Banking, Canadian-Style

David Leonhardt, interviewing Barack Obama, asked the president about trying to limit the scale of banks to which Obama replied “I’ve looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don’t separate between investment banks and commercial banks, for example.” Leonhardt intervened and said “Like Canada?” And then Obama said “Canada being a good example. And they’ve actually done a good job in managing through what was a pretty risky period in the financial markets.”

This is all well and good, but aside from being financial supermarkets, the Canadian banking situation is really extremely different from ours.

The Canadian financial sector is dominated by the “big five” banks that all enjoy “tier one” regulatory status. And while these banks are financial supermarkets, and they’re quite big relative to Canada, Canada is a relatively small country so the banks themselves are modestly sized compared to the largest American financial institutions. So when considering the relevance of the Canadian model to the question of whether or not the United States is interested in limiting bank size we need to try to be clear on what we’re envisioning. The US is about ten times the size of Canada.

If we’re envisioning a sector dominated by fifty financial services supermarkets each of Canadian-style size, then we really will need to break up some of the existing conglomerates. But if we’re talking about consolidating the United States into five financial supermarkets, then we’re talking about making some banks much bigger than current American institutions. Alternatively, if we’re not talking about doing either of those things then we maybe need to ask ourselves how relevant this Canadian example is.


Another point is that one issue any country is going to face if it implements Canadian-style levels of regulation is that bank managers will complain that they’re being rendered internationally uncompetitive. In Canada, this is addressed through regulatory limits on the extent to which foreign banks can compete with Canadian banks, on restrictions on foreign ownership of Canadian bank equity, etc. I haven’t heard anyone in the United States talk about doing anything like that. Which is, I suppose, fine. But as I understand it those limits on international competition are integral to the sustainability of the Canadian banking model. So if we’re going to reject them, then we need to put it aside as a good analogy of what we’re aiming at.