Banking, Canadian-Style
David Leonhardt, interviewing Barack Obama, asked the president about trying to limit the scale of banks to which Obama replied “I’ve looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don’t separate between investment banks and commercial banks, for example.” Leonhardt intervened and said “Like Canada?” And then Obama said “Canada being a good example. And they’ve actually done a good job in managing through what was a pretty risky period in the financial markets.”
This is all well and good, but aside from being financial supermarkets, the Canadian banking situation is really extremely different from ours.
The Canadian financial sector is dominated by the “big five” banks that all enjoy “tier one” regulatory status. And while these banks are financial supermarkets, and they’re quite big relative to Canada, Canada is a relatively small country so the banks themselves are modestly sized compared to the largest American financial institutions. So when considering the relevance of the Canadian model to the question of whether or not the United States is interested in limiting bank size we need to try to be clear on what we’re envisioning. The US is about ten times the size of Canada.
If we’re envisioning a sector dominated by fifty financial services supermarkets each of Canadian-style size, then we really will need to break up some of the existing conglomerates. But if we’re talking about consolidating the United States into five financial supermarkets, then we’re talking about making some banks much bigger than current American institutions. Alternatively, if we’re not talking about doing either of those things then we maybe need to ask ourselves how relevant this Canadian example is.
Another point is that one issue any country is going to face if it implements Canadian-style levels of regulation is that bank managers will complain that they’re being rendered internationally uncompetitive. In Canada, this is addressed through regulatory limits on the extent to which foreign banks can compete with Canadian banks, on restrictions on foreign ownership of Canadian bank equity, etc. I haven’t heard anyone in the United States talk about doing anything like that. Which is, I suppose, fine. But as I understand it those limits on international competition are integral to the sustainability of the Canadian banking model. So if we’re going to reject them, then we need to put it aside as a good analogy of what we’re aiming at.
33 Responses to “Banking, Canadian-Style”
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May 1st, 2009 at 1:20 pm
Um, so what exactly is Matt’s anti-big-bank argument supposed to be about?
Market share/too-big-to-fail? Then it would seem the Canadian example is still relevant.
Political clout? Again, it would seem the Canadian example would still be relevant.
Also, why is Matt so quick to grant that we should allow U.S. banks to be poorly regulated in order to make them internationally competitive? And aren’t they going to make the same argument about economies of scale? So either way, you are going to have to override this concern.
I honestly believe Matt isn’t thinking clearly on this subject.
May 1st, 2009 at 1:21 pm
Why do we give a crap whether our banks are “internationally competitive”? That affects only the bonuses paid to their executives- not their ability to serve their real intermediary function in our economy. And it’s the kind of “thinking” that got us in trouble in the first place. Let’s start worrying less about the financial sharpies and more about being internationally competitive in PRODUCTIVE industries.
Good old 3-6-3 banking is the only kind we should be concerned with.
May 1st, 2009 at 1:28 pm
At this point, don’t C, BAC, Morgan Stanley, Goldman-Sachs, and Wells Fargo account for something like 70% of US banking? I think we are talking about something like increasing the size of each of these banks by 20% or so.
May 1st, 2009 at 1:29 pm
I honestly believe Matt isn’t thinking clearly on this subject.
Yeah on one hand he belives it’s a bad analogy b/c the Canadian economy is smaller than America’s, on the other hand he likes the Swedish model analogy even though the Swedish economy is vastly smaller than America’s. It don’t compute.
May 1st, 2009 at 1:36 pm
Nicholas Beaudrot,
Last I knew each bank held less than 10% of U.S. deposits, although that may have changed recently.
May 1st, 2009 at 1:41 pm
Canada is a relatively small country so the banks themselves are modestly sized compared to the largest American financial institutions.
Oh Matt, sometimes you don’t do any research at all, do you? Of the ten biggest banks in North America, four are Canadian.
