Monday, September 19, 2011

No Banking Crisis, Eh?

Why Didn't Canada Have A Banking Crisis in 2008 (or in 1930, or 1907, or ...)?

NBER Working Paper, August 2011

Abstract: The financial crisis of 2008 engulfed the banking system of the United States and many large European countries. Canada was a notable exception. In this paper we argue that the structure of financial systems is path dependent. The relative stability of the Canadian banks in the recent crisis compared to the United States in our view reflected the original institutional foundations laid in place in the early 19th century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk—the mortgage market and investment banking—and was tightly regulated by one overarching regulator. In contrast the relatively weak, fragmented, and crisis prone U.S. banking system that had evolved since the early nineteenth century, led to the rise of securities markets, investment banks and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2008 was not contained.

Nod to Kevin Lewis


Anonymous said...

The rise of securities markets, mutual funds, etc., wasn't all bad.

John Thacker said...

I wonder how many people read this and realize that Glass-Steagall was one of the things keeping banking fragmented.

Expected Optimism said...

Also, when the subprime mortgage crisis ripped through US banks, the Canadian government took on bad Canadian debt themselves, to become the largest subprime mortgage lender in the world. I imagine that had some effect.