By Juby John
Edited by Namrata Caleb, Senior Editor. The Indian Economist
While surfing through banking systems of various countries, the one which caught my attention was “Canadian banks” which are ranked no. 1, five years in a row, in global banking system competitiveness report by world economic forum.
Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts (danger of falling) or government intervention in the financial sector or mortgage sector. Yup, it’s Canada.[i]
Here starts a brief structural info about Canadian banks. In Canada, the depository institutions or banks are divided into 3 categories: Schedule I, II, III. Schedule I banks are Canadian owned and are authorized to accept deposits & carry on a wide range of activities. There are currently 22 schedule I banks in Canada but they are dominated by six largest banks. The other types of banking institutions in Canada include 25 plus schedule II banks which are subsidiaries of foreign banks authorised to accept deposits & provide a range of services & about 20 schedule III banks that are branches of foreign banks with limitations on their activities.
As a result, Canada has a much more intensely regulated banking system.
The financial sector stability assessment undertaken by the international monetary fund (IMF) in 2000 indicated that “the regulators and supervisory structure in Canada is well developed, complies with major internal principles & standards & is a source of international best practice in a no. of areas. The uniqueness which led to its success is:
While cheque is still the primary business to business payment mechanism in the U.S. and many other countries, Canadian companies have moved much more quickly to electronic payments comprising of 75% of total transactions.
While the typical B2B cheques take from 1 to 3 days to clear in other countries (like U.S.), checks in Canada are essentially same day items. The processing of the payments (both checks & electronic) is handled by the bank themselves or through bank associations such as Canadian payments associations (CPA) The CPA runs both the automated clearing settlement system (ACSS) and the large value transfer system (LVTS). The ACSS is designed to clear both paper & electronic items & in recent years, the trend has definitely been towards electronic.
Canadian banking customers also have the ability to open accounts in currencies other than the Canadian dollar, which are known as foreign currency accounts.[ii]
Canadian banks also started to offer a detailed billing for services provided.
The federal govt. of Canada has taken an active interest in enhancing protection for consumers of financial services. Canadian banks are constantly upgrading their security systems and procedures to stay ahead of criminals & working with other partners- including law enforcement, government & other payment partners to educate customers, the public & merchants about how to prevent fraud. In 2009, parliament passed identity theft legislation giving law enforcement agencies the ability to charge criminals for possessing the personal information of others before it can be used for fraud or theft.[iii]
In Canada, the rules are more flexible unlike U.S., (based on prudent lending practices) and the relatively larger size of the banks to both the average Canadian company & overall economy- men that many corporate customers do not need to follow the same multi-bank borrowing like their U.S. counterparts.
However the roles of supervision & lender of last resort are similar like other countries, the bank of Canada (central bank) does not participate in the operation of payment system.
Canadian banks are becoming more active participants in the U.S. markets as many of their customers either expand their businesses into the U.S. or as opportunities to enter the U.S. banking market present themselves. The six major domestic banks also have a significant presence outside Canada, in areas such as U.S., Latin America, and the Caribbean & Asia. International operations account for approx. 35% of their gross revenues in 2001.
The Canadian banking insurance corporation protects depositors by providing deposit insurance to encourage well managed member institutions, it also promote standards of sound business and financial practices.
Canada’s banks act is reviewed & updated every five years to ensure the regulatory structure is keeping pace with changes in the industry.
CANADIAN BANKING HIGHLIGHTS[iv]
HIGHLY EFFICIENT: same day clearing of paper and electronic
PROGRESSIVE: world leader in automated banking machines
(ABMs), debit cards & internet banking
ELECTRONIC: 75% of payment transactions in Canada are processed
Electronically, dominated by debit cards, credit cards
RISK MANAGED: LVTS is a collateralized RGTS & process over 85%
of the inter-bank payment value
NATIONAL: operates across Canada in 6 time zones
CONCENTRATED: “big six” account for 90% of bank assets
STABLE: all the major Canadian banks have over 1000 branches
BUILDING FOR THE FUTURE: banks take a co-operative approach to new infrastructures, cheque processing, credit card settlements, large value payment
THUS, THERE ARE A NUMBER OF REASONS WHY CANADIAN BANKS EXHIBIT A GOOD BANKING MODEL. THE CANADIAN BANK HAS SURVIVED THE CREDIT MARKET MELTDOWN WITHOUT ANY INFUSION OF GOVERNMENT MONEY AND HAVE RELIED LESS ON LIQUIDITY SUPPORT THAN U.S. AND OTHER EUROPEAN COUNTRIES.
[i] Newsweek, February 7 2009
[ii]Graziadio business review- a peer reviewed journal of relevant information and analysis by D.J. Masson(2007)
[iii] Canadian bankers association, article, 2013
[iv] Best practices in Canadian banking for U.S. Corporations by William hines, PNC Bank Canada (moderator); Michael pavkovic, RBC capital markets; Jon macapinlac, PNC capital markets; vicki chalifoux, PNC bank
[v] Financial times, august 28 2009