CHAPTER 1

INTRODUCTION
Banking in Canada is widely considered the most efficient and safest banking system in the
world, ranking as the world's soundest banking system for the past three years according to
reports by the World Economic Forum. Released at October 2010, Global Finance magazine
put Royal Bank of Canada at number 10 among the world's safest bank and TorontoDominion Bank at number 15.
Canadas banks, also called chartered banks, have over 8,000 branches and almost 18,000
automated banking machines (ABMs) across the country.
In addition, "Canada has the highest number of ABMs per capita in the world and benefits
from the highest penetration levels of electronic channels such as debit cards, Internet
banking and telephone banking"

1.1 THE BEST BANKING SYSTEMS IN THE WORLD

According to the survey by the World Economic Forum, Canada has the worlds best
banking system. It is followed by Sweden, Luxembourg and Australia. Canada received 6.8
out of total 7 points and topped the list. The United States, which has seen a lot of big name
bank failures in the global financial crisis, has fallen down to 40th place.

The Criteria
According to World Economic Forum, this report is based on findings of top executives. The
executives handed the banks a score between 1.0 (insolvent and possibly requiring
government bailout) to 7.0 (healthy and with sound balance sheets). This report was released
because most of the central banks in Europe, United States, China, Canada, Sweden and
1

Switzerland slashed their interest rates in an attempt to end panic selling on the markets and
also to restore much shaken trust in the general banking system to avoid financial meltdown.
The Best Banking System - Canada
The main reason behind the success of Canadian banks is solid funding and conservative
consumer lending. Canadian banks are more stringent in their policies regarding the amount
of loans they can extended to consumers compared to other international banks. Consumers
wanting to lend from Canadian banks are required to set aside a minimum of 7 percent for
Tier 1 capital, compared with 6 percent for U.S commercial banks.According to the Canadian
banking regulator, the institutions can lend up to 20 times their capital base.
The European peers assets were almost more than 30 times their capital. In the U.S and U.K,
the average weighted capital was more than 25 times.
Canadian regulators resisted pressures from the banking executives to loosen the lending
restrictions, while the economy was booming. The banks employed stricter guideline
measures for lending and were better at navigating through the global financial crisis.
Moreover, most of the Canadian banks are also somewhat reluctant to lend to homebuyer
with low credit scores, which provides less exposure to mortgage defaults. Subprime loans
account for only about 5 percent of the total in Canada; while in the U.S it was at 20 percent
where independent lenders and mortgage brokers were competing with commercial banks to
win over the business at the cost of attracting high-risk borrowers.

1.2 ORIGINS

Banking in Canada began to migrate in earnest from colonial overseas banking operations to
a local banking system with the founding of the Bank of Montreal in 1817. Other banks soon
followed and began business and after a lengthy approval process began unregulated banking
business. These institutions issued the only local currency notes until amendments in the
British North America Act allowed federal and provincial governments to begin to introduce
their own notes starting in 1866. Official Canadian currency took the form of the Canadian
dollar in 1871, overriding the currency of individual banks. The establishment of the Bank of
Canada in 1935 was also an important milestone in banking and monetary governance.

Despite various loss events (such as the Latin American debt crisis, the collapse of Olympia
and York, Enron-related liabilities, and the U.S. Subprime mortgage crisis), the big five
banks have thus far proven to be safe and stable companies. For example, in securities
prospectuses the Royal Bank of Canada says it has paid a common share dividend in every
year since 1870, the year after it received its banking charter.

According to the Department of Finance, two small regional banks failed in the mid-1980s,
the only such failures since 1923, which is the year Home Bank failed. There were no bank
failures during the Great Depression compared to 9000+ in the US.

In the 1980s and 1990s, the largest banks acquired almost all significant trust and brokerage
companies in Canada. They also started their own mutual fund and insurance businesses. As a
result, Canadian banks broadened out to become supermarkets of financial services.

After large bank mergers were ruled out by the federal government, some Canadian banks
turned to international expansion, particularly in various U.S. markets such as banking and
brokerage.
3

Two other notable developments in Canadian banking were the launch of ING Bank of
Canada (which relies mostly on a branchless banking model), and the slow emergence of
non-bank mortgage origination companies.

A survey conducted by the World Economic Forum called the Global Competitiveness
Report of twelve-thousand corporate executives, in 2008, concluded that Canada has the best
banking system in the world, receiving a score of 6.8 out of possible seven.

1.3 Regulation

Canada's federal government has sole jurisdiction for banks according to the Canadian
Constitution, specifically Section 91(15) of The Constitution Act, 1867 (30 & 31 Victoria, c.3
(UK)), formerly known as the British North America Act, 1867. Meanwhile, credit
unions/caisses populaires, securities dealers and mutual funds are largely regulated by
provincial governments.

The main federal statute for the incorporation and regulation of banks, or chartered banks, is
the Bank Act (S.C. 1991, c.46), where Schedules I, II and III of this Act list all banks
permitted to operate in Canada under these three distinct categories:

Schedule I: Banks allowed accepting deposits and which are NOT subsidiaries of a
foreign bank. Examples include "The Big Five" banks (as mentioned above) and
smaller second tier banks such as National Bank of Canada, Laurentian Bank of
Canada, President's Choice Financial and Canadian Western Bank. Because the
Schedule I banks are not subsidiaries of any foreign bank, they are the true domestic
banks and are the only banks allowed to receive, hold and enforce a special security

interest described and provided for under the Bank Act and known to Canadian
lawyers and bankers as the "Bank Act security".

Schedule II: Banks allowed to accept deposits and which are subsidiaries of a foreign
bank. Examples include AMEX Bank of Canada, Citibank Canada, HSBC Bank
Canada, ING Bank of Canada and Wal-Mart Canada Bank. Like the Schedule I banks,
the Schedule II banks are incorporated under the Bank Act.

Schedule III: Foreign banks permitted to carry on business in Canada. Examples

include Bank of America, Capital One, Credit Suisse and Deutsche Bank AG. Unlike
the Schedule I and Schedule II banks, the Schedule III banks are NOT incorporated
under the Bank Act and they operate in Canada, usually within the country's largest
cities (being Toronto, Montreal, Calgary and Vancouver), under certain restrictions
mentioned in the Act.

