Although it may seem like all banking systems are created equally, at least in countries with similar economic conditions, you'll be surprised by how different they can actually be in the details. Let's take a look at some differences between Canadian banks vs. U.S. banks to understand whether there is the same risk of bank failures in our country.
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Why Do We Compare the United States and Canada Banks?
After the Silicon Valley Bank and Signature Bank collapsed, comparing United States and Canada banks became especially relevant. Canadians want to know how banking in Canada and the U.S. differ as they want to ensure their banks are less vulnerable.
In a global sense, we compare the bank systems of these two countries in order to learn from others' experiences. This allows us to analyze the causes and consequences of decisions made, identify development potentials and market trends, as well as prevent crises, and learn from the mistakes of others.
What Are the Key Differences Between U.S. and Canada Banking?
To better understand how financial institutions in the U.S. work, let's take a look at the major differences between the U.S. and Canada banking systems.
The Canadian Banking System Is Safer
First of all, Canadian banks have a larger share of loans, making them safer than American financial institutions. They are also well-capitalized and are required to maintain certain levels of capital and capital buffers and liquidity as a collapse-preventive measure. Domestically Systemically Important Banks, (D-SIB’s) which control more than 85% of the domestic assets, also enjoin banks to have at least 3% of their total risk-weighted assets as the domestic stability buffer. The World Economic Forum in 2008 called the Canadian banking system the world's safest.
However, nothing is 100% guaranteed. To prevent losses, it's recommended to choose a bank from the "Big 6," which includes Toronto Dominion, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, Royal Bank of Canada, and National Bank of Canada.
Canada Has Fewer Banks Than the U.S.
The U.S. boasts a robust financial landscape with over 7,000 domestic banks, complemented by numerous private and online lending institutions. In addition to traditional banking, various connecting services, including prominent names like 1F Cash Advance, play a significant role in the lending ecosystem. On the other hand, Canada's banking sector is more streamlined, comprising approximately 35 domestic banks. This leaner structure reduces competition among Canadian banks, contributing to the establishment of a stable financial system less susceptible to savings and loan crises. Moreover, within Canada's lending landscape, notable entities like Loans Canada further enrich the financial landscape, providing diverse options for individuals seeking loans and financial assistance.
Banks in Canada Are Regulated Differently
The Canadian financial system is more focused on safety and soundness. In contrast, U.S. regulations pay more attention to anti-money laundering, privacy, banking access, and consumer protection. Additionally, relationships between banks and regulators in Canada are more collegial.
Difference in Displaying Balances
Although this difference doesn't affect the financial system, it may be useful for you if you're banking in a neighbouring country. Unlike Canadian bank accounts the U.S. bank account statements usually have two balances. The actual one displays the amount of money you have in your account at the moment. The ledger balance also includes some transactions and amounts that haven't yet been posted as they were made by the bank cut-off times.
U.S. Banking Has Higher Domestic Market Worth
While the Canadian market is worth $142 billion CAN, the U.S. market is valued at $1.4 trillion USD, which is almost ten times more. The Canadian banking system is focused on growth opportunities and, therefore, tends to expand internationally, primarily in the U.S.A. The American banking system, at the same time, is more focused on the massive domestic market growth.
U.S. Banks Have Lower Leverage
U.S. banks have lower leverage than Canadian peers as they have shown more conservative approaches during the post-crisis period. Therefore, they have spent the past number of years building capital. Canadian banks were not as impacted by the Financial Crisis, so they were able to use lower risk weights.
Canadian Banks Have Lower Deposit Insurance Amounts
In the U.S., your deposit is ensured by the Federal Deposit Insurance Corporation (FDIC). To protect depositors' accounts, the FDIC guarantees up to $250,000 USD safety per depositor for each deposit ownership type in each insured bank. In contrast, deposits made at Canadian banks are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 CAN.
What's Common Between Banks in Canada and the U.S.?
The American and Canadian banking systems are quite similar in their essences. This is because they perform many similar functions and have comparable economic impacts. Both of them have central banks, which are The Federal Reserve and The Bank of Canada. The U.S. banks are protected by the Federal Deposit Insurance Corporation, just like Canadian financial institutions are insured by the CDIC. Thus, we can say that the distinction between these two systems are mostly caused by their different bank regulation approaches.
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In conclusion, the divergences between Canadian and U.S. banking systems mirror the unique needs of their respective populations. Canada, boasting the world's wealthiest middle class, prioritizes stability and resilience in its financial landscape. As we navigate these distinctions, it becomes evident that financial security extends beyond traditional banking—enter Insurdinary. In Canada, where citizens enjoy benefits like health care and lower education costs, Insurdinary stands as a testament to comprehensive financial well-being, recognizing that insurance plays a vital role in safeguarding individuals against unforeseen circumstances. Thus, in the tapestry of financial landscapes, Insurdinary seamlessly weaves the threads of stability, ensuring Canadians have a robust foundation for both banking and insurance, reinforcing the essence of true financial security.