Can the Canadian banking model work for the U.S.?

No, and Simon Johnson explains why.  Excerpt:

Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense.  We would need to merge our banks into even fewer banking giants, and then re-inflate Fannie Mae and Freddie Mac to guarantee some of the riskiest parts of the bank’s portfolios.  With our handful of new “hyper megabanks”, we’d have to count on our political system to prevent our banks from going wild; Canada may be able to do this (in our view, the jury is still out), but what are the odds this would work in Washington?  This would require an enormous leap of faith in our regulatory system immediately after it managed to fail repeatedly and spectacularly over thirty years (see 13 Bankers, out next week, for the awful details).  Who can be confident our powerful corporate lobbies, hired politicians, and captured regulators can become so Canadian so soon?

There is much more at the link, recommended.

Comments

While I agree that the Canadian banking system wouldn't work in the US, I don't necessarily think the article captures all of the real reasons why Canada did well and the US didn't.

It's been suggested that risk aversion is also in the culture of Canadian banks. Thus, leverage ratios may be higher in Canada, but that leverage is invested in safer assets. (AFAIK, Canadian banks had relatively little exposure to the problematic asset based securities that sunk a large number of US banks). There may be something in the low competition among Canadian banks that contributed to that (i.e. less competition = less incentive to take large risks to edge out competitors. Tyler - that falls into cultural economics doesn't it - care to comment?)

Also the real estate/mortgage market behaved differently in Canada. Mortgage insurance (mandatory for mortgages over 80% of the price of the house) is part of it. It's harder to default on a mortgage and you can't walk away from a mortgage here. I believe there are laws that more tightly regulate some of the sub-prime issues (no 'introductory' interest rates, etc.).

You can't talk about the differences between the mortgage business in Canada and America without talking about where the vast majority of defaulted dollars were lost in America: in the four Sand States of California, Arizona, Nevada, and Florida, with California accounting for a sizable majority of the nation's defaulted dollars.

As social scientist Daniel Patrick Moynihan used to say, if you want your state to have fewer social problems, you should drag it closer to the Canadian border.

Canadian banks were actually significantly more leveraged — and therefore more risky — than well-run American commercial banks...

Re: As social scientist Daniel Patrick Moynihan used to say, if you want your state to have fewer social problems, you should drag it closer to the Canadian border.

Hmm. Doesn't seem to have helped Michigan-- or New York for that matter.

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