Why Canada's banking system remained stable during the 2008 U.S. financial crisis

Canadian/U.S. Financial Crisis

In 2008, the United States banking system was engulfed by a financial crisis that also went ahead to affect quite a number of large European economies. However, a notable exception to this financial crisis was Canada. In this text, I concern myself with the 2008 U.S. financial crisis, its causes as well as solutions. I also discuss the reasons why the U.S. banking crisis did not largely affect Canada despite the two markets being significantly related to each other.

banking crisis Causes

It can be noted that over time, many theories have been put across as to what triggered the U.S. financial crisis. However, when considering what informed the crisis; two approaches can be undertaken, that is, the long run factors that informed the crisis and secondly, the proximate causes that triggered or accelerated the financial crisis. In regard to the longer run imbalances, the arguments which have been advanced so far include but are not limited to the U.S. home ownership policy bias, enhanced inequality levels, U.S./China trade imbalances that were rather persistent and China's high saving rates. The proximate causes of the crisis include financial products (new) and trading OTC, arbitrage (regulatory), executive compensation structure risk bias, credit rating agencies behavior, financial innovation and subprime lending raise etc. (Kolb 80).

Canada Banking System and the U.S. banking crisis

The issue of Canada's banking system being an exception to the U.S. banking crisis despite the relations between the two markets has informed debate for quite a while. According to OECD, the recession in Canada was not as serious as it was in U.S. And government bank bailouts as a result of bank failures were largely unheard of (42). This 'unusual' scenario is what has motivated a number of economists to suggest a number of reasons as to why Canada remained relatively stable. To begin with, there have been suggestions that the cause of Canada's stability could have been the significant level of regulation as well as conservatism as compared to the U.S.

The Canadian banking system can be describes as being relatively robust by dint of the diversification as well as size of the financial institutions in the marketplace. The banking system in Canada is also highly regulated (OECD 42). However, when it comes to the U.S., the banking system is largely fragmented in that financial institutions are quite fragile and small. Further, it can be noted that unlike in the United States, the Canadian government possesses the power to not only regulate but also charter banks. The U.S. does not have express provisions in the constitution which allow the regulation of banks by the Congress.

Hence in the final analysis, the U.S. banking system appears more fragmented in relation to that of Canada. Hence the more robust and regulated banking system in Canada could have insulated it from the banking crisis that was most severe in the U.S. (OECD 42).

Conclusion

In conclusion, it is important to note that the Canadian banking system's stability cannot be said to be a rare happening. During previous U.S. banking system crises (in the 1920s and between 1863 and 1914), Canada's banking system as far as its stability is concerned was not affected.