Before the depression, the US heavily regulated banks and restricted the founding of branches; there lots of small banks tethered to local markets. In contrast, Canadian banks didn’t face such stringent regulations and were larger and more diversified. For this reason, in the US we had an epidemic of bank failures, and Canada did not.
1. The best part of Canadian banking is their mortgage design: a five-year rollover, with recourse. Recourse means that if your house goes down in value, you cannot just turn the keys in to the lender and walk away. They can come back to you to make up their loss. Our 30-year, fixed-rate, no-recourse mortgage has lots of credit risk and interest-rate risk that sits with the lender, until stuff happens, and then it goes to the taxpayer. We got stuck with losses from interest-rate risk during the S&L crisis, and we got stuck with losses from credit risk during the 2008 crisis.
2. The worst part of Canadian banking is the high concentration in large banks. As in Europe, this goes along with a very stunted equity market. Firms raise capital using debt, and they owe that debt to big banks. The U.S. system, with its much more prominent stock markets, is better.
3. The worst part of the U.S. financial system is the political power of trade associations and large banks. The trade associations have leverage over Congress, and the large banks have leverage over everybody in Washington. In Canada, the big banks have to respect the regulators. Here, the bank executives can go over the heads of the regulators any time they need to.
4. Over the last thirty years, we have seen a decline in the relative importance of the stock market in the U.S.:fewer public firms, many fewer IPOs, and firms raising less of their capital in the stock market. At the same time, we have gone from a fragmented banking system to one that is very highly concentrated. Household wealth also has become more highly concentrated.
I think that if you don’t do something to limit the growth of big banks, you end up with big-bank-dominated corporate finance, meaning less active equity markets and a less democratized financial system. Also, given our political culture, you end up with the political system subservient to the CEOs of the biggest banks. In short, you combine the worst of Canada and the worst of the U.S.