The bank regulator is the Office of the Superintendent of Financial Institutions (best known
as OSFI), whos authority stems from the Bank Act. The financial groups are also governed
by regulatory bodies (bank regulators, securities regulators, insurance regulators, etc.) in each
country in which they operate.

1.4 REGULATORY CHALLENGES

Banks in Canada come under the purview of two regulators: The Office of the Superintendent
of Financial Institutions (OSFI) for prudential regulation and the Financial Consumer Agency
of Canada (FCAC) for consumer matters. Every five years, Canadas Bank Act is reviewed
and updated to stay abreast of industry changes. Regulations and regulatory compliance have
been key to the Canadian banking industry, enabling it to remain strong and stable. However,
the move forward impact of regulatory changes worldwide is a big concern for banks in
5

Canada. As they enter international markets, Canadian banks will be more exposed to global
turmoil and conditions that are in a state of flux due to economic troubles, worries of
sovereign debt and stringent regulations. Adjusting to the regulatory changes will require
transformation of business operations that could slow growth and cause tradeoffs to be made
between risk and profitability.

The key for Canadian banks will be to navigate changes that will have an impact on their
business operations, models, systems and profitability, as regulators continue to introduce and
implement new measures to ensure transparency and stability to the banking system. Banks,
therefore, must effectively manage their resources while complying with regulations, which
calls for retooling and investing in IT systems to ensure compliance and competitive
advantage. Moving forward, this type of investment will put additional pressure on
profitability and operational efficiencies.

1.5 TECHNOLOGY CHALLENGES

The sound business practices of Canadian banks helped them weather the global financial
storm effectively compared with banks from other nations. Going forward, technology will
play a key role for these banks to achieve the balance between compliance and growth.

The Big Six have invested $55.8 billion between 1996 and 2009 in technology to provide
their customers with secure, accessible and convenient banking systems. Investments,
especially on the compliance and reporting front, can be expected to grow as Canadian
banking regulators mandate early adherence with new regulations. Basel III will require
banks to pay more attention to integrating data sources and using newer data modelling
techniques. Liquidity reporting is another area in which banks will need to invest

significantly. They will also need to ensure they have a robust IT infrastructure to deal with
data integrity and usability.

Legacy modernization is a major challenge for the Canadian banking industry. Newer banks
are using IT to attract new customers and improve their level of service. More established
institutions face a difficult time deploying new technologies, as a major portion of their
businesses is supported and run on legacy systems. Celent, a prominent research house,
predicts that a significant percentage of IT budgets in the future will be allocated to
maintaining legacy systems .Modern-day innovations such as service-oriented architecturebased systems and cloud-based technologies can help alleviate upgrade expenditure
challenges. Recently, Scotiabank signed up for a cloud-based software as a service (SaaS)
solution to replace its multiple legacy trade and supply chain applications for its global trade
services.These kinds of systems provide an efficient way of allocating capital, in which the
bank pays only for computing resources that are actually used, while providing a means to
quickly enter new markets and offer new and innovative services. The call for replacing
legacy systems is a longstanding need. Canadian banks need to address this with a slow and
steady, incremental approach, since these heritage systems are pervasive across business
lines; it is too risky to replace them all at once. Competition for customers in the ultracompetitive Canadian banking market also calls for newer technologies to achieve market
and mind share. Given the state of banking and the economy, taking a middle path is the best
approach for banks that want to conserve capital and maintain operating margins over the
short term.

CHAPTER 2
FAST FACTS ABOUT THE CANADIAN BANKING SYSTEM
1. Number of bank branches across Canada: 6,205, of which approximately 2,100 are
rural and small town branches.
2. Number of banks in Canada: 80.
3. Number of transactions logged at bank-owned ABMs in Canada (2012): 842 million.
4. Number of online banking transactions completed with the six largest banks in
Canada in 2012: 583.7 million.
5. Canadians are careful borrowers, and mortgage arrears in Canada remain very low (in
fact, as of June 2013 only 0.31% of bank mortgages are in arrears).
6. Taxes paid in Canada in 2012 (by the six largest banks): $8 billion.
7. Banks contribute approximately 3.1% to Canadas GDP.
8. Taxes paid worldwide in 2012 (by Canada's six largest banks): $10.2 billion.
9. Amount banks and their subsidiaries paid in salaries and benefits in Canada in 2012:
$20.8 billion.
10. In 2012, banks employed 275,280 Canadians and industry employment has increased
by 14.4% over the past ten years while full-time industry employment has increased
by 25.4% over the same period.
11. Number of people employed by Canadian banks in other countries in 2012: 108,740.
12. Percentage of senior managers with the six largest banks who are women (2011):
33.3%. Women constitute 65.3% of the workforce at Canadas six largest banks
(excluding subsidiaries).
13. Banks provide financing to some 1.6 million small and medium-sized businesses.
14. Amount six largest Canadian banks spent on technology in 2012: $7.7 billion.

15. Amount six largest Canadian banks spent on technology from 2002 to 2012: $60.4
billion.
16. Dividend income paid in 2012 by Canadas banks to shareholders: $12.6 billion.
17. Canadas Bank Act is reviewed and updated every five years to ensure the regulatory
structure is keeping pace with changes in the industry.
18. Percentage of Canadians who give banks a good performance rating when it comes to
being stable and secure: 87%.
19. Percentage of Canadians that have a favorable impression of banks in Canada: 86%.
20. Percentage of Canadians who trust banks to protect the privacy of their personal
information and transactions: 83%.
21. #1 Canadas ranking by the World Economic Forum for the soundest banking
system in the world, (a ranking achieved six years in a row).
22. The World Economic Forum has ranked Canadas banking system as the most sound
in the world, five years in a row.
23. Banks employ 275,000 Canadians. Full-time bank employment has increased 25.4%
in the past 10 years.
24. Banks contributed approximately 3.1% or $53 billion to Canadas GDP.
25. Banks paid $12.6 billion in dividends (2012) to shareholders.
26. Banks provide financing to 1.6 million small and medium-sized businesses.

