[lbo-talk] The Canadian banking model

Michael Pollak mpollak at panix.com
Sat Feb 28 04:20:32 PST 2009


[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.



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