Canadian Exceptionism


Canada is one of the few countries without a major banking crisis.  Weirdly, this was also true in 1930.  I've seen this list of the success factors for Canadian banks in several places.  I want to believe it, but . . . doesn't seem to be as simple as "Canadian banks are more tightly-regulated".

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn't matter if a local housing market goes bust).

2. We don't have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don't have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can't just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn't describe those differences as "Canada is more regulated".

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

I don't find "they were more tightly regulated" a plausible explanation.  When you dig down, most of those explanations seem short on the actual regulations that accomplished this marvelous feat, or even an extraordinary risk management system, and long on glowering regulators putting the fear of God into snivelling bankers through sheer force of moral righteousness.  But more importantly, the banking crisis seems to be hitting almost every other country very hard even though they have very different bank regulators. 

The standard liberal response is that all of those regulators were in the grip of Anglo-saxon free market mania.  Maybe.  This Anglo-Saxon mania seems awfully broadly distributed, into countries that don't show much sign of it in other sectors of their economy.  More importantly, even if all of these countries had banking systems that were equally unregulated by some metaphysical metric divinable only by contributors to Crooked Timber, they were differently unregulated.  Yet countries with very different (assuming arguendo, all bad) regulatory systems were all hard hit.

But I don't find this list all that plausible either.  1-4 also describes Britain, indeed, much of Europe.  And the last item describes America--it's just people found cute ways to get around the insurance requirement with piggyback loans.

I hate to say it, but the best explanation I've heard comes from Canadian bankers, and people who have worked in/with Canadian banking.  It's that the Canadian bankers are, well, Canadian.  They're very conservative.  And they don't trust easy money.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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