Canada's Banks a Model in Bad Times

Sources:

Financial Times - Canadian Banks Prove Envy of the World

CBC News - When Banks Don't Compete

Amid the epic bank collapses and other woes in the United States during the global financial crisis, Canada's banks have remained largely stable. When US President Barack Obama visited Canada on his first foreign trip last week, he remarked that perhaps the US banks should be taking hints from those across the border. A report by the World Economic Forum named Canada's banks as the most sound globally.

Canadian banks, while not unaffected by the global financial crisis, have been able to weather the crisis' effects much better than their large US counterparts. Canada's bank stability is due in part to more conservative practices - even in boom times, Canadian banks did not lend as aggressively as US banks. Canadian banks also operate in a more highly regulated environment. And Canada's investment banks were brought under that regulatory umbrella when they were bought by traditional banks in the 1980s, something that didn't happen in the US.

Canada's banks are also more centralized than US banks: the six biggest control over 90 percent of Canada's banking assets. And these banks work closely together, in a "clubby" relationship that led one critic to allege Canadian banks are not forced to compete for customers like those in the US.

Nevertheless, it appears that President Obama views Canada's banks as at least a lesson, if not a model, for US banks in the future. While the current financial crisis has seen the failures or sales of US giants such as Wachovia, and with the Citi group now teetering on the edge, Canadian banks have maintained their high credit ratings. The Canadian banks Toronto-Dominion and RBC are two of only seven banks in the world that are still rated AAA by Moody's.  

Discussion:

1. How should the US incorporate the features of Canada's banking industry into a future regulatory or supervisory structure?

2. In boom times, do the Canadian banks' conservative behavior and highly regulated position decrease their global competitiveness?