CHAPTER 3
CANADIANS DOMINATE WORLDS 10 STRONGEST BANKS
Banks from Citigroup Inc. (C) in the U.S. to BNP Paribas SA (BNP) in France are racing to
shed assets and raise money ahead of new global capital rules that start taking effect in 2015.
For Canadian lenders, these moves have created the opportunity to go on a shopping spree.
Canadas six largest banks have spent $37.8 billion since 2008 on about 100 acquisitions at
home and abroad, Bloomberg Markets magazine reports in its June issue.
We and our Canadian competitors are only able to do that because we have some flexibility
as a result of our strength, says Gerald McCaughey, chief executive officer of Canadian
Imperial Bank of Commerce, which bought JPMorgan Chase & Co.s minority stake in asset
management firm American Century Investments last year. Over the longer term, this should
actually help to maintain the strength of the Canadian banking system and its
competitiveness.
CIBC (CM) was No. 3 in Bloomberg Markets second annual ranking of the worlds
strongest banks, followed by three of its Canadian rivals: Toronto-Dominion Bank (TD) (No.
4), National Bank of Canada (NA) (No. 5) and Royal Bank of Canada (No. 6), the countrys
largest lender. Bank of Nova Scotia ranked 18th, and Bank of Montreal was 22nd.

No other country dominated the list as did Canada: The nation of 34.7 million people has
only eight publicly traded banks, two of which are regional lenders. Only three U.S. banks -JPMorgan Chase (JPM) (No. 13), PNC Financial Services Group Inc. (PNC) (No. 17)
and BB&T Corp. (BBT) (No. 20) -- made the top 20. Four European banks were included:
two from Sweden and one each from the U.K. and Switzerland.

10

3.1 $100 BILLION OR MORE

For the ranking, they considered only banks with at least $100 billion in assets. They weighed
and combined five criteria, comparing Tier 1 capital with risk-weighted assets, for example,
and nonperforming assets with total assets. Tier 1 capital includes a banks cash reserves,
outstanding common stock and some classes of preferred stock, all of which combine to act
as a buffer against losses.
Banks that posted an annual loss for last year or that failed government stress tests werent
eligible for consideration.
Canadian banks invoke their strong capital levels, the countrys conservative lending culture
and strict regulatory oversight under a single supervisor as reasons for their showing. The
supervisor requires Canadian banks to hold a higher level of capital than do international
standards.
Major banks around the world follow the rules of the Basel Committee on Banking
Supervision -- an arm of the Bank for International Settlements, based in Basel, Switzerland,
that draws banking regulators from 27 nations to set standards for lenders. The committee
issued its first internationally accepted capital guidelines in 1988.

3.2 BEYOND BASEL

Those rules, known as Basel I, focused on credit risk: the possibility that borrowers might not
pay back their bank loans. The committee required banks to hold total capital, at least half of
it in Tier 1 capital, equal to at least 8 percent of their risk-weighted assets.
Canadas regulator, the Office of the Superintendent of Financial Institutions Canada, has
gone beyond those levels in its requirements, a stance that has shielded lenders from some of
the financial follies that undermined other global banks, especially in 2008. As far back as
January 1999, OSFI sent a letter to Canadian banks telling them to set aside at least 10
11

percent of total capital as a cushion for losses. I do not think it was popular at the time, says
Julie Dickson, OSFIs superintendent. Thats where having a supervisor with a pretty clear
mandate allows you to take those unpopular decisions.

3.3 EXCEEDING REQUIREMENTS

The Canadian regulator also set criteria on the quality of banks assets, requiring them to hold
75 percent of their capital in equity. When the crisis erupted, we realized we had stuck to a
fairly basic rule, which was that the bulk of Tier 1 capital had to be in equity, Dickson says.
That turned out to be very, very important.
Some of Canadas lenders elected to exceed OSFIs requirements. Investors criticized Bank
of Nova Scotia (BNS), CEO Richard Waugh says, for holding too much cash. So many
people in 1999 and 2001 said: Scotia, youve got excess capital because youre way above
Basel, way above OSFI. You should do stock buybacks and extra dividends, Waugh recalls
in an interview at an annual investor meeting in Saskatoon, Saskatchewan. We said, Its not
excess, because it was getting 18 percent return on capital, which was a very good place, and
our shareholders would have had a difficult time reinvesting elsewhere.
Waugh credits the high returns to profits spread equally among four main businesses: global
wealth management and domestic, international and wholesale banking.

3.4 INTERNAL MODELS

Since 1988, the BIS has further tweaked global rules. The 2004 Basel II accord set more
guidelines on how to address and quantify the risks of a banks assets -- allowing them to use
internal models, for instance.
And in 2010, regulators rewrote the rules again to address shortcomings that arose out of the
financial crisis. The group will require banks to hold 7 percent of their assets as core reserves,
12

or equity core Tier 1 capital, by 2019 when the latest rules -- known as Basel III -- are fully
implemented. Banks will be required to have minimum Tier 1 capital of 6 percent starting in
2015.
While having strong capital is crucial, Canadian banks will prosper only if they can expand
their reach, Waugh says. Because if you dont grow, youre going to eventually have some
issues on capital and strength, he says. Scotiabank has units in about 50 countries and is
looking in particular at Latin America and Asia, says Waugh, whos also vice chairman of the
Washington-based Institute of International Finance.
Expanding in the U.S.
Canadian banks spent $14.4 billion last year on acquisitions, many of them aimed at growth
in the U.S. Having conservative capital standards in Canada going into the downturn clearly
was a competitive advantage, TD Bank CEO Edmund Clark says. He says Canadas secondbiggest bank was ferocious at managing liquidity.
TD Bank has accelerated a U.S. expansion strategy that Clark began in 2004. In 2008, the
bank took over Commerce Bancorp of Cherry Hill, New Jersey, in a $7.1 billion transaction
that helped give the Canadian lender 1,284 branches in the U.S. today -- more than the 1,150
it currently has in Canada. TDs green logo is now a common sight on the streets of New
York, where it aims to become the citys third-largest lender by number of branches within
four years, and in Boston, where its name adorns the TD Garden, home to the Boston Celtics
basketball team and Boston Bruins hockey team.

