An Analysis of the Stability of the Canadian Commercial Banks

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An Analysis of the Stability of the Canadian
Commercial Banks

• By Yisha Li
• Under the supervision of lecture Zhe Zhang
• April, 2009

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The importance of the banks

• The Bank of Canada (Canada's central bank)
• 13 domestic banks
• Foreign bank subsidiaries operating in Canada

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The Big Six Banks
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The three chapters in the essay

• 1. Credit Risk and Management
• 2. Operation Risk
• 3. The supervision of the Canadian Banking System

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Chapter1 The credit risk

• Credit risk is the risk most associated with
  the possibility that borrowers may default on
  their obligation due to the inefficient operation
  of creditors companies.

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The Three main indicators (Ratio)

• There are three main indicators show the
  stability of banks against credit risk.
• 1.Nonperforming loans to total loans (????????)
• 2.Bank regulatory capital to risk-weighted assets
  (?????)
• 3.Profitability

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The tendency of nonperforming loans to total
loans Canadian American
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Bank regulatory capital to risk-weighted assets

• Basel committee 8
• Canadian banks 12
• Therefore, shareholders of banks have more
  motivation to operate with Canadian banks due to
  their high percentage of regulatory capital.

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Profitability

• Canadian 9.3 ? 21.0 ( increased )
• American 14.1?11.4 ( decreased )
• The lasting and good capability of gain profits
  guarantee Canadian banks keep operating in a
  benign way.

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Diversified assets
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Chapter2 Operation risk

• Operation risk is distributed among all levels
  of a commercial bank's management, and penetrates
  the entire operations process. Huge operation
  losses have been experienced by many financial
  firms including Canadian commercial banks over
  past decades. Operation risk is now treated with
  the same importance as credit risk by banks
  around the world.

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The risk management system

• 1.Recognize risks
• 2.Establish approaches to evaluate and supervise
  operation risk
• 3.Manage risk following specified plans
• Increased use of technology

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Chapter3 The Supervision of the Canadian Banking
System

• ?The single regulation model
• ?Risk- based assessment

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The single regulation model

• Independent from central bank
• Avoiding complex multi-supervision
• Reduce cost

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Risk-based assessment

• 1. Identify the significant activity by
  considering the banks service plan and capital
  distribution.
• 2. Asses net risk of the significant activity
• 3.Define the banks Net Risk level and
  integrate level
• 4Adjust supervision according to different level

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Conclusion

• 1. Canadian commercial banks have proven to be
  more conservative in credit aspects than American
  banks. The indicators show that Canadian
  commercial banks have a steady profitability,
  relatively high capital quality and appropriate
  capital ratio. These aspects guarantee Canadian
  banks to be faced with less credit risk.
• 2.Canadian commercial banks use new IT technology
  in the operation of the daily works. All of these
  things enable Canadian commercial banks to be
  resilient enough to overcome the unavoidable
  credit risk and operation risk facing modern
  banks today as a result of the global financial
  crisis.
• 3 In addition the OFSI single regulation model
  and the risk-based assessment guarantee the
  prudent operation of Canadian commercial banks.

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