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The International Exposure of the Canadian Banking System

Author

Listed:
  • Christian Friedrich
  • Hanno Friedrich
  • Nick Lawrence
  • Javier Cortes Orihuela
  • Phoebe Tian
Abstract
Over the past decade, the six largest Canadian banks held an increasingly greater share of their assets and liabilities abroad, linking the Canadian banking system more closely to economic and financial developments elsewhere in the world. In 2023, the share of Canadian banks’ foreign assets and liabilities amounted to around 50%, with foreign exposures even exceeding domestic ones for some balance sheet items and calculations. Using a combination of regulatory and commercial data sources, we document Canadian banks’ foreign activities and provide an overview of potential vulnerabilities that may be associated with them. The following facts emerge: First, Canadian banks’ foreign activities differ considerably from their domestic ones. While Canadian banks engage domestically mostly with real sector entities, such as households and non-financial corporations, their most common counterparties abroad are non-bank financial institutions (NBFIs). To the extent that NBFIs or their behaviours might be less known to Canadian banks—for example, because of information asymmetries— a considerable exposure to such entities could constitute a potential vulnerability. Second, Canadian banks have sizable foreign currency and foreign country exposure to the US dollar and the United States, but also notable exposures to other currencies and countries. Third, we document the presence of an indirect foreign exposure channel for Canadian banks through lending to internationally exposed firms, even if these firms are domiciled in Canada and borrow in Canadian dollars. Lastly, we present a case study highlighting how Canadian banks have expanded internationally at times when banks of many other countries retreated.

Suggested Citation

  • Christian Friedrich & Hanno Friedrich & Nick Lawrence & Javier Cortes Orihuela & Phoebe Tian, 2025. "The International Exposure of the Canadian Banking System," Staff Working Papers 25-1, Bank of Canada.
    • Handle: RePEc:bca:bocawp:25-1
    DOI: 10.34989/swp-2025-1
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    References listed on IDEAS

    as
    1. Toni Ahnert & Kristin Forbes & Christian Friedrich & Dennis Reinhardt, 2018. "Macroprudential FX regulations: shifting the snowbanks of FX vulnerability?," Bank of England working papers 758, Bank of England.
    2. Ahnert, Toni & Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2021. "Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability?," Journal of Financial Economics, Elsevier, vol. 140(1), pages 145-174.
    3. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2020. "Emerging market economy exchange rates and local currency bond markets amid the Covid-19 pandemic," BIS Bulletins 5, Bank for International Settlements.
    4. Forbes, Kristin & Friedrich, Christian & Reinhardt, Dennis, 2023. "Stress relief? Funding structures and resilience to the covid shock," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 47-81.
    5. Andisheh (Andy) Danaee & Harsimran Grewal & Brad Howell & Guillaume Ouellet Leblanc & Xuezhi Liu & Xiangjin Shen & Mayur Patel, 2022. "How well can large banks in Canada withstand a severe economic downturn?," Staff Analytical Notes 2022-6, Bank of Canada.
    6. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    7. Auer, Simone & Friedrich, Christian & Ganarin, Maja & Paligorova, Teodora & Towbin, Pascal, 2019. "International monetary policy transmission through banks in small open economies," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 34-53.
    8. Chen, David Xiao & Friedrich, Christian, 2023. "The countercyclical capital buffer and international bank lending: Evidence from Canada," Journal of International Money and Finance, Elsevier, vol. 139(C).
    9. James Chapman & Halil Evren Damar, 2015. "International Banking and Liquidity Risk Transmission: Evidence from Canada," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(3), pages 455-478, November.
    10. Rohan Arora & Guillaume Bédard-Pagé & Philippe Besnier & Hayden Ford & Alan Walsh, 2021. "Non-bank financial intermediation in Canada: a pulse check," Staff Analytical Notes 2021-2, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G3 - Financial Economics - - Corporate Finance and Governance

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