Clearly, the U.S. has a larger share of financial activity happening in the “other financial institutions” area, while Canada has a larger share of its financial activity happening explicitly in the banking sector. The Canadian economy is of course closely tied to the U.S economy. But the recession in Canada was milder than in the U.S., perhaps in part because Canada’s financial sector was less exposed to the issues of shadow banking.
Two interesting possibilities:
1. The Canadian shadow banking sector is underdeveloped. Canada is an ok place to get a mortgage or a commercial loan, but for more sophisticated financial transactions you have to go elsewhere.
2. The American shadow banking sector is overdeveloped. Our financial institutions are playing a game of hide-and-seek from the regulators, and shadow banking has emerged to enable banks to produce balance sheets that appear (to regulators) to be safer than they really are.
Of course, both of these could be true to some extent. I am more inclined to believe (2).
As an aside, I have no idea how one could measure the size of the shadow banking sector with any precision. I picture large books of derivatives, and do you look at gross or net exposure, current market value or potential value at risk, etc.?