[Can our Canadian friends elaborate on the idea that Canadian banks are "all broadly owned by public shareholders." Is that in any way different from the normal meaning of being a publicly owned company -- i.e., being entirely owned privately?]
[Rhetorically it's a nifty move to say that adopting the Canadian model would mean going back to Hamilton's original vision.]
http://www.nytimes.com/2009/02/28/opinion/28tedesco.html
The New York Times
February 28, 2009
Op-Ed Contributor
The Great Solvent North
By THERESA TEDESCO
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 very qualities.
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
40th).
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 marketplace.
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 players.
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 50 or 60 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.