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The Study In Brief

  • Despite having highly similar economies, in banking the experience of the crisis-prone United States contrasts starkly with Canada’s stability.
  • For each major US crisis, different reasons have been put forward to explain Canada’s comparative stability in the face of broadly similar shocks, an issue that arose again in the context of the failure of Silicon Valley Bank and its aftermath.
  • This Commentary examines whether there is a unifying explanation for these contrasting outcomes and what this implies for Canada’s future financial sector stability. It identifies the changes introduced in the 1890 and 1900 Bank Act revisions that led Canada to manage banking sector problems in a cooperative arrangement between the banks and the authorities. The aim was to address the externalities generated by bank failures while controlling the resultant moral hazard through social networks rather than market discipline.
  • Importantly, the system ensured enough competition to be efficient. Drawing on this comparative analysis, the Commentary considers the lessons to be drawn for future financial regulation.

Introduction

Silicon Valley Bank (SVB), an iconic institution serving the US technology sector and the United States’ sixteenth-largest bank by assets, collapsed in a crisis that unfolded with shocking speed between March 8 and 10, 2023 (Chappatta 2023). The collapse sent shock waves through the US and global financial systems.

The context was anything but benign: on March 7, the day before the SVB crisis flared, Jerome Powell, the chair of the US Federal Reserve, in testimony before the Senate Banking Committee, commented that interest-rate increases could be larger and more rapid than previously anticipated. Specifically, Powell stated that “the ultimate level of interest rates is likely to be higher than previously anticipated” and that, if necessary, the Fed “would be prepared to increase the pace of rate hikes” (Schneider and Dunsmuir 2023).

With the US yield curve inverted since mid-2022,1
 investors’ appetite for risk was on the wane as the threat of recession rose. Powell’s comments invited a further repricing of risk. It was SVB’s fate to be the canary in this particular coal mine. It was exposed to the downturn in the technology sector, and its business model was to borrow short to lend long, exposing it to interest-rate risk in the event of rising short-term rates. Exposed investors in banks subject to either or both risks faced the question: “Do I stay or do I go?” They ran.2

  • New York-based Signature Bank, the twenty-ninth-largest bank in the United States, failed two days after SVB (Giang 2023). The Federal Deposit Insurance Corporation (FDIC) seized the bank and sold it to Flagstar Bank, N.A., a subsidiary of New York Community Bancorp, with the latter bank assuming the business of Signature Bank as of March 20, 2023 (FDIC 2023a).
  • San Francisco-based First Republic Bank, the fourteenth-largest bank in the United States, received a US$30 billion bank-led liquidity injection to shore up confidence after US$70 billion in emergency loans and other liquidity from the Federal Reserve and JPMorgan Chase had failed to stabilize it (Copeland et al. 2023). Even with this support, First Republic was unable to continue, and was seized by authorities on May 1, with its assets sold off to JP Morgan, which assumed First Republic’s deposit liabilities (FDIC 2023b).
  • Zürich-based Credit Suisse’s share price collapsed, forcing a massive emergency injection of funds by the Swiss bank supervisory authorities (Cooban 2023) and subsequently a takeover by UBS (Patrick et al. 2023).
  • SVB itself was sold, following a two-week auction process, to North Carolina-based First Citizens Bank, ending its history (Choe 2023). The FDIC estimated the cost of the SVB resolution to its Deposit Insurance Fund at approximately US$20 billion (FDIC 2023c).

The run was in part due to the initial approach by the US authorities to the SVB failure, which was to establish a Deposit Insurance National Bank under FDIC control to provide insured depositors immediate access to their insured funds and to pay out a portion of the funds owed to uninsured depositors through an Advance Dividend, while holding back a portion to help cover any losses to the Deposit Insurance Fund. The prospect of losses triggered a run on uninsured deposits in other banks, including Signature and First Republic.

The authorities (including the FDIC, the Federal Reserve and the Secretary of the Treasury) reacted by invoking the systemic risk exception under the Federal Deposit Insurance Act, which set aside the least-cost requirement to the Deposit Insurance Fund to protect the uninsured depositors in SVB and Signature (Gruenberg 2023).

As well, President Joe Biden sought to reassure markets and depositors to prevent further bank runs, saying “Your deposits will be there when you need them” (Sweet et al. 2023). And analysts emphasized that SVB and First Republic had been outliers in terms of business strategies – in particular, in terms of having asset-liability mismatches – that exposed them unduly to the risks posed by rising interest rates (see, for example, Defend, Mortier, and Germano 2023; Russell and Zhang 2023).

While markets generally discounted the risk of further knock-on events, nonetheless several mid-sized US banks that were judged not to be “too big to fail” – in particular, Los Angeles–based PacWest and Phoenix-based Western Alliance (Hirsch 2023a). Pacific Western was merged out of existence in July 2023 as it could not recover (Nishant and Saini 2023). The share price of Western Alliance did rebound but remains as of this writing well below its pre-SVB moment valuations, which suggests that markets have yet to issue an “all clear” signal.

In tallying up the damage, the assets of the three failed US banks totalled US$548 billion (FDIC 2023d), which is larger in absolute terms than the US$526 billion (inflation adjusted) held by the 25 US banks that collapsed in 2008 at the height of the subprime crisis (Russell and Zhang 2023) and of the same order of magnitude (2.4 percent versus 3.4 percent in the subprime crisis) when the two figures are compared as a share of total banking assets.3
 If the merger of Pacific Western in July 2023 is included as effectively a failure, then the estimated US$26.73 billion worth of assets at the time of the merger could be included in the total, bringing the 2023 event to US$575 billion, or 2.5 percent of total US banking system assets.4
 The SVB moment was by no means a small event in the history of US financial sector crises.

The Immediate Impact on Canada

The immediate ramifications on Canada, however, were minor. Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), took control of SVB’s Canadian branch, which had started operations in Canada only in 2019 (OSFI 2023b; Punchard 2023) and resumed a practice adopted during the COVID-19 pandemic of a daily check on bank liquidity levels.

As SVB’s Canadian branch was only authorized to lend and not take deposits in Canada, there were no ramifications in terms of depositor risk. Some Canadian technology companies that had established relationships with Silicon Valley did have deposit accounts in SVB, which then became part of the US resolution of the failure.

Canadian analysts hastened to emphasize the limited risk of instability to the Canadian banking sector (see Johnson 2023). Commentaries noted the small direct exposure of Canadian banks to the technology sector and that the main exposure of Canadian banks to US developments was indirect through their US bank subsidiaries.5
 Markets validated that assessment: while Canadian bank stocks fell on the SVB news and subsequent events, the initial decline was less that in US bank stocks and also less than EU bank stocks (Figure 1).

And not for the first time, the “Canadian model” for banking was touted: “Not only should the failure of Silicon Valley Bank not have significant negative implications for our banks, but this crisis should actually be viewed as further vindication of the Canadian banking model” (Scotiabank analyst Meny Grauman, quoted in Bickis 2023).

SVB – Lessons Learned?

The SVB collapse has been compared to the Bear Stearns moment as the subprime crisis started to unfold (Pollard et al. 2023). This raises the question of whether the system remains exposed to a Lehman moment parallel. Markets generally appear to have drawn a line under the SVB moment but there are reasons to consider the lessons from this incident.

First, while the US policy response to SVB nipped the incipient crisis in the bud, the US banking system remains fragile on a structural basis. As Jiang et al. (2023) note, “prior to the recent asset declines all US banks had positive bank capitalization. However, after the recent decrease in value of bank assets, 2,315 banks accounting for [US]$11 trillion of aggregate assets have negative capitalization relative to the face value of all their non-equity liabilities.” The Federal Reserve Board’s October 2023 Financial Stability Report confirms that “high interest rates continued to depress the fair value of longer-maturity, fixed-rate assets that, for some banks, were sizable.” As well, it notes that “a subset of banks continued to face funding pressures, reflecting concerns over uninsured deposits and other factors” (FRB 2023).

Second, the shadow banking sector, which engages in credit intermediation outside the framework of rules developed to govern banks in this activity, has grown its direct lending very substantially.6
 In the latter regard, as Hirsch (2023b) comments, “Direct lending [by the shadow banks] at this scale has never been tested: Nearly all its decade-long growth has happened amid cheap money and outside the pressures of a recession. The industry’s opacity means it’s nearly impossible to know what fault lines exist before they break.”

Third, while the tech sector exposure has been flagged as a reason to treat SVB as an isolated case, the larger risk for the financial system is rapid technological change driving pervasive structural change in the economy. For example, commercial real estate debt is a source of risk as increased work-from-home drives both reduced demand for office space and the products of the services sector that evolved to serve office workers. Also, it is unknowable what stresses the widespread adoption of artificial intelligence systems will unleash – but stresses there will be.

These structural issues loom large, since further monetary tightening has not been taken off the table as of this writing. Following the Federal Open Market Committee (FOMC) meeting of early November 2023, Fed chair Jerome Powell stated: “We haven’t made any decisions about future meetings…It’s fair to say that the question we’re asking is: Should we hike more?” (cited in Foster 2023). Perhaps even more important, the Fed has indicated that rates will remain high for longer. As can be seen from Figure 2, the subprime crisis did not break out immediately following the monetary tightening of 2006, but rather after an extended period of high interest rates, a situation that now looms for the US economy (note: the grey bars denote recessions).

Figure 1

Accordingly, even though the US money centre banks, which have been the focus of supervisory attention since the subprime crisis, are reportedly well capitalized, it is an open question of whether US authorities are in a position to revert to business as usual on bank closures without tipping the system into yet another crisis.

This is significant because while the SVB crisis has led to consideration of regulatory reforms in the United States,7
 it does not appear to have led to a fundamental reappraisal by US authorities of their overall approach to banking supervision. In particular, although the relatively limited fallout from SVB to date reflects the invocation of the systemic-risk exception, the United States is looking for ways “to improve the likelihood of an orderly resolution of large regional banks under the FDI Act, without the expectation of invoking the systemic risk exception” (Gruenberg 2023, emphasis added).

In this Commentary, I consider what light can be shed on the policy course being taken in the United States from the historical evolution of the Canadian and US financial sectors in terms of financial stability. Where Canada has implicitly prioritized avoiding systemic risk in handling troubled financial institutions and has a remarkable history of stability, the United States has implicitly prioritized moral hazard and has an unparalleled history of financial crises.

Figure 2

The Commentary is organized as follows. The next section provides an overview of this history, documenting the differences in societal costs of the two approaches; the online Appendix reviews this history in greater detail. The following section discusses the many contending explanations for the divergence in historical outcomes. It identifies the tipping point in history where Canadian and US experience diverged given the choice made in Canada early in its history to prioritize prevention of the negative externalities associated with bank failures, while the United States tolerated failures to provide a market discipline on moral hazard. The next-to-last section discusses the implications of these choices for financial sector efficiency and stability and the extent to which there is a trade-off between the two objectives based on tolerance for risk taking. The final section concludes with a discussion of the lessons Canadian policymakers should draw from the SVB failure – and what lessons US policymakers might draw from the Canadian experience.

The Great Divergence

Canada and the United States are highly similar economies, as would be expected given the many common historical influences on economic policy and regulation, similar levels of income and urbanization, the shared geography (each Canadian region is part of a larger North American region with its US neighbour) and the high degree of economic interaction, amplified by more or less free trade since the 1989 Canada-US Free Trade Agreement. Importantly for the present discussion, the agreement removed US banks from the cap on foreign bank assets in Canada, opening up competitive pressure in Canada’s financial markets. The Bank Act reforms that authorized foreign branch banking in Canada further opened up the system to competition on the asset side, although not so much on the funding side.8
 For example, SVB was present in Canada as a lending branch.

Deep integration creates incentives for regulatory convergence, which in the North American context essentially means that Canadian standards and regulations tend to follow the rules adopted by the United States, even if they differ in their minutiae (Hart and Dymond 2007).9

In the financial sector, however, and particularly in banking, the US model has not been the primary influence on Canada: where the United States has been crisis prone, Canada has a long history of stability. In fact, the two countries arguably occupy the polar extremes of the most and least crisis-prone financial sectors of the major economies.10

The Anomalous History of US Financial Crises

The United States is a far outlier in terms of frequency of bank failures and financial crises. In its early history, the United States had recurring financial crises/panics/incipient panics on a decadal-plus basis, resulting in 3,401 banks suspending payments between 1865 and 1914 alone (Davis and Gallman 2001). The Federal Reserve Board was established in 1913 in response to the 1907 panic.

