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Canada Wins

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According to Mark Perry,

this recent financial crisis isn't the first time that Canada's banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great Depression, not a single bank in Canada failed. When almost 3,000 American banks failed during the Savings and Loan (S&L) Crisis, only two small Canadian banks failed in 1985, and those were the first bank failures in Canada since 1923. And while almost 200 U.S. banks have failed since the start of the global recession in early 2008, Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure.

He points out that home mortgages are safer in Canada, with more down payments and more upfront mortgage insurance. Also, a Canadian cannot walk away from the mortgage--the bank can come after your personal assets if you default. Banks hold more mortgages, in part because the standard mortgage there has an interest rate that changes every five years, so that the duration mismatch is not as severe as it is with our thirty-year fixed-rate mortgages.

I had a chance to brief some members of a Congressional committee last week as part of an informal panel on the topic of the future of Freddie Mac and Fannie Mae. Our Congresspersons, including Republicans, still have a very hard time imagining a mortgage market without securitization. Perhaps they ought to make a field trip up north.

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COMMENTS (14 to date)
richard writes:

I don't believe mortgage interest is tax deductible in Canada either, thus the homeowner has a greater incentive to pay down the principal and reduce their household leverage.

ERIC writes:

@ richard, you are correct.

Incuhed writes:

This should be front page reading for Congress, and everyone who has influence on electing those boobs in Washington in charge of dictating bank regulation. Those are staggering details between countries, and the rules to tinker with seem fairly straight forward.

Oh, wait, politics doesn't affiliate with policy -nevermind.

Tristan Band writes:

All the more reason NOT to hate Canada. Yeah, libertarians and conservatives do not like their health care system. I think Milton Friedman, when talking about the 19th century in Free to Choose, said it best:

"You're looking at the hole in the barn door, and not the barn door itself."

In many respects, their economy is in better order than ours. Banks, as mentioned, bear the full risk. Borrowers bear the full responsibility. As a result, the banking system remains fairly stable.

[Comment edited for crude langage.--Econlib Ed.]

Dave writes:

Yeah, but if we required more money up front, the ability to go after personal assets if the note isnt paid etc, WHO would own homes in America?

Would there be enough blacks and hispanic (the ones here legally, not the illegals)homeonwers to make the political class happy; or, would HUD, Barney Frank et al decide that there was some sort of discrimination in the market and require banks to lend to people who could not afford to purchase a house?

How would ACORN and the poverty industry profit from this scheme?

I think many people in government and banking knew exactly what was going on in the US in the 90s.

Dan Weber writes:

Interesting stuff. They say that paying down your mortgage is a tax-free investment, but in the next section they talk about pre-payment penalties being common. How do they reconcile those two statements? Does "pre-payment" only mean paying off the whole thing early?

Also, the linked article suggests that big banks are easier to regulate. Maybe Canadian "big banks" are much smaller than American "big banks."

Tom West writes:

Dan, almost all mortgages come with some form of prepayment allowed (often some variation of incrase your payments by 15% each year and pay off 15% of the principal each year. This occurs without penalty.

However, most Canadian mortgages are not "open". They cannot be paid off completely without (typically) a 3 month interest penalty.

As for easier to regulate, that often refers to the fact that you can put Canada's big-six banks in a room and you've got >90% (95% 98%?) of Canada's bank capitalization.

It must be noted that while we Canadians can feel virtuous now, there was a lot worry back when American finance was making money hand over fist that Canada's lack of innovation and dynamism was going to end up with super-successful American banks devouring our stick-in-the-mud Canadian banks.

If the crisis had hit 5 years later, there might not have been any Canadian banks to fall back on. We all praise innovation, but we should remind ourselves that it occasionally comes with catastrophic consequences, and it's only possible to tell "good" innovation from "bad" innovation in hindsight.

Ilya writes:

Canada is not the only example. Australia is another country which survived the crisis well - in fact, better than Canada - and had no bank failures.

There are some interesting parallels between Canada and Australia. I'v blogged about this in more detail here: but in summary, come down to a number of structural factors shared by Canada and Australia:
- better regulation, including more stringent separation between investment and retail banking;
- mortgage markets based on full recourse to the borrower and nation-wide diversification;
- lack of significant sub-prime borrower base;
- macro factors: in Australia, this means funding pressures and government policy limiting the banks' ability to get carried away. In Canada, this means it is easier to conduct specculation in nearby NY than in Canada itself.

Ilya writes:

I should also mention that unlike Canada (at least according to Perry), Australia did go and still is going through a property boom/bubble. It also has a significant securitisation market. And yet, the banks are as healthy and perhaps healthier than ever.

Moody's published a paper comparing Australia to the US, UK and Spanish mortgage markets, if interested. May need a subscription though:

Jaap writes:

praises for the 'Canadian system' are all fine, but what most cheerleaders forget to mention is that in case of a default, it is mostly the taxpayer who's on the hook. CMHC insures virtually all mortgages with a downpayment of a mere 5%.
the major housing markets are still heavily overvalued (especially compared to the US) and a slide of as little of 5% will put Canada in a world of pain.
this survey can illustrate the high prices:

lately, most banks have raised the alarm about a possible housing bubble in Canada.

Ted Craig writes:

Canada and Australia are both doing well. They are both countries with relatively small populations (California has a larger population than either) and abundant natural resources. Let's not forget the commodities boom that preceded the housing bust. Canada may have a swell banking system, but it also benefits from being the largest oil exporter to the largest oil consumer in the world.

dlr writes:

And of course, the most important reason of all -- the Canadian and Australian housing bubbles haven't popped - yet.

Canadian housing is estimated to be 20% overpriced. That doesn't sound that bad, but US prices have only come down about 30%, and look at all the damage that has been done to bank balance sheets. Australian housing estimated to be even more overpriced - 50%. ( based on historical price to rent ratios Both from

If the two countries are very lucky, the descent will be gradual, but we shouldn't start patting them on the back for how robust their banking systems are, when they haven't yet been 'stress-tested'.

John Thacker writes:

If the two countries are very lucky, the descent will be gradual, but we shouldn't start patting them on the back for how robust their banking systems are, when they haven't yet been 'stress-tested'.

Except that the Canadian system suffered no bank failures during the Great Depression, either. (And the US response to the Great Depression included enacting a bunch of laws that made the US system even more different than Canada's.)

Les Cargill writes:

"Except that the Canadian system suffered no bank failures during the Great Depression, either. (And the US response to the Great Depression included enacting a bunch of laws that made the US system even more different than Canada's.)"

This is principally because of the small bank lobby, right?

I have heard that *in general*, bank panics are much more likely in banking systems that operate like the Bank of England or US banks. Is this true? Is there a known reason for this? Is it simply leverage? If this is known, if there are architectural reasons that being modelled off the BoE is known to cause panics, why don't we stop doing that? When you stop hitting yourself in the head with a hammer, it is generally acknowledged to feel quite good.

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