Friday, May 8, 2009

Canadain Versus U.S. Banking Systems

Canadian banks have weathered the current economic crisis much better than their U.S. counterparts. Nick Rowe has suggests the following:

But it doesn’t seem to be as simple as “Canadian banks are more tightly-regulated”.

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).

2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn’t describe those differences as “Canada is more regulated”.

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

For more information, see the direct blog post here and the discussion here.


Anonymous said...

Our banks are always at a comparative long-term growth disadvantage because bad banks in other jurisdictions get bailed out.

Corporations are overpaying CRA on purpose. You good skim off a small interest rate tax to repeat traders and give the proceeds to tax payers who pay large accurate amounts. Call it a Greed Shift.

Phillip Huggan said...

...a solution may be to encourage Canadian bank investment in foreign banks that are too big to fail, where the foreign budgets are in surplus (China, India, OPEC-banks). Small ownership stakes rather than actual takeovers as an M/A strategy. Buffett has already provided a model to invest safely in ABCP; money up front and a high investment RoR.