The interwar period featured additional waves of bank failures, including over 9,000 failures during the 1930–33 period alone (Calomiris and Mason 2003). During the Bretton Woods era, the United States had a brief respite from financial crises, but these returned with a vengeance in the 1980s. A partial tabulation of the post-1980 crises and the bailout costs they entailed (prior to the SVB event) is provided in Table 1.

The Sharp Contrast between Canada’s History and US Experience

The contrast between the US experience and that of Canada could not be greater, despite the fact that Canada experienced the same major shocks as did the United States. Since 1900, Canada has had only one significant bank failure (Home Bank in 1923).11
 During the Great Depression, one commercial bank was merged out of existence to avoid a failure, but the shrinkage in banking capacity required in view of the decline in economic activity was accomplished by a reduction in bank branches. There were no failures. In the post-war period, there were several notable mergers that might have been driven by weaknesses that could have led to failure (examples include the merger of the Toronto Bank and Dominion Bank to form the Toronto-Dominion Bank; and the merger of the Imperial Bank and the Canadian Bank of Commerce to form the Canadian Imperial Bank of Commerce) but again, there were no failures.

Table 1

Canada, however, had its version of the savings and loan crisis in the early 1980s. In the United States, this crisis was centred in the oil patch, with Texas the epicentre. In Canada, it was centred in Alberta. Canada closed two small banks (Canadian Commercial and Northland) and merged another troubled bank (Bank of British Columbia) out of existence, with financial support from the public purse. No depositor lost a cent and there was no crisis – although, as the Estey Commission underscored, it was the collapse of the Canadian Commercial Bank that undermined the Northland Bank’s “survival tactics” in raising capital (Estey 1986, 6). The cost to the Canadian government amounted to $1.39 billion, of which $875 million was payouts to uninsured depositors, $316 million was losses incurred by the Canada Deposit Insurance Corporation (CDIC), and $200 million injected by the federal government to facilitate the takeover of the Bank of British Columbia by Hongkong Bank of Canada (Chant et al. 2003). It is worth noting that this was the only instance in the history of Canada’s deposit insurance program where the banking system proper required assistance.

Canada also had an echo in its non-bank deposit-taking sector of the extended period of banking sector troubles in the United States from the early 1980s through the mid-1990s. Canada lost 38 trust and loan or mortgage companies insured by the CDIC during this period, including six in 1983. The last deposit-taking institution to fail in Canada was Security Home Mortgage Corporation, in 1996 (although there have been some close calls since). The total amount in deposit repayments or rehabilitation laid down by the CDIC amounted to $10.2 billion, with total losses of about $1.7 billion.12
 No depositor, insured or uninsured, lost money, and these failures did not trigger a crisis – although Chant et al. (2003) list trust and loan failures as constituting a “borderline crisis.” In addition, it is worth noting that the Alberta credit union system required a recapitalization.

Canada emerged from the Great Financial Crisis of 2007–08 without the failure of a financial institution. To be sure, the Canadian banking system required liquidity support (including from the Federal Reserve) during the crisis due to the closing of global funding markets, but Canadian banks did not need any capital injections from public authorities.

That record has been maintained since, including through the SVB crisis, notwithstanding some close calls along the way.

Duelling Explanations

Canada and the United States provide a “natural experiment” for studying the impact of alternative financial sector regulatory and supervisory polices (see Bordo, Rockoff, and Redish 1994). Canadian officials have promoted the “Canadian model” – for example, through Canada’s Global Risk Institute in Financial Services) – researchers have tried to tease out just what about that model accounted for its apparent relative success and some countries (such as Ireland) have set out to imitate it. Nonetheless, the reason for the difference in outcomes is tantalizingly difficult to pin down.

Different Crises, Different Explanations

A first major challenge in identifying the source of Canada’s relative stability is that, for each US crisis, differing aspects of the “Canadian model” have been singled out as the key explanatory factor.

For example, it is generally argued that, in the Great Depression, Canada’s regionally diversified national banking system enabled it to avoid the waves of bank failures experienced in the US unit-bank-dominated system. As many analysts have pointed out, however, regional diversification breaks down as a risk-management measure when all regions of a country are subject to a common shock, as was the case in the Great Depression. Moreover, by the time of the subprime crisis, US banks had become regionally diversified, and the largest bank to fail in US history to that point – Washington Mutual – had as impressive a branch network as any of the major Canadian national banks.

When the United States had its savings and loan crisis, Canada largely avoided the problems because of a timely liberalization of interest rates in the late 1960s, prior to the inflationary surge of the 1970s, thus avoiding the disintermediation suffered by the US savings and loans institutions that was a major contributing factor to the crisis in the United States.13
 The interest-rate deregulation was not adopted in anticipation of this particular problem, but rather responded to a Canada-specific problem of competitive balance between banks and non-banks that arose from regulatory restrictions on Canadian banks’ lending rates, so this looks more like serendipity than a feature of a Canadian “model.”

When the United States again lurched into crisis as a result of the subprime mortgage debacle, Canada’s system emerged largely unscathed despite many similar contextual developments. Some of the differences noted to explain the difference in outcomes in this latter incident include:

  • statistically significant differences in particular balance-sheet ratios – for example, capital and liquidity ratios or the share of liabilities generated by retail versus wholesale deposits, as Rostnovski and Huang (2009) emphasize;
  • the concentrated Canadian banking system (Bordo, Redish, and Rockoff 2011);
  • differences relevant to the mortgage market, including the lesser run-up in housing prices in Canada, the fact that mortgage interest is not tax deductible in Canada, which works to constrain speculation, and the fact that Canadian mortgage loans are not non-recourse loans as is the case in many US states, (features emphasized by Dodge 2011);
  • the consolidation of supervision of Canada’s federally supervised financial institutions under the Office of the Superintendent of Financial Institutions, which contrasted with the fragmented US regulatory framework;14
     and
  • Canada’s innate conservatism in running the financial sector and stronger prudential requirements – for example, capital requirements over and above the Basel Accord requirements and limits on the role of innovative forms of capital in Tier 1 capital, points emphasized by Jackson (2013) in a Congressional Research Service report.

For example, in their exegesis of the subprime crisis, Bordo, Redish, and Rockoff (2011) attribute Canada’s escape from crisis to the fact that the concentrated Canadian banking system had absorbed the key sources of systemic risk that exploded in this crisis – namely, the mortgage market and investment banking – and was tightly regulated by one overarching regulator. By contrast, in the United States, a weaker fragmented banking sector had resulted in the evolution of a strong financial market that featured a large shadow banking system, multiple competing regulatory authorities, and a “labyrinthine set of regulations for financial institutions.” In the US system, the shadow banks were largely outside the regulatory umbrella and the risks that they took were therefore not well understood or monitored. While Canada had its version of the shadow banking crisis in the form of the meltdown of the non-bank asset-backed commercial paper (ABCP) market, this activity was relatively small in Canada compared to the United States (see, for example, Chant et al. 2003).

To be sure, the Canadian financial sector reforms in the early 1990s – which replaced the “four pillars” framework based on the separation of banking, trust, investment underwriting and insurance with an integrated financial sector model under one supervisory institution – explicitly targeted many of the risks that blew up in the United States in the subprime crisis.15
 Those reforms, however, responded to the problems encountered by the Canadian financial system in the 1980s, parallel to and contemporary with those encountered by the US financial system and could not explain the prior history of stability, nor did they anticipate the issues that would subsequently drive the subprime crisis.

Moreover, the risk-management rules both Canada and the United States adopted are broadly consistent with the global standards that have emerged through decades of work through international organizations such as the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO). Regulatory convergence has also gained impetus from international competitiveness concerns.

Paralleling the official processes, individual financial institutions have developed mathematically sophisticated techniques to manage risk, mining the massive databanks that have been developed on financial markets and instruments. Although individual institutions in Canada and the United States might have superior systems, it is hard to see why Canadian banks as a whole should consistently have more effective internal controls than do US banks.

To illustrate the difficulty of untangling this particular web, both Canada and the United States adopted a major financial sector reform prior to the subprime crisis, allowing banks into investment underwriting. In Canada, this was done through the “mini big bang” of 1987. In the United States, the reform was the repeal of the Glass-Steagall Act in 1999, a move that has been blamed explicitly for contributing to the subprime crisis. In Canada, the mini big bang was motivated by the desire to protect the banking system from disintermediation by a nascent shadow banking system – as signalled by the institution of the “bought deal” by Gordon Capital in the mid-1980s. Such a system would have created a dynamic problem of adverse selection as the banks’ best clients moved into direct financing, given that, at the time, they had as good or better credit ratings than the banks, which were saddled with non-performing sovereign loans associated with the Latin debt crisis. In one country, deregulation is said to have led to the crisis; in the other, the same deregulation can be argued to have prevented the crisis.

The Simultaneous Failure of Multiple Lines of Defence

The second major challenge in trying to nail down specific regulatory or supervisory features as responsible for Canada’s record of stability lies in the fact that, in managing their affairs, financial institutions have multiple lines of defence against failure: internal risk-monitoring management systems, internal auditors, boards of directors’ audit committees, boards of directors themselves, external auditors, and the disciplines generated by scrutiny from interested shareholders, market analysts and credit-rating agencies. Supervisory oversight and regulatory rules of the road are thus only one line of defence, and not necessarily the most important.

Given the various lines of defence, following every major financial debacle, of which we now have had four and counting in the span of a quarter-century – the Asian crisis, dot-com, subprime and now SVB – recriminations are levelled at each layer: the managers (and their pay/incentive packages), the directors, the auditors, the rating agencies, the market analysts, the risk models and the technicians who build them and, of course, public sector rules and the supervisory authorities.16

For example, examining the subprime crisis, the Financial Crisis Inquiry Commission (FCIC 2011) seemingly apportioned equal blame to the “captains of finance and the public stewards of our financial system” who “failed to question, understand, and manage evolving risks” in the financial system, while commenting disapprovingly on households that “borrowed to the hilt.” The Commission listed its major findings as follows:

  • The financial crisis was avoidable: it was the result of “human action and inaction, not of Mother Nature or computer models gone haywire” (FCIC 2011, xvii).
  • There were failures in financial regulation and supervision: “The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets” (FCIC 2011, xviii).
  • There were “dramatic failures of corporate governance and risk management at many systemically important financial institutions” (FCIC 2011, xviii).
  • There was “excessive borrowing, risky investments, and lack of transparency” (FCIC 2011, xix).
  • The government was “ill prepared for the crisis, and its inconsistent response [allowing some institutions to fail but bailing out others] added to the uncertainty and panic in the financial markets” (FCIC 2011, xxi).
  • There was a “systemic breakdown in accountability and ethics” (FCIC 2011, xxii).

More generally, the Commission blamed the collective “we” for allowing the development of a shadow banking system that lacked all the safeguards built around the formal banking system to prevent recurrence of the crises of the 1930s; in Biblical tones, the Commission concluded, “We had reaped what we had sown” (FCIC 2011, xx).

In the case of the subprime crisis, the chain of failure was multiplied many times over because of the multiple players involved in the generation of the derivative instruments at the heart of the crisis. As Baily, Litan, and Johnson (2009, 8) observe,

What is especially shocking...is how institutions along each link of the securitization chain failed so grossly to perform adequate risk assessment on the mortgage-related assets they held and traded. From the mortgage originator, to the loan servicer, to the mortgage-backed security issuer, to the CDO issuer, to the CDS protection seller, to the credit rating agencies, and to the holders of all those securities, at no point did any institution stop the party or question the little-understood computer risk models, or the blatantly unsustainable deterioration of the loan terms of the underlying mortgages.

The Asian crisis elicited a similar litany of recriminations of failure at every step in the line of defence: Where were the auditors? Where were the credit-rating agencies? Where were the risk models?

These recriminations are being reiterated at present in the SVB crisis (Barr 2023). For example, in the review of the SVB failure, it was noted that supervisory officials had warned SVB about the risk that higher interest rates posed to its balance sheet as far back as November 2021; SVB failed to address the concerns, however, exposing it to the deposit run that took it down (Son 2023) and exposing the supervisors for not having acted on their own warning.

That should give pause for reflection.

