Canada weathered the financial storm thanks largely to a robust and well-regulated banking sector. As the country hosts G8 and G20 summits this month, can it offer world leaders a more reliable economic model?

The sheer scale of new, gleaming glass and steel high-rise buildings in Toronto is striking. Standing next to the towering skyscrapers of Bay Street, the heart of the city's financial centre, construction sites lead down to the spectacular C$1.5bn (£1bn) development of the enormous waterfront. Few places in the world are putting that level of investment into new developments and they are all testament to Canada's strong economy, which has come through the global financial crisis without bank bail-outs, the only G7 country to do so.

This month the nation will host both the G8 and G20 summits and Canadians will be keen to show visiting leaders what lessons the rest of the world can learn from them. Canada, often seen as boring and unadventurous, has emerged robust from the slowdown, with one of the soundest economies anywhere, mainly due to rigid financial regulation.

"We have had no bank failings and we have established ourselves on the global stage as having a very stable financial services sector because of this tight regulation. Companies used to bemoan this regulation, but now that they have escaped unscathed we are waiting for them to send us flowers," says Sandra Pupatello, Ontario's minister for economic development and trade.

For once Canada, perpetually standing in the shadow of the US, can compare favourably to the superpower next door. And with the potential to emerge as a new petrol power—the oil sands of Alberta are said to make Canada the second-largest source of oil after Saudi Arabia—it is no wonder the country is on a high.

Today four of the world's top banks are Canadian—quite an achievement given the country has just six major banks—and Toronto's booming financial services sector employs 230,000 people. As in many other countries, manufacturing has declined as the financial sector has grown. Pupatello is keen to spread the message and attract more business. "We have to take advantage of this opportunity because we have the whole world looking at Canada asking, 'how did that happen?'," she says.

Part of the answer is that Canada is a smaller market and easier to control. "We don't have thousands of banks so there is an easier and less formal relationship between the banks and the regulator," explains Janet Ecker, president of the Toronto Financial Services Alliance, a public-private partnership. "There are always complaints from a sector about a regulator, but it has been a strong relationship and they have pushed the risk agenda hard, and that has been very helpful."

Canada's healthy economy is explained by the presence of a powerful regulator, the Office of the Superintendent of Financial Institutions, which keeps watch on financial bodies. Higher capital requirements and a strict leverage cap have limited the activities of banks and, crucially, those requirements apply equally to commercial and investment banks. Another key factor is a well-regulated mortgage sector—large downpayments and home loans are insured by government, leaving little risk for banks.

Ashley Prime, deputy consul general of the British Consulate in Toronto, says this framework is in tune with the national culture. "Canada is a conservative place and it is risk-averse," he says. "There was a huge credit crunch here in the early 1990s and the economy was in freefall, but this time, because they were tightly regulated when everybody was going off on this Wild West show, their banks are making billion-dollar profits now."

It is unsurprising then that even bankers seem content with heavy regulation. Colleen Johnston, chief financial officer of TD Bank, calls it "smart". "In the US you have regulators that live with you every day, but in Canada it is much more principles-driven. In rule-driven environments people always find ways around the rules, so I think it has been very smart regulation here," she says.

Barbara Stymiest, group head of strategy, treasury and corporate services at Royal Bank of Canada, the country's largest, acknowledges that tight regulation disadvantaged Canadian banks. "On the other hand, we saw transactions that we just didn't understand and deals done with such narrow spread that they were well outside our risk appetite, so we were stepping back anyway," she says.

"The leverage cap was important to keep the Canadian banking balance sheet strong and, of course, in the US there was no such cap on investment banks. We are now seeing that the highly leveraged European banks have run into trouble, with most of them in deleverage mode and not really at the table on deals now."

Johnston shares her view. "In 2005, we made a strategic decision to exit our complex structured products outside North America and that was a profitable business for us. We did not understand the products well enough in terms of risks and transparency, and we had to ask ourselves how we would be affected if we ran into difficulties," she says. "We want to make investments with a good return and where our shareholders sleep well at night."

Ecker, though pleased that rigid regulation secured the economy while other countries were forced to bail out banks, insists no one is feeling smug. "We dodged a bullet and we can't rest on our laurels," she says. "There is a determination to capitalise on the knowledge and expertise in risk management, and to export this talent."

Stymiest says this is the right approach. "I think it is a very good initiative from a policy perspective to augment risk-management skills in this country. We describe part of our success as risk management and I hope we can become an exporter of risk-management talent."

But does a cautious, conservative approach and successful risk-management leave room for entrepreneurialism? Dr Ilse Treurnicht, chief executive of the MaRS innovation centre in Toronto, denies Canada lacks entrepreneurial spirit. "Our entrepreneurial ecosystem is younger so what we miss are the serial entrepreneurs who have started four or five companies," she says. "We still build our young tech companies with first-time entrepreneurs and inexperienced management teams, so a big part of what we do is to try and give them the right support so they can be successful and go on to become serial entrepreneurs."

