The Impact of the Subprime Crisis on Canadian Banks’ Stock Returns

This paper analyses the impact of the United States' (US) subprime crisis on Canadian banks' stock returns, using event study methodology. Our results suggest that despite their holdings of US toxic (subprime) mortgage-backed assets, Canadian banks have been solid in the face of the subprime crisis and the global 2007-2008 financial crisis. In spite of the huge 2007-2008 US financial turmoil, characterized by the failure of many financial institutions, Canadian banks' stock returns were not negatively impacted by subprime events before March 14-16, 2008; more than a year after the beginning of the crisis. The fear of contagion coming from the US has been very limited. As shown by the CIBC case — the most exposed Canadian bank to subprime assets — the situation has been very well managed by banks. Moreover, the Government of Canada Insured Mortgage Purchase Program and Canadian Lenders Assurance Facility had been very helpful, and had positively impacted Canadian banks' stock returns