Stable Banks, Stable Finance: The Canadian Experience
Unique aspects of the Canadian banking system allowed Canada to better withstand the recent financial crisis than the United States, said Michael Wilson, Canadian Ambassador to the United States, at an event hosted by the Canada Institute and Economic Studies Program of the Brookings Institution. The program examined Canada's financial system, particularly its approach to financial market regulation, and explored whether aspects of the Canadian model could be adopted in other countries. Wilson was joined on the panel by Barry Bosworth and Douglas Elliot of the Brookings Institution. Nick Le Pan, former Canadian Superintendent of Financial Institutions, and Mark Carney, governor of the Bank of Canada, offered an overview of Canada's banking system, as well as their views on the essential components to a stable and prudent financial regulatory framework. Carney's and Le Pan's remarks were off the record.
Canada and the Financial Crisis
Ambassador Wilson highlighted several aspects that allowed the Canadian financial system to fare better during the recent economic crisis than the United States or European Union. He cited Canada's stable macro environment as one area that greatly contributed to the country's overall financial stability, noting that for over a decade prior to the crisis Canada had maintained balanced budgets and often had surpluses. Canada's monetary policy also contributed to its overall financial stability. Wilson said that Canada has a long track record of implementing policies that promote stable prices and predictability, which helped create an economic environment that was less likely to create the types of financial bubbles that triggered the economic crisis in the United States when its housing market collapsed.
A strong regulatory framework is also critical to the health and stability of the Canadian financial system, said Wilson. He stated Canada's financial regulatory framework is reviewed every five years, ensuring that Canada's policies remain relevant in a constantly evolving global market. He also credited Canada's centralized supervision of financial institutions, conducted by the Office of the Superintendent of Financial Institutions, as a primary reason for the success of Canada's economic system. Finally, Wilson noted that Canada's culture of financial conservatism prevented its financial community from engaging in high risk ventures that led to the current crisis in other countries, including sub-prime lending.
Evaluating Canada's System from an American Perspective
Bosworth reiterated Wilson's assertion that the Canadian banks' decision not to engage in sub-prime lending in addition to the Canadian government's centralized regulatory and supervision framework were the major factors that allowed Canada to avoid the worst of the financial crisis. He added that if the United States wishes to avoid a similar crisis in the future, policymakers should focus less on creating more regulations and more on coordinating and centralizing existing regulators.
Bosworth maintained that despite Canada's sound fiscal policy and strict banking supervision, its economy was not immune to the financial crisis. As long as Canada remains linked to the global economy it will be impacted negatively by global economic downturns, particularly when its largest trading partner to the south is one of the countries most affected. He predicted that while the current economic downturn in the United States has likely ended, there is no telling how sustainable the economic recovery will be, despite proposed reforms to the U.S. financial system. If bailouts are now accepted as the norm, said Bosworth, the U.S. economic system will continue to face instability.
Elliot recommended creating a set of institutions that would work to enforce strict regulations on the business conduct of large U.S. companies in an effort to avoid future government bailouts. He also said it was disappointing that the Obama administration's recently announced financial reforms failed to consolidate regulatory agencies, noting that five of the six types of current regulators are expected to remain in place.
While Nick Le Pan's comments were off the record, view his presentation here.
Read Ambassador Wilson's remarks.
Drafted by Ken Crist, Program Associate, Canada Institute