Bad Apples

A theme that has received prominent discussion as a causal factor in financial crises is fraud. In the case of the subprime crisis, it was noted that none of the executives of the major failures went to jail: “Too big to fail, too powerful to jail?” is a question raised by Pontell, Black, and Geis (2014) in assessing why there were no major prosecutions – although hundreds of lower-level participants in the mortgage origination process were prosecuted (Nguyen and Pontell 2010). In a retrospective, Griffin (2021) identifies from a survey of the literature what he terms “a cohesive narrative that conflicts of interest and the malfeasant features it generated played a central role in the financial crisis.” Nguyen and Pontell (2010) describe the fraud as “built into” the financial system – that is, the system is structurally fraudulent in that “lax lending policies, poor underwriting standards, inadequate regulatory structure, and government oversight…entails significant amounts of fraud at various institutional levels.”

From the perspective of the present author, there are three major problems with assigning fraud a key role in the subprime or other financial crisis. First, fraud is a routine part of economic activity and is subject to routine monitoring and prosecution. For example, the US Mortgage Bankers Association estimated that, in 2006, mortgage fraud cost the industry between US$946 million and US$4.2 billion (cited in Nguyen and Pontell 2010). For its part, the FDIC issues a regular “Mortgage Loan Fraud Industry Assessment Based on Suspicious Activity Report Analysis.” The January 2017 report highlighted that the frequency of suspected frauds had risen substantially in the previous year (FDIC 2007).

The real issue, however, is not individual misrepresentations on mortgage applications by applicants who intend to repay, but “fraud for profit” – the latter is systematic (FBI 2007). That leads to the second point, which is that an allegation of fraud as a critical factor means “fraud for profit,” which then indicts the entire system – the “built-in” argument noted above. Fraud then becomes all-encompassing, and its role in “causing” the subprime crisis and, by extension, the longer history of US banking sector crises becomes inherently an “American-exceptionalism” argument – which is uncomfortable to rely on.

Finally, this fails to explain the failure of the entire system of controls all at once but only episodically. In short, fraud will always be found, will always be a contributing factor to the scale of the losses, but fails as a critical explanatory factor and, a fortiori, as a predictive factor.

Bad Models

Where the “fraud” explanation implicitly argues that the system was fine but there were bad apples in the barrel, a diametrically opposite explanation is to argue that the players were fine but risk models could not keep up with financial innovation.

Securitization is hardly new: it dates back to the 1800s, and the modern era, driven by securitization of mortgages, dates back to at least the 1970s (Kaplan 2014), if not the 1920s (Goetzmann and Newman 2010). The evolution of the overall financial system in terms of the relationships among the various types of intermediaries, their relative scale and so on would, of course, modify the system’s behaviour. For example, Gorton and Metrick (2010) point to the role of repurchase agreements in maturity transformation as the real culprit – although they acknowledge that all explanations remain controversial. In the big picture of long history, specific innovations become a digression in a footnote.

Canada Has the Bugs but Not the Disease

In light of the above, it is interesting, from the perspective of a comparative US-Canada analysis, to review the list of causal factors the CDIC lists in its own analysis of failures of Canadian financial institutions (CDIC 1997):

Mismanagement:

• lack of business plans and coherent strategies.

• excessive risk taking in expanding market segments.

Control system

• inadequate control systems to ensure compliance with internal policies and supervisory rules.

• inadequate credit analysis and loan review procedures.

Poor asset quality

• excessive concentration in a single sector.

• excessive loan growth in relation to management, control systems and funding sources.

• overlending (high loan-to-debt serviceability ratio).

Poor liquidity

• lack of cash to ensure the continuation of operations, caused by mismatch of loans and short-term assets and liabilities.

Capital adequacy

• inadequate capital to meet all applicable regulatory requirements and/or operating losses.

Fraud and concealment

• material fraud, which generally includes the intent to deceive and/or an attempt to conceal insider abuse in self-dealing.

Parent (or group contagion)

• difficulties caused by problems elsewhere in the group.

This list would not be out of place in any analysis of the US system. And yet, Canada’s system is stable and the US system is not. The bugs that are blamed for the disease of instability are present in Canada, but the disease is not. And this too gives pause for reflection.

The Tipping Point: Where Canada and the US Diverged

If we look to history for the answer, we need to focus on developments in Canada when its experience started to diverge. This was 1900. Prior to that date, Canada’s financial institutions failed as routinely as those in the United States. After that date, they did not. In 1900, Canada had a decennial revision of its Bank Act. For reasons that are probably completely buried in the sands of time, Canadian policymakers gave a prime role in resolving bank problems to the Canadian Bankers Association.

Here it is salient to note that the first Canadian banks were founded by Scots, and there are many parallels between Canadian banking history and Scottish banking history. Scotland had a history of banking stability that contrasted sharply with the tendency of the English banking system to lurch into crises. In their magnum opus to explain banking sector fragility as a “game of bank bargains,” Calomiris and Haber (2014) go into great depth in describing England’s troubled history but spend little time on Scotland, despite noting the distinctly different history. Nor do they unpack Canada’s similar divergence from its southern neighbour’s experience, despite Canada’s shared banking tradition with Scotland.

But there is a hook here on which to hang a theory. The implicit “model” that explains the sharp improvement in Canadian banking sector stability comes originally from the role of the Canadian Bankers Association. Bankers are strongly averse to instability because of the negative spillovers of such failures on their own banks and on the value of their bank charters. Any need for reinforcement of this perspective was provided by the fallout from the Home Bank failure in 1923. And thereafter, Canada handled incipient bank problems through mergers and acquisitions, not through allowing failures (see the Appendix for examples of how Canadian banks resolved incipient problems). The Canadian bankers controlled moral hazard through what we would refer to today as “social networks.” The United States, by contrast, prioritized the role of market disciplines in controlling moral hazard.

This, along with the historical accident of decennial revisions that prompted regular reform between crises rather than driven by crises, allowed the Canadian system to address the externalities generated by bank failures directly rather than indirectly through market discipline, while adapting to changing societal needs and technological conditions on a timely basis. Importantly, the system ensured enough competition to be efficient, as concluded by studies explicitly focused on this point conducted over many years (see the online Appendix for an elaboration and citations).

Following the SVB failure, Canada finds itself in a familiar position of observing a simmering financial crisis in the United States driven by a factor common to both countries – in this case rising interest rates due to monetary tightening – and facing similar factors in the risk environment, including commercial real estate and the increased potential rapidity of bank runs due to the digital transformation. Again, the United States is driven to consider a range of reforms in the wake of a crisis, while Canada is not.

Discussion and Conclusions

There are several takeaway points from the consideration of the comparative history of Canadian and US financial sector stability.

First, the US response in the SVB crisis balanced concerns about stability with concerns about longer-term efficiency from a possible heightening of moral hazard risk. In this regard, the US approach to SVB was much more in line with Canadian historical practice and does not necessarily create the risk of future crisis since, as Canada has demonstrated, moral hazard risks can be addressed between crises. The most comparable episode to SVB in US financial history is the Latin debt crisis, when the US authorities, alongside their international counterparts in this instance, exercised regulatory forbearance and avoided a US banking crisis on that account. That is encouraging for the prospects of avoiding a banking crisis in the present moment given the continuing vulnerabilities in the US banking system and the unknown risks in the shadow banking system.

Second, while US authorities are subject to the political necessity to be seen to be taking action, Canadian authorities are not. Nonetheless, OSFI was quick off the mark to monitor liquidity in the Canadian banking system, given that the SVB failure was triggered by a liquidity crisis, and the Canadian Bankers Association, although no longer armed with the powers conferred on it by the 1900 Bank Act, was similarly quick to issue a statement asserting the stability of the Canadian banking system. Forewarned is forearmed.

Third, while history tells us there is no parallel between the United States and Canada in terms of banking crises, the same history shows that Canada’s stability advantage was not quite as clean as it might appear. In this regard, see for example: the shrinkage of Canada’s bank branches in the Great Depression, which roughly matched the number of US bank failures; the litany of trust and loan company resolutions paralleling the US S&L and banking crises of the 1980s-1990s; and the collapse of Canada’s ABCP market during the subprime crisis in parallel with the collapse of similar instruments in the United States. Moreover, Canada's comparative stability also arguably owes something of a debt to serendipity – for example, the timely deregulation of interest rates for reasons unrelated to the benefit that Canada enjoyed as a result when accelerating inflation massively escalated the US savings and loan crisis. Accordingly, there is no basis for complacency. The present paper does not make the case for Canada to pat itself on the back. The SVB moment is, after all, the first such crisis in the age of social media, online banking and an unprecedented disruption that is unfolding in terms of the way we work flowing from the changes wrought by the pandemic and that are to come in the age of artificial intelligence.

Finally, while the evidence strongly argues that Canada did not buy stability through a grand trade-off with efficiency, since the US propensity for crisis has little to do with economic efficiency gains from optimizing competition in financial markets, this is not to argue that there is no trade-off at all between these objectives. Working within a regulatory/supervisory model that gives appropriate weight to the many and often destabilizing negative externalities of allowing financial institutions to fail and that acknowledges the de facto impossibility for depositors to judge the soundness of a bank from the quality of the marble in its foyers or the implications of the footnotes in its annual reports, it is possible to craft a financial sector policy that nudges the system toward greater efficiency while courting some additional margin of risk.

For example, the major Canadian banks reported Common Equity Tier 1 (CET1) ratios well above the regulatory minimum in 2022 (Rush 2023). From the perspective of the banks, this might reflect the need to maintain buffers above regulatory minima for risks not captured by the formal regulatory framework, including, for example, various uncertainties facing the economy, such as the historically high ratio of debt to income in Canada. From the perspective of the economy, however, it might reflect excessive prudence, as reflected in the fact that the margin between the prime business lending rate and the rate to small and medium-sized enterprises has tended to be the highest in the OECD (Kronick and Bafale 2022). In light of the narrative in this Commentary, one would be hard pressed to attribute the gap reported by Kronick and Bafale (2022) between the average spread for Canada (2.26 percentage points) and the United States (0.26 of a percentage point) to the treatment of moral hazard concerns in dealing with troubled institutions.

An informed reading of our own history – including reflecting on the Porter Commission’s advocacy for bank entry into conventional mortgage lending despite the mismatch in terms of assets and liabilities that this entailed – suggests that Canada has the margin to push for greater efficiency in its financial institutions policy. And, as also informed by its own history, this margin might be credited to the fact that, a century ago, in response to the last major bank failure in Canada, the collapse of Home Bank in 1923, Canada took the right decision about how to deal with the negative externalities of bank failures. The rest is history.

Canada has avoided its own banking crises over the past century, but it has not escaped the macroeconomic consequences of US banking crises. Nor would Canada escape the macroeconomic consequences of any knock-on financial trigger in the wake of the SVB failure, whether in the formal banking system or in the shadow banking system. The main takeaway lesson from Canada’s experience, when compared to that of the United States, is that there is no grand trade-off between economic dynamism and efficiency and instability. Instability is a choice made by prioritizing moral-hazard concerns over the negative externalities that come from bank failures. Moral-hazard issues are addressed far more effectively through regulatory design formulated in quiet periods rather than in the heat of a crisis. Economic efficiency can be pursued by fine-tuning the scope for risk taking through competition and regulatory design.

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Poapst. J.V. 1956. “The National Housing Act, 1954.” Canadian Journal of Economics and Political Science 22 (2): 234–43.

Pollard, Amelia, Giulia Morpurgo and Reshmi Basu. 2023. “SVB Isn’t a ‘Lehman Moment’ – But Could It Be a ‘Bear Stearns’ One?” Bloomberg, 14 March. https://www.bloomberg.com/news/newsletters/2023-03-14/what-s-the-next-banking-crisis-after-svb-analysts-say-it-won-t-be-last

Pontell, Henry N., William K. Black, and Gilbert Geis. 2014. “Too Big to Fail, Too Powerful to Jail? On the Absence of Criminal Prosecutions after the 2008 Financial Meltdown.” Crime, Law and Social Change 61: 1–13.

Punchard, Hilary. 2023. “OSFI takes permanent control of SVB’s Canadian branch assets.” BNN Bloomberg, March 15. https://www.bnnbloomberg.ca/osfi-takes-permanent-control-of-svb-s-canadian-branch-assets-1.1896031.

Rappeport, Alan. 2023. “F.D.I.C. proposes broadening bank insurance for businesses.” New York Times, May 1. https://www.nytimes.com/2023/05/01/business/fdic-bank-insurance-proposals.html.

Ratnovski, Lev, and Rocco Huang. 2009. “Why Are Canadian Banks More Resilient?” IMF Working Paper WP/09/152. Washington, DC: International Monetary Fund. July.

