Chartered Institute of Bankers of Nigeria (CIBN)

Building a Resilient Financial System to Withstand External Shocks

Richard Gorab, Senior Banker RBC Wealth Management
October 20, 2011
Published under permission from CIBN - 201011

Contents
Canada Where we stand in the current economic environment The Canadian banking regulatory system Mortgage lending in Canada factors that helped weather external shocks Canadian Government Debt Past problems Learning lessons applicable to today from Canadas successful debt reduction

Published under permission from CIBN - 201011

Published under permission from CIBN - 201011

Published under permission from CIBN - 201011

Canada's Banking System is the World's Soundest

In late 2011, the World Economic Forum named Canadas banking system the worlds soundest. This was the fourth year in a row that the Canadian banking system ranked number one in the World They are well-capitalized, having more cash on-hand than most similar institutions in the developed world. They are well-regulated. Canadian banks are forced to adhere to stricter rules than those that govern most other banking systems, including those in the United States. They are well-managed. Canadian bank managers are less prone to risk-taking than their counterparts in the U.S. and Europe, taking a very conservative approach with their investors funds.

Published under permission from CIBN - 201011

Canada has a national banking system with diversified, well managed institutions
Canadas banks are well-diversified organizations; investment banks are anchored by solid deposit-taking institutions. Canadas system of national institutions diversifies regional risk, so a downturn in an individual economic sector is balanced. National system contributes to economic growth by moving funds from areas of excess deposits to regions where growth is creating demand for new credit.

Banks in Canada make lending decisions on a case-by-case basis, extending credit to those who have the capacity to repay their loans. This prudent approach is a key reason why banks in Canada have largely avoided the problems that have plagued banks elsewhere.

In a survey by the Strategic Counsel, 81% of respondents believe that prudent lending is a key reason Canadian banks have performed better than their international peers
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Canadian Bankers Association

Published under permission from CIBN - 201011

Canada has a strong regulatory system

Canada has a streamlined bank regulatory system, with two primary regulators:

1) The Office of the Superintendent of Financial Institutions (OSFI) for prudential regulation and the Financial Consumer Agency of Canada (FCAC) for consumer matters. In contrast, the United Stated has a complex network of different regulators. 2) Canadas Bank Act is reviewed and updated every five years to ensure the regulatory structure is keeping pace with changes in the industry.

Canada has been recognized by the International Monetary Fund and others as having a sound regulatory system.

Canadian Bankers Association

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Canadas banks are well-capitalized

Banks in Canada are among the best capitalized in the world, exceeding Bank for International Settlements norms by significant margins. This allows banks to continue lending and provides a cushion against loan losses, which tend to increase during economic downturns. Banks have been strengthening their capital levels by raising new capital from investors in the marketplace For the past two years, Moodys Investor Service has ranked Canadas banking system as first in the world for financial strength Moodys, Global Banking Report, 2008 & 2009 The World Economic Forum has ranked Canadas banking system as the most sound in the world, four years in a row World Economic Forum, Global Competitiveness Report, 2008, 2009, 2010 & 2011

Canadian Bankers Association

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Mortgage lending in Canada is stable and prudent

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Canadas mortgage market has several fundamental differences from the US market.
Canada does not have the same problems with sub-prime mortgages that have been at the root of the problem in the US. In Canada, the vast majority of mortgage loans are prime. There are many high-risk mortgage products in the US that do not exist in Canada. These include:

1. Adjustable-rate mortgages, with unrealistically low introductory interest rates that can rise substantially; 2. Interest-only payments, where the mortgage principal is never lowered; 3. Negative amortization payment schedules, with payments that are less than the interest charged; and no-documentation lending.

Canadian Bankers Association

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Key differentiators points

1. 2. When American house prices decreased, many borrowers found that their mortgage was higher than the value of their house and unaffordable. Canadian mortgage products have not had these high-risk features and have stood the test of time as interest rates and house prices go up and down. As a result, Canadian homeowners have maintained a healthy amount of equity versus debt in their homes. In fact: Overall home equity is at 72 per cent of the total value of housing in Canada; For homeowners who have mortgages, equity levels average 50 per cent.

CAAMP, Annual State of the Residential Mortgage Market in Canada report, November 2010

Canadian Bankers Association

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Canadian lenders tend to hold the mortgages they originate.

In the US the model was an "originate to distribute" model (through securitization). Canadian mortgage originators have a much greater incentive to be prudent because they directly bear the consequences of imprudent lending decisions. In Canada, bank mortgages with less than 20% down must be insured. This is not the case in the US. Canadians are careful borrowers. In June 2011, just 0.41% of mortgages were in arrears.( Seven Canadian largest banks) The rate of arrears in the US is more than ten times higher than in Canada

Canadian Bankers Association

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A strong and stable banking system benefits all Canadians

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AS taxpayers:
Canadians have not had to bail out financial institutions, inject capital into institutions, or set up public entities to buy toxic assets. To maintain consumers access to credit in an environment of stalled global credit markets, the Canadian government acted to increase liquidity by buying more than $69 billion of safe, insured mortgages from the banks through the Insured Mortgage Purchase Program, which has now ended. The Canadian government expected to earn a profit from this initiative.

As consumers:
Canadians continue to have access to a banking system that is accessible, affordable and competitive. Canadians remain confident in the safety of their deposits, and continue to make use of affordably priced credit. Lending to consumers has increased throughout the economic downturn.

Canadian Bankers Association

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As business owners:
Canadas banks remain open for business and committed to providing credit. Banks have been filling a credit gap as some other lenders have exited the market. According to the International Monetary Fund: Financial conditions have tightened but strains are considerably less severe than in other major countries, and credit growth remains solid, both of which reflect a resilient financial system.

As investors:
Most Canadians are shareholders in Canadas banks either directly, or through the CPP, pensions and mutual funds. Pension funds and RRSPs are key beneficiaries of the billions of dollars of dividends that banks pay each year. The amount paid in dividends for 2010 was CAD 10,3 Billions
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The health of Canadas banking sector means banks can continue, as always, to contribute substantially to the Canadian economy, including

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Key Figures:
$8.3 billion in taxes paid to all levels of government. Contributed approximately 3.4% to Canadas GDP. Employed 267,000 Canadians. Full-time bank employment has increased 21.5% in the past 10 years. Provided financing to 1.6 million small and medium-sized businesses. Provided multi-million dollar support for Canada's charities and not-forprofit community groups

A strong and stable banking system is at the heart of Canadas economic recovery.
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Canadian Federal Government Debt

An Evolution Towards Fiscal Responsibility

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 From 1975 to 1997 Canadian Debt to Federal GDP rose from 10% to near 70% At the height of the Canadian debt crisis in 1994, the country had a budget deficit of around 9 per cent of GDP. The following year, the Prime Minister, unveiled a budget with spending reduced by 20 per cent. By 1997 the deficit had been eradicated.

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From 1975 to 1997 Canadian Debt to Federal GDP rose from 10% to near 70% The Canadian debt peaked in 1994, with budget a deficit of 9 % of GDP. The following year, the budget reduced spending by 20 per cent. By 1997 the deficit had been eradicated.

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Strategy Canada used for Debt Reduction

The First Success was to secure public support for deep and painful cuts Cuts would be shared by all sectors of society The process was transparent with Ministers vetting budgets in front of a Star Chamber committee including the Prime Minister The government moved quickly to show progress The focus was on cuts, tax increases were low to allow the economy to grow

Published under permission from CIBN - 201011

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