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Canadian Banks Got Lucky


Bank of Canada

© d.neuman on

Andrew Coyne writes in that there is more to the relative success of Canadian banks than you hear about in the press. While many in the US think that these banks survived by sticking to the deposits and loans business, this is actually untrue—many of the banks bought out brokerages in the 90s. But there are important differences:
  • The “Fathers of Confederation” who put together the governmental structure of Canada decided to give federal charters to banks. As a result, there are now five major national banks with a century or more of experience, a broader base of depositors, and less vulnerability to local economies. In contrast, the US has over 8000 banks, many with very local reach.
  • Being nationally chartered, Canadian banks don’t have to wade through the patchwork of regional regulations that afflict the US system. It was often these regulations that motivated the US banks into making creative financial decisions.
  • All aspects of the Canadian financial sector, be it investing, banking, or insurance, are overseen by the same organization: the Office of the Superintendent of Financial Institutions (OSFI). This allows the OSFI to provide a stabilizing hand over the whole industry. The US has a separate organization for each component.
  • The OSFI isn’t rule–based, but rather steps in when it sees banks getting out of hand, and nudges them back into safer waters.
  • The OSFI is strictly concerned with minimizing risk, so banks are not pressured to give loans out (by governments anyway) to specific groups. That isn’t to say that Canadian banks didn’t get caught trying to make money on things like mortgage–backed securities, which cost them $20 billion (CAD) in write–downs.
  • And finally, Canadian banks got caught in a few crises in the early 80s and 90s: Third–world debt, and large real–estate project collapses. These weren’t large enough to cause any bank to fail, but they were definitely painful. And they were recent enough that the Canadian banks were still stinging a bit when the party down south started up.



April 6, 2009 - Posted by | Uncategorized

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