RBC. 2023. “Royal Bank of Canada Investor Presentation, Q3/2023.” https://www.rbc.com/investor-relations/_assets-custom/pdf/irdeck2023q3.pdf.

Ricks, Morgan. 2016. The Money Problem: Rethinking Financial Regulation. Chicago: University of Chicago Press.

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Online Appendix

US and Canadian Experiences, Regulatory Policies, and Tipping Points

The US Experience

The United States has a unique history of frequency of financial crises and financial institution failures. In its early history, the United States had recurring financial crises/panics/incipient panics, including in 1797, 1815, 1819, 1825, 1833, 1837, 1839, 1857, 1860–61, 1873, 1884, 1890, 1893, 1897, 1907 (the event which prompted the formation of the Federal Reserve System) and 1914.1
 Between 1865 and 1914 alone, some 3,401 banks suspended payments (Davis and Gallman 2001).

The interwar period featured additional waves of bank failures. In particular, there were numerous failures in the agricultural states in the 1920s – although these were not associated with panic-type bank runs but rather reflected shocks to the real economy (Walter 2005) – followed by a total of over 9,000 failures nationwide during the 1930–33 period, which witnessed four separate episodes of bank panic (Calomiris and Mason 2003).

Following an extended period of relative calm from the 1940s through the 1970s, US bank failures surged between 1980 and 1994, including in the mutual savings bank sector, the commercial bank sector and the savings and loan sector.

The mutual savings bank problems surfaced early. Between late 1981 and year-end 1985, the Federal Deposit Insurance Corporation (FDIC) conducted 17 assisted mergers or acquisitions of mutual savings banks with total assets of nearly US$24 billion, at a cost estimated at about US$2.2 billion (FDIC 1997, chap. 6). Subsequently, 58 more savings banks with combined assets of about US$60.8 billion failed, including some that had been restructured in the first wave, at a cost to the public purse of US$6.6 billion (FDIC 1997, appendix table 6-A.1), bringing the overall total of savings bank failures during this period to 75, with total assets of US$85 billion, and generating a cost to the public of US$8.8 billion.

A much bigger problem erupted in the commercial bank sector. Between 1980 and 1994, more than 1,600 banks insured by the FDIC were closed or received FDIC financial assistance, with a total cost to the taxpayer estimated at US$36.3 billion (FDIC 1997, chap. 1). Prominent events in this period included the failure of an Oklahoma bank, Penn Square, in 1982 during the oil patch downturn; this had significant ripple effects due to loan participations it had sold to other banks. The Penn Square closure represented the largest bank failure in which uninsured depositors suffered losses up to that point in the FDIC’s history (FDIC 1997, chap. 3). Shortly after, in 1984, Continental Illinois collapsed, in part due to its connections to Penn Square. Continental Illinois was at the time the seventh-largest bank in the United States, the largest US commercial and industrial lender and one of the most highly regarded by the market in the year that preceded its collapse (see, for example, Rowe Jr. 1984). This crisis, featuring an electronic bank run by wholesale depositors, cost the FDIC US$1.1 billion in resolution costs and gave rise to the sobriquet “too big to fail,” as well as a debate about “nationalization” of banks due to the public capital injected to keep them from failing (FDIC 1997, chap. 7). These incidents, however, turned out to be just the prologue: at the height of the banking crisis in 1988–92, during the bust in the commercial real estate market, on average one bank failed in the United States every day.

Unfolding concurrently with the commercial banking crisis, the US savings and loan crisis resulted in the closing of 1,043 thrifts holding US$519 billion in assets, the insolvency of the Federal Savings and Loan Insurance Corporation, the federal insurer for the thrift industry, and a public bailout cost of US$123.8 billion (Curry and Shibut 2000).2
The crisis resulted in retail deposit runs on thrifts in Ohio and Maryland that were reminiscent of scenes from the 1930s, and forensic investigations unearthed numerous scandals and resulted in a number of criminal prosecutions
(Todd 2010).

US capital markets then generated in short order several additional bouts of financial stress that threatened the banking system and pressured the Federal Reserve to make significant adjustments to monetary policy to avert systemic risks. The stock market crash of 1987 brought the US financial system to the point of breakdown and raised fears of a widespread credit crunch, requiring the Federal Reserve to inject liquidity into markets and to prompt commercial banks to extend credit to securities firms, despite any concerns they might have had about the size of their exposure (Carlson 2006; GAO 1997). Through contagion, the effects spread worldwide and prompted new regulatory initiatives (such as circuit breakers). To this day, the event remains poorly understood despite the fact that it provoked extensive study because of the spanner it threw into the workings of conventional finance theory.3

The collapse of Long Term Capital Management (LCTM) in 1998 at the tail end of the Asian/emerging market crisis of 1997–98 also elicited a massive intervention organized by the Federal Reserve based on its judgment that the hedge fund’s bankruptcy would pose a systemic threat. A consortium of 14 institutions with outstanding claims against LTCM infused new equity capital into the firm and took over its management at a meeting chaired by William McDonough, head of the New York Federal Reserve Bank. According to one of the principals of LCTM, Myron Scholes, although the Fed facilitated the refinancing, it did not bail out LTCM, as all the funds came from private creditors and, in any event, LCTM was liquidated (Scholes 2000). As Myron Scholes explains, the Fed’s initiative was prompted by the threat of holdup actions by creditors claiming they had priority claims on LCTM assets; such actions would have forced LCTM to file for bankruptcy. Press reports at the time suggested a bankruptcy would have forced an unwinding of as much as US$100 billion, resulting in cascading losses through the international financial system.4
 The Fed also made three consecutive cuts of 25 basis points in the Fed Funds Rate (September 29, October 15 and November 17, 1998) to ease emerging strains in financial markets, which resulted in a strong boost to US capital markets.5
 Unfortunately, the boost helped to further inflate the dot-com bubble, the bursting of which wiped out paper value of perhaps US$8 trillion and precipitated the US recession of 2001.

Although this crisis did not result in further major financial instability, it did prompt new regulatory initiatives such as the Sarbanes-Oxley Act to address scandalous practices, and focused attention on macroprudential aspects of financial regulation.6
 This event also elicited a powerful expansion of the money supply to avert problems from the wealth effects of the stock market bust, which in turn helped set up the subprime mortgage problem that followed hot on its heels.

As regards the subprime crisis, Ben Bernanke (2012) provides a good retrospective, including a good sense of the (apparent) bewilderment of the protagonists in this drama in trying to understand how something as relatively minor and prosaic in the grand financial scheme as aggregate losses on subprime paper on the order of US$1 trillion could upset the whole system: “By way of comparison, it is not especially uncommon for one day’s paper losses in global stock markets to exceed the losses on subprime mortgages suffered during the entire crisis, without obvious ill effect on market functioning or on the economy” (Bernanke 2012, 2). Bernanke explains the difference in terms of concentration of losses:

In the case of dot-com stocks, losses were spread relatively widely across many types of investors. In contrast, following the housing and mortgage bust, losses were felt disproportionately at key nodes of the financial system, notably highly leveraged banks, broker-dealers, and securitization vehicles. Some of these entities were forced to engage in rapid asset sales at fire-sale prices, which undermined confidence in counterparties exposed to these assets, led to sharp withdrawals of funding, and disrupted financial intermediation, with severe consequences for the economy. (Bernanke 2012, 6.)

Once confidence in these weak nodes unravelled, the crisis then unfolded as a “classic financial panic,” the kind that had been eliminated in retail banking by deposit insurance (Bernanke 2012, 11), but that in this case had flared up in a non-traditional context: the shadow banking system.7
 Gorton (2010, 17) similarly describes the panic as a classic bank run in which financial firms ran on other financial firms by not renewing sale and repurchase agreements (repos) or by increasing the repo margin (“haircut”), forcing massive deleveraging, which drove the shadow banking system into insolvency. The propagation and amplification of the financial shock is explained by the financial accelerator (see, for example, Bernanke, Gertler, and Gilchrist 1996).

The Canadian Experience

The Canadian experience was quite different. The number of chartered banks formed in Canada early in its history was relatively small compared that in the United States. Canada’s first chartered bank, the Bank of Montreal, started business in 1817. The number of Canadian banks peaked at 51 in 1875 before a period of consolidation through failure and merger brought the number down to 22 at the end of 1914. During this period, 46 banks failed or had their charter revoked, and an additional 23 disappeared through merger (Neufeld 1972). But notwithstanding the fact that, cumulatively, Canada lost nearly half the chartered banks that ever opened their doors prior to World War 1, Canada did not have recurring systemic crises as did the United States during this period (Calomiris 2007).

In addition to chartered bank failures, Canada also experienced numerous failures of private banks and near-banks in its early history, which is often overlooked. In the early history of Canada, numerous private banks sprang up to provide financial services in areas underserviced by the chartered banks. Neufeld (1972) lists 147 private bankers in operation in 1885, of which 80 were operating in centres not served by a chartered bank. Many of these private banks, which operated without any regulatory oversight whatsoever, failed, inflicting significant losses on the small communities they served, as brought out in debates in the House of Commons at the time (Neufeld 1972, 173–5). Similarly, the early building societies in Canada mostly ended badly.

In the interwar period, Canada had exactly one bank failure, Home Bank in 1923, which led to the establishment of the office of the Inspector General of Banks in 1924. Due to a continued steady pace of consolidation through merger, however, Canada entered the Depression years with just 11 banks in operation.

The consolidation wave continued through the Depression. There was only one major acquisition – that of the Weyburn Security Bank with its 30 branches by the Canadian Imperial Bank in 1931. The archival evidence clearly shows that this acquisition was facilitated as a pre-emptive move to avert Weyburn’s failure (Carr, Mathewson, and Quigley 1995). The main action in terms of consolidation was through closure of branches, which had essentially the same effect as unit bank failures in the United States in terms of reducing banking capacity, but without the disruptions to creditor-debtor relations that are attendant on failures. From a peak of over 4,600 branches in 1920, the Canadian bank branch system shrank to about 3,600 in the 1940s. Some of this was due to the merger wave of the 1920s, some due to reduction of capacity during the 1930s. Canada exited the Depression with 10 banks still standing.

During the troubled 1980s, Canada lost three small banks: two to failure (Canadian Commercial Bank and the Northland Bank, both based in Canada’s oil patch) and one through an assisted merger (Bank of British Columbia, which was taken over by Hong Kong Bank of Canada). No depositor lost a cent and there was no crisis. The cost to the federal government amounted to $1.39 billion, of which $875 million was payouts to uninsured depositors, $316 million losses incurred by the CDIC and $200 million injected by the federal government to facilitate the takeover of Bank of British Columbia (Chant et al. 2003). This understates somewhat the full extent of the reduction of banking supply capacity in Canada at the time because a number of foreign-owned banks also exited the Canadian market.

Canada’s trust and loan companies, the successors to the building societies, also experienced a series of failures in the troubled 1980s and early 1990s. Of the 40 trust and loan company failures the CDIC lists since it came into existence in 1967, 38 of them occurred between 1980 and 1996, coinciding with the years of heightened rates of bank failure and the savings and loan crisis in the United States. The last deposit-taking institution to fail in Canada was Security Home Mortgage Corporation in 1996, although there were some near-misses later.

No depositor lost money, and the failures did not trigger a crisis – although Chant et al. (2003) list them as a “borderline crisis.” The handling of the failure in 1992 of Central Guaranty Trust Company (CGT), Canada’s fourth-largest trust company with $12 billion in financial assets and the largest financial institution to fail in Canada’s history, was described by CDIC president Michelle Bourque in a speech to the C.D. Howe Institute in 2014 as follows: “CGT closed at midnight on December 31, 1991, and was reopened a minute later as a part of Toronto-Dominion Bank. Depositors did not have to lose a minute of sleep, nor did they lose a single dollar of their money. The cost of the failure was recouped through premiums collected from our member institutions” (Bourque 2014). The total amount in deposit repayments or rehabilitation laid down by the CDIC amounted to $10.2 billion, with total losses of about $1.7 billion (based on a compilation from CIDC annual reports).

The Canadian banking system sailed through the various bouts of market turbulence from the late 1990s through the subprime crisis without systemic crisis – apart from liquidity support during the subprime crisis when global funding dried up – or major financial institution failures.

