CRISIS AND RESPONSE: CANADIAN BANKS ARE THE WORLD S BEST

During the subprime financial crisis the value of mortgage-backed securities held by financial institutions plummeted and governments in the United States and Europe worked on full-scale banking bailouts and rescue packages in the trillions of dollars. Canada, however, did not have to bail out any banks, although Canadian banks also had their problems. Their shares fell by almost 50% and some of them experienced huge losses; for example, the CIBC suffered writedowns in excess of $6 billion in 2008 because of significant exposure to the U.S. capital and real estate markets.

One reason Canadian banks have done much better than their U.S. and European counterparts is that Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has been more conservative than banking regulators in other countries. As a result, Canadian banks have lower leverage and more conservative lending and acquisition practices. In fact, in the aftermath of the subprime recession, Canada s banking system has been viewed as the soundest in the world, with many countries considering Canadian-style reforms of their financial markets.

Managing banks is not an easy task, and the subprime crisis highlights that it has become even more difficult because of increased complexity in the financial services marketplace. In Chapter 13 we look at the business and process of banking and in Chapter 14 we study financial derivatives and how managers of financial institutions use derivatives to manage different types of risk.