3.5 ONCE-IN-A-LIFETIME OPPORTUNITY

We were in there and said: We have a once-in-a-lifetime opportunity. Lets take advantage
of it, Clark says. Toronto- Dominion -- one of four banks globally to boast the top Aaa
long-term debt rating from Moodys Investors Service -- added further to its U.S. clout last
13

year when it acquired auto lender Chrysler Financial Corp. from Cerberus Capital
Management LP.
Bank of Montreal (BMO), Canadas fourth-largest lender, also ramped up its presence in the
U.S. by buying Marshall & Ilsley Corp., a Milwaukee-based bank, last year for $4.19 billion.
Prior to that, its main U.S. asset had been the small Chicago- based Harris Bank franchise it
bought in 1984.
Royal Bank has also been active. In April, it agreed to buy the 50 percent of RBC Dexia
Investor Services Ltd. it didnt already own from Banque Internationale a Luxembourg SA
for about C$1.1 billion ($1.1 billion) in cash.
As they flex their muscles with acquisitions, Canadian banks may face tougher times ahead.
Consumer lending is slowing this year. RBC Capital Markets predicts that Canadian bank
profits will rise 7 percent in 2012, slightly more than half the 13 percent rate in 2011.

3.6 STOCKS OUTPERFORM

Canadian bank stocks have outperformed those from south of the border. In the four years
ended on Dec. 31, the Standard & Poors/TSX Composite Commercial Banks Industry Index
(STCBNK) that tracks Canadas eight traded banks rose 4.8 percent compared with a 56
percent decline for the 24-member KBW Bank Index (BKX), which includes the biggest U.S.
banks.
Canadian banks havent been completely immune to the woes faced by their counterparts in
the U.S. and Europe in recent years. CIBC had more than C$10 billion in writedowns
following the U.S. mortgage-related financial crisis of 2007, more than any other Canadian
bank. CIBC also was one of the first to rebuild its balance sheet, selling C$2.94 billion of
stock nine months before Lehman Brothers Holdings Inc. collapsed and markets seized up.

14

Still, writedowns at Canadian banks were a fraction of the $2.08 trillion taken by financial
companies worldwide.
Theres no reason for Canadian banks to become smug, the countrys banking regulator says.
Complacency is a real danger for Canada, OSFIs Dickson says. The bar is always rising
in risk management, and if you become complacent, you may say youre doing a good
enough job and you dont really have to change anything.

15

CHAPTER 4
"BIG FIVE" BANKS
In everyday commerce, the banks in Canada are generally referred to in two categories: 1) the
five large national banks and 2) smaller second tier banks (notwithstanding that a large
national bank and a smaller second tier bank may share the same legal status and regulatory
classification.

The five largest banks in Canada are:

Royal Bank of Canada

Toronto Dominion Bank

Bank of Nova Scotia

Bank of Montreal

Canadian Imperial Bank of Commerce

Notable second tier banks include the ATB Financial, National Bank of Canada, the
Laurentian Bank, the Desjardins Group (technically not a bank but an alliance of credit
unions), HSBC Bank Canada, and ING Bank of Canada. These second tier organizations are
largely Canadian domestic banking organizations. Insurance companies in Canada have also
created deposit-taking bank subsidiaries.

Unlike the smaller Canadian banks, the Big Five are not just Canadian banks, but are instead
better described as international financial conglomerates, each with a large Canadian banking
division. In fiscal 2007, RBC's Canadian segment called "Personal Financial Services" (the
segment most related to what was traditionally thought of as retail banking) had revenue of
only CAD$5,082 million (or 22.6%) of a total revenue of CAD$22,462 million. Canadian

16

retail operations of the Big Five comprise other activities that do not need to be operated from
a regulated bank. These other activities include mutual funds, insurance, credit cards, and
brokerage activities. In addition, they have large international subsidiaries. The Canadian
banking operations of the Big Five are largely conducted out of each parent company, unlike
U.S. banks that use a holding company structure to hold their primary retail banking
subsidiaries.

Canada's 5 largest banks have been designated as too big to be allowed to fail for the country
by the federal regulator, meaning they will be subject to more stringent capital requirements
and supervision.

The Office of the Superintendent of Financial Institutions said the designation stems from a
framework issued by the Basel committee on banking oversight in October that set out
guidelines for assessing domestic financial institutions.

Under the OSFI requirements, the Bank of Montreal, Bank of Nova Scotia, Canadian
Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and TorontoDominion Bank will be subject to an additional one per cent capital buffer for risk, meaning
they will have to hold more assets in reserve to protect against a sudden run on deposits.

The banks will need to have a common equity tier 1 ratio of eight per cent as compared with
seven per cent for smaller, less important financial institutions as of Jan. 1, 2016.

"The measures are designed to limit the likelihood that a major bank would encounter distress
or failure that could negatively impact the Canadian economy or taxpayers," OSFI head Julie
Dickson said in a news release.

17

In November, the Financial Stability Board updated its list of 28 international financial
institutions that were assessed too big to fail, but none of the Canadian banks made the grade.

However, OSFI said the banks are systemically important to the Canadian economy by virtue
of their size, interconnectedness, substitutability and flexibility.

In its explanation, OSFI said a bank's distress or failure is more likely to damage the
Canadian financial system or economy if its activities comprise a large share of domestic
banking activity."

It noted the six biggest banks account for over 90 per cent of total banking assets in Canada
and that "the differences among the largest banks are smaller if only domestic assets are
considered, and relative importance declines rapidly after the top five banks and after the
sixth bank (National)."

