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The coming depression blog | June 24, 2019

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The Mysteries of Finance: What Do Canadians Know that Americans Don’t?

HALIFAX, N.S. I have just arrived in Canada to participate in the Halifax International Security Forum and find myself suitably impressed with my surroundings.

It is my first visit north of the border in more than a decade and it is abundantly clear that the Canadian economy has been outperforming. The markets concur. Canada’s success is notably symbolized by, for instance, the Canadian dollar — the “loonie” — which is up more than 55 percent against the U.S. dollar in the last ten years. It is chastening to note that just since the beginning of the Wall Street crisis in late 2008 alone it has gained more than 25 percent.

So what do the Canadians know that Americans don’t? One thing surely is that you can’t have a healthy economy if you have a sick financial system. The fact is that the Canadian banking system has not suffered a serious crisis since the 1930s. Compare that to the pattern of rapidly recurring crises that have rocked the U.S. banking system since the 1980s.

So how do the Canadians do it? They believe unashamedly in firm regulation and, unlike most of the rest of the English-speaking world (perhaps their Francophone minority had something to do with this), they have generally refused to follow America’s lead in financial faddishness.

A key dynamic is the so-called “widely held” rule, a 1967 law that forbids concentration of ownership in banking. This has had the effect of greatly discouraging takeovers, which in turn means that bank managements are not under relentless pressure to prop up their short-term profits. Such pressure in the United States has led to all sorts of faddish activities which though they made produce good profits for a few quarters lead to disaster in the end.

The “widely held” rule has also greatly curtailed foreign banks’ expansion efforts and that has rendered the Canadian banking market an island unto itself. The Canadian Big Five, led by the Royal Bank of Canada and the Toronto-Dominion, own about 90 percent of all Canadian banking assets. “Innovative” U.S. banking practices are thereby stopped at the border and without the complication of having to deal with foreigners’ expectations and pressures, Canadian regulators maintain a firm grip. According to the Canadian thinktank the Fraser Institute, Canada ranked a lowly 18th out of 21 industrialized nations in the share of its banking market held by foreign banks. The only foreign bank with a significant share of Canadian banking assets is HSBC.

The Canadian banks’ share of their home market has actually increased in recent years as distressed foreign banks have sold their Canadian assets. Thus Toronto-Dominion, for instance, last year bought Bank of America’s Canadian credit card portfolio. Similarly National Bank of Canada has bought Canadian banking assets from retreating foreign banks.

In stock market terms, the conservative approach to regulation has borne spectacular fruit for investors in Canadian bank stocks. Royal Bank, for instance, is up nearly eightfold since the end of 1999 and Toronto-Dominion nearly fivefold. As for JP Morgan Chase, generally regarded as one of America’s best run banks, its stock has risen less than 13 percent in the period. And it has been lucky compared to the rest of the U.S. money center banks. Citigroup, for instance, is down more than 88 percent.


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