Economist: Money in the Bank
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Economist: Money in the Bank

People work hard for their money, but they don’t make their money work hard for them. It’s time to fix that. Economist whips your income into shape with smart, practical advice.

E.F. Schumacher got it right: small is beautiful. While this past year has been full of global bank failures and financial bailouts, Canada’s once relatively-small Big Five banks have remained financially sound—so much so that we here at Economist are surprised by the number of people who aren’t aware of their superlative standing in the world today.
Just recently, our banks caught the attention of some venerable blogs and news publications. In an article last month, Newsweek‘s Fareed Zakaria wondered, “So what accounts for the genius of the Canadians?” His answer: “Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers.” Our banks abstained from the quick profits (and long-term risks) associated with complex derivatives that bet on the safety of sub-prime mortgages lent to financially unstable borrowers; instead, they kept their focus on stable retail banking operations that service ordinary Canadians. This isn’t to say that our banks didn’t experiment with the lucrative products—they just never bought in as substantially as their competitors.
Canadian banks also remained small relative to their peers when most global banks expanded. Why? Because they weren’t permitted to merge. That decision was censured by those to the right of the political centre over the past fifteen years, but it’s now lauded. While global financials bought other firms and used lax regulations to undertake risks that totalled more than the value of their entire company (i.e. AIG), Canada’s Big Five remained the Big Five. Now that the massive international banks have gotten hit by the recession and have witnessed their market values plummet, both Royal Bank and Toronto Dominion have crept into the top ten of North American banks based on size, with very little effort to boot.
So how does any of this help you? For starters, know that your money is safe. Not only are our banks at a very, very low risk of going under, up to one hundred thousand dollars of your money in a single bank account is insured by the Canada Deposit Insurance Corporation (the federal government). Yesterday’s announcement of another 0.5% cut to the Bank of Canada’s key lending rate will also decrease the interest rate on small loans and mortgages. The Big Five can now borrow from the Bank of Canada (a common activity) at a lower interest rate and all five of them have all agreed to pass this saving on to their clients instead of hoarding it to benefit their financial standing. (Theoertically, nothing prevents the banks from colluding and saving the difference between their old and new borrowing rates.) On a bigger scale, Canada is now recognized globally for something other than maple syrup and “eh!”
Of course, none of this means that there are no risks to Canada’s banking system. Forty-year mortgages (specifically, their minimal down payments and extra years of interest) are just one example of the potential threats that have crept inside our borders. What are we, England? Personal bankruptcy rates in Canada have also been rising at an increasing rate and calls to Credit Canada, a credit counsellor, were up thirty-five percent in January. But even with these worries, we’re much better off than every other country in the world, and we should be proud of it. Even Obama thinks so.