Congressional researcher assesses Canada as a model for financial regulation

James J. Jackson, a specialist in international trade and finance with the U.S. Congressional Research Service, takes a close look at Canada's system of financial regulation with an eye towards adopting some new policy recommendations for the United States. “Canada’s financial system, in particular is garnering attention, because it seems to be more resistant to the failures and bailouts that have marked banks in the United States and Europe. In particular, some observers are assessing the merits of the way Canada supervises and regulates its banks, as one possible model for the United States,” Jackson writes.

Canada, of course, is the only G7 country whose banks have not required any equity investment or bailout from any government.

Some random excerpts from Jackson's report:

the IMF concluded that Canada’s system is highly mature, sophisticated, and well-managed. In addition, the system is characterized by strong prudential regulation and supervision and a well-designed system of deposit insurance and arrangements for crisis management and resolution of failed banks.

Unlike the United States and some European countries, subprime mortgages account for fewer than 5% of Canadian mortgages, which sharply limited Canada’s direct exposure to the meltdown that occurred in the subprime mortgage market. Although Canada’s mortgage markets are somewhat less innovative than in the United States, Canadian consumers seem to be well served and home ownership rates are comparable with those in the United States.20 In addition, Canadian law requires that all bank-held mortgages above a loan-to-value ratio of 80% be insured, which has curtailed the securitization of mortgages by banks in Canada. About one-third of mortgages are securitized in Canada, about half as much in percentage terms as in the United States.21 In addition, prepayment penalties and the lack of interest deductibility reduces the demand for longterm mortgages, so the maturity of most mortgages generally does not exceed 5 to 10 years.

However, the smaller scope of Canada’s financial system and its economy likely lessen the transferability of systems or procedures used in Canada to the vastly more complex U.S. financial system. In addition, it can be argued that Canada’s supervisors and regulators can take a more conservative approach than their U.S. counterparts as a result of Canada’s proximity to the U.S. capital markets. Nevertheless, Canada’s financial supervisory system and regulatory structure have proven to be less susceptible to the bank failures that have loomed in the United States and Europe and may offer some insight for U.S. policymakers. Canada’s reliance at the federal level on a unified supervisor and regulator appears to have some merits as compared to a more decentralized approach.

Canada’s approach does have some drawbacks. Specifically, Canada’s system of regulating securities markets at the provincial level means that regulations regarding market participants and investor protection differ by province, creating inefficiencies in the system and raising costs to providers and consumers. Differences between provinces also mean that coordinating policy approaches across the 13 provinces can be slow and cumbersome.


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