To be sure, the stark differences in the above accounts are at least somewhat misleading. The great number of US bank failures reflects in good measure the fact that the US system had evolved for much of its history with unit banks. By contrast, Canada, like most other countries, had branch-banking systems (on the significance of this difference, see, for example, Bordo 1995). Accordingly, Canada had far fewer banks than the United States, while the number of branches of Canadian banks was generally similar to the number of unit banks in the United States on a per capita basis. For example, in 1910, when Canadian bank-branch density reached what proved to be a relatively stable level of about one per every 3,000 Canadians, there was one bank for every 3,770 Americans (Davis and Gallman 2001).

Considered in this light, the failure of Home Bank in 1923, which involved the closure of over 70 branches,8
 scaled up by a factor of 10 to account for the relative sizes of the two economies, would be roughly equivalent to the closure of over 700 US unit banks – a figure that would not be out of place in the litany of US bank failures during the 1920s, when more than 600 banks failed annually (Bean et al. 1998). Similarly, there was a considerable contraction in the number of branches in Canada during the Great Depression. Scaling the Weyburn branch number by a factor of 10, this would have been roughly equivalent to 300 US unit bank failures in that period, to which total must be added a scaled-up figure to account for branch closures that would have corresponded to several thousand US bank failures during the same period. This was, however, less than proportionate compared to the number of US bank failures in this period (Haubrich 1990) and without the damaging consequences for depositors or bank clients (Bordo, Rockoff, and Redish, 1994).

Also, it is important to note that many crises were averted by problems having been “swept under the rug,” so to speak. During the 1930s, the federal government bailed out Newfoundland, Manitoba and Saskatchewan, which indirectly staved off problems for the Canadian banks that were heavily exposed to them (Dimand and Koehn 2009). During the Latin debt crisis, the Inspector General of Banks exercised “regulatory forbearance” to avoid triggering action when the entire banking system was technically insolvent due to excess exposure to non-performing sovereign debt.9
 And, in the subprime crisis, the federal government (and interestingly the US Federal Reserve) provided massive liquidity support to the Canadian chartered banks when global funding dried up. This was hardly immaterial given that the hardest-hit Canadian bank, CIBC, which reported a loss of US$4.3 billion for 2008 (Lam 2009), received liquidity support well in excess of its total capital base (Macdonald 2012), while some $32 billion of non-bank asset-backed commercial paper (ABCP) became illiquid in the crisis in that market, which erupted in August 2007, triggered by the US subprime event (Chant 2008).10

In a similar vein, this narrative does not delve into the experience of the credit union movement in the two countries, where the experience appears to be more similar than dissimilar, as both systems emphasize amalgamations and purchases of troubled credit unions over costly liquidations.11

In summary, while Canada’s record is not quite as clean as it is often made out to be, its financial sector did show much greater stability overall than did the US system, at least after its early years – and without any significant penalty in terms of efficiency (Allen and Engert 2007; Bordo 1995; Witmer and Zorn 2007). The difference in the performance of the Canadian financial sector thus appears to have deep roots. Several key factors that influenced the evolution of the Canadian system in a way that might have accounted for this difference are examined below. This understanding is important for the evaluation of transportability of the Canadian “model” to other jurisdictions.

The Evolution of Regulatory Policies

The main elements of Canada’s early banking regulation from a prudential perspective reflected instructions from the British Treasury issued in 1833 (Curtiss 1948). Almost two centuries later, these elements read remarkably well in terms of establishing a sound basis for the operation of a financial institution:

  • banks had to make return or statement of affairs, which as early as 1856 was to be made on a monthly basis and made public (thus providing for transparency);
  • shareholders were liable for the amount of their shares, which amounted to “double liability” in the event of a failure (thus providing a discipline against undue risk taking);
  • issue of banknotes – which represented Canada’s currency before the Bank of Canada took over the role on an exclusive basis – was regulated with reference to paid-in capital;
  • provision was made for a sufficient reserve fund;
  • banks were required to remain lenders, and not allowed to become partners in the businesses to which they lent (thus separating banking and commerce); and
  • limitations were placed on loans to officers and directors, and a ban placed on banks’ investing in their own stocks or lending on the security of these stocks (that is, no “self-dealing”).

The concern with financial soundness and the protection of bank creditors seems to have been internalized by Canadian authorities from the beginning. As Shearer (1977, 6) notes “the very first enquiry – the 1868 Select Committee on Banking and Currency of the Dominion – was motivated by a concern that [as Hansard recorded] ‘for both circulation and deposits there should be the fullest measure of security given to the public.’”

With two notable exceptions – the reforms prompted by the 1964 Porter Royal Commission’s investigation into banks and banking and the comprehensive 1987–92 reforms – the Canadian system subsequently evolved through a gradual accretion of amendments rather than as the result of any grand design. In part, this was due to a series of ad hoc legislative developments at the time of Confederation, which resulted in the life of the banks’ charters being established on a uniform basis at 10 years in the 1870 Bank Act. Periodic revisions of the Act were needed to extend individual banks’ charters – the first decennial revision took place with the 1880 Bank Act – and provided an opportunity to make timely adjustments as circumstances dictated, with adequate time for preparatory analysis and reflection (Shearer 1978). At the same time, the regular reviews prevented the build-up of issues that would have warranted major overhauls, at least for banks: Canada’s federal non-bank financial institutions legislation was not regularly updated until the introduction of the five-year review cycle for all federal financial institutions in the 1992 reforms.12

While the early history of Canada’s bank regulation emphasized prudential concerns, it also featured substantial pushback from Canadian financial institutions against regulatory intervention. As Shearer (1977) noted, the proposal by Canadian authorities in the late 1860s to introduce measures already adopted in the United States that required banknotes in circulation to be backed by government securities was “vigorously opposed by the banking interests and ultimately withdrawn … leading to the resignation of Canada’s first minister of finance.” Similarly, there was resistance from the chartered banks to the introduction in the (delayed) 1913 revision of the Bank Act of a more rigorous shareholders’ audit pursuant to the recommendations of a Commission of Enquiry into the failure of the Farmers Bank of Canada. The Commission had determined that the bank’s failure resulted from “gross extravagance, recklessness, incompetency, dishonesty and fraud” on the part of management (Porter Royal Commission, quoted in Shearer 1977).

Canada did not establish a banking supervisory office until 1925 (introduced pursuant to the 1924 Bank Act revision).13
 A supervisory office had been suggested as early as 1880, but the chartered banks successfully resisted the proposal; a supervisory office for insurance companies, the Office of the Superintendent of Insurance, was created in the late 1800s. By contrast, the United States had established a national bank regulator, the Office of the Comptroller of the Currency, as early as 1863.

Canada did not establish a central bank until 1935,14
 again in part due to resistance from the chartered banks, while the United States established the Federal Reserve System in 1913. Canada did not introduce deposit insurance until 1967; the United States established the Federal Deposit Insurance Corporation in 1933. Thus, although Canada started with sound regulatory principles and conservative attitudes regarding prudential matters, it lagged the United States in the development of a formal supervisory framework and systemic measures to address financial instability.

It might be tempting, given this record, to infer that the greater stability of the Canadian system might have reflected the absence of deposit insurance or government supervision, and thus was due to more prudent behaviour by financial institutions instilled by market discipline, in the context of generally sound, if minimalist, rules of the road. There are many claims to this effect. Wells (1987) uses this argument in a comparison of the early Canadian and US banking histories; Bordo (1990) summarizes the perspective of “free-banking” advocates on the disutility of government regulation of banks, an issue revisited below.

Following the early changes to tighten regulation, subsequent reforms in Canada started to move in the direction of promoting competition and expanding the supply of financial services to the Canadian economy. A major reason for this shift in emphasis was the phasing out of banknotes issued by the chartered banks as circulating currency with the 1934 Bank Act revision. With this reform, the function of issuing banknotes was vested with the Bank of Canada following its establishment in 1935.15
With the phasing out of note issue by the commercial banks, the double liability of shareholders was also phased out.

Many of the measures introduced in Canada in this more recent history parallel those that have come under fire in the United States as contributing factors to the US subprime crisis.

In the immediate postwar period, concern about the supply of housing led to initiatives such as the establishment of Canada Mortgage and Housing Corporation16
 to administer the National Housing Act (NHA) of 1938, a Depression-era measure to boost housing construction. In the 1954 revisions to the NHA, the chartered banks were allowed to make loans at NHA terms to expand the supply of capital for the housing market and to improve the distribution of loans in smaller communities (Poapst 1956). Previously, long-term illiquid loans such as mortgages had been thought inappropriate to back the short-term demand liabilities with which banks funded themselves. Provision was also made for the development of a secondary market in NHA loans to bring in funds from investors who were not allowed to be primary issuers of such loans; the extent of marketability of the mortgage loans was thought to be important to the extent of engagement of chartered banks in this market (Poapst 1956, 238–9).

The 1967 Bank Act revisions, which followed the first ever in-depth review of the micro structure of Canada’s financial sector (Shearer 1977) by the 1964 Porter Royal Commission, continued in this vein. As Shearer noted, “Porter was much less concerned with ‘soundness’ and more concerned with efficiency and innovativeness than was traditional.” Notably, in this regard, the 1967 revisions relaxed the restriction on bank mortgage lending by permitting non-insured, conventional mortgage lending.17

Nonetheless, two measures introduced in the 1967 Bank Act revision proved to be particularly valuable in preserving stability in Canada’s financial sector, although for reasons unrelated to the prime motivations behind the measures.

First, regulations on bank lending rates were removed to level the playing field for the banks vis-à-vis near-banks that were not subject to interest-rate regulation.18
This deregulation of interest rates preceded the corresponding deregulation in the United States by some 13 years. These were important years, however, as they witnessed the acceleration of inflation that generated powerful stresses in the US financial sector in the context of ongoing interest-rate restrictions; the savings and loan debacle in the United States can be traced in good measure to this interaction of accelerating inflation and regulated interest rates. Canada avoided these stresses by the timely removal of the 6 percent ceiling on bank lending rates before this had a chance to create a snowballing crisis as it did in the United States.19

Second, the 1967 Bank Act revision introduced a restriction on ownership of chartered bank shares to 10 percent. This was ostensibly for antitrust reasons (Shearer 1978), although the measure was prompted largely by the perceived threat of foreign takeovers in the wake of Citibank’s interest in a non-bank financial institution in Canada. In time, this measure came to be seen as a primary regulatory bulwark against related party transactions – since widely held banks had no related parties through shareholding structures – and involvement in commercial, non-banking activities through upstream related parties.20

The 1980 Bank Act was notable primarily for bringing the Canadian activities of foreign banks, which had been conducted through a variety of non-bank mechanisms, under the Act. This measure, which required the establishment of separately capitalized foreign bank subsidiaries, had overt prudential aspects: ensuring adequacy of capital in Canada to cover liabilities in Canada, which insulated the solvency of the subsidiary from the foreign parent. It also had competitive aspects, mostly in terms of restricting competition. First, limits were placed on the size of loans made by the foreign banks based on ratios of the loans to the capital in their Canadian subsidiary, rather than to the parent’s worldwide capital. In practice, this was more a nuisance factor than a constraint given the flexibility that lenders have to organize loan syndicates, which could of course include their parents – Canada’s having a wide-open capital account. Second, new branches of the foreign bank subsidiaries were subject to approval; this hardly deterred the expansion of foreign banks in Canada, however, as no application for branching was ever denied. Third, total foreign bank assets were subject to a ceiling based on a percentage of total banking system assets in Canada. Even this widely criticized measure had no real effect since the ceiling was never actually binding, as it was raised when approached. With the Canada-US free trade agreement, US banks were no longer subject to the asset ceiling;21
 the requirement to operate in Canada through a subsidiary rather than a branch was lifted in 1999,22
 and the number of foreign banks now operating in Canada through branches now outnumber those using the subsidiary route.23

The closest thing to the implementation of a grand regulatory design in Canada’s financial sector regulatory system was the overhaul in the late 1980s and early 1990s. These reforms started with the intent to modernize the non-bank financial institutions statutes, which had not had a thorough updating since the early 1900s. With the approach of the scheduled 1990 Bank Act revision, however, the reform initiative expanded to include the Act. Based on an extensive review of the formal barriers that up to that time had existed between banking, trust, insurance and securities dealing, the reforms replaced the “four pillar” framework with what was essentially a universal financial services model, albeit one that required these various activities to be conducted through separate affiliates.24

Nominally, the reforms extended powers of the financial institutions considerably; however, the review that preceded these reforms had concluded that the fungible nature of financial instruments had already allowed considerable functional competition across the formal regulatory barriers. For example, life insurance companies had started to issue short-term, daily interest, deferred annuities that competed directly with deposits. Securities dealers had introduced the “bought deal,” in which securities underwriters took on large corporate issues on their own books before distributing them to final purchasers through jobbers; previously, underwriters had lined up their distribution beforehand. With this innovation, securities dealers were able to sharpen competition with banks’ commercial loan facilities. Banks, meanwhile, were acting like insurers, building up contingent liabilities by issuing guarantees to gain fee business while minimizing capital requirements. To a good extent, therefore, the universal financial services omelette had already been made de facto; the reforms simply acknowledged and regularized these developments.