Royal Bank, Canada’s biggest bank by assets, is now seventh- largest in North America after tripling assets in the past decade, according to data compiled by Bloomberg from company filings. Toronto-Dominion, Scotiabank and Bank of Montreal rank eight, ninth and 10th. At the end of 2007, Toronto-based Royal Bank was the sole Canadian firm among the top 10.
Sensibly regulated Canadian banks climbed the rankings pretty quickly as American banks fell apart around them. “Canadian-style regulations” have proven themselves to be impressively internationally competitive.
Admittedly, our top five are modestly sized when compared to your remaining top five banks. Of course, our top five have received no bailout money and are unlikely to need any in the future.
May 1st, 2009 at 1:48 pm
Well you show a remarkable lack of knowledge in the field- as someone with first hand experience I will say two things: 1) Canadian banks are extremely conservative and I doubt they would have fallen for naked CDS; 2) they are much bigger than one would think with a global presence rivaled by few countries (e.g., Spain, Switzerland, USA, UK). See Value Line’s section devoted exclusively to this field- Canadian banks.
May 1st, 2009 at 2:04 pm
“Another point is that one issue any country is going to face if it implements Canadian-style levels of regulation is that bank managers will complain that they’re being rendered internationally uncompetitive. In Canada, this is addressed through regulatory limits on the extent to which foreign banks can compete with Canadian banks, on restrictions on foreign ownership of Canadian bank equity, etc. I haven’t heard anyone in the United States talk about doing anything like that.”
I think you need to take a step back and look at the specifics of what we’re really talking about here. In this case “Canadian-style levels of regulation” refers to capital requirements and other forms of regulation limiting the degree to which a firms can leverage it’s assets.
Yes, in the absense of other countries adopting sensible regulations in this area, it has been necessary for Canada to create a second-order regulatory regime to prevent foreign firms that are leveraged to the hilt to crowd out Canadian firms and thus effectively circumvent this regulatory structure, but it would be an entirely different kettle of fish if the US indicated they wished to move in the direction of serious limitations on leverage.
If the US adopted reasonable leverage restrictions the rest of the world–or at least those countries that want to be financial integrated with the US, i.e. invest in US banks–might well move in the same direction. At that point foreign ownership restrictions would no long be necessary, because we’d all be playiong by the same basic set of rules.
That being said, in any “Big Five” model I think you still need a more coherent and predictable system for conducting bank restructuring in the–much more unlikely event–that a mjor bank does fail. Furthermore, I think Canada desperately needs to encourage the growth and merger of credit unions to serve as a competitive check on our oligopolistic banking market.
May 1st, 2009 at 2:18 pm
It’s also important to note that despite the fact that the Big 5 Canadian banks are permitted to engage in investment banking, they rely much more heavily on deposits (and less on bonds and other tradeable liabilities) than the US banks. Each of the Big 5 rely on deposits for at least 63% of liabilities (and two are over 70%). In contract, Citi’s deposits are only 41% of its liabilities, B of A’s only 46%, JPM’s 50.2%. Only Wells Fargo (at 65%) is in the range of the Canadian Big 5. This has significant implications for systemic risk, since much of the danger of a “run” can be contained through deposit insurance. Also, the big reason why it matters (to the degree that it is true) that the Fed and Treasury (and the FDIC) lack resolution authority over bank holding companies and financial service holding companies is that if they just put the deposit taking operations of Citi or B of A into receivership, there would be a sudden run on their tradeable liabilities (ala Lehman), which are held as assets by other banks, insurance companies, pension funds, corporations, etc. This suggests to me that the PPIP approach would be a lot better if it was dedicated to buying up the tradeable liabilities of the big banks, and not their toxic assets. Then, FDIC could put the deposit taking parts of a troubled bank into receivership and the PPIPs could effectively impose debt-for-equity(in the non-deposit taking operations) swaps on the remaining creditors through an expedited bankruptcy. Plus, having the PPIPs buy up the tradeable liabilities (and to stand ready to do so in case of a run) would effectively contain systemic risk attendent to a bank reorganization. And this series of moves would in all likelihood produce a separation of commercial from investment banking, prefiguring the set up we would ideally get from reregulation.
