canada’s population covered. This makes Canadian bank regulators’ jobs easier, and the market safer.
Canada has successfully avoided a banking crisis for 123 years, and thanks to the strict regulations and a concentrated market, as well as recent tightening of global regulations, there is not one in the near future. If you’re interested in learning more, or discussing other topics of interest, contact our team of professional mortgage brokers. We look forward to hearing from you!