While extending the business powers of financial institutions, these reforms were also informed by the lessons learned from the failures of banks and non-bank financial institutions in Canada, by the lessons from the US savings and loan crisis, by the contemporaneous development of international standards for capital requirements and the financial market trends and innovations of the day. Accordingly, the reforms were more in the sense of re-regulation than de-regulation.

  • Business barriers that might expose individual financial institutional groups to disintermediation at particular points in the business/credit cycle were eliminated.
  • In terms of balance-sheet regulation, there was a review of risk-related capital requirements, risk-diversification requirements, restrictions on active involvement in non-financial businesses and “matching” requirements between assets and liabilities in terms of appropriate security, yield and term.
  • A hard look was taken at related-party transactions (especially with majority shareholders in the non-bank financial institutions); attempts were made to tighten controls on conflicts of interest.
  • Various proposals were considered to improve the functioning of boards of directors; some were eventually adopted (requirements that audit committees be composed of outside directors to ensure effective oversight by the board), while many were dropped as impractical. 25
  • Attempts were made to enhance external scrutiny by increasing disclosure requirements and by requiring a 35 percent public float of the shares of otherwise closely held companies in order to involve securities markets and rating agencies in analyzing performance.
  • An extensive debate was conducted on the role that deposit insurance and implicit guarantees to large institutions that are “too big to fail” might have in heightening moral hazard, and consideration was given to various means of potentially limiting such moral hazard (for example, risk-related premiums for deposit insurance).
  • The supervisory agencies were consolidated to facilitate supervision of financial conglomerates – for example, to address practices such as “kiting” of assets between linked institutions to keep problems about the balance one step ahead of supervisors – although the Estey Commission’s recommendation to merge the Office of the Inspector General of Banks with the CDIC was not adopted.
  • Many of the problems raised when supervisory officials take control of institutions were addressed, including the criteria to use in deciding to step in – that is, when the institution is insolvent on a net worth basis based on assets marked-to-market versus when it is unable to pay bills as they come due (the operational definition of insolvency).

Interestingly, these reforms included the introduction in Canada of one of the factors that is often argued to have been responsible for the US financial system meltdown – namely, the 1999 repeal of the Glass-Steagall separation of investment and commercial banking. Canada anticipated the US action a dozen years earlier in its 1987 “mini Big Bang,” which echoed the “Big Bang” regulatory reforms in the City of London in 1986. Accordingly, one would have to appeal to contextual factors that would have made the Glass-Steagall repeal particularly dangerous in the United States, whereas a similar reform in Canada proved to be innocuous to sustain this argument. Notably, the Canadian reforms were introduced just months ahead of the October 1987 stock market meltdown. The chartered banks were given a six-month head start in acquiring securities firms and might have bought high, but the system emerged from the meltdown unscathed.

The 1997 reforms, which were introduced in Bill C-82, An Act amending certain laws relating to financial institutions, focused on consumer privacy and coercive tied selling. Amendments to the regulatory framework in the 2000s relaxed, rather than tightened, regulatory controls. Interestingly, even as the US mortgage system was about to tank, Canada was modifying its regulations to allow its institutions to follow the US lead, including in areas such as mortgage lending rules.

To summarize, Canada did many things well in the area of financial regulation but was generally more concerned in recent decades with competitiveness than with soundness. In searching for the secret of Canada’s financial sector stability, one has to go beyond the role of rules and their enforcement.

The Tipping Points and Contributing Factors

Interbank Cooperation: The Scottish Model

Given the tribulations of the Royal Bank of Scotland in the subprime crisis (Mor 2018), it is ironic to note that one of the seminal factors in Canada’s tradition of stability was that, although banking regulation was initially laid down by the Crown, Canada’s early banks were founded and managed in the Scottish tradition, which featured a high degree of interbank cooperation and employed what one would now term social networks to discipline behaviour. Bankers are strongly averse to instability because of the negative spillovers of such failures on their own banks and on the value of their bank charters. The tradition established in Scotland whereby the largest banks would step into the breach in times of crisis was transferred to Canada with the Bank of Montreal, which also acted as the government’s banker and lender of last resort to troubled banks.

The US system was also exposed to the same influences. Calomiris and Gorton (1991), in a study that deserves more attention, documented the differences across US states in banking failures depending on the extent of interbank cooperation arising out of the clearing houses established for interbank payments purposes. The private banking associations established for this purpose provided ready-made institutions for coordinating member banks’ responses to panics, including through the provision of lender-of-last-resort loans, the issue of bankers’ notes that circulated as money and implicit deposit insurance.26
 The natural counterpart to these undertakings was the institution of self-regulatory disciplines, including monitoring risk taking, setting capital requirements and imposing penalties for rule violations.

The banks were mutual competitors but also cooperated. In this sense, the system featured not unadulterated competition but a blend of cooperation and competition – which might be termed “co-opetition.” This hybrid concept has been promoted by Brandenburger and Nalebuff (1996) who emphasize that, although business strategies are often described in terms of game theory, business is not a game in which someone has to lose – profitability of one enterprise, as they note, does not require that others must fail. In banking, the massive externalities that flow from one bank’s failure have long made it apparent that it is in the interest of all that none fails – thus overriding ambitions on each other’s market shares.

Confederation and the Choice of Branch Banking versus Unit Banking

Perhaps the single most obvious difference between the Canadian and US banking sectors – and one that is front and centre in all analyses of the difference between the two countries in terms of financial sector stability – is the prevalence of branch banking in Canada and of unit banking in the United States. In Canada’s very early history, pre-Confederation, individual banks were started principally by provincial charters, which were individual acts of the legislature. Unit banking was nonetheless introduced in Canada by the 1850 Free Banking Act, “An Act to establish freedom of Banking in this Province, and for other purposes relative to Banks and Banking. 10th August, 1850.” This was enacted by the province of Canada (which resulted from the merger of Upper and Lower Canada); the provisions were modelled directly on the nascent US unit-banking system. Unit banking failed to take root in Canada, however: only a few small banks were formed under the Act and the legislation was repealed by the new Dominion of Canada in 1880 (Curtiss 1948). This clearly was the first important tipping point.

The reason unit banking failed to take off appears to have been Confederation. The British North America Act vested regulatory jurisdiction over banks and banking unambiguously with the federal government because the chartered banks issued the currency of the land. This legislative outcome resulted in provincial bank charters becoming in effect Dominion charters as of 1867 (Curtiss 1948). In turn, this empowered the existing banks to operate in all provinces of the new Dominion of Canada. With both options available, the Canadian system “chose” branch banking, and the free-banking option withered on the vine. The regulation of other financial matters, including insurance, trust and contracts, remained with the provinces as part of the property and civil rights head of power.27

Many analysts have concluded that Canada’s branch-banking system allowed it to escape the wave of bank failures experienced by unit banks in the United States during the Great Depression (and earlier) because of portfolio diversification and efficiency gains from economies of scale (see, for example, Bordo 1995; Friedman and Schwartz 1963). However attractive this theory might be at first blush, there are many nagging doubts.

First, Canada’s record on bank failures pre-1900 was far from stellar. In part, this reflects the fact that, notwithstanding their branch-based structure, Canada’s chartered banks were not then all that well diversified regionally (see Davis and Gallman 2001). After 1900, regional diversification was of little benefit in the face of nationwide shocks, such as the Depression (Wagster 2009).

Second, turning to the US experience, over the years the US system has made significant strides in the direction of nationwide branch banking. This has occurred as the result of state-level regulatory reforms since the 1970s that have eased restrictions on intrastate branching, reciprocal state-level legislation permitting interstate branching and banks’ circumvention of the restriction on interstate branching through the development of holding companies (Bordo, Rockoff, and Redish 1994). Indeed, the failure of Washington Mutual during the subprime crisis, the largest bank failure in US history, involved a bank with 2,239 branch offices in 15 states – a branch network as impressive as that of any major Canadian bank (Sidel, Enrich, and Fitzpatrick 2008). Simply put, regional diversification is of little help when a crisis results in correlation of previously uncorrelated risks.

That being said, the branch-banking character of the Canadian banking system was clearly instrumental in facilitating reduction of banking system capacity in a non-disruptive fashion through consolidation of non-viable branches of individual banks or absorption of branch networks of the least viable banks by stronger banks through mergers. For example, the intervention into the Weyburn Bank, in which 30 branches were absorbed, was accomplished in one regulatory process involving one set of shareholders and one set of senior managers. A comparable process in the United States, scaled up for size of the institution, would have been substantially more transaction intensive, as it would have involved the absorption of some 300 individual banks.

Decennial Revisions

Because the charters of Canadian banks are issued for a limited time, there is a built-in requirement for Parliament to pass new legislation to extend them. This requirement, which occurs every ten years (the length of the original charters), provides a natural opportunity for the government to address any issues that have arisen in the meantime. Importantly, the arbitrary timing of the charters’ expiry means that reforms introduced at these times are not driven by immediate crisis. Many Canadian observers have commented on the importance of this feature. In the 1992 reforms, the ten-year review period was shortened to five years and extended from the Bank Act to all federally regulated financial institutions statutes. Interestingly, the first US banks were also federally chartered with time-limited charters – in this case 20 years. But this did not result in a Canadian-style regular review – the US system chose a different path.

As the account above makes plain, however, although a number of the changes introduced in decennial revisions proved in hindsight to have been very important in mitigating risks to the system – particularly the removal of interest-rate regulations in 1967 before the acceleration of inflation that wreaked havoc with regulated interest rates – there is little evidence of prescience in terms of reforms anticipating problems. The interest-rate deregulation, for example, was introduced for reasons of financial sector industrial policy, not prudence; and the consolidation of the banking and insurance supervisory bodies into OSFI was driven by the de facto integration of Canada’s insurance and deposit-taking sectors, not by concern over banks’ off-balance-sheet liabilities, nor did it prevent individual Canadian banks from taking a bath in the subprime mortgage debacle.

It could be, of course, that Canada simply had a lucky run, in which case its regulatory authorities should become ultra-conservative since such runs of luck inevitably end. This suspicion, however, should not cause us to suspend the search for deeper reasons for the difference between Canada and the United States in terms of financial sector stability.

The 1890 and 1900 Bank Act Reforms

The point in time at which the Canadian system began clearly to demonstrate greater stability can be identified quite exactly: with the passage of the 1900 Bank Act. Previously, most bank disappearances took place through failure; afterward, the vast majority occurred through mergers, many – if not most – effected under circumstances in which the acquired bank was under some duress.28

The 1900 Bank Act revision facilitated the merger of chartered banks by transferring approval from the legislature to the cabinet, and conferred on the Canadian Bankers Association particular duties in respect of failed banks and banknotes in circulation. The latter measure followed the introduction pursuant to the 1890 Bank Act of a redemption fund for notes in circulation issued by failed banks. The chartered banks had to subscribe 5 percent of the value of their own banknotes in circulation to this fund, which was managed by the government. This made the chartered banks mutual guarantors of the money they put into circulation (Curtiss 1948), which gave them an important incentive to deal with troubled banks early. With the facilitated merger provisions in the 1900 Bank Act, the banks adopted that route with alacrity.

This is not to go as far as to assert that the acquiring banks were engaged in charitable exercises, taking on losses at their own expense to avert losses to creditors of failing banks. Carr, Mathewson, and Quigley (1995) point to evidence that target banks were weak but not yet insolvent at the time of their takeover. This evidence includes the fact that takeover prices paid by the acquiring bank for stock in the target were consistent with or even above market prices; as well, correspondence among various parties to the deals attests to the adequacy of paid-in capital, reserves and double liability obligations of shareholders to cover the obligations of the target bank. Carr, Mathewson, and Quigley (1995) argue that market forces account for the mergers: that the assets of the weaker, smaller banks were more valuable to the shareholders of the larger banks, which could take advantage of economies of scale and superior technology. There is no compelling reason to believe, however, that these market advantages asserted themselves only after 1900 and not before. The sharp change in systemic behaviour at the dawn of the twentieth century suggests that it was the federal government working hand-in-glove with the Canadian Bankers Association in facilitating mergers to pre-empt risks to the stability of the system that was responsible for the sharp reduction in the rate of failures.

