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.)

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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.)

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