The Canadian Banking Sector: Trade-Off Between Competition and Financial Stability

While recognizing the merits of Canada's concentrated banking system, Morningstar DBRS views that increased competition across the sector could be encouraged without compromising financial security and safety.

-- Considered one of the most stable banking systems in the world, the Canadian banking sector is highly concentrated around the domestic systemically important Big Six banks, which account for about 95% of total bank assets in the country.

-- While the high degree of concentration has contributed to the stability of the Canadian financial system, it also results in barriers to entry that limit competition and lead to less choice, which can negatively affect Canadian consumers and businesses.

-- In our opinion, open banking, wider FinTech adoption in banking services, and payments system modernization are among the initiatives that could foster increased competition for banking and financial services.

“While the benefits are promising, we also recognize that there are some potential risks associated with the open banking industry and FinTech, including data privacy, cybersecurity threats, and fraudulent actions,” says Shokhrukh Temurov, Vice President, North American Financial Institution Ratings at Morningstar DBRS. “In our view, comprehensive risk management and technical frameworks supported by prudential regulatory and supervisory oversight will be instrumental to mitigate such risks.”