That Canadian banks are more closely, or carefully, regulated is fairly well-known. The specifics, however, deserve more attention.
The Canadian regulatory edifice is more centralized. There is no provincial equivalent to America’s state-chartered banks. All of Canada’s banks are federally chartered and overseen by federal agencies. One government-owned entity—the Canada Mortgage and Housing Corporation (CMHC)—plays a dominant role in shaping mortgage default-insurance policy...
Three additional features of the edifice stand out. For starters, over-leveraging is discouraged. The ceiling on leverage ratios (assets to capital) for Canada’s financial institutions is capped well below the U.S. norm (an average of 18:1 compared to over 25:1, respectively)...
Last but by no means least, CMHC, working alongside the banks, transparently plays a role in circumscribing residential mortgage securitization. Indeed, the great bulk of all lending in Canada takes place within the banking system itself, not through a largely unsupervised secondary market for bundles of loans and securities supposedly backed by other bundles of loans and securities—the “shadow banking system” that has burgeoned in the United States.
Contrary to what Americans might think, Canadian executives are handsomely compensated...
To an extent Canada may have avoided a hyper-risky mortgage market because, ironically, policymakers there seem less preoccupied with promoting ownership of “affordable” housing. Which is not to say that Canadian policy, at both the national and provincial levels, hasn’t furnished an ample supply of low-cost housing. To the contrary, so much is available at low rents that households may actually be less inclined to buy their dwellings... Perhaps even more important is the fact that macro-level fiscal policy in Canada differs rather fundamentally from America’s. It restrains the demand side more than does the U.S. national tax structure, which arguably rewards consumption while mostly dunning incomes and saving.
Although housing prices in Canada’s major urban centers (notably Vancouver and Toronto) have increased markedly since the 1980s, the country did not experience a U.S.-style housing bubble... Mortgage interest is not tax-deductible in Canada. The result, not surprisingly, is to induce less private investment in housing than there has been in the United States... Indeed, consuming in general is a bit less of a great national pastime in Canada, in part, because it is more heavily taxed.
Clearly, there is something to be said for studying Canada’s more centralized, and apparently better-coordinated, regulatory bodies. America’s assortment of financial watchdogs, jealously guarding their turfs and leaving gaping holes unmonitored, appears in dire need of correction. But let’s not kid ourselves: Even Canada’s seemingly comprehensive arrangements almost certainly fall far short of constituting a “systemic risk regulator,” capable of foreseeing and averting every imaginable form of financial excess. The Canadian system seems to have done a commendable job managing risk in one sector—mortgage lending. Given that the world’s financial meltdown originated with the U.S. sub-prime bust, the way Canada dodged it was no small accomplishment. Whether Canadian regulators and financial companies will remain as unscathed by crises begot from other sources, including novel mutations of financial assets likely to be invented in the future, remains very much an open question.
Also, here’s another caveat: In retrospect, cautious Canadian-style risk-management looks highly desirable. Yet before the crash, that same prudence might have seemed like too much of a good thing. In fact, financial systems such as Canada’s, which are less reliant on versatile non-bank capital markets, could seem insufficiently entrepreneurial. With twenty-twenty hindsight, we now know that Wall Street’s risk-takers were reckless. But during the boom, few of us were as skeptical of the borrowing binge they facilitated. Rather, their innovative financial instruments were mostly deemed creative ways of leveraging and deepening scarce capital. In other words, it is not too much to say that when times are rotten, we wistfully look to exemplars of moderation. When times are good, moderation often looks like a virtue only in moderation.
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