ON CANADIAN LESSONS

DIFFERENT STROKES

Our northern neighbor may be doing one or two thing right, as this Newsweek piece by Fareed Zakaria observes:

"Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world.

America's ranked 40th, Britain's 44th.

Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for overconsumption that the U.S. code does: interest on your mortgage isn't deductible up north.

In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours. Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes. And the rate of Canadian home ownership? It's 68.4 percent."

They're not doing better just on the financial front, but also in terms of how they grow their pool of contributing residents:

"The U.S. currently has a brain-dead immigration system. We issue a small number of work visas and green cards, turning away from our shores thousands of talented students who want to stay and work here. Canada, by contrast, has no limit on the number of skilled migrants who can move to the country. They can apply on their own for a Canadian Skilled Worker Visa, which allows them to become perfectly legal "permanent residents" in Canada—no need for a sponsoring employer, or even a job. Visas are awarded based on education level, work experience, age and language abilities."

Canadians don't need to say "Yes we can".  They can simply say "Yes, we did".

Comments

[vvurdsmyth]

If I am not mistaken, bank stability depends upon their assets to leverage exposure ratio. If the graph in John Mauldin's excellent article ( http://www.frontlinethoughts.com/pdf/mwo022009.pdf ) is correct,Canadian Banks have a couple of clicks more exposure than US banks, which is on the cusp of the 1/3rd least leveraged banks in the world (or at least on the list, which is quite comprehensive). So, peeling back the veil, the figure is for 2008, and we don't know how much involved Canadian banks have been in sub-prime type lending,or how high the spike in gasoline (which precipitated the mortgage/ credit mess) was in Canada. If for example the Canadian government counteracted high gas prices with tax credits, it would have attenuated the impact on the Canadian credit system.

For me, it raises more questions than it seems to answer, because it does not fit the scene. Canadian Banks may in fact be rock solid, but I'd like to to know more about why... or why the World Economic Forum figures indicate Canadian banks are less leveraged and Maudlin's article says they are more leveraged. Both can't be right. Personally, I hope the WEF figures are correct, because it would serve as a good banking model for the rest of the world, and having such a sizable neighbor more economically stable than the US is, would not be such a terrible thing...

Michael, thank you, for the article; sorry to seemingly rain on your parade; no evil intended; perhaps the disparity in figures can be put to the Twitterati.. kind of a light a candle rather than curse the darkness.