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Canada’s Financial Services Sector

Canada's Banks

Updated Version (August 2002)



In 1817 Canada’s first bank was opened by a small group of local merchants in Montréal. Since then the banking industry has become a major contributor to economic development and job creation, and plays a key role in supporting the growth of the new economy through significant investments in technology, innovation and the financing of new economy companies.

Up to the middle of the 20th century, the primary function of a bank was to accept deposits and grant commercial loans. In recent years the banking industry has undergone a dramatic transformation. Growth in business and changing customer needs, along with the rapid expansion of international trade, led to the introduction of more automation and new products and services. At the same time, banks started to face increased competition from other financial institutions, and revisions to Canada’s Bank Act in 1954 and 1967 enabled banks to offer new services such as mortgages and consumer loans. Subsequent changes to financial institutions legislation in 1987 and major revisions to the Bank Act in 1992 also increased competition by permitting banks to operate trust and securities subsidiaries.

The Canadian banking system today is mature, sophisticated and highly competitive. Canadian banks derive stability from their broad diversification in Canada and the U.S. and a strong consumer credit culture. They have also developed a dominant wealth management business, and have a world-leading infrastructure with a high degree of automation and strong management control systems.

Structure of the Canadian Industry

As of July 2002 there were 14 domestic banks, 33 foreign bank subsidiaries and 20 foreign bank branches operating in Canada. In total, these institutions had over $1.7 trillion in assets, which accounted for over 70 per cent of the total assets within the Canadian financial services sector. The six largest domestic banks accounted for the bulk of the activity, holding over 90 per cent of banking assets.

Banks are among Canada’s leading employers. In 2000 the industry employed over 235,000 Canadians and had a Canadian payroll of approximately $16.1 billion. In addition, in 2001 the six major domestic banks paid $4.8 billion in taxes to all levels of government.

Canada’s banks operate through an extensive network that includes over 8,000 branches and close to 18,000 automated banking machines (ABMs) across the country. 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. In 2001 Canadians conducted 2.2 billion debit card transactions from over 328,000 merchants, ranking Canada first in the world in ABM use. Between 1997 and 2000 the number of Internet banking customers registered with the six major banks increased by 262 per cent, to over 5.8 million customers. Telephone banking, which permits customers to make account inquiries, transfers and bill payments over the telephone 24 hours a day, is also an increasingly popular delivery channel for Canada’s six major banks, with over 9.7 million customers using the service in 2000.

The International Dimension

The six major domestic banks have significant international operations, which vary among the individual institutions both geographically and in strategic direction. They have been seeking growth opportunities in the United States, where they are focusing their business activities on wealth management, corporate investment banking and electronic banking. At the same time, the major domestic banks have made investments in select markets in Latin America, Asia, the Caribbean and other countries around the world. In 2001 their international operations accounted for approximately 33 per cent of gross revenues.

As of July 2002, 20 foreign bank branches were operating in Canada. The recent increase in the number of foreign bank branches stems directly from new legislation passed in 1999 allowing foreign banks to establish operations in Canada without having to set up Canadian-incorporated subsidiaries.

Recent Performance

In recent years Canada’s banks have demonstrated consistent performance. In 2001 the six largest Canadian banks reported earnings of $9.7 billion, compared to $9.6 billion in 2000, $9.1 billion in 1999 and $7.1 billion in 1998. Also, the total assets of all six banks have increased over the past two years (see Chart 1).

Chart 1 - Total assets, loans and deposits of the six major domestic banks - (8,856 bytes)

The profitability of the major Canadian banks was down in 2001, as their average rate of return on common equity (ROE) fell to 15.2 per cent from 16.8 per cent in 2000 (see Chart 2). Although it was the lowest ROE reported since 1998, it was higher than the returns in the early 1990s, with the average ROE falling to 5.4 per cent in 1992.

Chart 2 - Rate of return on common equity (ROE) and average return on assets (ROA) of the sis major domestic banks - (13,337 bytes)

Net interest income has historically been the banks’ major source of revenue. However, the contribution of non-interest income to revenue has been increasing over the past 10 years. Although this trend eased in 2001, non-interest income, at $31.4 billion, still accounted for over 50 per cent of gross revenue (see Chart 3). Non-interest income includes fees for services such as mutual fund and wealth management, securities underwriting, derivatives trading, asset securization, brokerage transactions, cheque processing, ABM transactions, credit card transactions, foreign exchange, and payment and deposit services.

