In the face of recent banking failures and economic disruptions in the United States, Canadians may have questions about the stability of our own banking system. As a professor of Business Administration at Trent University Durham GTA, my research, centred on analyzing the risks present in the Canadian banking sector, shows that we can feel secure that our nation's financial institutions are built on a foundation of resilience – thanks in part to our robust regulatory framework and diversified banking structure.
In contrast to the U.S. banking landscape, Canada's system is dominated by the Big Six banks, which hold over 90% of the country's banking assets. This concentration of banking power allows regulators to have a more accurate picture of the sector, making for more effective regulations and disincentivizing individual banks taking on dangerous risks to get ahead in a highly competitive environment. Both regulations and the internal behaviours of the Big Six banks are intended to ensure a well-diversified banking system which includes a mix of retail and commercial deposits, wholesale funding, and various types of loans, effectively shielding our banks from the risk of sudden deposit withdrawals, or "bank runs." The diversification of risks is an important factor in maintaining the stability and resilience of our financial institutions.
While bank failures are not unheard of in the United States – with federal reporting showing an average of 11 bank failures each year from 2000 to 2023 – Canada's last bank failure occurred in 1996. In the US, the recent collapses of the Silicon Valley Bank and the First Republic Bank, both of which had assets exceeding $10 billion, can be largely attributed to their under-diversified portfolios, focused on serving wealthy individuals and niche industries. In contrast, our Canadian banks have a significantly lower exposure to risky financial instruments, such as mortgage-backed securities, which played a central role leading up to the 2008 global financial crisis.
My research into the risks inherent in the Canadian banking system showed that Canada's Big Six banks have significantly improved their liquidity over the past decade, using deposit funds to make mortgage and business loans that drive economic growth. Our banks' comparatively low reliance on mortgage-backed securities and other steady but risky financial instruments have enabled them to weather past economic storms. This should provide comfort to Canadian households and investors concerned about the potential spillover effects of bank failures in other countries.
Canada's banking system is further strengthened by regulations from the Office of the Superintendent of Financial Institutions (OSFI), which mandates higher capital requirements for our banks than those imposed on their American counterparts. These capital buffers serve as a financial cushion against bank losses and help support our banks in both good and bad times. The stringent capital requirements and high liquidity creation mandated by the OSFI should help soothe investor concerns about the possibility of a Canadian bank collapse like the recent Silicon Valley Bank or First Republic Bank fallout.
Although the ripple effect of the Silicon Valley Bank and First Republic Bank failures may introduce some volatility in Canada's banking sector, our robust regulatory framework and diversified banking structure – not only the Big Six, but other Canadian banks and credit unions as well – continue to serve as a pillar of strength amidst global financial turbulence. Canadians can be confident in the fact that our banking system remains a shining example of stability and resilience.
This article, penned by Dr. Jie Zhang, Associate Professor of Business Administration at Trent University Durham GTA, originally appeared in Durham Metroland.