Boring Banks: Canada Style?

I am all for boring banks. The more boring the better. We could even press the limits of boring and go all the way to Canadian levels of tedium. That seems to be a theme in the press nowadays so I thought I would provide you with the necessary links:

Here’s Paul Krugman channeling the Financial Times.

And here is the FT itself.

The main thrust of these two articles is that banking should be very dull if we want to avoid crises. Dull as in Canadian dull. Or dull as in pre-Reagan American dull.

The comparison is worth studying because it reveals points of similarity as well between the two banking systems: interest rates were not very different in Canada and so cannot be used as the only explanation for the crisis here. Plus the Canadian system is highly concentrated, with just five main banks dominating the business, so ‘too big to fail’ is more suspect than some of us might have thought – me included.

The really big difference comes in two places, each of which no doubt contributed to the fact that Canada survived very well and we plummeted like a rock.

First Canadian banks stick much more closely to basic banking. They tend to hang on the mortgages they generate and not sell them off, or securitize, them. This stabilizes their earnings and gives them a very strong vested interest in making sure that their mortgages are well underwritten. Both these aspects of lending are remarkably absent in our big banks who trade away most loans even before the ink is dry on their contracts, and so have no ongoing interest in the safety of the loans they just made. Worse: if you are Goldman you are likely to make a bet that the loans you just sold will deteriorate in value as soon as you sell them.

Second Canada seems to have a much tighter regulatory regime. In particular it has a consumer protection agency for finance which is something we don’t have, and which is getting strong opposition from Republicans and bankers alike. The value of such an agency can be found in the types of mortgages allowed in Canada: those famous sub-prime loans that ran our economy onto the rocks are banned up there. In addition Canada has tighter rules on capital ratios and leverage than we do. Or, more to the point, it actually applies the rules that it has, rather than issuing exceptions hither and yon as we are prone to do.

None of this prevents the Canadian banks from playing on the world stage: the largest two Canadian banks, Royal Bank of Canada and Toronto Dominion [plain ‘TD’ to us] are large enough to be global players and provide their largest customers with a full menu of services.

The moral of the story is that banking, to be safe, has to be banking in the old world sense and not in the Reagan era go-go sense. I suppose that should be obvious, but apparently it isn’t.

Meanwhile our banks are getting back to their old tricks and our legislative system is about to break down once more. There are not the newly necessary 60 votes to get reform through the senate so it looking less and less likely we can change the way the banks do business.

Too bad, because every time they blow up it costs us taxpayers a wad of money. You’d think that our representatives would want that to change. Especially those kicking up a fuss about our budget deficit. It’s easy to say ‘no’ to everything. Much more easy than being a responsible senator.