Why Canadian Banking Remained Healthy During Economic Crisis

Canadian banking has its strengths and weaknesses, but when talking about being more conservative and healthy when difficult times come, they hands down beat their southern neighbors, as well as most other banking systems in the world because of their practices and tight government controls.

Of course the weakness of the system is when times are good they lag behind their banking competitors, seeming to plod along. But in the light of the current economic crisis, it seems they would rather plod along year after year than go through what the other banking systems around the world are in order to survive. They also don't have to deal with the wrath of their constituents, as they didn't have to bail out any of their major banks.

Some differences are also cultural, as Canadians, in general, are less apt to take on high risk and a lot of debt, and they also don't have the equivalent of a Freddie Mac or Fannie Mae to have to deal with.

So they didn't go through a housing bubble like the U.S. did because of the repackaging of securities and selling them to the highest bidder. This encourages taking on bad loan risks, which American banks obviously did, and creating the bubble mortgage market we've all read and heard about over the last several years.

Another strength and weakness in the Canadian banking system is the six-bank oligopoly, which is good for conservative practices, as they don't have to take risk to draw in customers by lowering some of their lending standards.

The weakness here is they aren't as consumer-friendly, and have more control over costs and not needing to compete to generate revenue and profits. So they can charge more fees and not have to be as good at customer service because of the lack of competition.

Again, this works great in tough times but is less desirable in better times.

One suggestion to add more conservative practices to the American banks would be to make the financial institutions hold onto their loans rather than selling them to the next guy who hopes to get a little piece of the action. Getting rid of that could go a long way toward making at least the mortgage side of the business more stable.

Of course as soon as everything turns good again, many will forget about this and look for ways to squeeze every penny out of every transaction made. Hopefully we're not doomed to go through this all over again once the recession actually ends.