Mark J. Perry has an interesting piece comparing the banking system in Canada with that of the United States. He notes that Canadian banking system has done much better than the U.S. one not only during this crisis but also during the Great Depression. He lists a number of reasons for the better Canadian performance during the recent crisis. Let me suggest another important difference: Canada had a better monetary policy during this time.
Now of the reasons provided by Perry, I believe the most important one is the extensive branch banking in Canada. As Perry notes, the U.S. has been plagued by unit-banking laws for years; it was not until 1994 that interstate branch banking was legal in the United States. Because of this difference Canadian banks had (1) better geographical diversification of their assets and (2) quicker access to reserves in the event of a bank run (i.e. draw on a branch bank's reserves). That is most likely why over 9000 U.S. banks perished during the Great Depression but zero shut down in Canada at that time. It is also a key reason why almost 3000 banks failed during the S&L crisis in the United States and only two shut down in Canada. One issue, however, associated with the extensive branch banking in Canada is the high concentration of asset ownership. Perry says this is a plus since it allows better coordination between policymakers and key players in the banking system during a crisis. Other observers like James Kwak and Simon Johnson are against high concentration of asset ownership. Their argument is that having a few banks control most of a nation's assets makes for a too-big-to-fail moral hazard problem as well as making the banks too influential. So here is a question to the James Kwaks and Simon Johnsons of the world: how do you reconcile your view of banking with the banking experience in Canada?
Now of the reasons provided by Perry, I believe the most important one is the extensive branch banking in Canada. As Perry notes, the U.S. has been plagued by unit-banking laws for years; it was not until 1994 that interstate branch banking was legal in the United States. Because of this difference Canadian banks had (1) better geographical diversification of their assets and (2) quicker access to reserves in the event of a bank run (i.e. draw on a branch bank's reserves). That is most likely why over 9000 U.S. banks perished during the Great Depression but zero shut down in Canada at that time. It is also a key reason why almost 3000 banks failed during the S&L crisis in the United States and only two shut down in Canada. One issue, however, associated with the extensive branch banking in Canada is the high concentration of asset ownership. Perry says this is a plus since it allows better coordination between policymakers and key players in the banking system during a crisis. Other observers like James Kwak and Simon Johnson are against high concentration of asset ownership. Their argument is that having a few banks control most of a nation's assets makes for a too-big-to-fail moral hazard problem as well as making the banks too influential. So here is a question to the James Kwaks and Simon Johnsons of the world: how do you reconcile your view of banking with the banking experience in Canada?
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