Why are Canadian banks left unscathed?

Here is one MR reader request, from RW Rogers:

Is it true that Canadian financial institutions have been relatively unscathed by the recent worldwide economic turmoil and that they were relatively unscathed during the Great Depression? If yes, why?

The Great Depression is a straightforward story, here is an excerpt from Paul Kedrosky:

Despite being adjacent geographically and tightly connected economically, banks failed in Canada and the U.S. at very different rates. Specifically, no Canadian banks failed in the period, while more than 8,000 U.S. banks failed.

Why? Among other reasons is the different structure of the systems, with Canadian banks having a branch banking structuring, making them less tied to any specific region or customer. For their part U.S. banks in the period were larger in number but smaller in assets, with far more single-branch banks in the U.S. than in Canada (where there were virtually none). The larger branch network created resilience, not just in terms of assets but in terms of markets.

What about the noughties?  Nick Rowe makes some relevant points: Canada has fewer major banks and they are more tightly regulated, hold more capital, and housing is not encouraged so much by law.  It is harder to walk away from an underwater mortgage.  Here is Megan McArdle on Canada.  Simon Johnson explains why the Canadian model cannot work for the US.  Most significantly, the U.S. banking system is in part the Canadian banking system, not so much for deposits but for high-risk activities.  That makes Canadian banking look safer, but of course Canada as a country bears a lot of risk from when the U.S. banking system goes bad.


What is even the point of linking to Megan McArdle? If I wanted everything to be (shakily) framed as a substance of liberal-conservative talking points, I wouldn't be reading Marginal Revolution and other similar blogs.

It's best to link to McArdle when she is arguing a position 180 degrees opposed to whatever point you are making. Intelligent readers will know what you're getting at.

What about the argument that us Canadians are simply yet to experience our housing bubble?



everyone looks like a genius until prices go down.

Which they have to. Soon. At least in some places.

For instance, I live in Ontario. You can't buy a house close to where all the jobs are (Toronto/Mississauga/Brampton/Oakville) without paying a base price of $300k. So a lot of families are choosing to buy condos instead. There's a huge boom in condo sales at the moment at least in Toronto. This is troubling, in that it speaks to a housing inventory shortage. Yet there are no more places to build houses within a reasonable distance of jobs. So we densify. Which means we either give up the Canadian dream of owning a detatched home in the (rapidly disappearing) suburbs, or we all move to Saskatchewan and starve to death.

Vancouver is even worse. The market there is so hot (read: is bubbling) that you can't buy a house unless you're a millionaire.

I just barely am able to buy a townhome for my wife and I. Interesting times.

I recall reading a WSJ interview with a Canada finance minister last summer about the latest crisis. It seems they never bought the the hogwash that home ownership causes responsible behavior. Rather, they seemed to continue to hold the tried-and-true notion that responsible people buy homes. And they also recognized that for some people renting works well.

So instead of trying to overwrite ancient laws, they stuck with them. I wonder if that held true in the 30s as well.

My theory is that the Canadian financial sector self-selects for low-risk. Let's say that you are a young hotshot Canadian investment banker inclined to take higher risks in search of greater profits. Why would you stay in Canada when you could easily go across the border to the States and make a ton more money? Same language, same culture, minimal distance.

So my theory is the people who stay in Canada tend to be people who are less likely to take high risks, who are more willing to stay home even if it means lower money. And the financial sector they built reflects that. Lower risk, but probably lower profits.

Rohan said "Lower risk, but probably lower profits".

I'd change that to "Definitely lower profits, probably lower risk". One is easier to measure than the other.

This might be somewhat true however it's not that easy to move to the US. Some of us forced to stay in Canada not really by choice. Obtaining a visa to work in the US is difficult, even having a job offer is often not sufficient.

The great depression is anything but a "straightforward story."

Thanks, Tyler!

As a Canadian living in the US for the past few decades, I see the reason as Canadians being willing to tolerate regulation in general, as long as it's in the long-term best interest of the country at large. I agree with Rohan Verghese that Canadians are far less risk tolerant than Americans. The cost of more "sensible" regulations is the relatively lower reward when things are going well. Canada may be doing better right now because the US economy is in one of its troughs, but when the US economy is flying, Canada's never flies quite as high. Americans have little tolerance for regulation, whether it has long-term benefits or not, and a lot more tolerance for risk. They consider a minimum of regulation to be in the long-term best interest of the country. As a result, they either win big or lose big.

My experience while living in the US is that there always seems to be an industry sector (trucking, airlines, S&Ls, telecom/tech, mortgages/housing, financial, etc) that's going into the tank big time, often after it's been deregulated to some extent, which affects the entire economy as it does. It's as if it's a planned economic model that intentionally allows one sector to crash at a time, instead of having a major depression from them all crashing simultaneously. That doesn't happen to the same extent in other countries because they are regulated so they can't fail as catastrophically.

Pierre Burton said it best: "The difference between Americans and Canadians is that Americans will risk anarchy for grass-roots freedom." I don't believe most Canadians would consider he meant it as a compliment to Americans, but I've said it to a lot of Americans who take it as one.

Almost all Americans I know would take it as one.

Steve & Rohan pretty much nailed. Canada is extremely risk averse - a couple of friends tried to get start-up capital (for their admittedly very risky venture of publishing a general interest magazine in the nineties, and trying to get the necessary loans for the venture was like trying to pull teeth.

In the past decade, let's not forget all that oil.

Seriously? Two reasons: lower takeup of commercial paper and The CMHC.

MacLean's is less certain of the CMHC:

But are those not two examples of "regulation and oversight" in the broad sense of the term... some entity making sure nobody does anything really stupid in the best interest of all? Is it just accidental good fortune that Canadian banks are required by law to be backed by a significantly higher reserve ratio than US banks?

"Canada has fewer major banks and they are more tightly regulated"

They aren't more tightly regulated, thats nonsense.

I can't believe no one has referenced this yet. The WSJ had an article out this morning (3/29/11) on Canadian house prices. They did participate in the boom alongside most advanced economies, although not as quickly. Their financial crisis may be on the way though, with house prices having risen to 5.5 times disposable income. And if the bubble pops, Canadian banks will be among the first to bear the pain.
Article: http://online.wsj.com/article/SB10001424052748703784004576220994025363866.html

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