Fascinating story in USA Today on the banking system our neighbors to the North enjoy:

Our northern neighbor sometimes seems so similar to the United States that it’s hard to tell where the USA ends and Canada begins. Here’s one way: Canada is the place with healthy banks, taxpayers unscathed by megabillion-dollar bailouts and no need to overhaul financial regulation because it was done right the first time.

As U.S. officials scramble to prevent a crisis sequel, the ability of Canadian banks to navigate the current financial storm is earning global plaudits. The World Economic Forum in October ranked the country’s financial institutions No. 1 in the world for solvency. U.S. banks came in 40th, two rungs behind Botswana.

A few noteworthy differences:

• Superintendent of Financial Institutions: A single, powerful regulator;

• Industry Concentration: 5 banks have 85% of assets in Canada;

• More conservative executive-suite culture: Bankers are more like Accountants than Wall Streeters;

• Canada’s version of Glass Steagall repealed in the 19080s.

It is more than regulation alone: Canada has a very different corporate culture; is less driven by pursuit of option riches, and seems to be more concerned with sustainable, rather than short term, corporate profitability. Bullet points 2 and 4 would likely be abused in the US.

The entire piece is well worth reading . . .

>

Source:
U.S. regulators could learn from Canada’s banks (USA Today)
David J. Lynch
USA TODAY, July 2, 2009

http://www.usatoday.com/money/world/2009-07-01-canada-bank-regulation_N.htm

Category: Bailouts, Credit, Derivatives, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Why Didn’t Canadian Banks Go Wild?”

  1. actually, we have a very different government structure. THAT is why things were different. We have had a Liberal government that was hostile to business until a minority conservative government took over running the country. Neither could or would do anything that even looked pro business/banking. The Liberals because of the red socialist stripes down their backs that had them in fear of losing their voting base and the conservatives for fear of losing control of parliament in a confidence vote (that which brings down a government).

    Canada was just plain lucky that the economic crisis hit when it did because the banks have been pushing to merge for years just like their big brothers down south. Fortunately, that may never happen now and we up here in monopoly land will be spared the horror in banking that we already suffer in internet/cell phone/cable quasi monopolies with fees and prices that are among the highest in the world thanks to our protective government (protective of the monopolies that is)

  2. Wes Schott says:

    …but we ain’t like them neighbors to the north

    ….remember Bowling for Columbine?

    Moore compares gun ownership and gun violence in foreign countries, notably Canada (where there are 7 million gun owners and fewer than 100 gun-related deaths), with gun ownership and gun violence in the United States. Moore concludes that there is no connection between gun ownership and gun violence.

    http://en.wikipedia.org/wiki/Bowling_for_Columbine

    …different culture, different value system

    …i don’t mean to be preachy…but, the bottom line is that this financial crisis…..is simply a moral crisis

  3. Joe Retail says:

    And as a (Canadian) individual investor, some of the best long-term performers in my portfolio have been … Canadian banks. I picked up some more in Q1 when their yields were driven up to around 10% as everyone panicked. Nice gains so far. Mind you I have tight stops on those, waiting for the other shoe to drop.

  4. willid3 says:

    maybe there isn’t a branch of GS up there? or they don’t have the clout they do here? or maybe their oligopoly isn’t as strong as ours seems to be?

  5. Gatsby says:

    LOL! Good point regarding GS willid3.

    Banking regulation/culture are one of many things we can learn from those Canadians. Next up: health care, democratic reform, lobbying laws and donut making.

  6. Joe Retail says:

    Well, make sure you learn from the good parts and avoid the rest, particularly for health care:
    - If you’re really sick, we’ll deal with it quickly and effectively;
    - If you’re a little bit sick, we’ll deal with it eventually;
    - If you’re interested in early diagnosis and prevention, good luck finding a doctor.

  7. danm says:

    1. Actually our central bank up here is being run by an ex-Goldman guy in his early 40s.

    2. Mortgage loans are recourse here. So the banks own you.

    3. Banks tend to keep the mortgages on their books… so less risk. Like I said, they own us.

    4. Canadian households are just as much in debt as Americans. House prices are still holding up or going up here so the average household is just starting to get squeezed.

    5. For some reason, our last prime minister (a Liberal) refused to let banks merge. I still can’t figure out if it’s because of a power trip (he wanted to keep bankers in their place) or because of conservative genius.

  8. Joe Retail says:

    danm, your point 4: I think I saw recently (maybe it was here) that home value is a lower percentage of Canadian households’ total assets than American. If that’s the case they would also be somewhat less sensitive to drops in house prices. Any idea if this is the case?

