Our so-called genius banks

One of the odder turns in the financial crisis has been the emergence of what can only be described as a worldwide cult of the Canadian banks. Yes, those Canadian banks: fat, slow, bone-stupid, deniers of loans and graspers of fees, easy targets for generations of low-rent columnists and politicians on the make.

Yet look at them now, the toast of five continents. The Financial Times calls Canada’s banks “the envy of the world.” Newsweek’s Fareed Zakaria gushes that, thanks to its banks, “Canada has done more than survive this financial crisis. The country is positively thriving in it.” Barack Obama, no less, confessed during his recent visit that Canada “has shown itself to be a pretty good manager of the financial system in ways that we haven’t always been here in the United States,” while Paul Volcker, the former Federal Reserve chairman and eminence grise in the Obama administration, has touted Canada’s banks as the model for what a reformed American system should look like.

He’s not alone. At the G20, Stephen Harper would have found an attentive audience whenever the subject turned to financial regulation. The notion that “the Canadian system” offers a blueprint for other countries’ banking sectors has become accepted wisdom—in Ireland, for example, they are more or less explicitly copying it. And, needless to say, the Prime Minister has not been shy about trumpeting our success at home, even urging Canadians to set aside their usual modesty and toast their banks’ good health. If other countries wish to idealize Canada, who is a Canadian politician to argue?

But what is this “Canadian system”? Are we really as others imagine us, an island of financial prudence in a sea of recklessness? What accounts for this, if so? Is it, as so many suggest, our more strict system of oversight and regulation? Or is it the more buttoned-down, risk-averse culture of our bankers? Is the future of banking the simple, no-frills model that Volcker suggests, where banks take deposits and make loans, but do little else? You know, like they do up in Canada?

We can date the origins of this particular mania with unusual precision. On Oct. 8 of last year, with stock markets collapsing around the world and several major banks threatening to do likewise, the World Economic Forum released its annual Global Competitiveness Report, a dense compendium of statistics purporting to rank the “competitiveness” of various national economies across a number of categories, or “pillars”: infrastructure, innovation, labour market efficiency, and so on. Canada ranked 10th overall in 2008, up from 13th the previous year: a respectable showing, but hardly earth-shattering. But buried in the numbers was one striking figure, of unusual interest at this particular moment: in the category of “soundness of banks,” Canada ranked number one. The world’s soundest banking system. That caught people’s attention.

The methodology of the report may be debated. It’s survey-based, for starters. The World Economic Forum did not collect a lot of hard data on each country’s banking system—leverage ratios, loan-loss provisions, that sort of thing. Rather, they asked 75 Canadian executives what they thought of their country’s banks. And they compared this to the responses other countries’ executives gave to the same questions about their banks. As it turned out, our guys thought our banks were sounder than their guys thought their banks were.

Still, there’s no denying that Canadian banks have weathered the storm better than most. It’s true that we have suffered no bank failures since the crisis began: the United States had 25 in 2008, with more banks likely to shut their doors this year. It’s true-ish that Canada’s banks have not had to be rescued by their government, if you don’t count the $25 billion—later raised to $75 billion, then $125 billion—in government purchases of mortgage assets through the Canada Mortgage and Housing Corporation: not a bailout, as such, since the CMHC was on the hook as the insurer of the mortgages anyway, but not quite laissez-faire either.

And it’s true that, by virtually any measure, Canada’s banks are in healthier shape than their international rivals: profitable, well-capitalized, even raising $9 billion in capital since the fall through fresh share issues—an unheard-of feat in today’s markets. As American banks have tumbled, collapsed, or merged, Canadian banks have risen in relative terms. Of the 10 largest banks in North America, measured by assets, four are now Canadian; a decade ago, we had none in the top 10. Just seven banks in the world retain a AAA rating from Moody’s Investors Service. Two—Royal and Toronto-Dominion—are Canadian.