18

Brands used by the big five by major financial service

Royal Bank
of Canada
(RBC)

TorontoDominion
Bank (TD)

Bank of Nova
Scotia (BNS)

Year
Founded

1864 Halifax,
Nova Scotia

1955; Bank
of Toronto
1857 and
Dominion
Bank 1869 Toronto,
Ontario

1832 Halifax, Nova

Scotia

1817 Montreal,
Quebec

Original
Name

Merchants'
Bank of
Halifax

Bank of
Toronto,
Dominion
Bank

Bank of Nova
Scotia

Bank of
Montreal

Head Office
Parent legal
name

Toronto,
Ontario
Royal Bank
of Canada

Toronto,
Ontario
Bank of Nova
Scotia

Toronto,
Ontario
Bank of
Montreal

Group brand

RBC

Scotiabank
Group

Canadian
retail
banking
U.S. retail
banking

RBC Royal
Bank

Toronto,
Ontario
TorontoDominion
Bank
TD Bank
Financial
Group
TD Canada
Trust

BMO
Financial
Group
BMO Bank
of Montreal

TD Bank

None

Other major
international
retail
banking
operations

RBC Royal
Bank of
Canada and
RBTT
(Caribbean
branches)
RBC Wealth
Management

Private
banking

RBC Bank
*Note: Sold
in June 2011

Scotiabank

Bank of
Montreal
(BMO)

Scotia Private
Client Group
19

CIBC

Harris Bank

None - Amicus
Bank's Amicus
FSB joint
venture
Marketplace
Bank/Safeway
Select Bank
1999-2002
FirstCaribbean

BMO Harris
Private
Banking

CIBC Private
Banking

Scotiabank
International

TD
Waterhouse
Private

Canadian
Imperial
Bank of
Commerce
(CIBC)
1961;
Canadian
Bank of
Commerce
1867 and
Imperial Bank
of Canada
1875 Toronto,
Ontario
Canadian
Bank of
Commerce and
Imperial Bank
of Canada
Toronto,
Ontario
Canadian
Imperial Bank
of Commerce
CIBC

Canadian
mutual
funds

RBC Funds
and PH&N
Funds

U.S. mutual
funds
Canadian
brokerage

Tamarack
Funds
RBC Direct
Investing and
RBC
Dominion
Securities
U.S.
RBC Wealth
brokerage
Management
formerly
RBC Dain
Rauscher
International West Indies
Brokerage
Stockbrokers
Limited

Banking
TD Mutual
Funds

TD
Waterhouse

BMO
Mutual
Funds and
Guardian
Group of
Funds

CIBC Mutual
Funds

CIBC
Investor's
Edge and
CIBC Wood
Gundy

TD
Ameritrade
(45%)

ScotiaMcLeod BMO
InvestorLine
and BMO
Nesbitt
Burns
BMO Harris
Investor
Services

Scotia
Insurance

BMO Life

CIBC Creditor
Insurance,
CIBC Travel
Insurance

Scotia Capital

BMO
Capital
Markets

CIBC World
Markets

Canadian
insurance

RBC
Insurance

TD
Waterhouse
(UK), TD
Direct
Investing
International
(LU)
TD
Insurance

U.S.
insurance
Capital
markets

RBC
Insurance
RBC Capital
Markets

TD
Insurance
TD
Securities

Major
custodial
operations

RBC Dexia
(June 27,
2012, RBC
purchased
the
remaining
50% from
Dexia)

Precious
metals

Scotia Mutual
Funds

CIBC Mellon
(50%)

ScotiaMocatta

20

4.1 ROYAL BANK OF CANADA (RBC)

Canadas largest bank by assets and market capitalization with broad leadership in
financial services.

A leading diversified financial services company in North America.

11th largest bank globally based on market capitalization(1), with operations in 46

countries.

80,000 full- and part-time employees.

More than 15 million clients worldwide

1. Personal & Commercial Banking

The Canadian market leader continuing to gain profitable market share.

RBC is the largest and most profitable retail bank in Canada; named Best Bank in
North American and Canada.

A major Caribbean Banking Group with branches in 20 countries and territories.

U.S. cross-border banking for Canadian clients and U.S. Wealth Management
clients.

Broad suite of products and financial services to individual and business clients

2. Wealth Management

A leading global wealth and asset manager.

Top 6 Global Wealth Manager by assets.

Ranked #1 in Canada in both retail asset management(3) and high net worth
market share.

Investment, trust, banking, credit and other wealth management and asset
management solutions.

21

3. Insurance

A market leader with a broad suite of products and strong distribution.

Canadian market leader in living benefits and one of Canadas largest bankowned insurance companies.

Achieved highest ever marks for Likelihood to Recommend and Ease of

Doing Business.

Life, health, home, auto, travel, wealth accumulation solutions as well as

reinsurance solutions

4. Investor & Treasury Services

A specialist provider of global custody, fund administration and asset

servicing to institutional investors.

Leader in cash management, correspondent banking and trade finance for

financial institutions worldwide.

Funding and liquidity management for RBC

5. Capital Markets
A leading North American investment bank with select global reach

10th largest global investment bank by net revenue.

Best Investment Bank in Canada across Equity, Debt and M&A for 6th
consecutive year.

Corporate and investment banking, equity and debt origination and

distribution, and structuring and trading.

22

4.2 TORONTO DOMINION BANK

The Toronto-Dominion

Bank is

Canadian multinational banking

and financial

services corporation headquartered in Toronto. It is the second-largest bank in Canada

by market capitalization and based on assets, and is the sixth largest bank branch network in
North America. Commonly known as TD and operating as TD Bank Group, The bank was
created in 1955 through the merger of the Bank of Toronto and the Dominion Bank, which
were founded in 1855 and 1869, respectively.
The bank and its subsidiaries have over 79,000 employees and over 19 million clients
worldwide. In Canada, the bank operates as TD Canada Trust and serves more than 11
million customers at over 1,150 branches. In the United States, the company operates as TD
Bank (the initials are used officially for all U.S. operations). The U.S. subsidiary was created
through the merger of TD Bank north and Commerce Bank, and serves more than 6.5 million
customers with a network of more than 1,300 branches in the eastern United States.
The company is ranked at number 86 on the Forbes Global 2000 2010 listing. In October
2008,

the

company

was

named

Employers in Maclean's and Greater

in

Toronto's

the

listings
Top

of Canada's

Employers by

Top

100

the Toronto

Star. Furthermore, in February 2011, it was named one of Canada's top 10 employers by
the Financial Post.

