Canadian Banking

As we begin 2010, I was not surprised to find that a survey of editors at Canwest News Service picked the recession as the top business story of 2009. With the recession casting a long shadow of uncertainly, it was the single story that had the most impact from coast to coast.

According to experts, the recession is now over, but that doesn't mean that the average Canadian will see a change in their financial situation in the coming year. Although, housing values are expected to continue to increase.

With similar cultures, it can be difficult to remember that the United States is a different country than Canada. The sub-prime mortgage meltdown in the United States showed the world the differences between our respective banking and lending practices. It's good to know that it's unlikely that Canada could find itself in a similar situation.

Wishing you prosperity and health for the next year!

By now, we've heard about the recent warning from the Bank of Canada regarding household debt being the biggest risk to the financial system. However, according to CIBC World Markets in its latest Economic Insights report, the warning is not as dire as the Bank of Canada makes it out to be.

While CIBC's economists agree that interest rates are going to rise in the second half of 2010, making some homeowners vulnerable to rising mortgage costs, they believe that the number of people who will be affected by the interest rates will be far less than the Bank of Canada predicts.

There are a couple of reasons why this might be so:

• Many Canadians have substantial amounts of equity in their homes and if costs rise to unmanageable levels they can always downsize.
• Many home owners already make accelerated mortgage payments and could cut back if monetarily necessary.
• For those with variable rate mortgages, CIBC believes that most will jump to a fixed rate mortgage before interest rates rise.

With all of the flip flopping on this topic, it's difficult to know who to believe. The only certain thing is that rates will rise, it's just a matter of how much and how quickly.

While banks in Canada have made it through the economic downturn relatively unscathed, there are likely to be some rough patches in the next year.

Most of the media attention from the recent Bank of Canada statement addressed personal household debt levels, but the bank also cautioned lenders to expect credit losses in 2010 when interest rates finally rise.

With mortgages secured, there is a risk that if home owners default on their mortgages that they will also be unable to make payments on unsecured debt, such as credit cards and lines of credit.

However, even if Canadian banks lose money on unsecured debt, it looks like they will emerge from the recession in much better shape than banks in other countries.

As anticipated, in keeping with its pledge to hold rates low until mid-2010, the Bank of Canada kept the benchmark over-night lending rate at 0.25 per cent. The bank also released its semi-annual Financial System Review that outlines developments and analysis of Canada's financial system.

According to the report, while the past several months show that the economy is improving, of the five factors that can be a major detriment to economic recovery, the only one that the Bank of Canada singled out as worsening was household debt.

The report provided two scenarios for what might happen to interest rates in the next three years. The first being that the benchmark rate would jump to 3.2 per cent by mid-2012 and the second assumed the benchmark rate would increase to 4.5 per cent.

Both of these scenarios would put a record number of home owners with large mortgages in serious financial danger. Should this happen, this would severely increase the number of personal bankruptcies that might risk derailing Canada's economic recovery.

Do you remember the first time you took out your debit card at a cash register, and used it to pay for your purchase? The nervous anticipation as you watched that little screen until it finally flashed, "Approved". The silent euphoria you felt (it actually worked!).

November marks the twenty-fifth birthday of the Interac payment system in Canada. What seems like second nature today was a revolutionary change in our payment system not all that long ago. It' amazing the speed at which Canadians took to the plastic system. We proudly boast the second highest per capita use of debit cards in the world, second only to the Swiss.

The days of toting out a chequebook to pay for groceries are long gone. In fact, the majority of Canadian retailers don't even accept cheques anymore. Interac has made strides over the years to improve the quality and speed of transactions, allowing high volume retailers such as dollar stores to accept debit cards without causing impatient delays in the line-ups.

If I were making a list of things that had the greatest impact on the everyday life of all Canadians, Interac payments would be in the top ten. Congratulations Interac and Happy 25th Birthday.

Ipsos-Reid conducted a poll from September 10th to 17th of this year on behalf of Royal Bank of Canada, to gather information about Canadians and the Tax-Free Savings Accounts.

