Should American Banking Pain Mean Canadian Gain? 

Can you guess how many US banks have failed in 2010? Eighty six to date, according to the Federal Deposit Insurance Corporation (FDIC). Eighty six sounds like a lot, so remember that there are only about 8,000 banks in total throughout the United States.

When a US bank is found to be failing, the FDIC intervenes and identifies a more solvent and secure financial institution that can absorb the troubled bank. Doing so minimizes disruption to the lives of depositors and loan customers.

In several cases this year, the FDIC has allowed Canadian banks, such as the Toronto Dominion (TD) Bank and Scotiabank, to take over failed US banks. These acquisitions haven’t sparked much controversy or even interest in the US. Given the close Canada-US relationship, there’s little chance for a Dubai Ports World-style political explosion, with angry Congressmen calling for hearings and scrutinizing the deals to determine whether they are in the US national interest.
 
Also helping the Canadian acquisitions stay under the radar are periodic rave reviews in the US media of Canada’s banking system (here’s one from NPR). These reports play up how Canada hasn’t had to bail out any of its banks during the Great Recession. By absorbing troubled US banks, the Canadian banks look like they are doing the American economy a neighborly favor. So why look a gift horse in the mouth?

But given that more bank failures are expected in 2010, and that the Canadians may buy additional US banks, one starts to wonder -- should Congress continue its hands-off approach, as the Canadian presence in the US banking system grows? Might it be timely for Congress to study Canadian-style banking in more detail?  These days, Canada’s political leaders seem unable to open their mouths without claiming that that there is a distinctly Canadian approach to banking that the rest of the world should adopt.

This kind of bluster begs a few questions that Congress may want to look into, not out of any deep suspicion or mistrust of Canada, but out of simple curiosity:

--What is “Canadian” banking, really? Is Canadian banking like “Islamic” banking – that is, does it derive from a substantially different worldview than the one that shaped the evolution of banking in other countries? Or is the “Canadian” label just a kind of marketing, like “Canadian” bacon -- or “Canadian” maple syrup (which, packaging aside, tastes the same as Vermont maple syrup)?

--How do the assumptions of Canadian banking compare to, say, the historic tenets of the American school of banking, as embodied by Founding Father (and first US Treasury Secretary) Alexander Hamilton’s various Reports on Public Credit?

--How successful has Canadian banking been over time? How does its record compare with the US record? What does it say about the Canadian banking system that Canada must entice foreign capital to fund the development of its natural resources, such as the Alberta oil sands? Why can’t Canada fund the oil sands development through its own banking system, if that system is so wonderful?

--What’s the link between the Canadian banking system and the fact that, economically, in 2010, Canada remains largely a source of raw materials, rather than finished goods? Does the cautious approach valued so much by Canada’s bankers mean that they feel an aversion to loaning money to Canadian manufacturers, for example? What have been the long-term economic consequences of this cautious approach for Canada?

One thing that Congress should keep in mind at all times as it studies the Canadian banking system -- the current turbulence aside, the US banking system has historically been a huge, unrivaled success. The transformation of the United States, from a wilderness without roads, railways, canals, etc. to an advanced industrialized country, was driven by what used to be called “internal improvements” (now known as “infrastructure”) financed through credit – credit made available through US banks (and other sources), in accordance with the vision of the great Alexander Hamilton.

A day or two of Congressional hearings could help determine what, exactly, Canada can teach the US about banking. There's no doubt that one can always learn by studying and learning from the experiences of others. However, despite all the hype about a “Canadian” banking model, there may very well be less here than meets the eye.

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Neil Hrab

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