  9. eren says:

    BR: that is not right. There is a good summary what’s going on in Canada:

    http://marketdepth.typepad.com/marketdepth/2009/06/sell-the-banks.html

    “True, Canadian banks have avoided some of the sillier extremes, particularly those related to off-balance sheet leverage. But the key problem in Canada is precisely the same as it is in the other western countries now experiencing bank solvency crises. Home prices have grown to an abnormally high multiple of employment income, supported by a rapid expansion in mortgage debt.
    CMHC and the Canadian Housing Bubble

    The key difference between Canada and other markets is that in Canada

    the cost of bad home loans have been socialized in advance. In Canada, we didn’t need to disguise our sub-prime excesses within dubious mortgage-backed securities. Why create an alphabet soup of bogus AAA paper when our government provides seemingly limitless quantities of underpriced mortgage insurance? As a formula for creating housing froth it has been virtually unbeatable. Housing markets may be cratering throughout the world, yet one observes a perverse new high in Canadian real estate prices in May of 2009.

    The key to Canada’s bubbly housing success been the CMHC . The Canada Mortgage and Housing Corporation writes guarantees on most Canadian mortgages originated at greater than 80% Loan-to-Value. This agency has been on a massive expansion binge of late. In 2008, a year of synchronized global recession, the CMHC expanded its mortgage insurance in force by a whopping 18%. CMHC now guarantees $407.7 Billion of high loan-to-value mortgages and an additional $233.9 Billion of securitized mortgages.

    In all, the CMHC mortgage guarantees are equal to slightly more than half of Canada’s GDP. Against this total, CMHC has miniscule equity capital of $8.1 Billion. How is it that more than $630 Billion of dodgy mortgages can be guaranteed by an entity posting just over 1% in equity? This is a question that curiously appears to have escaped the notice of Canada’s top notch financial regulators.

    The role of the Canadian banks has been to commit capital to CMHC-insured mortgages as quickly as they receive applications. It is not mortgage lending in the traditional sense, more like underwriting government bonds and taking a 150 basis point spread as compensation. In this way, the Canadian real-estate bubble looks a lot like its American cousin. Home loans are being written for those who likely cannot pay by lenders who pass through the credit risk to a third party. However, in the case of Canada, the third party is our own government and not the Chinese or Saudis who snapped up American mortgage paper.”

  10. willid3 says:

    danm, it sounds like your point 3 kept them from going into unrealistic loans. since they had a chance to loose money on the deal if they weren’t careful

  11. danm says:

    I think I saw recently (maybe it was here) that home value is a lower percentage of Canadian households’ total assets than American
    ———-
    I’ve never compared the data side by side but I have trouble believing that. Most household wealth in Canada is in housing.

    There are probably a lot more renters in Canada so maybe that makes a difference.

    It’s hard to compare asset valuations because don’t forget we don’t have interest deductions and other ownership society incentives that boost real estate values so our prices did not go up as much as yours. So that would make our asset valuations lower.

    Also, due to higher taxes, our disposable income is lower so that would also put a lid on real estate prices.

  12. danm says:

    If that’s the case they would also be somewhat less sensitive to drops in house prices. Any idea if this is the case?
    ——————
    Since Cdn households also hit the 0% savings rate, I`d say we’re in for a rough ride over the next few years.

    In Canada, we have bullet loans. It’s harder to refi when rates drop and our rates are usually fixed for max 5 years and then renegotiated. Most people, because of the low rates are probably in 3 year terms or less and have probably bought bigger than they could afford if rates increased. The risk in Canada is that rates soar to 5-8% just when a huge percentage of households need to renegotiate.

    Right now, rates are being artificially held down thanks to our ex-Goldman guy at the BOC…. a lot of people’s mortgage is based on prime minus something. My brother is currently paying less than 1.5%! Maybe they can keep on subsidizing mortgage loans forever even when rate shoot up (something tells me they’ll do it for as long as they can). That’s why Canadians are still spending.

  13. danm says:

    The key to Canada’s bubbly housing success been the CMHC . The Canada Mortgage and Housing Corporation writes guarantees on most Canadian mortgages originated at greater than 80% Loan-to-Value. This agency has been on a massive expansion binge of late.
    —————————
    I know in the last few months CMHC has stealthily been taking mortgages off banks books and packaging them.

  14. Onlooker from Troy says:

    It looks like maybe Canada is just behind the rest of the world in the evolution and popping of their housing bubble, if the writer in that link that eren provided is accurate in his assessment of the situation. Not too surprising really. This thing is global and the notion that any given nation is invulnerable, especially when they’ve had an outsized run up in housing valuations, is folly.