Chart 3 - net interest and other income of the six major domestic banks - (7,845 bytes)

The growth of net interest income in 2001 was caused by an increase in loan volumes (due to a decline in interest rates) in conjunction with higher net interest margins (from increased low-cost deposits). Interest income is derived mainly from lending activities to businesses and individuals and interest earned from banks’ own investments.

The decline in interest rates in 2001 created a positive environment for homebuyers. A refinancing boom also took place as borrowers replaced their higher interest rate debt with lower-cost debt, therefore reducing their overall debt-servicing costs.

Canadian interest rate spreads, which had been on a downward track over the last few years, stood at 1.6 per cent in 2000. While this is up slightly from 1.53 per cent in 1999, spreads remain among some of the lowest in the industrialized world (see Chart 4).

Chart 4 - International interst rate spreads - (12,516 bytes)

Service fee pricing practices differ significantly among countries, with most Canadian banks offering "flat-fee" banking packages that are tailored to individual needs and present considerable cost savings. According to Industry Canada’s 2001 annual report on financial services charges, electronic banking is the least costly method of banking in Canada.

Regulation and Supervision

The Financial Sector Stability Assessment undertaken by the International Monetary Fund (IMF) in 2000 indicated that "the regulatory and supervisory structure in Canada is well developed, complies with the major international principles and standards, and is a source of international best practice in a number of areas." The IMF further noted that "Canada’s emphasis on a consolidated, risk-centered approach to supervision has put the supervisory and regulatory authorities in a good position to address the challenges faced in recent years with financial institutions embarking on new and highly complex activities."

The World Economic Forum’s Global Competitiveness Report for 2001-2002 ranked Canadian banks among the soundest financial institutions in the world (see Chart 5). The soundness of the Canadian banking industry has been demonstrated many times over the past several years. Canadian banks weathered the debt difficulties of the less developed countries in the early 1980s, the decline in real estate values a decade later, and the Asian crisis in the late 1990s without experiencing any systemic problems.

Chart 5 - Soundness of banks, 2001-2002 - (8,670 bytes)

Under the Bank Act, the federal government is responsible for the regulation of the banking industry in Canada. However, given the hybrid nature of the banks’ activities, some of their subsidiary activities such as trustee services and securities dealing are provincially regulated.

The Office of the Superintendent of Financial Institutions (OSFI) is the federal agency principally responsible for supervising all federally regulated financial institutions and pension plans. OSFI’s role is to safeguard policyholders, depositors and pension plan members from undue loss, and to advance and administer a regulatory framework that contributes to public confidence in a competitive financial system.

The regulatory capital ratios of Canadian banks, which are defined by OSFI under the framework of risk-based capital standards developed by the Bank for International Settlements, are above the minimum requirements. The risk-based capital targets that were established by OSFI in 1999 are a Tier 1 capital ratio of at least 7 per cent and a total capital ratio of at least 10 per cent. The six largest domestic banks all surpassed these requirements in 2001 (see Chart 6).

Chart 6 - Capital ratios of the six major domestic banks: Tier 1 and total capital - (10,022 bytes)

The safety and soundness of the financial system are also enhanced by an early intervention system for troubled financial institutions, which was introduced in 1996. In addition, OSFI introduced a new risk-based supervisory framework in August 1999, which will be fine-tuned over time to ensure that supervisory practices remain effective and efficient in a rapidly changing financial marketplace.

The Large Value Transfer System (LVTS), which began operations in 1999, provides settlement certainty for payments. LVTS participants are required to pledge collateral to the Bank of Canada, which ensures settlement for the participants even if one of them were to default. The Bank of Canada guarantees settlement in the extremely unlikely event that more than one LVTS participant were to fail on the same business day and the sum of the exposures of failed institutions were to exceed the collateral pledged to support such positions.

The Canada Deposit Insurance Corporation protects depositors by providing deposit insurance. To encourage well-managed member institutions, it also promotes standards of sound business and financial practices.

In addition to ensuring that the regulatory environment responds to the evolution of the financial sector, the federal government has taken an active interest in enhancing protection for consumers of financial services. The Financial Consumer Agency of Canada was established in October 2001 to enforce the consumer-oriented provisions of the federal financial institution statutes, to monitor the industry’s self-regulatory initiatives designed to protect the interests of consumers and small businesses, to promote consumer awareness and to respond to general consumer inquiries.