This contrasts sharply with the US situation, where closing a unit bank was a routine affair. Thus, where the United States became proficient at closing banks, Canada became proficient at avoiding closures. It is hardly surprising, therefore, that moral hazard, an argument that justifies bank closures, figures so prominently in US thinking about financial regulatory issues, while Canada has tended toward an approach that de-emphasizes hard and fast rules – which, of course, affords greater latitude for regulatory forbearance, an important feature of a system that leads administrators to seek to buy time to work things out quietly.29

It is important to underscore in making this argument that the CBA no longer has the roles assigned to it in the 1900 Bank Act. The significance of the 1900 legislation is that it served as a tipping point, implying a path dependence in the evolution of the institutional culture for Canadian banking regulation.

The Role of Regulatory Forbearance

Regulatory forbearance30
 also appears to have played an important role in allowing Canada’s financial system to weather the larger shocks without triggering failures. Kryzanowski and Roberts (1993, 1998, 1999) argue that many of Canada’s large financial institutions, including the chartered banks and large mutual life insurance companies, were technically insolvent in the 1930s, but that implicit government support in the form of regulatory accounting window dressing allowed them to remain in business.

Although this early record of regulatory forbearance is disputed,31
 such an approach clearly was at play in several more recent bouts of global financial stress. During the developing country debt crisis of the 1980s, the major Canadian banks had loan exposure to developing countries that exceeded their base capital, engaged in involuntary lending to provide the debtor countries with funds to meet interest payments, rescheduled short-term loans as longer-term loans to dress their balance sheets and took advantage of rules allowing the averaging of loan losses over five years to soften the blow of non-performing loans on their balance sheets (McDade 1989).

Interestingly, perhaps the only major financial crisis that the US system has dodged was the developing country debt crisis – because, for once, the US authorities exercised regulatory forbearance, an action that has been openly acknowledged in the United States. According to US observers, banks with heavy loan exposure to developing countries were not required to set aside reserves to fully cover non-performing sovereign debt. This forbearance was necessary because seven or eight of the ten-largest banks in the United States might then have been deemed insolvent, which would have precipitated an economic and political crisis (FDIC 1997, chap. 5).

Regulatory forbearance by government regulators can be readily understood as the transporting of bankers’ private self-regulatory interest in avoiding a mutually damaging failure of one of their number into public regulatory practice. Arguably, this is not an independent reason for Canadian banking sector stability, but a direct consequence of the early tipping points that drove its evolution down the path it ultimately took.

The Role of Ownership Restrictions

Another aspect of Canada’s banking system that deserves more than passing mention with regard to the history of stability in the more recent era is the ownership limit that became part of the Bank Act in 1967. As is clear from the late date of the measure, it was not responsible for the history and legacy of stability, but one can argue that it was (fortuitously) an added bulwark during the recent period of global financial instability. How it did this was precisely for the reason that the measure is typically vilified in the more fundamentalist economic commentary: it insulated Canadian banks from hostile takeovers, thus easing the market pressures to which bank executives are exposed and which can lead to greater risk taking – recall in this context the famous statement from Citi’s Chuck Prince about having to dance when the music is playing!32

This is a factor that cuts two ways, of course: market pressures can also drive efficiency, and for most of the past four decades this latter consideration has tended to dominate the mostly negative commentary on Canada’s system.33
Responding to that commentary, the ownership restrictions were eased in 2001, with banks with capital of $5 billion or more subject to 20 percent individual ownership limits, banks with capital between $1 billion and $5 billion allowed to be closely held but with a requirement for 35 percent public ownership and smaller banks with capital of less than $1 billion allowed to be closely held (Finance Canada 2006). In retrospect, however, the Canadian system might have dodged a bullet by not going further in the direction suggested by most advocates.

But the Canadian banking system is in fact highly efficient – even though it might not be at the frontier for that measurement at any particular point in time. For example, Allen et al. (2007) find that (a) Canadian bank labour productivity is as high as or higher than that in the United States in generating assets and net operating revenue; (b) cost-inefficiency for Canadian banks averages about 6.5 percent, much less than for US bank holding companies (about 14 percent); and (c) Canadian banks have moved closer to the efficiency frontier over time, and in fact their technological progress exceeds that of US banks. Although Allen, Engert, and Liu (2007) find that Canadian banks still have not exploited economies of scale fully, there is no evidence for a productivity or efficiency gap vis-à-vis US banks. In short, there is no particular empirical evidence for an efficiency-instability trade-off – Canada does not buy its stability through efficiency-choking regulation.

To the extent there is such a trade-off, however, Canada’s banking system history shows that, in a dynamic system, staying away from that frontier is vital for the longer-term health of the system, given the significant role of externalities in system stability. Market purists will not like this analysis, but the principle is there to be seen in probably most spheres (I am tempted to say all spheres) of human endeavour. Efficiency is a good thing, for example, but redundancy is vital to robustness. Complex systems have “sweet spots” that balance opposing tensions.

Big Shall Not Buy Big

One of the idiosyncratic curiosities that emerged from the 1992 financial sector reforms was the policy of “big shall not buy big.” This was not part of law or regulation; it was simply announced, although that should not be taken as a sign of its relative importance (or lack thereof).34

The background to this policy is as follows. As the financial reform package was being put together, it was foreseen that the removal of the restrictions on formal linkages between banks, trust, insurance and investment dealers would result in a wave of mergers and acquisitions. The potential for a reduction of competition was obvious; at the same time, the potential for gains from economies of scope and scale was also thought to be significant. Canada, it was concluded, would get the best of both worlds by allowing industry consolidation – but only up to a point. That point was set by the policy: “big shall not buy big.” In Canada’s financial system, it was easy to do the arithmetic: if the five major banks, the two large mutual life insurance companies, and the odd investment dealer and trust company created diversified financial groups, the system would have a critical mass of competition – especially with Canada’s strong cooperative credit system serving as a vital check and balance.35

This was industrial policy. Students of Japan’s MITI/METI policies over the postwar period – when Japan promoted industry consolidation, but only up to a point, such that Japanese industry would benefit from fierce domestic rivalry while at the same time its companies would be viable international competitors – will have no trouble seeing the family resemblance in the policies. Even the essentially informal approach – not adopted through formal regulation or legislation – has echoes of Japan’s industrial policy approach.36

This policy came into play when four of the five Canadian chartered banks announced in 1998 their plans to amalgamate, in violation of their undertakings at the time the 1992 reform package was put together. Famously (or notoriously, depending on one’s perspective), Finance Minister Paul Martin rejected the mergers.

Again, the government’s policy decision was vilified. Charles Baillie, Chairman and Chief Executive Officer of Toronto Dominion Bank, in addressing the House of Commons Standing Committee on Finance, referenced this policy in a pejorative manner:

The other road is to say no to mergers, to say that big shall not buy big ... to say that our institutions are big enough for Canada, and to rule out our competing effectively in world markets. Canadian financial institutions would also see their domestic market shares dwindle, squaring off against much larger foreign-owned competitors. That would be a valid choice, if your vision for Canada does not encompass excellence. Such a choice would not be catastrophic. It would not be a crisis. The decline of our influence as institutions, and Canada’s position as a global financial centre, would be gradual. Our major banks and insurance companies and mutual fund companies are large enough to continue to operate profitably, and to develop strategies to operate in a narrower range of businesses, in order to generate acceptable returns for shareholders. But what of the long term – where would we be? Certainly, with consolidation continuing elsewhere – and make no mistake, bank mergers are a worldwide phenomenon – we would gradually lose our place at the table. There would be certain areas and businesses in which we simply could not compete; consolidation elsewhere results in our major institutions ranking further and further from the top tier, farther and farther from the table. (Baillie 1998.)

Baillie’s perspective was, of course, not borne out by history. Canada’s banking sector did not dwindle, thwarted by policies that prevented “excellence” – which is to be read as emphasizing one particular element of the system to the extreme, in exclusion of all others. “Big shall not buy big” turned out to be a pragmatic, intuitively conceived policy that balanced competing imperatives. A fan of either of the competing imperatives necessarily will see the policy as badly flawed. Only an appreciation of the critical nature of a “sweet spot” in complex dynamic systems that is attained when valid imperatives compete with one another and the ideal outcome is a compromise, a draw, an unsettled tension, allows an understanding of why this policy was in fact ideal.

Concluding Thoughts

As a footnote and a segue back to the present, the policy of “big shall not buy big” may have prevented the Canadian banks from taking excessive risks in a North American acquisition strategy predicated on successful mergers in the run-up to the subprime crisis. This approach foreshadowed TD Bank's escape from its planned merger with a US bank as the SVB crisis unfolded.

The history of Canadian and US banking sectors is a puzzle that rewards the study and continues to provide a reference point for contemporary practice in dealing with troubled banks. Calomiris and Haber (2014) theorize in their concept of “The Game of Bank Bargains,” which they describe as a game that is played between bankers, governments, and interest groups with political power, that countries do not “choose” their banking systems, but rather they “get” a banking system consistent with the institutions that govern the distribution of political power within their societies (for a review of this book with specific comment on Canada, see Ciuriak 2016). The present Commentary builds a case that, at least in terms of stability, countries do get to choose: they can choose to address the negative externalities of bank failures, or choose not to. For Canada, these lessons appear to be fully internalized in Canada's approach to financial sector regulation and supervision. For the United States, there are lessons there for the taking.

