The woes of the global financial system are well known to most investors, particularly the problems impacting United States and European banks. Canadian banks, however, have escaped much of the effects of the world financial crisis, and a recent report from the International Monetary Fund (IMF) proves that this was not by accident. It was instead due to a combination of fiscal prudence, and what Americans would call "excessive regulation." (To learn more, read What Is The International Monetary Fund.)

IN PICTURES: 10 Biggest Losers In Finance

Far From Failing
Banks in Canada adhered to much more stringent capital standards, with tier 1 capital ratios far in excess of the minimum required ratio of 7.0%. Also, the leverage ratio is limited to 5% of total capital. The banks were also more conservative in underwriting the housing boom, with only 5% of mortgage loans classified as subprime, and only 25% securitized. Since the majority of loans were kept on the balance sheets of banks, they were much more careful about who they lent to.

Top Billing
The IMF report noted that to date, not one Canadian bank has failed or required government capital through the current financial crisis. Bank write downs were also much lower, at only 0.5% of GDP in 2008, compared to 3.0% for European or U.S. banks. The market has rewarded this stability and prudence, as four Canadian banks show up in the top 10 list of money center banks ranked by market capitalization. These include Royal Bank of Canada (NYSE:RY), Bank of Nova Scotia (NYSE:BNS), Toronto Dominion (NYSE:TD) and Canadian Imperial Bank of Commerce (NYSE:CM) (For more on the banking sector, see The Industry Handbook: The Banking Industry.)

Healthy Ratios
Tier one and total capital ratios for these four banks and the Bank of Montreal (NYSE:BMO) were as follows as of March 31, 2009:

Name Tier One Total
Bank of Montreal 10.2% 12.9%
Bank of Nova Scotia 9.5% 11.4%
Canadian Imperial Bank of Commerce 9.8% 14.8%
Royal Bank of Canada 10.6% 12.5%
Toronto Dominion 10.1% 13.6%

The report did note that the Canadian banks might need to raise some capital if the economy deteriorated further. The IMF assumed a 3% contraction in GDP in the second quarter of 2009, and unemployment of 8.9%. This doesn't mean that a public bailout would be needed as the entire C$16 billion of tier one capital that has been raised through the financial crisis has been from private sources. There are a few items of concern in Canada. The country has a level of dependency on the commodity boom, as Canada is a major exporter of oil and gas. Also, the automotive industry does contribute to Canadian GDP, and the threat to that industry is well known.

The Bottom Line
Although Canadian banks are not immune from the recession, and are beginning to feel some pain, it is clear that there won't be any bailouts needed any time soon, as the banking system managed its businesses prudently during the boom years leading up to the recession. (For more on the financial crisis, see The Fuel That Fed The Subprime Meltdown and our Subprime Mortgages Feature.)

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  3. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  4. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
  5. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  6. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  7. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  8. Fundamental Analysis

    Is a U.S. Industrial Recession on the Horizon in 2016?

    Find out why the industrial economy may be teetering on an industrial recession and what could prevent it from going over the cliff.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center