MaRS, housed on the former site of Toronto General Hospital, where the first clinical trials of insulin took place in the 1920s, was created to focus on commercialisation of innovation but also to build a new generation of businesses. "The model is to bring together technology and social innovation with capital and business," says Treurnicht. Many businesses there follow in the long tradition of a strong life sciences sector—there are five hospitals in two city blocks and the district has the world's largest concentration of stem-cell scientists.

Treurnicht believes the problem is that Canadians don't invest enough in their companies. "Even though you can develop a company more cost effectively in Canada at pre-revenue stage, once they have to go into market it is very difficult for them to compete because we underfund them. The amounts invested by VCs are a lot smaller than those invested in the US and it just makes it so much harder to compete," she says. "Short-term availability of new capital is a real problem for a young company."

Ecker, too, mentions the lack of venture capitalists. "There are simply not enough rich people in Canada and we are pressing to make it more open to foreign venture capitalists to come here and invest," she says. "We need more stories like RIM (Research in Motion)," she adds referring to the producer of BlackBerry (see below).

To find more success stories such as RIM, surely better access to capital is needed? Ecker defends the banks' lending policies. "Some sectors would say that it is tough to get a loan, but banks have tried to keep lending even through the downturn," she says, noting that financial institutions are not obliged to lend to businesses. "It is a decision for the banks who they lend to."

Stymiest at Royal Bank says that usually the right companies secure capital. "There will always be a lot of noise around companies that can't find equity finance and bank credit, and that noise will never go away but you have to remember that bankers don't like to make bad loans and VCs don't like to make bad investments, so the noise tends to come from the unbankable or the uninvestable."

But for Treurnicht a key challenge for Canadian entrepreneurs is to promote themselves better. "Canadian entrepreneurship, like European entrepreneurship, looks and feels different from what it looks like in Silicon Valley. Often when companies go to raise funds in California we have to coach them to be more aggressive. We are a little understated and that is one of our challenges," she says. Prime agrees: "They are understated and that is typically Canadian. Who, with millions of BlackBerry users around the world, knows that they come from RIM in Canada? Not many because they don't shout about it," he says.

Canadian banks may have survived, but changes still need to be made. Bank bosses took voluntary pay cuts and shareholders now vote to approve bonuses. The cautious, conservative culture extends to remuneration packages. "The investment banker in Wall Street will make more than the investment banker in Bay Street, but the banker on Bay Street still has a job," says Ecker.

"Some people will say that if the music had kept playing another year or two some institutions might have been tempted to get involved in risky business—they did leave value on the table and they were criticised for that. If things had kept going for another year, would they have changed? I don't know, but we are where we are."

Canada's Silicon Valley

When Mike Lazaridis dropped out of Ontario's University of Waterloo a month before the end of his degree few would have predicted that the company he then set up would become the top seller of smartphones.

Lazaridis, set up Research in Motion (RIM) on campus in 1999 and by 2009 he employed 14,000 people and had shipped 75 million BlackBerry phones, with the company boasting 390 per cent growth year on year.

The University of Waterloo sits at the heart of the Waterloo Technology Triangle, an hour-and-a-half to the east of Toronto. The university's core areas have always been science, engineering and mathematics, and it works closely with tech businesses in the area.

One third of ideas that have spun out of Canadian universities started at Waterloo and tech giants scour the area for recruits. Nine per cent of Microsoft employees attended the university. And the national Globe and Mail newspaper has called the campus "the cultural and economic model for Canada".

Drew Knight, director of international programs, says: "We are trying to develop a culture of innovation, but at the same time focus on commercialisation, and help and support for start-ups."

The area features business accelerator centres, hosting about 20 companies dedicated to entrepreneurs. Here, they have access to lawyers, accounts services and resident entrepreneurs, who advise and support start-ups.

RIM is one of the biggest employers in the technology triangle, which over the past 20 years has become an enormous tech area with 87,000 people working there.

The university offers the world's largest co-op programme, where students alternate between study and paid employment, with half of all students (13,000) enrolled in 100 programmes. It employs 100 people alone just to search for jobs for co-op students. RIM is the largest employer of co-op students.

Tom Jenkins, executive chairman and chief strategy officer of software giant Open Text, another university spin-off, highlights the ability to work well together as a reason for the success. "Canadians are good at collaborating and learn it from an early age, and the Waterloo area is a good indicator of that," he explains. The innovators of Waterloo now think it is time to shift the focus.

"There is a rise in new forms of entrepreneurship and this is our time," says Eugene Roman, chief technology officer of Open Text. "People ask me 'what is happening in California?', but really they should be asking 'what is happening in Canada'."