23

4.3 BANK OF NOVA SCOTIA

The Bank of Nova Scotia , commonly known as Scotia bank, is the third largest bank in
Canada by deposits and market capitalization. It serves some 19 million customers in more
than 55 countries around the world and offers a broad range of products and services
including personal, commercial, corporate and investment banking. With assets of
$754 billion, Scotia bank shares trade on the Toronto and New York stock exchanges.
Scotiabank is one of North America's premier financial institutions and the most
international of Canadian banks. We provide personal, commercial, corporate and investment
banking services to individuals, small and medium-sized businesses, corporations and
governments in more than 50 countries around the world, and coast to coast across Canada.
In today's complex financial services market, success belongs to companies that can balance
innovative technologies with a personal touch. The Scotiabank Group provide these balances
by "putting people first." While technological advances are making routine banking
transactions increasingly convenient and efficient, Scotiabank employees are focused on
constantly building stronger, deeper relationships with their customers in a human,
straightforward and knowledgeable way.
The bank was incorporated by the Legislative Assembly of Nova Scotia on March 30, 1832,
in Halifax, Nova

Scotia,

with William

Lawson (17721848)

serving

as

the

first

president. The bank moved its executive offices to Toronto, Ontario, in March 1900. Scotia
bank has billed itself as "Canada's International Bank" due to its acquisitions primarily in
Latin America and the Caribbean, but also in Europe and India as well. BNS Institution
Number (or bank number) is 002. The company ranked at number 92 on the Forbes Global
2000 listing in 2012 and is currently under the leadership of Richard E. Waugh who serves as
CEO and Brian Porter, who serves as President.
24

4.4 BANK OF MONTREAL

The Bank of Montreal, (commonly BMO in either official language), or BMO Financial
Group, is one of the Big Five banks in Canada. On June 23, 1817, John Richardson and eight
merchants signed the Articles of Association to establish the Bank of Montreal in a rented
house in Montreal, Quebec. The bank officially opened its doors for business on November 3,
1817, making it Canada's oldest bank. In Canada, the bank operates as BMO Bank of
Montreal and has more than 900 branches, serving over seven million customers. The
company also has substantial operations in the Chicago area and elsewhere in the United
States, where it operates as BMO Harris Bank. BMO Capital Markets is BMO's investment
and corporate banking division, while the wealth management division is branded as BMO
Nesbitt Burns.
The company is ranked at number 150 on the Forbes Global 2000 list.

4.5 CANADIAN IMPERIAL BANK OF COMMERCE

The Canadian Imperial Bank of Commerce (French: Banque Canadienne Impriale de
Commerce), commonly CIBC, is one of Canada's chartered banks, fifth largest by deposits.
The bank is headquartered at Commerce Court in Toronto, Ontario.
The bank's two strategic business units, CIBC World Markets and CIBC Retail Markets, also
have international operations in the United States, the Caribbean, Asia and the United
Kingdom. Globally, CIBC serves more than eleven million clients, and has over 40,000
employees. The company ranks at number 172 on the Forbes Global 2000 listing. CIBC was
named the strongest bank in Canada and North America, and the 3rd strongest bank in the
world, by Bloomberg Markets magazine, in May 2012.

25

CHAPTER 5

4 CANADIAN BANKS ON TOP 10 LIST OF WORLD'S STRONGEST

Four of Canada's biggest banks have landed among the top 10 in a global ranking of the
strongest banks, although two of them have seen their rankings slip from last year.
According to data compiled by Bloomberg Markets magazine, CIBC, Royal Bank,
Scotiabank and TD were ranked 3rd, 4th, 7th and 8th, respectively, on the publications
annual ranking of the worlds strongest and safest lenders.
Bloomberg Markets maintains a list of global banks with at least $100 billion US in assets.
This year, 78 firms made that cut-off.
The magazine then ranks the lenders based on five broad categories, including the size of
their capital reserves, the amount they keep on hand to cover bad loans, the percentage of
their assets that are inefficient or considered non-performing and the amount they take in
deposits.

Among the Canadian banks. Royal Bank and Scotia saw their ranking improve, while CIBC
and TD slipped. In TDs case, the bank slipped from 4th in the world to 8th.
A particular source of strength for Canadian lenders is how big their Tier 1 capital ratios are.
Thats the financial term for a lenders cash reserves and how many of its own shares it owns
both of which are valuable assets to have act as shock absorbers if and when the economy
hits a rough patch.

26

Every year, our stress tests tell us were stronger than the previous year, Toronto-Dominion
bank president Ed Clark told the magazine. You dont have to go out on the risk curve to
look after the shareholder, and its a foolish bet to do that, he said.
Although they continue to compare favourably internationally, Canadian banks arent
immune to the signs of slowdown in the global and domestic economies. Ratings agencies
Moodys and S&P each downgraded their outlooks for most of Canadas major lenders late in
the year. And official data shows Canadians debt loads continue to tick alarmingly high, a
trend that could make the banks who loaned out all that debt vulnerable.
Another eye-opening placement on the list is U.S lender Citibank. Bloomberg Markets
ranked Americas biggest lender in fifth overall.
Citis presence so high on the list is significant because it wasnt that long ago 2008 to be
precise that the bank was saved from bankruptcy thanks to a $45 billion US bailout from
the U.S. government.
Citi was disqualified from Bloombergs rankings as recently as last year because it failed the
U.S. Federal Reserves so-called stress test of banks that may be vulnerable to financial
shocks.

27

CHAPTER 6
THE BENEFITS
Canadas banks have been rated the soundest in the world, five years in a row. Why does this
matter to Canadians? When we have banks we can depend on, we can plan ahead, take
advantage of opportunities and know that our banks will be there when we need them.

6.1 STRONG AND STABLE BANKS BENEFIT ALL CANADIANS:

Since Canadas first bank opened its doors almost 200 years ago, banks have played and
continue to play a central role in financing much of Canadas growth. Canadas financial
services sector is an essential contributor to the countrys economic growth and well-being.
In 2012, the banking sector contributed $53 billion to the Canadian economy, and they paid
$12.6 billion in dividends to shareholders and that includes individual Canadians who hold
shares through their pensions and their retirement funds.
Why does this matter to Canadians?
1. Helping Canadians save for retirement
Millions of Canadians count on retirement savings products offered by Canadas banks to
plan for their future.
2.

Making small businesses a reality

Dependable banks also allow dreams to flourish when opportunity knocks. More than 1.6
million small businesses look to banks for the money they need to grow and business loans
help to create jobs.

28

3.

Supporting young Canadians to succeed

Banks understand the role that they have in contributing to a positive future for Canada.
From helping Canadians better manage their money to improving the financial literacy of
youth, to student loans; banks can be depended upon to provide what people need.
4. Being part of the community
Banks employ over 275,000 Canadians across the country and were good customers too.
And banks and their employees are among the countrys most active corporate donors
supporting the arts, sports, culture, music, health and the environment.

