Liberals (and the even further leftists in Canada) love to tout the false premise that American banks failed on such a large scale because of a lack of regulation and government intervention into their businesses. And Canada’s didn’t because the government regulates and intervenes all day long.
In actual fact, in many or most ways, the opposite is true. In many ways, it was precisely U.S. government meddling in the market and its incessant social engineering that caused the failures in the U.S.; and the lack of government meddling and efforts at social engineering (at least through the banks) that saved them in Canada. That and more sound, conservative management at the top, corporate level…
Regulation Didn’t Save Canada’s Banks
Our neighbors to the north keep government out of lending decisions.
Advocates of increased regulation of U.S. financial markets have concluded that more stringent rules governing leverage and capital ratios account for Canada’s impressive performance. They champion such measures here.
Nevertheless, Canadian banks operate in a very different context. Copying the Canadian banking system in this country, without understanding how its banking and housing sectors operate, would be a mistake.
Start with the housing sector. Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting “affordable housing” through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off their mortgage loans, Canadian banks held a larger share of them on their balance sheets. Bank-held mortgages tend to perform more soundly than securitized ones.
For obvious political reasons, debate in Washington spotlights the need for future financial regulation while glossing over the role of government housing and other regulatory policies in the current crisis. This is dangerous
Those who blame financial deregulation for the breakdown of U.S. markets should note that Canada shed its version of Glass-Steagall more than 20 years ago. Major banks thereafter rapidly bought and absorbed investment banks.
Those desirous of importing Canadian banking regulations to the U.S. should first delve more deeply into the actual practices of our northern neighbor’s housing and financial system. Choosing selectively often leads to choosing poorly.