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Speaker 1: You're listening to Taking Stock with pim Box and Kathleen

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Speaker 1: as a long Blueberg Radio. We are at the fourth

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Speaker 1: annual Canadian Fixed Income Conference. It is sponsored by National

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Speaker 1: Bank of Canada Financial Markets. National Bank of Canada Financial

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Speaker 1: Markets is the soul bank whose primary focus is the

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Speaker 1: Canadian marketplace. And here to tell us more about banking

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Speaker 1: in Canada is Peter Rutledge. He is Managing Director Financial

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Speaker 1: Services Research at National Bank Financial Peter Runtlings, thank you

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Speaker 1: very much for being with us. Thanks for for having

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Speaker 1: me explain to our listeners some of the major differences

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Speaker 1: about the composition and structure of the Canadian banking system

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Speaker 1: versus let's say, what we may be familiar with here

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Speaker 1: in the United States. Well, I mean, the most important

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Speaker 1: thing to understand about the difference in the system is

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Speaker 1: how they developed over time. Canada, going back to the

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Speaker 1: start of the country, has always had a branch banking system,

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Speaker 1: so a few large banks located in the center of

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Speaker 1: the country who have branches all across the country. We've

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Speaker 1: had the equivalent of interstate banking since the country was formed,

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Speaker 1: whereas in the United States you have a state based,

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Speaker 1: unit based banking system that only recently became UH nationwide.

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Speaker 1: And so as a result, we've long had very large,

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Speaker 1: systemically important financial institutions control our banking system and as

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Speaker 1: and those institutions have been quite profitable, and that profitability

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Speaker 1: has acted to stabilize the system. And they and we've

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Speaker 1: had generally UH much fewer banking crises and bank failure.

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Speaker 1: So since about UH nineteen sixty seven, when our deposit

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Speaker 1: insure came into force, there's only been about thirty five

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Speaker 1: to forty bank failures. It's amazing. And in fact, during

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Speaker 1: the financial crisis, many people pointed to Canada to say,

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Speaker 1: you don't need lots of banks to have a stable

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Speaker 1: banking system. How are the are the rules different? Are

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Speaker 1: the Canadian banks regulated differently? Have you eminated the problem

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Speaker 1: of too big to fail? Or is the government just

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Speaker 1: always ready to step in and so you're you you

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Speaker 1: keep them on a tighter leash? How do you make

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Speaker 1: it work in Canada? Right? Well, I think there's general

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Speaker 1: acceptance that we have six systemically important institutions. They've long

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Speaker 1: been systemically important, and they have long been too important

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Speaker 1: to fail. UH. Since up until the financial crisis, the

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Speaker 1: authorities sort of accepted a public backstop, So the sovereign

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Speaker 1: in effect was always there as a last resort backstop

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Speaker 1: to the banking system. Since the crisis came and went, UH,

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Speaker 1: the Canadian regulatory system has adopted or is in the

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Speaker 1: process of adopting UH global banking regulatory rules around too

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Speaker 1: Important to Fail. And now they're trying to bring in

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Speaker 1: a private sector backstop to the banking system to replace

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Speaker 1: the public sector. What is the trade off if you

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Speaker 1: have a government that is implicitly and almost explicitly being

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Speaker 1: the backstop, what are the banks trading off in order

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Speaker 1: to live under that umbrella? Um? Establishing a private system

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Speaker 1: brings in private actors who UH will be acting in

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Speaker 1: their own coninecial self interest and they may be they

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Speaker 1: may behave unpredictably and so that it introduces an element

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Speaker 1: of risk into the system now and that didn't exist

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Speaker 1: when the public sector was the backstop. So that's you know,

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Speaker 1: what the public sector will have to adapt and they're

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Speaker 1: they're adapting the regulatory system for that reality. The benefit

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Speaker 1: of it though, is, you know, if the public sector

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Speaker 1: is the backstop, typically the public isn't really aware of that,

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Speaker 1: and so when you have the public sector enter in

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Speaker 1: to protect the payment system that becomes UH. You know

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Speaker 1: that that that UH annoys people, annoys the general public

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Speaker 1: for understandable reasons because they don't understand they have that

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Speaker 1: contingent risk. What this STEM does is it says to

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Speaker 1: private sector investors in advance x ANTI before there's a

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Speaker 1: banking system crisis, you know you're taking that risk, and

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Speaker 1: you can ask to be compensated by the banking systems

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Speaker 1: for taking that backstop risk. And that is a better,

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Speaker 1: a better way to do it. Couple things I hope

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Speaker 1: we can touch on in the couple of minutes we

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Speaker 1: have left. The first one would be capital, contingent capital.

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Speaker 1: How Canadas deal that? In a in a nutshell, what

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Speaker 1: is different about Canada right now? That is so important

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Speaker 1: for investors to understand. US banks have a holding company

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Speaker 1: company model, and there they're issuing contingent capital through their

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Speaker 1: holding company structures and and moving it into the operating company.

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Speaker 1: Canadian banking system is structured on an operating company model only,

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Speaker 1: so we're having to design contingent capital within the operating company.

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Speaker 1: And it just means the conversion mechanism, the recapitalization mechanism

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Speaker 1: is different. Housing and we've been speaking to people throughout

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Speaker 1: the conference about the housing market in Canada, and there

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Speaker 1: are some surprising differences between let's say, take out a

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Speaker 1: mortgage in Canada and taking out a mortgage in the

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Speaker 1: United States ext pin UH. Some of the differences are

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Speaker 1: the longest amortization term is now twenty five years. You

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Speaker 1: can get thirty year mortgages, but basically the standard for

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Speaker 1: higher risk mortgages it's twenty five years. UH. Second, there's

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Speaker 1: no tax deductibility for mortgage interest payments. People are incentive

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Speaker 1: financially always to pay down their mortgage and that does

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Speaker 1: make a difference. Finally, the Canadian sovereign through UH a

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Speaker 1: mortgage insurance subsidiary UH, basically absorbs or takes on the

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Speaker 1: credit risk in the mortgage system. So if we had

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Speaker 1: a big housing price correction and there are a lot

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Speaker 1: of losses around mortgages, it would flow through to the

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Speaker 1: mortgage insure that is a sovereign ntity, and so there

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Speaker 1: would not be any uh you know, risk around capital

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Speaker 1: in the banking system tied to only a house of

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Speaker 1: price correction. Well, so thank you for walking us through

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Speaker 1: the Canadian banking industry. Some of the key regulations, how

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Speaker 1: they're changing how they're working. Peter Rtgage, thank you so

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Speaker 1: very much for joining us. He's Managing director for Financial

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Speaker 1: Services Research at National Bank of Financial We're live at

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Speaker 1: the National Bank of Canada Financial Markets Canadian Fixed Income Conference.

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Speaker 1: I'm Kathleen Hayes along with Pen Fox. This is Limberg