6.2 THEY PROVIDE WHAT PEOPLE NEED:

More than 90 per cent of Canadians feel positively about their bank. This exceeds what you
find for other service-oriented industries and its been on the rise over the last twenty years.

Canadians value the stability and soundness of our banks with 81 per cent of
Canadians believing that Canadas banks are more stable than other banks around the
world. And for a good reason. Canadas banks came through the recent global
financial crisis without any taxpayer funded bailouts, there were no bank failures and
they continued to lend. And its why the World Economic Forum, for the fifth year in
a row, said Canadas banks are the soundest in the world.

Canadians value the safety that banks provide in terms of financial transactions and
personal information with 83 per cent of Canadians seeing banks as doing a good job
of protecting their personal information and transactions.

29

Canadians value the added convenience and choice in how they bank with 76 per cent
rating the performance of banks as good when it comes to introducing technologies
that improve the convenience of banking.

Canadians see the value in having banks that are profitable with 81 per cent
understanding that, like any company that has shareholders, banks have to focus first
on providing good returns to those who own their shares.

6.3 THEY PLAY BY THE RULES, MANAGE RISKS SENSIBLY AND

HAVE A STRONG REGULATORY SYSTEM:
Canadas banks are well managed, well regulated and well capitalized. We play by the rules
and our national banking system is a key strength. By diversifying regional risk, a downturn
in an individual economic sector is balanced since funds can be moved from areas of excess
deposits to regions where growth is creating demand for new credit.
Banks in Canada are also 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.
And Canada has been recognized by the International Monetary Fund and others as having a
sound regulatory system. Our streamlined bank regulatory system has two primary regulators:
the Office of the Superintendent of Financial Institutions (OSFI) for prudential regulation and
the Financial Consumer Agency of Canada (FCAC) for financial consumer matters. In
contrast, the United States, for example, has a complex network of different regulators. And

30

Canadas Bank Act is reviewed and updated every five years to ensure the regulatory
structure is keeping pace with changes in the industry.
And Canadians have a strong track record when it comes to paying their mortgages. Less than
half of one per cent of all mortgage holders with the country's largest banks have gone more
than three months without making a payment. This number has been stable for more than two
decades, in times of high and low unemployment, high and low interest rates, and a strong or
weak Canadian dollar.

31

CHAPTER 7
WHAT HELPED CANADA'S BIG BANKS WEATHER THE
FINANCIAL CRISIS

The little-discussed safety net that helped the big banks through the financial crisis was their
complete, masters-of-the-world dominance over the day-to-day financial affairs of almost all
Canadians.

When the banks need revenue and profits, they simply have their clients supply it. And so
they did in 2007, as the crisis began to take shape, and for years afterward.

Let us recount the ways, starting with the re-pricing of variable-rate mortgages. Before the
crisis, these mortgages were available at your lenders prime rate minus a discount as large as
0.9 of a percentage point. At the height of the crisis, variable-rate mortgages were being sold
with a mark-up over prime of one to 1.5 of a percentage point. Since then, the discount has
gradually returned and is now at roughly 0.4 off prime.

A case can be made that fixed-rate mortgages would also be lower if pre-crisis pricing was
used. Data from Canada Mortgage and Housing Corp. shows that in the 7.5 years prior to the
crisis, posted five-year fixed-rate mortgages were priced at 2.44 percentage points on average
above the yield on the five-year Government of Canada bond. Today, the gap is around 3.2
points, down a bit from peak levels but still higher than it was.

Discounted mortgages are also more expensive than they might have been, precrisis. They
used to be sold at roughly one percentage point above the five-year Canada bond; today, the
gap is more like 1.6 points for a well-discounted mortgage.

32

The home-equity line of credit is one more example of higher costs as a result of the crisis.
HELOCs, as theyre called in the banking world, used to be available at prime. Today, the
rate for these widely used borrowing tools is prime plus 0.5 to prime plus one. Rates on
unsecured credit lines where you dont pledge your house as security have also risen.

Banks made the argument that the crisis forced them to pay higher rates to raise funds for
lending to clients, and that this cost had to be reflected in higher borrowing costs. Havent
things calmed down by now?

To some extent, yes. But mortgage planner David Larock said banks have come under tighter
regulations in the past few years that continue to play a role in higher lending costs.
Customers have still come out ahead, he argues. The [interest rate] discount weve enjoyed
because of the crisis has far outweighed the marginally increased costs that lenders have for
the most part passed on to consumers.

The crisis was a stressful time for the banks, and they took it out on their customers in a
variety of ways. One bank had the bright idea, just as a recession was asserting itself, to
charge people a $35 inactivity fee if they left their unsecured credit line unused over a 12month period. The fee was later cancelled after some embarrassing publicity.
Another gift of the crisis was one banks decision to bump up its credit card interest rate by
five percentage points if a customer missed two consecutive minimum payments.

Even today, the banks continue to get tough with customers about borrowing. Some have
started to adjust the interest rates on credit cards and other lending products according to a
customers credit record. People who pay on time see no change, or a token rate cut. Those
struggling with debt get loaded down with higher interest rates.

33

Not all changes in the banking business have been negative. In an effort to create pools of
money they can profitably lend out, the banks have embraced the high-interest savings
account. Thanks to competition between banks, interest rates in these accounts are in the low
1-per-cent range. Thats tiny by historical standards, but decent when compared to one-year
term deposits and bond yields.

The consulting firm McVay and Associates says that savings deposit rates are 75 per cent
higher than they were five years ago, with much of the cash coming out of money market
mutual funds. Even after recent fee cuts, money market funds are only producing returns
around 0.5 per cent.
Financially, Canadas banks are in strong shape right now. Profits are rich, shares have been
rising in price and dividends are being cranked higher on a regular basis. Take a moment to
admire the turnaround. You helped pay for it.

34

CHAPTER 8
WHY CANADA CAN AVOID BANKING CRISES AND U.S. CANT

Since 1790, the United States has suffered 16 banking crises. Canada has experienced zero
not even during the Great Depression.