May 1st, 2009 at 2:22 pm
Ian,
Although to be fair, if the U.S. banking industry concentrated into five big banks, they would each be considerably bigger than the biggest Canadian bank. In fact, one of the reasons the Canadian banks have gotten bigger lately is that they are acquiring U.S. assets.
But I also don’t see what this has to do with any of the supposed reasons Matt was against big banks.
May 1st, 2009 at 2:26 pm
One other big picture thought: I’ve been criticizing the poorly-reasoned anti-big-bank arguments Matt has been offering in part because I am afraid this issue will distract us from the real issue, which is the need to put in place much stricter banking regulations. And for good or ill, Matt made that argument for me in this post, by implying that he would be willing to trade away “Canadian-style levels of regulation” in return for getting the smaller banks he desires.
May 1st, 2009 at 2:28 pm
Commercial banks are agents of the federal government, other financial institutions are not.
Commercial banks need to be separate (as Glass-Steagal provided) so as to avoid the private/public confusion of mission.
May 1st, 2009 at 2:32 pm
And all I thought Barack Obama was saying was that we shouldn’t distinguish between investment and commercial banks. He didn’t comment on which other aspects of the Canadian model he liked. I don’t know what all the fuss about bank size is about since he didn’t mention regulating bank size.
May 1st, 2009 at 2:51 pm
I thought Matt’s characterization of the Canadian banking scene was pretty decent. There’s a lot going on up here. It’s not easy to sum up.
It was a lot better than what you read in the average newspaper up here. But really … who cares? Canada wins. Not because of our banks are better, but because we consistently and unceasingly produce superior divas. Our diva output crushes!!
Shania Twain
Avril Lavigne
Celine Dion
Alanis Moressette
Emily Haines
Fiest
Nelly Furtado
Look out America!!
May 1st, 2009 at 3:18 pm
Well lookie that, until yesterday I worked in that building!
(for some reason I keep thinking “they took our jobs!” in South Park voice
that’s all, I have no opinion on the merits of our banking system vs the American one.
cheers!
May 1st, 2009 at 3:25 pm
The idea is to have banks that don’t go broke every time there is an economic downturn.
Canadian banks clearly can withstand at least a level 4 hurricane. Our banks get blown to bits in a gentle breeze.
Take some bailout money and launch a study. Figure out what the fuck they are doing up there in frozen North.
@14 wsam: Whatever happened to Rene Doucet? Would you consider him a diva? Best anthem singer ever. As soon as I heard his voice I got depressed, I knew my team was about to get spanked once again in the Forum.
May 1st, 2009 at 3:48 pm
“And for good or ill, Matt made that argument for me in this post, by implying that he would be willing to trade away “Canadian-style levels of regulation” in return for getting the smaller banks he desires.”
Actually a lot of us are for this. I mean, it seems the split is over people who favor one of the following:
Given how large corporations are routinely able to railroad regulators, Option 1 represents no real change.
For real change, we need to dramatically change the structure of the institutions themselves.
May 1st, 2009 at 4:21 pm
@2 Steve LaBonne: “Good old 3-6-3 banking is the only kind we should be concerned with.”
The old 3-6-3. It is a concept embraced in Canada in more than one area. For instance, many CFL teams have used variations of the 3-6-3 defense. It allows flexibility in coverage schemes and blitz packages. Highly important when you have to defend the pass every down. The Canadians. Love ‘em.
On a more serious note, you are absolutely correct. 3-6-3 banking is a beautiful concept. The trick is to hire bankers who love golf. How much damage can you do when you are on the golf course by 3:00 pm?
May 1st, 2009 at 4:42 pm
I am curious about Canadian “restrictions on foreign ownership of Canadian bank equity.” In today’s economy of multinational corporations, how can they know what countries are represented by the investor in their banks?
