Nicolas Schmitt, economics professor at Vancouver's Simon
Fraser University, shows that, thanks to their national regulator, Canadian
banks operate in a way that has protected them from the crisis.
The Canadian financial market is a bit like the country: low-key and a little
boring. Today, it is the envy of the rest of the world. Its biggest bank, the
Royal Bank of Canada, is now the 11th biggest bank in the world by market capitalization.
Its market capitalization is about three times that of Citigroup and 30 percent
higher than that of UBS or Credit Suisse. There are now three Canadian banks
among the 30 largest in market capitalization in the world. Obviously, this
is due to the fact that their American, English and Swiss counterparts' capitalization
has melted away like snow in the sunshine. Of course, the Canadian banks' profits
have dropped considerably, but they remain positive. Why is the Canadian financial
system considered the most solid in the world at the present time?
The answer is simple: It's the result of a government that did not allow itself
to be influenced by the banks and of a regulator that remained conservative
[with a small "C"]. The Canadian financial regulator has the reputation
of being the most conservative among its American and European equivalents.
For example, Canadian banks must hold Tier 1 capital of 7 percent of their assets
(weighted by risk) and bank indebtedness may not exceed 20 times capital. The
Canadian regulator is also attentive to the quality of bank capital, in particular
with respect to the proportion of ordinary shares. In Switzerland, a financial
regulator and an independent surveillance authority (Finma) have just been born
and new rules introduced. However, the big banks' level of indebtedness is significantly
more than 30 times their capital.
The second difference is in the treatment of bank mergers. As in several developed
countries, Canadian banks have wanted to merge and form a few global banks to
better participate in the global growth of financial markets. The Canadian government
has always rejected these mergers. As elsewhere, it had to weigh up the advantages
connected with greater size and presence at an international level against the
costs related to a reduction of competition in the domestic market. In 1998,
the Canadian Competition Bureau clearly indicated that such mergers would decrease
competition for several financial products (portfolio management, credit cards,
loans etc.) in a significant number of submarkets. Consequently, it indicated
what disinvestments by merger participants would be necessary to compensate
for those reductions in competition. The banks quickly understood that the requirements
were such that, by merging, they would risk losing an important advantage in
the domestic market for an uncertain share of the international financial market.
At that time, the merger that formed the present UBS was taking place and other
global banks were forming, as in the Netherlands, for example. The result is
that in 2007, UBS total assets represented 480 percent of Swiss GDP and Credit
Suisse's assets 286 percent, the number one and number three in this global
classification according to the OECD (an Icelandic bank pacing between UBS and
Credit Suisse), while the total assets of the largest Canadian bank represented
only 40 percent of Canadian GDP. The size of the big Swiss banks and the economic
concentration in that sector have become such that, in its 2009 report on Switzerland,
the IMF worried about the authorities' intervention and surveillance abilities
in that domain.
These differences are critical because the Canadian financial regulator and
the country's merger policy have led Canadian banks to adopt a more traditional
and less risky model than that adopted by the big Swiss banks. That may be observed,
for example, in the fact that the Swiss interbank market (loans and borrowings
between banks) is nine times greater than in Canada. Not only are the consequences
for the banks not the same when the market freezes up, as it did in 2008, but,
above all, that shows that Canadian banks depend far more than do their Swiss
counterparts on traditional and stable sources of funds, such as individuals'
deposits. Moreover, a bank hesitates more to form units specializing in financial
tools that only a few experts master when it must remain relatively small and
debt free. And even if it wanted to hire such specialists, how could it attract
them, when global banks snatch them up for a fortune? So then, it's not very
surprising that Canadian banks should have stayed largely outside those markets.
Today, the Canadian government is congratulating itself on its choices. For
Switzerland, the consequences are altogether different, since, additionally,
many financial institutions that intend to keep a reasonable size to better
benefit from the advantages of the Swiss financial center must be beginning
to ask themselves what shall become of them. For the race to attain a global
size is a factor that today gives other countries levers of influence to modify
the banking secrecy situation.