It turns out Canada can thank the French for their stable system, according to a paper by
Columbia Universitys Charles Calomiris, presented at the Atlanta Feds 2013 Financial
Markets Conference.
When it became a British colony, the majority of Canadas population was of French origin
and the French inhabitants hated the British government.
So to keep the colony firmly within the Empire, British policymakers steered toward a
government structure that would limit the power of the French-majority while also giving
Canada more and more self-government. The eventual result was a highly-centralized federal

35

government which controlled economic policy making and had built-in buffers for banker
interests against populist forces, the paper argues.
That anti-populist political system known in political science as liberal constitutionalism
or liberal democracy is a key ingredient in Canadas stable banking track record, Mr.
Calomiris contends in his paper, which is a summary of a much longer book hes written with
Stephen Haber due out in September. Thats because this kind of political system makes it
difficult for political majorities to gain control of the banking system for their own purposes,
the authors contend.
Populist democracies like the U.S., on the other hand, tend to create dysfunctional banking
systems because a majority of citizens gain control over banking regulation that steers credit
to themselves and to their friends at the expense of the citizens that are excluded from the
banking system, he said.
The contrast between the U.S. and Canada was part of Mr. Calomiris broader argument that
dysfunctional banking systems which are by far the norm rather than the exception around
the world are the result of political factors.
Whether societies have dysfunctional banking systems is really not a technical issue at all.
Its a political issue, Mr. Calomiris said at the conference, introducing his premise as we do
know how to avoid dysfunctional banking but that we make political choices you might
even say consciously not to have functional banking systems for most of the modern era in
most countries of the world.
The history of the U.S. banking system is one in which the government forms partnerships
with different interest groups at different points in history, and those coalitions jointly
influenced the way the banking system was regulated, Mr. Calomiris argues.

36

In populist democracies, such as the United States, the regulation of banking is used as a
political tool to favor some parties over others. It is not that the dominant political coalition in
charge of banking policy desires instability, per se, but rather, that it is willing to tolerate
instability as the price for obtaining the benefits that it extracts from controlling banking
regulation, he writes in his paper.
Backing up their argument: Only six countries including Canada have been crisis-free
and at the same time have banking systems that provide abundant credit. Three of these
Singapore, Malta and Hong Kong are small, island-bound city-states where the
homogeneity of the population makes it politically difficult to create losers. The other three
Canada, Australia and New Zealand all share histories of liberal democracy.
Mr. Calomiris argues that in the U.S., a coalition that emerged in the 1990s of government,
big banks and activist consumer groups came helped fuel the housing crisis. Regulatory
changes opened the door to a wave of mergers and acquisitions that created todays
megabanks. But banks still had to get approval usually from the Federal Reserve to
complete those mergers and outside groups were able to weigh in on the wisdom of the deal
as part of the Feds decision-making process.
Community groups, with the Clinton administrations encouragement, used the Feds
approval process to extract binding concessions from banks to loosen underwriting standards
for poor, urban communities concessions to which the Fed agreed, Mr. Calomiris argues.
The banks had to apply the looser standards to everyone. That helped fuel an explosion in
poorly underwritten mortgages that contributed to the depth and severity of the housing crisis,
he contends.
All in all, Mr. Calomiris theory is a bleak one for the ability of financial reform efforts to
make much of a difference.
37

Smart economists with their regulatory ideas are sort of dead on arrival, he said. Political
coalitions will decide not whether youve got the right VAR model [but] whether a
banking system is going to be set up with rules that will lead it to be stable and have abundant
credit or not.

38

CHAPTER 9
CONCLUSION
For all the recognition that the Canadian banking industry receives, it operates in a limited
and insular market. The industrys move outside Canada for growth will expose banks to
global economic challenges, as well as a slew of regulatory compliance challenges. The
industry can overcome these obstacles by leveraging its strong banking system, built on
plain-vanilla products, limited exposure to riskier businesses and products, as well as a strong
focus on long-term returns and customer service.

Another strength is that the government offers no incentives for consumers to take on higher
debt, resulting in prudent borrowing. The Dodd-Frank Act began mandating stress-testing to
measure the health of banks following the global economic crisis, but OSFI, the Canadian
banking regulator, has been administering stress tests even before the crisis took place. This
places Canadian banks in a strong position to contend with new challenges and opportunities.

Emerging technologies such as analytics, social media, mobile devices and cloud computing
will play a greater role in the coming years. As the millennial generation grows in size and
influence, demand for services that make use of these tools and techniques will play a
significant role in determining growth and pecking order. Social media is already proving to
be a critical platform to appeal to various segments of customers. According to the JD Power
2011 Canadian Retail Banking Customer Satisfaction Study,9 more than 60% of retail
banking customers use social media, and among those who use social media for banking
purposes, 24% say they do so to discuss their banking experience or inform their bank of a r
service issue. As more and more consumers use online and mobile banking services, it will be

39

imperative for banks to consider how they can integrate these technologies and tap into their
power to support and grow their businesses.

Regulations and economic conditions worldwide remain a cause for concern. Banks today are
required to deal with more stringent capital, liquidity and risk management requirements. In
such a scenario, improving operational efficiencies and gaining additional ground by utilizing
their existing competitive advantages will determine which banks will succeed in the future.

Canadian banks will do well by:

Maintaining the fine balance of meeting growth targets while complying with more
stringent regulatory requirements.

Diversifying into markets and related businesses with strong growth potential, while
applying the experience gained in their home markets.

Effectively dealing with the economic, political, cultural and regulatory hurdles in
markets where they operate.

Developing and providing innovative products and solutions.

A recent Global CEO survey by PricewaterhouseCoopers says that 87% of banking and
capital market CEOs believe that innovation will lead to operational efficiencies; 64% believe
that IT investments will help them tap into new marketing and transactional opportunities.

Achieving operational efficiencies with smart use of technology and third-party services to
keep focused on acquiring, retaining and delighting customers.

The Canadian banking industry weathered the global financial storm. In fact, no Canadian
financial institution required a government bailout.
40

Given their strong fundamentals, track record and operational strategies, Canadian banks are
well positioned to tap into new growth opportunities. But this can only happen if they can
quickly and cost-effectively upgrade their legacy systems and apply historically solid risk
mitigation strategies to expand into new geographies and offer ancillary products that will
enable them to incrementally improve their top and bottom lines.

41