Keep Canada in Mind

This article originally appeared in Perspectives, published by the Canadian Council of Chief Executives.

While not immune, Canadian banks have weathered the recent financial storm relatively well. And I humbly suggest that when it comes to ways to improve the global financial sector—and ultimately the global economy—Canada offers a model that’s worth consideration.

First, Canada has had a good macroeconomic policy framework that has produced excellent results. The country has its fiscal house in order. Public finances were put into surplus over a decade ago. In the early 1990s, Canada had the second-highest debt-to-GDP ratio of any industrialized economy. Today, Canada’s net debt ratio is the lowest in the G-7. Even with the Canadian government’s recently announced stimulus package, the ratio of net debt to GDP will remain under 30 percent. Compare that to the United States, where the debt-to-GDP ratio is predicted to exceed 60 per cent. Also, Canadian monetary policy has been consistent and effective. Canada was one of the first countries to establish inflation targeting. Since the 1990s, Canada has successfully kept inflation low and stable.

Second, Canada has a strong financial sector regulatory policy approach. Since 1867, Canada has had a “national” banking system, not a regionally based one. This provides a real advantage of geographic diversification and economies of scale.

Federal legislation that governs the banking sector—the Bank Act— is overhauled every five years. This mandated regular review allows for change and evolution, but in a disciplined and measured manner. During the 1980s, regulations separating the traditional four pillars of the financial sector — banks, insurers, trust companies and investment dealers — were largely eliminated. By the 1990s, all the major investment dealers were owned by banks, creating an integrated bank model. We did not have the lightly regulated, independent dealers that have been at the centre of the problems in the United States. Our dealers have been managed under a single, prudential financial institution framework for more than 20 years.

Third, we have a banking sector that is performing well due to sound business models and proven risk-management practices. Our leverage is one of the best in the world. It was one of the best going into the crisis, and remains so now.

Underpinning this success is the conservative, pragmatic risk culture of Canada and its bankers, combined with a strong internal governance structure.

During this financial crisis, Canadian banks have had their own challenges to contend with. No one has been completely immune and we have made mistakes. But on the whole, we have also had very strong performance relative to American and European banks.

We are lucky in Canada, absolutely. We are a country rich in resources. But our country and our financial system also have been well managed. As governments, policy makers and private firms contemplate the future and make more lasting changes, keep Canada in mind.

Richard E. Waugh is the President and CEO of Scotiabank. He was a 2007 Americas Society Spring Party honoree.