Apparently US banks may be owned by any investor worldwide. Might the veiled presence of oil rich nations on the boards of these banks explain decisions that don’t make sense otherwise?
The SEC should know what proportion of US banks are controlled by foreign based entities as a matter of national security, in spite of probable claims of “proprietary information.”
May 1st, 2009 at 4:48 pm
On the diva front let’s not leave out Diana Krall, the pride of Nanaimo, B.C., and (ugh!) Celine Dion!
May 1st, 2009 at 4:50 pm
oops! Pupface was in wsam’s list!
Anyway, you guys down south can have HER!
May 1st, 2009 at 4:58 pm
Glass-Steagall is more of a symbol for financial regulation than a useful regulatory model for the future. Until the 1980s, most people put their savings (including retirement funds) into banks, S&Ls, etc., so the commercial banks could fund loans from their deposit base. Deposit insurance was a primary factor, which became less significant with SIPC insurance and the substantially larger yields in the securities markets.
From the 1980s (with money market funds and the enormous growth of mutual funds), the securities markets have most of the money, which has resulted in securitization (commercial banks make loans, sell the loans into the securities market to get new capital from which to make new loans). Glass-Steagall basically was obsolete at the time of its repeal.
If Glass-Steagall is re-imposed, how do you get investors to put their money in banks rather than the securities markets ? If not, what other regulatory schemes will work — size restrictions arguably address the “too big to fail” concept but it’s easy to see those restrictions getting loosened over time.
May 1st, 2009 at 5:16 pm
The dual-banking system in the US (parallel federal and state charters and regulations) doesn’t apply in Canada, does it? I’m pretty sure that all Canadian banks are under the purview of Ottawa.
May 1st, 2009 at 6:13 pm
Hey max424,
I think you are referring to the late Roger Doucet. Yeah, he was great… as were the Habs.
The greatest problem American banks will have in trying to imitate the format of Canadian banks will be to provide service in both English and French. Or to have such nicely coloured money.
May 1st, 2009 at 6:27 pm
You mean why would they own bank stock? The same reason they would own any other stock.
May 1st, 2009 at 6:36 pm
I certainly agree with stricter regulations. But tell me, DTM, do you think deposit-accepting institutions — where Americans put their checking and savings — should own insurance companies, credit companies, car companies, etc.? Should the allowed to perform the functions that investment banks traditionally performed? What is the advantage to me as a depositor or as a taxpayer in allowing banks to do these things?
May 1st, 2009 at 7:03 pm
This is my last comment on this thread. I voted for BHO and support most of what he has done in his first 100 days. But the approach to the banking crisis is a motherfucking disgrace — an extension of Paulsen’s approach, about what we would have gotten under Bush.
There is NO defensible reason — economic or otherwise — to allow deposit-holding institutions to engage EVER AGAIN in any of the risky so-called investments that got our biggest institutions in trouble. The notion that stricter regulation will solve the problem not only ignores human nature but also the fact that our government is owned (politically) by the banks.
Our economic system desperately needs an institution that holds deposits and makes safe loans to families and business — totally uncompromised by the so-called “innovation” created by Wall Street. There are plenty of institutions that exist to invest for higher returns with more risk. Banks are — or should be — different.
Summmers and Geithner reject this. They are part of the problem, not part of the solution.
May 1st, 2009 at 10:41 pm
There are a couple of things I need to say:
kd lang
Joni Mitchell
Sarah McLaclan
AND
The Canadian banks are more like provincial governments or federal ministries than anything else. They are highly regulated, federally chartered, and all about compliance. They have a license to print money year in and year out.
Over the last 20 years, they have begun to seek less well regulated markets with higher returns. They bought US banks (BankNorth, Centura). They bought brokerage houses. They sold mutual funds and insurance policies.
But everything they touch turns low return, low risk. They can’t do anything else.
