Mixed Reviews for Canadian Banks Post-Crisis

Not everyone thinks boring is better.

April 14, 2010

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1053493_80027928Canadian banks are enjoying a certain lustre, after being ranked for the second year in the world as the top of the league by the World Economic Forum (aka Davos man).

But not everyone is convinced that it is prudence, plus a conservative lending culture, plus a stricter regulatory environment that prevented Canadian banks from engaging in the follies that ultimately led elsewhere to foreclosure.

In praise of  boring Canadian banks is Nobel Laureate Paul Krugman: “The point is that when Canadian and U.S. experience diverge, it’s a very good bet that policy differences, rather than differences in culture or economic structure, are responsible for that divergence. And anyway, when it comes to banking, boring is good.”

In support of the “boring thesis” is a January article from the Financial Times (by a Canadian author).

“Depending on your degree of fondness for Canucks … Canadians are either too nice or too dull to indulge in the no-holds-barred, plundering capitalism that created such a spectacular boom, and eventual bust, in more aggressive societies. A senior official in Ottawa likes to say that Canadian bankers are ‘boring, but in a good way. They are more interested in balance sheets than in high society. They don’t go to the opera.’ Some of them … have never even been to Davos.”

Not so fast says former IMF chief Economist Simon Johnson and his erstwhile Canadian collaborator Peter Boone.

“Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation.  The chief executives of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto.  This makes it easy to monitor banks.  They also have smart-sounding requirements:  If you take out a loan worth over 80 percent of a home’s value, then you must take out mortgage insurance.  The banks were required to keep at least 7 percent Tier One capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.

“But is it really true that such constraints necessarily make banks safer, even in Canada?

“Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged — and therefore more risky — than well-run American commercial banks.”

It appears Canadian banking is about as popular as Canadian medicare in some circles.

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