    Australia is going to get their turn soon too when the commodity run of late, driven by this stocking up and forced overbuilding by China, runs out of steam.

  15. super_trooper says:

    @BR, as a general rule, the endogenous population frequently gives a better analysis about their own country. I would like to see a Canadian angle on their financial system.
    “Canada has a very different corporate culture; is less driven by pursuit of option riches, and seems to be more concerned with sustainable, rather than short term”. Western Europe (not including UK) has a similar corporate culture to Canada ( lack of gigantic options) still the banks of Austria and Sweden for example invested foolishly in Eastern Europe.

  16. danm says:

    It looks like maybe Canada is just behind the rest of the world in the evolution and popping of their housing bubble
    ————-
    Yup. Personal bankruptices are rising quickly and real estate is still holding up… imagine when it weakens!

  17. super_trooper says:

    @danm, same in many countries in Europe, ppl have a mix of day to day market rates/2year fixed and 5 year fixed. I don’t understand how it’s possible in the US to have fixed 30 year rates (what if the 70s return w/ +10% interest rates) and can walk away from your house. That’s why house prices in many places in Central Europe are still stable, with 2% interest rate on a $400000 house (not even a McMansion), you’re good. Aned why pay it off, when apparently house prices keep going up, even in a recession. Once you fix it at 4-5% for 5 years… 2014 may be a very bad year.

  18. danm says:

    “Canada has a very different corporate culture; is less driven by pursuit of option riches, and seems to be more concerned with sustainable, rather than short term”.
    ————-
    I would agree with that although over the last decade greed has really taken hold.

    We always end up with the short end of the stick when we deal with Americans so we inherently have to be more careful.

    For example, when our dollar was 63 cents, the US forest product companies were having trouble competing with our Cdn firms so the US decided decided that we dumping our forest products and starting charging us penalties and higher tariffs. Now that our dollar is closer to 90 cents, it’s not an issue anymore.

    Canada can never make a quick buck in market extremes because the US will clobber us, we always do better by staying slow and steady, under the radar I guess.

  19. The Curmudgeon says:

    Canada’s got a bright future. Know why? Global warming. That, and like willid3 said, less Goldman Sachs. Until everyone moves there to escape the heat and the taxes in the US. Then GS will move there too.

  20. Bob A says:

    I’d say ‘concentration of power’ has already been acheived here:

    . so called ‘credit card reform’ gets passed with no limits on credit card interest.

    -remember these interest charges directly reduce what consumers can spend.

    -equivalent to a tax increase on lower income brackets but affects profits of
    any non bank corporation

    . most banks charge 3% ‘foreign’ transaction fee for purchases from out of country company,
    EVEN IF you make the purchase from home.

    -pure ripoff. ‘because they can’. and most people are unaware or just too stupid to complain.
    not that it would matter if they did. only one major card company Capital One has not yet adopted these new fees. you can get a Capital One card but you gotta wonder how long that will last.

  21. FrancoisT says:

    This sub-story tells a great deal about Canadian executive-suite culture:

    “In 2005, for example, Ed Clark, CEO of TD Bank Financial Group, which operates a U.S. retail subsidiary, grew increasingly worried about the complexity of some of the securities in the bank’s portfolio.

    Clark didn’t fully understand how the derivatives would behave in different market environments, and he suspected no one else did either.

    So he did something almost no one on Wall Street had the foresight to do: He ordered his traders to ditch the risky but highly profitable positions. Over the next nine months, TD gradually unwound its derivatives holdings…”

    Can anyone imagine CEOs at Citi, GS or Lehman doing that in 2005? Remember the “as long as the music play, we got to dance?”

  22. FrancoisT says:

    “But the prospect of congressional turf battles prompted the administration to shy from tackling the fragmented U.S. regulatory system, meaning perhaps the greatest Canadian lesson is being ignored.”

    WTF? Does the author of this article postulate the Obama Administration is afraid of Congressional turf wars?
    That bodes well for reforming the financial sector.

  23. [...] #40! We’re #40 Jump to Comments Can’t we export some lobbyists to pollute their system too? As U.S. officials scramble to prevent a crisis sequel, the ability of Canadian banks to navigate [...]

