This article looks at the basic reasons why the Canadian banking system was recently judged by the World Economic Forum to be the soundest in the world. It does so by first examining the basic functions of a financial system and what Canadian banks are allowed to do as intermediaries within that system. It then considers the market structure of Canadian banking and the role of the Canadian government in regulating the financial system. It finishes with a discussion of the four basic management areas of any financial institution: liquidity management, asset management, liability management and capital management. On all dimensions the Canadian banks seem to be conservatively managed, well regulated and operating in a benign economic environment without obvious systemic risks, mainly due to the absence of a competing ‘parallel’ intermediation system as exists in the United States.