[A-List] The Great Solvent North
shimogamo at ashisuto.co.jp
Mon Mar 2 04:53:09 MST 2009
by Theresa Tedesco
New York Times Op-Ed (February 28 2009)
Toronto - Has the world turned upside down? America, the capital of
capitalism, is pondering nationalizing a handful of banks. Meanwhile,
Canada, whose banking system had long been notorious for its stodgy
practices and government coddling, is now being celebrated for those
The Canadian banking system, which proved resilient in the global
economic crisis, is finally getting its day in the sun. A recent World
Economic Forum report ranked it the soundest in the world, mostly as the
result of its conservative practices. (The United States ranked fortieth.)
President Obama has joined the adoring throng. He recently said that
Canada has "shown itself to be a pretty good manager of the financial
system in the economy in ways that we haven't always been here in the
United States". Paul Volcker, former chief of the United States Federal
Reserve, commented that what he's arguing for "looks more like the
Canadian system than the American system".
Most people don't know that the vision behind Canada's banking system,
made up of a few large, national banks with branches from coast to
coast, actually had its beginnings in the United States. Canada's system
is the product of a banking framework inspired by Alexander Hamilton,
the first American secretary of the Treasury. Hamilton envisioned the
First Bank of the United States, chartered in 1791, as a central bank
modeled on the Bank of England.
Canadians found inspiration in Hamilton's model, but not all Americans
did. In the 1830s, President Andrew Jackson opposed extending the
charter of the Second Bank of the United States, perceiving it as
monopolistic. Money-lending functions were then assumed by local and
state-chartered banks, eventually giving rise to the free-market,
decentralized system that America has today.
Today, Canada's system remains truer to Hamilton's ideal. The five major
chartered banks, the few regional banks and handful of large insurance
companies are all regulated by the federal government. Canadian banks
are relatively constrained in the amounts they can lend. Canadian banks
are required to have a bigger cushion to absorb losses than American
banks. In addition, Canadian government regulations protect the domestic
banks by limiting foreign competition. They also keep banks broadly
owned by public shareholders.
Since Canada's financial services sector was deregulated in 1987,
permitting the banks to buy brokerage houses, they have enjoyed vast
earnings power because of their diverse businesses and operations. And
in contrast to the recent shotgun marriages at bargain prices between
ailing Wall Street brokerages and American banks, Canadian banks paid
top dollar decades ago for profitable, blue-chip investment firms.
Canadian banks are known to be risk-averse, and this has served them
well. While their American counterparts were loading up their books with
risky mortgages, Canadian banks maintained their lending requirements,
largely avoiding subprime mortgages. The buttoned-down banks in Canada
also tended to keep these types of securities on their books, rather
than packaging them and selling them to investors. This meant that the
exposures they did have to weak mortgages were more visible to the
The big five Canadian banks - Royal Bank of Canada, Toronto-Dominion
Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank
of Montreal - survived the recent turmoil relatively unscathed. Their
balance sheets remain intact and their capital ratios are comfortably
above requirements. Yes, Prime Minister Stephen Harper's government may
buy as much as 125 billion Canadian dollars (about $100 billion) worth
of mortgages, increasing banks' capacity to lend. But this is small
change compared with the scale of Washington's bailout.
Few would have predicted that Canadian banks, long derided as among the
least autonomous because of stringent government oversight, would emerge
from the global mayhem as some of the more independent international
Since Mr Obama seems to admire the Canadian banking system, his
administration might want to take a page out of its playbook.
This would entail building a national banking system based on a small
number of large, broadly held, centrally and rigorously regulated firms.
Imitating the Canadian model would require sweeping consolidation of
American banks. This would be a very good thing. Washington had
difficulty figuring out the magnitude of the financial crisis because
there are so many thousands of banks that it was impossible for
regulators to get into all of them.
Washington is already on the path to achieving consolidation.
Eventually, some of the larger banks into which the government is
injecting taxpayer money will probably be deemed beyond help, and will
either be allowed to die or be partnered with other banks. The market
will take its cues from this stress-testing, and make its own bets on
which banks will survive. It's hard to predict how many will have
survived when the dust settles, but the new landscape might consist of
only fifty or sixty banking institutions. More radically, Washington
could take over the licensing of banks from the states, or, at the very
least, consider more stringent regulation of global and super-regional
banks. After all, the Canadian system is considered successful not only
because it has fewer banks to regulate, but because regulation is based
on the tenets of safety and soundness.
There is no time to waste. Reconfiguring the American banking structure
to look more like the Canadian model would help restore much-needed
confidence in a beleaguered financial system. Why not emulate the best
in the world, which happens to be right next door? At the very least,
Hamilton would have approved.
Theresa Tedesco is the chief business correspondent for The National Post.
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