You're listening to Taking Stock with pim Box and Kathleen as a long Blueberg Radio. We are at the fourth annual Canadian Fixed Income Conference. It is sponsored by National Bank of Canada Financial Markets. National Bank of Canada Financial Markets is the soul bank whose primary focus is the Canadian marketplace. And here to tell us more about banking in Canada is Peter Rutledge. He is Managing Director Financial Services Research at National Bank Financial Peter Runtlings, thank you
very much for being with us. Thanks for for having me explain to our listeners some of the major differences about the composition and structure of the Canadian banking system versus let's say, what we may be familiar with here in the United States. Well, I mean, the most important thing to understand about the difference in the system is
how they developed over time. Canada, going back to the start of the country, has always had a branch banking system, so a few large banks located in the center of the country who have branches all across the country. We've had the equivalent of interstate banking since the country was formed, whereas in the United States you have a state based, unit based banking system that only recently became UH nationwide.
And so as a result, we've long had very large, systemically important financial institutions control our banking system and as and those institutions have been quite profitable, and that profitability has acted to stabilize the system. And they and we've had generally UH much fewer banking crises and bank failure. So since about UH nineteen sixty seven, when our deposit insure came into force, there's only been about thirty five
to forty bank failures. It's amazing. And in fact, during the financial crisis, many people pointed to Canada to say, you don't need lots of banks to have a stable banking system. How are the are the rules different? Are the Canadian banks regulated differently? Have you eminated the problem of too big to fail? Or is the government just always ready to step in and so you're you you keep them on a tighter leash? How do you make it work in Canada? Right? Well, I think there's general
acceptance that we have six systemically important institutions. They've long been systemically important, and they have long been too important to fail. UH. Since up until the financial crisis, the authorities sort of accepted a public backstop, So the sovereign in effect was always there as a last resort backstop to the banking system. Since the crisis came and went, UH, the Canadian regulatory system has adopted or is in the process of adopting UH global banking regulatory rules around too
Important to Fail. And now they're trying to bring in a private sector backstop to the banking system to replace the public sector. What is the trade off if you have a government that is implicitly and almost explicitly being the backstop, what are the banks trading off in order
to live under that umbrella? Um? Establishing a private system brings in private actors who UH will be acting in their own coninecial self interest and they may be they may behave unpredictably and so that it introduces an element of risk into the system now and that didn't exist when the public sector was the backstop. So that's you know, what the public sector will have to adapt and they're
they're adapting the regulatory system for that reality. The benefit of it though, is, you know, if the public sector is the backstop, typically the public isn't really aware of that, and so when you have the public sector enter in to protect the payment system that becomes UH. You know that that that UH annoys people, annoys the general public for understandable reasons because they don't understand they have that
contingent risk. What this STEM does is it says to private sector investors in advance x ANTI before there's a banking system crisis, you know you're taking that risk, and you can ask to be compensated by the banking systems for taking that backstop risk. And that is a better, a better way to do it. Couple things I hope we can touch on in the couple of minutes we have left. The first one would be capital, contingent capital. How Canadas deal that? In a in a nutshell, what
is different about Canada right now? That is so important for investors to understand. US banks have a holding company company model, and there they're issuing contingent capital through their holding company structures and and moving it into the operating company. Canadian banking system is structured on an operating company model only, so we're having to design contingent capital within the operating company. And it just means the conversion mechanism, the recapitalization mechanism
is different. Housing and we've been speaking to people throughout the conference about the housing market in Canada, and there are some surprising differences between let's say, take out a mortgage in Canada and taking out a mortgage in the United States ext pin UH. Some of the differences are the longest amortization term is now twenty five years. You can get thirty year mortgages, but basically the standard for higher risk mortgages it's twenty five years. UH. Second, there's
no tax deductibility for mortgage interest payments. People are incentive financially always to pay down their mortgage and that does make a difference. Finally, the Canadian sovereign through UH a mortgage insurance subsidiary UH, basically absorbs or takes on the
credit risk in the mortgage system. So if we had a big housing price correction and there are a lot of losses around mortgages, it would flow through to the mortgage insure that is a sovereign ntity, and so there would not be any uh you know, risk around capital in the banking system tied to only a house of price correction. Well, so thank you for walking us through the Canadian banking industry. Some of the key regulations, how they're changing how they're working. Peter Rtgage, thank you so
very much for joining us. He's Managing director for Financial Services Research at National Bank of Financial We're live at the National Bank of Canada Financial Markets Canadian Fixed Income Conference. I'm Kathleen Hayes along with Pen Fox. This is Limberg