Looking Ahead

Today’s financial world is rapidly changing. Technology and global competition are significantly altering the structure of the Canadian banking industry. Canadian banks are facing increased competition from other established financial service providers and new foreign entrants. New technology and the Internet are also enabling competitors to enter the market without having to invest in branches, which presents further challenges to Canada’s banking industry.

To address these challenges, the major domestic banks have made significant investments in technology in order to provide products and services that are innovative, meet consumer demands and enhance their competitiveness. They have integrated and restructured their business activities in order to be more cost-efficient and have entered into alliances with high-technology firms to control information technology and data-processing costs. They have also expanded their customer base through online banking and e-commerce, both in-house and through technology-based ventures and acquisitions, and targeted growth areas such as wealth management and corporate and investment banking. Further expansion in selected markets outside Canada remains a key strategy for a number of the large domestic banks, whose portion of earnings from international operations continues to grow.

The legislation governing Canada’s federally regulated financial institutions is subject to review every five years. The last scheduled review was completed in 2001, and amendments to the relevant financial statutes became law in October of that year. The legislated five-year review provision ensures that the regulatory framework remains current and that the financial services sector has the flexibility it needs to react to changing times.

Annex 1

Banks registered to do business in Canada (July 2002)

Domestic Banks

1. Amicus Bank
2. Bank of Montreal
3. The Bank of Nova Scotia
4. Canadian Imperial Bank of Commerce
5. Canadian Western Bank
6. Citizens Bank of Canada
7. CS Alterna Bank
8. First Nations Bank of Canada
9. Laurentian Bank of Canada
10. Manulife Bank of Canada
11. National Bank of Canada
12. President’s Choice Bank
13. Royal Bank of Canada
14. The Toronto-Dominion Bank

Foreign Bank Subsidiaries

1. ABN AMRO Bank Canada
2. Amex Bank of Canada
3. Bank of America Canada
4. Bank of China
5. Bank of East Asia
6. Bank of Tokyo-Mitsubishi
7. Bank One Canada
8. BNP Paribas
9. Citibank Canada
10. Comerica Bank - Canada
11. Credit Suisse First Boston Canada
12. CTC Bank of Canada
13. Deutsche Bank Canada
14. Dresdner Bank Canada
15. Habib Canadian Bank
16. HSBC Bank Canada
17. ING Bank of Canada
18. International Commercial Bank of Cathay
19. IntesaBci Canada
20. J.P. Morgan Bank Canada
21. J.P. Morgan Canada
22. Korea Exchange Bank of Canada
23. MBNA Canada Bank
24. Mizuho Corporate Bank
25. National Bank of Greece
26. Rabobank Canada
27. Société Générale
28. Sottomayor Bank Canada
29. State Bank of India
30. Sumitomo Mitsui Banking Corporation of Canada
31. UBS Bank
32. UFJ Bank Canada
33. United Overseas Bank

Foreign Bank Branches – Full Service

1. ABN AMRO Bank N.V.
2. Bank of America, National Association
3. Bank One, NA
4. Bayerische Landesbank Girozentrale
5. Capital One Bank
6. Citibank, N.A.
7. Comerica Bank
8. Deutsche Bank AG
9. First Commercial Bank
10. HSBC Bank USA
11. JPMorgan Chase Bank
12. Maple Bank
13. Mellon Bank, N.A.
14. Rabobank Nederland
15. State Street
16. U.S. Bank National Association
17. United Overseas Bank Limited

Foreign Bank Branches – Lending

1. Credit Suisse First Boston Toronto Branch
2. National City
3. Union Bank of California, N.A.

Source: OSFI Web site (http://www.osfi-bsif.gc.ca/).


Annex 2

The six largest banks by assets (October 2001)



($ billions)

Royal Bank of Canada


TD Bank Financial Group


Canadian Imperial Bank of Commerce


The Bank of Nova Scotia


Bank of Montreal


National Bank of Canada


Source: Canadian Bankers Association.

Further information on legislation to reform the financial services sector can be obtained from the Department of Finance at http://www.fin.gc.ca/. Additional information on the banking industry is available from the Office of the Superintendent of Financial Institutions at http://www.osfi-bsif.gc.ca/ and from the Canadian Bankers Association at http://www.cba.ca/.