Richard Gorab of RBC - 201011

8/3/2019 Richard Gorab of RBC - 201011

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Published under permission from CIBN - 2010111

Chartered Institute of Bankers of Nigeria (CIBN)Building a Resilient Financial System to Withstand External Shocks

Richard Gorab, Senior Banker RBC Wealth ManagementOctober 20, 2011


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Contents

Canada Where we stand in the current economic environment

The Canadian banking regulatory system

Mortgage lending in Canada factors that helped weather external shocks

Canadian Government Debt Past problems

Learning lessons applicable to today from Canadas successful debt reduction


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Canada's Banking System is the World's Soundest

In late 2011, the World Economic Forum named Canadas banking system the worldssoundest. This was the fourth year in a row that the Canadian banking system rankednumber one in the World

They are well-capitalized, having more cash on-hand than most similar institutions in thedeveloped world.

They are well-regulated. Canadian banks are forced to adhere to stricter rules than thosethat govern most other banking systems, including those in the United States.

They are well-managed. Canadian bank managers are less prone to risk-taking than theircounterparts in the U.S. and Europe, taking a very conservative approach with theirinvestors funds.


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Canada has a national banking system with diversified, well managedinstitutions

Canadas banks are well-diversified organizations; investment banks are anchored bysolid deposit-taking institutions.

Canadas system of national institutions diversifies regional risk, so a downturn in anindividual economic sector is balanced.

National system contributes to economic growth by moving funds from areas of excessdeposits to regions where growth is creating demand for new credit.

Banks in Canada make lending decisions on a case-by-case basis, extending creditto those who have the capacity to repay their loans.This prudent approach is a key reason why banks in Canada have largely avoided theproblems that have plagued banks elsewhere.

In a survey by the Strategic Counsel, 81% of respondents believe that prudent lending isa key reason Canadian banks have performed better than their international peers

Canadian Bankers Association


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Canada has a strong regulatory system

Canada has a streamlined bank regulatory system, with two primary regulators:

1) The Office of the Superintendent of Financial Institutions (OSFI) for prudential regulationand the Financial Consumer Agency of Canada (FCAC) for consumer matters.In contrast, the United Stated has a complex network of different regulators.

2) Canadas Bank Actis reviewed and updated every five years to ensure the regulatorystructure is keeping pace with changes in the industry.

Canada has been recognized by the International Monetary Fund and others as having asound regulatory system.



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Canadas banks are well-capitalized

Banks in Canada are among the best capitalized in the world, exceeding Bank forInternational Settlements norms by significant margins.

This allows banks to continue lending and provides a cushion against loan losses, whichtend to increase during economic downturns.

Banks have been strengthening their capital levels by raising new capital from investors inthe marketplace

For the past two years, Moodys Investor Service has ranked Canadas banking system asfirst in the world for financial strength Moodys, Global Banking Report, 2008 & 2009

The World Economic Forum has ranked Canadas banking system as the most sound inthe world, four years in a row World Economic Forum, Global Competitiveness Report,2008, 2009, 2010 & 2011



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Mortgage lending in Canada is stable and prudent


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Canadas mortgage market has several fundamentaldifferences from the US market.

Canada does not have the same problems with sub-prime mortgages that havebeen at the root of the problem in the US. In Canada, the vast majority ofmortgage loans are prime.

There are many high-risk mortgage products in the US that do not exist inCanada. These include:

1. Adjustable-rate mortgages, with unrealistically low introductory interest rates thatcan rise substantially;

2. Interest-only payments, where the mortgage principal is never lowered;

3. Negative amortization payment schedules, with payments that are less than theinterest charged; and no-documentation lending.



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Key differentiators points

When American house prices decreased, many borrowers found that their mortgage washigher than the value of their house and unaffordable.

Canadian mortgage products have not had these high-risk features and have stood thetest of time as interest rates and house prices go up and down.

As a result, Canadian homeowners have maintained a healthy amount of equity versusdebt in their homes.

In fact:

1. Overall home equity is at 72 per cent of the total value of housing in Canada;

2. For homeowners who have mortgages, equity levels average 50 per cent.

CAAMP, Annual State of the Residential Mortgage Market in Canada report, November 2010



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Canadian lenders tend to hold the mortgages theyoriginate.

In the US the model was an "originate to distribute" model (throughsecuritization).

Canadian mortgage originators have a much greater incentive to be prudent

because they directly bear the consequences of imprudent lending decisions.

In Canada, bank mortgages with less than 20% down must be insured. This isnot the case in the US. Canadians are careful borrowers.

In June 2011, just 0.41% of mortgages were in arrears.( Seven Canadianlargest banks)

The rate of arrears in the US is more than ten times higher than in Canada



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A strong and stable banking system

benefits all Canadians


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AS taxpayers: Canadians have not had to bail out financial institutions, inject capital into institutions, or set up

public entities to buy toxic assets. To maintain consumers access to credit in an environment of stalled global credit markets, the

Canadian government acted to increase liquidity by buying more than $69 billion of safe, insuredmortgages from the banks through the Insured Mortgage Purchase Program, which has now ended.

The Canadian government expected to earn a profit from this initiative.

As consumers: Canadians continue to have access to a banking system that is accessible, affordable and

competitive.

Canadians remain confident in the safety of their deposits, and continue to make use of affordably priced

credit.

Lending to consumers has increased throughout the economic downturn.



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As business owners:

Canadas banks remain open for business and committed to providing credit.Banks have been filling a credit gap as some other lenders have exited themarket.

According to the International Monetary Fund:

Financial conditions have tightened but strains are considerably lesssevere than in other major countries, and credit growth remains solid, bothof which reflect a resilient financial system.

As investors:

Most Canadians are shareholders in Canadas banks either directly, or through

the CPP, pensions and mutual funds. Pension funds and RRSPs are key beneficiaries of the billions of dollars of

dividends that banks pay each year.

The amount paid in dividends for 2010 was CAD 10,3 Billions


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The health of Canadas banking sector

means banks can continue, as always,to contribute substantially to theCanadian economy, including


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Key Figures:

$8.3 billion in taxes paid to all levels of government.

Contributed approximately 3.4% to Canadas GDP.

Employed 267,000 Canadians. Full-time bank employment hasincreased 21.5% in the past 10 years.

Provided financing to 1.6 million small and medium-sized businesses.

Provided multi-million dollar support for Canada's charities and not-for-profit community groups

A strong and stable banking system is at the heart of Canadaseconomic recovery.


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Canadian Federal Government DebtAn Evolution Towards Fiscal Responsibility


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From 1975 to 1997 Canadian Debt to Federal GDP rosefrom 10% to near 70%

At the height of the Canadian debt crisis in 1994, the countryhad a budget deficit of around 9 per cent of GDP.

The following year, the Prime Minister, unveiled a budgetwith spending reduced by 20 per cent.

By 1997 the deficit had been eradicated.


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From 1975 to 1997 Canadian Debt to Federal GDP rose from 10% to near 70%

The Canadian debt peaked in 1994, with budget a deficit of 9 % of GDP.

The following year, the budget reduced spending by 20 per cent.

By 1997 the deficit had been eradicated.


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Strategy Canada used for Debt Reduction

The First Success was to secure public support for deep and painful cuts

Cuts would be shared by all sectors of society

The process was transparent with Ministers vetting budgets in front of a StarChamber committee including the Prime Minister

The government moved quickly to show progress

The focus was on cuts, tax increases were low to allow the economy to grow

Richard Gorab of RBC - 201011

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