  24. danm says:

    So he did something almost no one on Wall Street had the foresight to do: He ordered his traders to ditch the risky but highly profitable positions-

    Can anyone imagine CEOs at Citi, GS or Lehman doing that in 2005? Remember the “as long as the music play, we got to dance
    —————
    RBC did the same thing. When it bought Centura, an American bank, it quickly sold off its MBS/real estate portfolio for the same reasons.

    They could afford to do it because their multiple was compared to those of Cdn banks and not US ones.

  25. CJ says:

    Posters above mentioned that Paul Martin wouldn’t allow any bank mergers when he was Prime Minister, a policy that looks good in retrospect. Nothing against PMPM, but he and any other Ottawa government have no real choice. There are only five big banks and any mergers would immediately bring about unacceptable concentration (to use Stephen Harper’s words).

    I’m a Canadian who has lived in the U.S. for 12 of the past 20 years. Lots of American banks are solid institutions that are doing fine. They’re the banks that didn’t pursue mergers or “innovations” and didn’t get caught up in the excesses of Wall Street culture.

  26. @Onlooker from Troy http://www.ritholtz.com/blog/2009/07/why-didnt-canadian-banks-go-wild/#comment-189748

    It looks like maybe Canada is just behind the rest of the world in the evolution and popping of their housing bubble, if the writer in that link that eren provided is accurate in his assessment of the situation.

    No. We didn’t let the bubble get blown up quite as much. We had a CBer that was targeting the inflation rate (1% – 3% band) while Uncle Alan down south was targeting asset prices during the craziest part of the housing bubble. It kept the bubble within reason for us. That CB head has since been replaced with a Goldman guy and things have been a lot more unstable. That is obviously deliberate. These guys are worse than black marketers. They profit from chaos. In the case of banks it is not so much war but economic chaos

    I felt a sense of dread go through me the day the media proudly announced the new CB head was a Goldman guy. I would have told anyone who was willing to listen that our financial stability just went out the window but not a man in the street would have understood a word I was saying and would only have given me back a blank stare

  27. elborbah says:

    There are a few reasons why the Canadian banks are a lot better -but one of note is on a tax basis – there is no deduction for mortgage interest or property taxes for Canadian individual filers – the lack of this tax subsidy tempered some of the worse bubble excesses south of the border.

  28. danm says:

    I felt a sense of dread go through me the day the media proudly announced the new CB head was a Goldman guy.
    ——————
    It’s not just Carney, it’s also Harper, our answer to Bush just like Sarkozy is to France. Just this puts us behind the curve.

  29. r says:

    I lived in Canada for 2 years and the rest of my life in the US.

    IMHO, elborbah is correct. We were going to purchase a house in Canada, but when we found out (if i remember correctly) we had to pay something close to sales tax on the purchase price and also found out the mtg interest wasn’t tax deductible, it was more cost effective and less risky to rent.

    Rewind the US for 10 years and imagine these tax burdens and add the higher Canadian tax burden (total VAT is 15%, plus i think income tax we paid in Canada was about 40%) and houses are the great investment everyone thought they were from 2000-2006.

    The government and bank rants above made me laugh out loud.

    Beer tax was so high in Canada that we went with all of our neighbors to the make your own breweries.

    Every time we went back to the states, all our neighbors asked us to buy shoes, clothes, small appliances, etc. for them from the US because they were much less expensive. None of my US neighbors asked me to purchase things in Canada for them.

    Don’t get me started on my personal experiences with Canada’s “free” health care. [Obama is using the same marketing dept as the Canadian government.]

  30. kcowan says:

    There are a bunch of differences:
    1) mortgage brokers are a minor factor because the big five banks compete aggressively.
    2) mortgages are all recourse without limit.
    3) no 30-year mortgages, all 5-year renewable, no/little benefit to betting long.
    4) remortgages are expensive with lots of user fees.
    5) collateralization of mortgages is a small factor in the big 5 banks.

    But it is certainly not just the result of superior management/regulation. Bank executives are very conservative by nature up here because they can survive without being aggressive. But they still had a good share of toxic MBS from the US because they believed the NY ratings houses.

  31. [...] Why Didn’t Canadian Banks Go Wild? Short answer: Very different exec culture and regulatory [...]

  32. eurostoxx says:

    why are americans so enamored with Canadian banks??

    does anyone remember CIBC’s $10B loss on CDO’s and CDS exposure… basically they lost 10B trying to make a couple million… great risk mgmt there

    or NBF’s ABCP debacle

    or BMO’s oil trading debacle

    oh and if TD and Royal Bank were so prescient to exit the MBS market, why did they both buy US banks near the peak of the market

    canadian bankers are not smarter than their US counterparts, just less risky

    thats all