Canada’s Great Escape

There has been an earlier discussion of why Canada didn’t suffer a banking crisis. The Financial Times asked the same question in its January 30/31 issue. The answers provided by the FT may not satisfy all, but here they are: Old-fashioned prudential regulation is singled out: capital requirements, quality of capital and leverage ratios. Other major Western countries, particularly the US, were all relaxing them while Canada was tightening them. The regulators worked in tandem and there were no regulatory gaps to exploit.

Additionally, bank regulation in Canada is principles-based, rather than rules-based. That obviates legalistic circumvention of safety-and-soundness regulations. “The message in the US is it’s your responsibility to meet our rules. In Canada, the responsibility is to run the institution right.”

Finally, there were no trendy innovations in the mortgage market, and securitization was much less common.

In other words, banking and supervision done the old-fashioned way: safety first.

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About Gerald P. O'Driscoll 16 Articles

Affiliation: Cato Institute

Gerald O’Driscoll is a widely quoted expert on banking and monetary policy. Previously the director of the Center for International Trade and Economics at the Heritage Foundation, O’Driscoll was senior editor of the annual Index of Economic Freedom, co-published by Heritage and The Wall Street Journal. He has also served as vice president and director of policy analysis at Citigroup, and vice president and economic advisor at the Federal Reserve Bank of Dallas. He has also served as staff director of the Congressionally mandated Meltzer Commission on international financial institutions.

He is widely published widely in leading publications, including The Wall Street Journal. He has appeared on national radio and television, including Fox Business News, CNBC and Bloomberg. With a dozen years experience as a university professor, O’Driscoll speaks regularly at academic conferences and universities.

O’Driscoll holds a B.A. in Economics from Fordham University, and an M.A. and Ph.D. in economics from UCLA.

Visit: Jerry O’Driscoll's Page

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