Northern Exposure

Can Canada serve as a financial regulatory model?

At its heart, banking moves cash from those who have it to those who need it. It may be small depositors and large borrowers, or the other way around. This intermediation is essential. Otherwise, the cash can’t get where it’s needed and growth opportunities go undeveloped. The more sophisticated the economy, the more complex the banking system. So in the US we have a complex system of commercial banking, shadow-banking, and consumer banking which includes banks, insurance companies, mutual funds, and hedge funds.

This is relevant because legislators are now looking to other economies for models of how to structure our financial system. The problem is that if we look at a simple economy, we’ll come up with overly simple financial rules.

The white swan in this exercise is Canada. They pretty-much escaped the financial crisis, even though the top six Canadian banks have combined assets equal to twice their economy’s size. By contrast the top six American banks total only 2/3rds of our GDP.

So why aren’t Canadians worried about too-big-to-fail up north? Because they have a fairly simple economy. As an example, name one world-class Canadian company—apart from beer. Tough isn’t it? Hard cases make bad laws, and simple economies make bad models.

Douglas R. Tengdin, CFA
Chief Investment Officer
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