FW: CANADIAN BANKS - NY TIMES FEB 27th
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By THERESA TEDESCO
Published: February 27, 2009
Toronto
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Jeff Jackson
Related
Times Topics: Nationalization
of Banks
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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