Canada’s banking industry remains distinctively sound. The World Economic Forum’s Global Competitiveness Report of 2015 ranked Canadian banks as the soundest in the world for the eighth consecutive year. Table3 shows the recent impressive performance of the six major banks (which hold about 93% total bank assets in Canada). The evidence reveals that between 2014 and 2015, average consolidated revenue of the“Big Six”rose by 4.3% from about C$20.5 billion to about C$21.4 billion. Meanwhile, their average net income increased from about C$5.5 billion to about C$5.8 billion representing an increase of about 4.8%. Their average efficiency rate stood at about 58.4%, and average non-interest expense or operating cost increased from about C$11.6–C$12.4 billion in the same period. This rise in operating cost partly explains the modest but continuous reduction in return on equity from about 17.1% in 2012 to 15.6% in 2015.17This return on equity is
twice the level of international peer banks.18Long term profits of 15% or more are higher than a competitive level, a factor that normally attracts new entrants.
Perhaps the strongest measure of the soundness of Canada’s banks is their performance during the worldwide financial meltdown in 2007–08. Not one of Canada’s banks needed to be rescued. Another measure is the regularity of dividend payments. The CIBC, for example, has not missed a regular dividend since 1868.19 This is a remarkable achievement. Yet given that in the years since 2008, return on equity of Canadian banks has been at or above 15% compared to eight or 9% for international peer banks,20consumers may well ask iftoo muchattention is paid by regulators to‘safety and soundness’and not enough to competition, especially to higher prices paid by Canadian consumers—and byfirms that are too small to use disintermediation by raising funds directly. Canadian banks make significant con- tributions to the economy in terms of output, employment and tax revenue. That said, the industry accounts for close to 4% of the Gross Domestic Product (over $65 billion in 2015) and employs over 280 thousand Canadians. The top six banks operate in more than 65 countries and have more than 3700 branches outside Table 3 Selected performance indicators of the“Big Six”Canadian Banks
Banks Years Market capitalization ($ billions)
Net income ($ millions)
Consolidated revenue ($
millions)
Total non-intérêt expansés ($
millions)
Efficiency rate (%)
BMO 2014 53.00 4,333 16,718 10,921 65.3
2015 48.90 4,405 18,135 12,182 64.2
BNS 2014 84.00 7,298 23,604 12,601 52.6
2015 74.00 7,213 24,049 13,041 53.4
CIBC 2014 40.80 3,215 13,376 8,525 63.7
2015 39.80 3,590 13,856 8,861 63.9
NBC 2014 17.30 1,538 5,464 3,423 58.6
2015 14.60 1,619 5,746 3,665 58.6
RBC 2014 117.40 9,004 34,108 17,661 51.8
2015 107.90 10,026 35,321 18,638 52.8
TD 2014 102.40 7,883 29,961 16,496 55.1
2015 99.60 8,024 31,426 18,073 57.5
“Big Six” Average
2014 69.15 5,545.17 20,538.5 11,604.5 57.85
2015 64.13 5,812.83 21,422.17 12,410.0 58.40
Average return of equity (all six in %)
2012 17.1
2013 16.2
2014 16.6
2015 15.6
SourcePWC Perspectives on the Canadian Banking Industry (2014 and 2016 Edition). The“Big Six”banks include The Bank of Montreal (BMO), The Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD)
Canada.21These same banks paid an annual average of about $7.8 billion in taxes per year between 2012 and 2015.
The structure of the Canadian banking industry is important. TheBig Sixbehave like an unorganized collusive oligopoly—though firms frequently act more like they are under monopolistic competition—where banks offer differentiated prod- ucts.22Eggert23finds that although banks strategize toward product differentiation, their products and services remain largely similar. TheBig Sixtook advantage of amendments to theBank Act(made in the 1980s and 1990s) to increase their size relative to all otherfinancial institutions. As noted, amendments removed regulatory
“fences”and allowed banks to enter the securities and trust businesses leading to the acquisition of the major trust and brokeragefirms, some of which were weak or failing.
Of importance to regulators and policymakers, is whether the structure of the industry leads to soundness and efficiency or promotes competitiveness in the industry over time. Canadian banks, as noted, are widely adjudged to be sound, lessening worries about sudden failure. It is evident that those regulators who are obliged to focus on soundness are not concerned by “unorganized collusive” behavior if it aids soundness and safety. Consumers’ priorities extend beyond soundness whenever reliability is achieved, in part, through high fees and interest charges. Further, firms using financial services point out forcefully that their competitiveness is compromised by oligopolistic bank prices24 …and knock on effects ultimately harm consumers.
A study conducted by Bain and Companies Inc. for Power Financial Corporation in 2003 found that the leverage enjoyed by the bigger banks resulted in higher prices for consumers relative to the 1980s.25Interest rate spreads were higher and bank charges and other fees were increasing. It is instructive to note that theBig Six have more dominance now than in the early 2000s when the Bain study was conducted. A more recent study—conducted in 2014 by the Financial Consumer Agency of Canada—found that bank price increases on normal monthly chequing plans have been moderate, whereas the charges associated with variable fees have increased significantly.26
Many agencies have claimed credit for the stability of the Canadian sector relative to the 2007–08 when other countries suffered from a collapse of major financial institutions. Reasons include monetary policy, interest rate policy, dif- ferences in supervision, and, in the case of the U.S., a large shadowfinancial sector
—largely unregulated. Much of that is true, though possibly overemphasized by analysts in close contact with their own part of the grand financial elephant.
Underemphasized is the key role in the crisis was played by a malevolent inno- vation, making the point that it is nạve to believe every innovation is good. The business model of some innovative firms was to slice and dice packages of low quality mortgages, have them graded incorrectly, then sell the packages to sophisticated buyers as valued assets. The remarkably low quality of mortgage-backed securities and asset-backed commercial paper was certainly not transparent: quality was not detected byfinancial sector experts.
The measurement of price changes from 2000 on is fraught with difficulty. Some consumer advocates objected to new or increased bank fees, and FCAC research supports that.27If market competition has not been providing consumer protection from price increases, the recent proliferation of financial technology firms (FinTechs) holds special promise for Canadianfinancial consumers.