Except for CIBC, which has gotten itself into a big mess repeatedly for acting like a US bank.
May 1st, 2009 at 11:12 pm
@19 Maybelle Stearns: “Might the veiled presence of oil rich nations on the boards of these banks explain decisions that don’t make sense otherwise?”
You mean like a single Saudi prince owning 36 percent of Citigroup? We aren’t bailing out American banks. We are bailing out the worlds most influential Capitalists, who by definition, don’t give a flying fuck about their country of origin. Their loyalty is to their beloved system.
We need a National Bank. A 3-6-3 bank. A Canadian style bank. A conservative bank. A bank that represents the National interest. We need a People’s Bank that stands apart, stands in stark contrast from the psycho banks we are bailing out.
The United States Savings and Loan, run by the United States for the people of the United States. Let the rapacious Masters of the Universe whine that they can’t compete with an institution that plays fair and square. Fuck them and their Casino. Let them rot.
May 1st, 2009 at 11:32 pm
@28 Alison: Lang, Mitchell, and McLaclan are Canadians? Damn, I didn’t know that. Is there anything those people don’t do well?
I got it. Canadians are tearing up their prairies in order to extract the black gold, leaving nothing but poisonous muck; all to feed their gluttonous neighbor to the south. They caved in, didn’t they. Afraid of invasion, no doubt.
Can’t blame ‘em. Retain national sovereignty and remain the number one country in the world! Top 5, anyway. Norway, Sweden, Denmark, Finland, and Canada, the Nordic countries.
May 3rd, 2009 at 12:31 pm
[I]t seems the split is over people who favor one of the following:
Option 1: Big Banks & Big Regulation
Option 2: Small Banks and Big Regulation
But my point was that Matt seemed willing to sell out “Big Regulation” (aka “Canadian-style levels of regulation”) for small banks. So Matt was heading for Option 3: Small Banks and Small Regulation. I would note he has hinted at this before, suggesting he would be willing to institute a sliding scale of regulation where smaller banks would be less regulated than bigger banks. And those of us who know about the Savings & Loan Crisis, Great Depression, Panic of 1893, and so on understand that isn’t such a hot idea.
Given how large corporations are routinely able to railroad regulators, Option 1 represents no real change.
And yet it worked in Canada, and in the U.S. for about fifty years. I also think this supposed advantage of smaller banks is overblown: as multi-billion-dollar enterprises they would still be fully capable of heavy lobbying on an individual basis, and moreover could act collectively through trade associations.
But tell me, DTM, do you think deposit-accepting institutions — where Americans put their checking and savings — should own insurance companies, credit companies, car companies, etc.? Should the allowed to perform the functions that investment banks traditionally performed? What is the advantage to me as a depositor or as a taxpayer in allowing banks to do these things?
This is a complex question. There are boring versions of most of these functions that could be combined with ordinary deposit-and-lending banking in a way that may well reduce the overall financial risk those firms would face. That could be good for depositors and borrowers, basically by reducing the necessary average spread between deposits and loans, and in theory it could minimize the frequency of bank failures as well.
On the other hand, as we just learned (or rather relearned), there are esoteric versions of most of those functions that when combined with ordinary deposit-and-lending banking can increase the overall financial risks of the firms. Which is bad.
So I see us as having two choices. We could just go back to keeping deposit-and-lending firms separate from other financial firms, accepting this as a second-best solution from the perspective of the costs of this system and the frequency of bank failures. Or we could let these firms diversify, but only in limited and heavily regulated ways.
May 3rd, 2009 at 9:00 pm
A Canadian bank (TD) has its name on the Boston Celtics arena, and, until 2006, also on the Orlando Magic arena. Also, I can report from firsthand observation that CIBC, RBC, and BMO have offices in New York, London, Tokyo, and Chicago. Not sure about TD and Scotia.
May 4th, 2009 at 11:00 am
I think it’s a good banking system, Thanks a lot.