The past year and a half has been a tumultuous time in the financial services sector, as countries around the world have dealt with the credit crunch and the global economic crisis. During this time, one thing has become very clear: there is dramatic and strong evidence that the Canadian banking sector is a national asset that benefits all Canadians.

For two years in a row, the World Economic Forum has ranked Canada’s banks as the most sound in the world. Moody’s Investors Service Inc. has recognized our institutions as first in the world, in terms of financial strength.

During the past 15 months, the U.S. and European governments have had to spend more than $500 billion to prop up their countries’ weakened financial institutions. As federal Finance Minister Jim Flaherty said during a recent speech in Toronto: “The [Canadian] government has not had to use taxpayers’ money to support Canada’s banks.”

Unfortunately, a recent report by the Organization for Economic Co-operation and Development, which was reported in this publication, contains information that is incomplete and has been misinterpreted. The report looks at the measures that countries have taken to shore up their financial systems and compares government support made available to the financial services sector in OECD countries, including capital injections, the purchase of assets, liquidity provisions and guarantees as a percentage of GDP.

For Canada, the OECD report came up with 22% of GDP in government programs. However, the government initiatives for financial services institutions in Canada — which also includes non-bank institutions, such as insurance companies — is inflated. Only a fraction of the amount in the report was ever actually used. For example, according to the OECD report, the Canadian government provided monetary guarantees for financial services institutions that totalled more than 11% of GDP in Canada.

The Canadian government did launch a loan guarantee facility last fall, but only in response to similar actions taken by other governments, which had the potential to “unlevel” the competitive playing field for Canadian banks. It is important to note that this facility was never used by Canadian banks.

Another section of the OECD report concerns governments’ purchases of banks’ assets. With banks in other countries facing collapse, many governments felt compelled to purchase their risky assets to shore up the quality of their balance sheets and to prevent failure. This was not the case in Canada.

In this country, an innovative program was put in place to enhance liquidity in the marketplace, but not because there were solvency concerns among Canadian banks. The federal Insured Mortgage Purchase Program empowered the Canadian Mortgage and Housing Corp. to invest in sound mortgages from Canadian banks and other lenders. These mortgages were not subprime or distressed, and these transactions involved no additional risk to the government because they were already insured by CMHC. In fact, the government purchased these mortgages at commercial rates and expects to make billions of dollars in profit from the transactions.

The IMPP was a smart investment by the government that freed up credit, to the benefit of all Canadians. However, it should be noted that to date, only half — $66 billion of the $125 billion available — has been used by the banks and other lenders. But we believe the full $125 billion was included in the OECD report.

If one compares the overall numbers provided in the OECD report to the actual amount of government support used by the Canadian financial services sector, the total amount is much lower than 22% and puts Canada well below not only the U.S. and Britain but also Germany and Japan.

It is reassuring to know that Canada’s federal government stood ready to intervene. But it is even more reassuring to know our banks’ prudent management made such intervention unnecessary.

Canada’s banking sector is, indeed, in an enviable position these days. And while Canada’s efficient financial regulatory system has certainly contributed to this position of strength, we should not underestimate the positive results of the banks’ sound management practices.

Key bank management decisions — such as avoiding irresponsible mortgage lending, keeping capital levels well above compulsory levels set by national regulators and continuing to lend prudently — were not undertaken just to meet government requirements. Rather, they were tactical choices made as part of a successful long-term strategy. Throughout the economic crisis, banks in Canada kept credit flowing to Canadians, even as many non-bank lenders reduced credit or pulled out of the market altogether. This was not regulated behaviour; it made good business sense.

@page_break@Our banks are a national success story that all Canadians can be proud of, bankers and non-bankers alike. IE



Nancy Hughes Anthony is president and CEO of the Canadian Bankers Association.