Canadian Banks: Why Following the Rules Works

Ian Austen/The New York Times

By: Alexander Díaz-Thomas, 3L

The American banking system is currently in freefall after the collapse of Silicon Valley Bank (“SVB”). Self-described as a “financial partner of the innovation economy,” SVB was a large commercial bank that served to funnel money into new high-tech ventures, start-ups, and investments in Silicon Valley. After SVB’s implosion, the American banking system was so unstable that other banks such as First Republic, a smaller peer of SVB, was only able to stave off a similar implosion through a call for 11 of the biggest U.S. banks to inject more than $30 billion into the collapsing bank, a move orchestrated by the U.S. Treasury Dept. Secretary Yellen.

While the American Banking system is in free fall, Canadian banking regulators have reassured the Canadian public that their system is not in a tizzy. This is partially due to the centralized nature of the Canadian Banking system. Unlike the U.S., where a large portion of banking is handled through a vast array of small banks, in Canada there are six large banks, meaning that market choices for customers are somewhat more limited, as bank customers all pay similar fees, which in turn allows the Canadian Banks to benefit from a large fee-paying base. Since the large Canadian banks benefit from a large fee-paying demographic and hold about 90% of all deposits, they do not feel the need to go and gamble on high-risk-high reward ventures or investments.

While the Canadian banking system is stringent and is not without criticism it cannot be said that the Canadian system suffers from a lack of complying with regulation. The conservative nature of the Canadian Banking industry means that depositors benefit from the Big 6 Canadian banks often having more cash on hand to reinsure depositors than the regulators require. On the other hand, in the U.S., now only banks with assets north of $250 billion dollars are subject to Dodd-Frank protections, similar to the big Canadian banks. These protections, passed after the 2008 recession, were designed to precisely stop an event like the SVB’s implosion from happening. However, with intense lobbying from the banks, in 2018 Trump essentially nullified Dodd-Frank consumer protections for most American Banks.  

The lesson that U.S. policymakers need to learn from this event is that if you do not want to have a banking crisis every decade you cannot expect banks to write effective regulation for themselves. Following Canada’s example, the. U.S. regulators must move to strictly regulate the American Banking system and not become regulated by the Banks themselves.

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