New to the forum this year, TFSA's allow each Canadian aged 18 years or older to put aside up to $5000 per year (subject to incremental increases with inflation), without paying any income tax on the interest they earn. The good news is 71 percent of Canadians know they now have a tax-free option.

However, a whopping 76 percent of those polled have not opened a tax-free account. Why not? Over half said they have no money to put into such an account, while 22 percent simply don't know how the tax-free accounts work.

It's a shame really, since tax-free savings has been a staple in the UK and the US for quite some time. Canada is long overdue in offering its' citizens a break in taxes on our hard earned money. Hopefully, next year will see some improvement in our economy, and more Canadians will start taking advantage of the tax-free program.

A recent report by CIBC said that Canadian households have increased their debt loads in the first six months of the year by $44 billion. We have lower interest rates to thank for that.

As dismal as the debt number sounds, it is not as bad as it looks on paper. More Canadians are making moves in the housing market, thanks to historically low interest rates, which means the majority of the debt is principal rather than interest.

In some recessions, we have seen soaring interest rates, which means a large portion of the debt we owe is actually the interest on loans, mortgages, lines of credit and so on. However, this time around, the interest portion of household debt is reportedly 7.7%; the rest of the debt is the money we borrowed.

While a surge in household debt is not always comforting to the economy, lower interest rates allow Canadians an even chance to get ahead of their debts. However, whether or not we do that remains to be seen.

Canadians are once again mystified the Canadian dollar could be trading for 94 cents US. How is this possible? The truth is, it's not so much Canada being stronger, it's other countries, the United States in particular, hitting a weak spell.

A high Canadian dollar isn't great for our economy, but it does have some perks. When our dollar is high, we see more people migrating to US dollar accounts, hoping to cash in when the dollar drops again. Hey, it's better than interest on savings accounts.

The online and cross border shoppers are enjoying a strong dollar and starting Christmas shopping a little earlier. Not so great for Canadian retailers, but it does add a kick to the last minute shopping at the malls.

Good news for borrowers as well. The Bank of Canada is thinking about extending the .25% key rate past its promised date of June 2010, in an effort to keep our economy stimulated. As for the average consumer, take advantage where you can, because we all know, what goes up, must come down.

Are we really closing in on forty years of automated bank machines? Yes, we are. On December 1, 1969, CIBC brought forth the first Canadian bank machine. Granted, it isn't even on par with today's technology and advanced ABM's, however, it gave us the very first opportunity to get cash from a machine, rather than a teller.

The first ABM, known as "the 24 hour cash dispenser", used a key instead of a card, and let CIBC clients withdraw a whopping $30. It may not seem like much by today's standards, but in the early years of automated banking, this was impressive.

Today, our automated banking system has the benefit of numerous advancements in technology, with the bank card itself remaining front and centre as our access point. Young people today don't even know what a passbook is, and would be hard pressed to fill out a deposit slip.

So, with equal degrees of nostalgia and awe, we must wish the ABM system a happy fortieth birthday. Love it or hate it, people free banking is here to stay.

While Wall Street and Bay Street think the Canadian Banks are "sleepy", Global Finance has allotted each of the top five Canadian Banks a spot on their list of fifty safest banks in the world. Oddly enough, the same conservative practices give our banks both statures.

It's a Canadian thing for sure. Our banks don't indulge in high-risk investment opportunities, they don't lend money to people who can't afford to pay it back and they certainly don't offer us huge interest rates on our savings and investment accounts. The top five have always been relatively safe, but in case you are wondering where your bank is on the list, here it is:

• #10 - Royal Bank of Canada
• #14 - TD Canada Trust
• #22 - Scotiabank
• #31 - Bank of Montreal
• #37 - Canadian Imperial Bank of Commerce

Canadian banks haven't done anything differently for all five to make the list this year. It's actually a result of other banks around the world going broke, that freed up spots on the list for all five of our banks. Hollow victory perhaps, but we'll take it anyway.