  • 1
    The yield curve depicts the rate of interest at different maturities of debt instruments. Normally, investors demand higher interest rates to lock in lending for longer terms. Accordingly, the normal yield curve slopes upward. However, during periods of monetary tightening, short-term rates can move higher than long-term rates, resulting in a downward sloping yield curve. Yield curve inversions have invariably preceded recessions in the US economy in the post–Bretton Woods era. The inversion after mid-2022 was by far the deepest in this era. On the relationship between yield curve inversions (measured as the 10-year bond rate minus the 3-month Treasury bill rate) and recessions, see Federal Reserve Bank of St. Louis (n.d.).
  • 2
    It is important to emphasize that maturity transformation is a staple part of banking practice; hence the banking system worldwide faced the risks from further interest-rate hikes in the context of an already steeply inverted yield curve. On this see, for example, Tindera and Armstrong (2023). Moreover, while banks worldwide obviously did not face the same sector-specific credit risks that SVB did, recessions generate credit risk throughout the system. There is a saying in financial markets that, when liquidity dries up (as was threatened by Powell’s March 7 statement to Congress), markets find out who was “swimming naked.” Not to put too much of a fine point on this, investors did not want to find out. TMI – and too late.
  • 3
    Total commercial bank assets in the United States were US$11.15 trillion in March 2008 (about US$15.6 trillion in 2023 dollars) when Bear Stearns failed. They were about US$22.9 trillion in March 2023 when SVB failed (Federal Reserve Bank of St. Louis n.d.).
  • 4
    On the merger, see PacWest (2023); on the troubled condition of Pacific Western at the time of merger, see Nishant and Saini (2023).
  • 5
    The major Canadian banks’ exposure to US operations is as follows:<br />
    • TD: 35% of TD’s earnings come from US retail banking (TD 2022), including from TD Bank, America’s Most Convenient Bank, which is the tenth largest US bank, and through its holdings in the Charles Schwab Corporation. See:&nbsp;https://www.td.com/about-tdbfg/corporate-information/corporate-profile/… />
    • RBC: 25% of RBC’s global revenue comes from the United States. RBC claims to be the leading Canadian investment bank in the United States and the 6th largest wealth manager in the United States (RBC 2023). It also holds LA-based City National, the 35th largest bank in the United States, which focuses on Hollywood.<br />
    • CIBC: 11.3% of its global revenue comes from its US operations (CIBC 2022).
  • 6
    Shadow banks are non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulation and supervision. Both Bear Stearns and Lehman Brothers operated in the shadow banking system (Gelzinis 2019). The shadow banking system raises continuously rolled-over short-term debt (money market funds, commercial paper, asset-backed commercial paper, and so on (FSB 2011) to fund portfolios of financial assets, thus engaging in maturity/liquidity transformation and leverage, just as banks do by taking deposits to fund various types of loans. The short-term debt issued by shadow banks thus functions as privately issued (near) money. See Ricks (2016) for a discussion of the role of shadow banks in the subprime crisis and their growth in the aftermath due to financial innovation and increased increased “regulatory arbitrage” as the formal banking system was subjected to intensified regulation (on the latter, see e.g., FSB 2011 and McCulley 2009).
  • 7
    These could take many forms – reversal of the relaxation of Dodd-Frank regulations imposed in response to the subprime crisis under the Economic Growth, Regulatory Relief, and&nbsp;Consumer Protection Act&nbsp;signed into law by President Donald Trump on 24 May 2018; improved supervision (including increased head count at the regulatory agencies); increased capital requirements for banks; changes in practice for marking to market to provide flexibility in weathering the present episode, expansion of deposit insurance coverage, and others (Barr 2023; Jiang et al., 2023; Rappeport 2023; and Smialek 2023).
  • 8
    Some foreign bank branches in Canada are permitted to offer full banking services, but most are not allowed to accept deposits of less than $150,000, and some that are designated as lending branches can only accept deposits or otherwise borrow from financial institutions (see&nbsp;OSFI 2023a).
  • 9
    This natural tendency is strengthened by the advocacy of Canadian continentalists who argue that Canada should go so far as to eliminate unilaterally the many small differences that persist between the two systems by adopting US standards and regulations to facilitate still deeper economic integration (see, for example, the External Advisory Committee on Smart Regulation 2004). Hart (2006) articulated the case for this as follows: “The regulatory “output” in both countries may be roughly identical, but the United States disposes of much larger regulatory resources than does Canada; as a result, its regulatory “input” is roughly 10 times that of Canada. Common sense suggests that Canada can both reduce its costs and gain superior results by aligning itself more deliberately with the United States and benefiting from the much larger US regulatory effort in selected areas, from drug approvals to environmental standards.” Given political sensitivities, however, the case for Canadian convergence toward US standards is more often couched in terms of promoting cooperation/consultation between the national regulatory authorities to avoid/reduce unnecessary differences.
  • 10
    There are other countries that could claim to have highly stable financial systems; the United States is unique in its history of instability.
  • 11
    This claim concerning the Home Bank failure as a landmark event rests on several pieces of evidence: (a) it imposed large losses on depositors; (b) it led to a Royal Commission of inquiry into its causes; (c) it led to a major reform in the governance system – namely, the establishment of the Office of the Inspector General of Banks; and (d) it remains cited as a prominent failure (see, e.g., Turley-Ewart 2004).
  • 12
    Estimate compiled by the author from CDIC annual reports.
  • 13
    Institutional differences between the United States and Canada, of course, might have played a role in raising the costs of the S&amp;L crisis to the United States. But banks obviously take into account institutional differences in formulating their lending practices&nbsp;ex ante. The systemic factor in the S&amp;L crisis was rising interest rates in a context of Regulation Q restrictions on interest rates. There was no way around those for the US institutions.
  • 14
    Formal reviews of the functioning of Canada’s prudential regulatory and supervisory system also emphasize the effectiveness of interagency cooperation in Canada between OSFI, the Bank of Canada, the CDIC and the federal Department of Finance through formally established bodies such as the Senior Advisory Committee, which considers systemic issues, including crisis preparedness, and the Financial Institution Supervisory Committee, which addresses institution-specific problems, including early intervention into troubled financial institutions. More generally, Canada gets good marks for the collegial culture of information exchange and cooperation among the agencies with a formal role in financial system governance. See IMF (2019) for a detailed discussion of these issues and the division of responsibilities among Canada’s federal agencies for dealing with systemic-risk issues, including the overarching responsibility of the minister of finance for financial system stability, and the Bank of Canada’s responsibilities as lender of last resort and manager of the payments system.
  • 15
    Notably, Canada continued to have provincially regulated and supervised financial institutions (including securities dealers, mutual fund and investment advisors, credit unions and provincially incorporated trust, loan and insurance companies) that were not under the purview of OSFI, but under 13 separate supervisory authorities. Notably, the provincially supervised segment of Canada’s financial sector includes Quebec’s Desjardins group, which plays a very significant role in that province. However, following the 1987 mini “Big Bang” that allowed the banks into underwriting and the 1992 reforms that broke down the “four pillar” structure, the main sources of systemic risk were brought largely under the direct oversight of OSFI. That said, in its review of Canada’s financial system in 2019, the International Monetary Fund observed: “Inter-agency coordination and cooperation works well at the federal level and among provincial authorities, but the federal-provincial nexus needs further improvement…The capacity to conduct Canada-wide surveillance should be strengthened, supported by continued efforts to address data gaps. A federal-provincial platform to discuss systemic risk issues and formulate policy responses should be established. System-wide contingency plans, including how to provide market-wide liquidity support, should be put in place” (IMF 2019).
  • 16
    Public policy, of course, gets it from both sides – from market fundamentalists who argue that the crises are actually caused by the heavy hand of regulation (including the inducements for risk taking created by deposit insurance and the political motivations to bail out failing banks), and from those who blame the supervisory authorities for being derelict in their duties.
  • 17Originally Central Mortgage and Housing Corporation, the change to the current name was made in 1979.
  • 18The 6 percent ceiling on bank loans had driven the banks out of the residential mortgage market when market interest rates moved above the ceiling (Freedman 1998).
  • 19As Freedman (1998) describes, “[t]he extreme case of such [maturity transformation] was the savings and loan associations in the United States, which held 25-year mortgages and issued savings account and short-term deposits. The mismatch to which this type of behaviour gave rise proved to be very costly when short-term rates rose well above longer-term rates. While Regulation Q remained in force, the savings and loan associations faced serious disintermediation [because they could not raise deposit rates], and when it was removed, they faced severe losses.”
  • 20The proposal to introduce regulated financial institution holding companies in the process leading up to the 1992 reforms was intended to buttress the separation of finance and commerce while allowing horizontal diversification within the financial services industry.
  • 21This exemption was extended in 1994 to Mexican banks under the North American Free Trade Agreement and in 1995 to all foreign bank subsidiaries pursuant to Canada’s commitments under the World Trade Organization Agreements.
  • 22Foreign bank branches were, however, restricted to the wholesale deposit-taking business – that is, deposits were subject to a minimum value of $150,000 to avoid potential issues under Canada’s deposit insurance system. See Allen and Engert (2007).
  • 23The June 1999 legislation allowed foreign banks to establish operations in Canada through either full-service branches or lending branches. Full-service branches are permitted to take deposits greater than $150,000, while lending branches are not permitted to take any deposits and are restricted to borrowing only from other financial institutions. Currently, there are 27 full-service branches and 4 lending branches in Canada, compared with 15 foreign bank subsidiaries. See OFSI (2022).
  • 24The Department of Finance reform proposals were set out in a series of reports, The Regulation of Canadian Financial Institutions: Proposals for Discussion (the “Green Paper”) in April 1985; the Technical Supplement to the Green Paper in June 1985; New Directions for the Financial Sector (the “Blue Paper”) in 1986; and Proposed Legislation to Revise and Amend the Law Governing Federal Trust and Loan Companies (the “White Paper”), December 1987. The process leading up to the 1984 Green Paper included an internal review of issues to be addressed and a series of discussion papers that were considered by the Dimma Commission, appointed by then junior minister of finance Roy MacLaren. Several key external reports that fed into the reforms included: A Study to Assess the Current Mandate and Operations of The Office of the Inspector General of Banks by Coopers and Lybrand, April 1986; and the Report of the Inquiry into the Collapse of the CCB and Northland Bank chaired by the Honourable Willard Z. Estey of the Supreme Court of Canada.
  • 25Various proposals were made to improve internal governance that were not ultimately adopted, but are noteworthy for the extent of the review conducted. For example, consideration was given to setting higher standards for boards, including to raise the standard of care from that expected from the “ordinary prudent person” to that of an “experienced business person qualified to be a director of a regulated financial institution”; in the end, the standard “prudent person” rule was adopted. Other proposals aimed at improving the functioning of boards of directors that did not make it into the legislation included limits on the size of boards to increase their effectiveness, attendance requirements to ensure a high level of diligence, limits on interlocking directorships and greater responsibility and greater authority for audit committees. Consideration was also given to increasing the standards for, and independence of, internal auditors, to increase their access to the audit committee (in a “whistle-blowing” sense) and to increase interaction with supervisory authorities.
  • 26Grossman and Rockoff (2015) comment on these roles of clearinghouses, albeit without emphasizing regional distinctions within the United States.
  • 27The federal government was assigned power over: “Banking, the incorporation of banks and the issue of paper money.” Other closely related heads of power assigned to the federal government included currency and coinage, legal tender, bills of exchange and promissory notes, and interest. Notably, the Bank Act is the only federal financial institutions statute that includes provisions concerning personal property. In non-bank financial institutions statutes, these provisions are omitted. This illustration of the federal-provincial allocation of powers was made stark by the formal template approach to revising and update the non-bank statutes in the 1992 reform.
  • 28The sharp difference in comparative failure and merger rates pre- and post-1900 tends to undermine the argument that the difference in preparedness to close banks in Canada compared to in the United States reflects the fact that Canadian banks from the early days combined both savings bank and commercial bank functions, while in the US system savings banks were for the most part distinct from commercial banks. In other words, according to this argument, Canada had an implicit deposit-insurance motive for avoiding bank closures, while the United States did not (see, for example, Kryzanowski and Roberts 1993). The change in patterns pre- and post-1900 points to a different institutional factor. Bordo (1986) also notes the role of the newly established Canadian Bankers Association in pre-empting destabilizing failures.
  • 29For a pejorative take on this issue, see Boone and Johnson (2010):
    “The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks. This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them. During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: ‘Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?’ In other words: don’t bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly.”
    For a positive take on this issue see Chant et al. (2003, 100–01): “[OSFI’s] mandate emphasizes the importance of early intervention in the affairs of troubled institutions…With a formal process for early intervention there is a greater likelihood of averting institutional failures by providing incentives for institutions to conduct their business prudently.”
  • 30For a discussion of regulatory forbearance, see Santomero and Hoffman (1998).
  • 31The view that regulatory forbearance explains the lack of failures of Canadian banks during the Depression is challenged by Carr, Mathewson, and Quigley (1995), who argue that Canadian banks actually were solvent during the 1930s.
  • 32The actual quote cited in Wighton (2017) is, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.” The quote is rightly notorious – if somewhat unfairly so to Prince himself, as Wighton goes on to argue – as it lines up with Keynes’s comment: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him” (quoted in Guardian 2007). This in turn lines up neatly with Alan Greenspan’s (in)famous comment that his mistake was in depending on the market’s self-correcting mechanisms to rein in ruinous behaviour (Andrews 2008). Prince, in testimony before Congress, stated: “My belief then and my belief now is that one firm in this business cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future” (quoted in Sanati 2010). Prince emphasized in his testimony that he had requested regulators to impose limits. One can interpret the Canadian restrictions on takeovers through ownership limits as, in fact, removing that imperative to dance when the music is playing.
  • 33For example, the OECD’s chief economist, in a review of Canada’s economy in 2006, commented on the financial sector as follows:
    “The size of the financial sector in Canada, defined as total loans to the private sector and security market capitalization relative to GDP, is not much more than half that of its US counterpart. Canada in 2000-03 had the fourth lowest share of cross-border loans in total domestic borrowing among OECD countries and foreign banks have low penetration of the domestic loan market ... [Although] foreign ownership ownership restrictions in the banking sector were eliminated in the mid-1990s. ...there are domestic constraints limiting concentration of ownership and maintaining a political step in the process of approving bank mergers. This works against large new players, foreign or domestic, entering the market. Hopefully, both these issues will be carefully examined in the upcoming review of the Bank Act” (Cotis 2006).
  • 34Shaw (2006, 480) calls it a “perceived” policy: this is hardly the word to describe it. “Big shall not buy big” was a linchpin policy that permitted what in retrospect was a massive deregulation of the system. Certainly, to those involved in the framing of the policies and the regulation, it was paramount.
  • 35This discussion is based on the present author’s personal experience as Chief, Financial Institutions Section and Project Director, Financial Institutions Reform Project, Finance Canada.
  • 36I hasten to add that this was not apparent to me, or to my knowledge to anyone else involved in the reform project at the time; the connection, however, leaps out upon reflection.
Dan Ciuriak

Dan Ciuriak is Fellow in Residence with the C.D. Howe Institute. He also holds fellowships with the Centre for International Governance Innovation (Waterloo) and  the Asia Pacific Foundation of Canada (Vancouver) and is Director and Principal, Ciuriak Consulting Inc. (Ottawa).