Introduction
Finances have such a tendency as to influence production, distribution, and consumption. At the same time, one ought to note that they have an objective character. The role of finances in economics is constantly enforcing and reflecting distributing relations of the increasing complexity within society.
General Information
Definition of Financial System
If we just proceed to the definition of a financial system at all, it should be therewith noted that this phenomenon stands for a complex of controllable finance-legal norms of financial affairs and financial establishments that help a state to form, to distribute, and to use both centralized and decentralized monetary funds. Consequently, it seems hard to overestimate the necessity of such a kind of system nowadays.
General Structure of Financial Systems
1) The totality of different spheres and links that mediate both formation and utilization of incomes;
2) The system of financial establishments.
Mainly, it may be described in the following way. First, we have the key unit called a financial system. Then, this unit is often divided into such two branches as state-municipal (a framework of organization of power) finances and the finances of independent economic agents. After this, the system seems to be a little bit branchy. In order not to confuse you with the stream of incoherent information at the same paragraph, I feel the desire to examine the subsequent point from new lines.
Independent economic agent’s level. Here, the situation is less divaricated. Finances of the previously mentioned agents are allotted to the next three links:
1) Finances of firms and enterprises;
2) Finances of nonprofit organizations;
3) Household finances.
Appearance of Finances
Generally, finances tend to express economic relations that are inseparably connected with the following issues:
1) The provision of the state-level, municipal, and private sector of economics with the sources of financing;
2) The production spheres;
3) The home economics.
Financial System Participants
According to the fact that finances cannot actually exist without money, I would like to say that the state budget is formed during the process of the aforementioned relations (I mean the monetary ones). Last but not least here is that the regular monetary assets budget supply is provided with legislation.
Economic indicators
Before we start talking about the financial systems of the both countries, I would like to draw your attention to the historical facts concerning the standpoint of the economic development along with some most popular and evident economic growth figures during the last years.
The United States of America. According to Central Intelligence Agency (February 25, 2016), “The US has the most technologically powerful economy in the world, with a per capita GDP of $54,800.” This indicator appears to be among ten most significant ones in the world. In the last three years, the country demonstrated the positive surplus concerning the real gross domestic product growth.
Canada. This state is generally agreed to resembling the way the United States operate its economic system being the market-oriented one. Gross domestic product per capita fluctuates around $45,000 here.
As Forbes.com (2010) stated, “Buffeted by the global economic crisis, the economy dropped into a sharp recession in the final months of 2008, and Ottawa posted its first fiscal deficit in 2009 after 12 years of surplus.”
Canadian Financial System
Role of Banks
Bank of Canada, or Banque du Canada (n.d.), mentions, “The financial system is vital to the functioning of the economy and the welfare of Canadians.” The predominant majority of commercial activity is executed due to the financial system. The Bank’s main role was launched within 1930’s. The Act created tells us that promoting both financial and economic well-being of the country must be supported as it appears to be the task of the first priority.
It is also important to note that there exist nine domestic banks within the state. According to the Canadian Department of Finance (November 13, 2008), “Canada's major banks (the so-called "Big Six") are the core of Canada's banking system. With about 90 per cent of bank assets, they provide a wide and expanding spectrum of financial services throughout Canada.”
Well, it is worthwhile saying that loan losses have fallen due to the Canadian policies and many other amendments over past decades. In such a way, this pushed the major banks’ profitability improvements. However, the subsidiaries of smaller Canadian banks have hardly taken a significant part in the so-called rebound.
Government Initiatives
In the majority of cases, the Canadian financial system is considered to be one of the most buoyant and best controlled in the whole world. According to the Canada’s Economic Action Plan (2015), “Measures and initiatives of the Economic Action Plan reinforce the stability of the financial sector and protect Canadian consumers.” It seems to be very likely that the main issue lies within the basic idea of the aforementioned plan, affecting the following links:
1) A balanced budget;
2) Low-tax plan for jobs;
3) Growth;
4) Security.
Comparison
I must confess that the Canada-American system are very much alike; still, we can actually observe that both market and regulatory practices provided reveals to be not the same. This is best seen while considering the implementation of monetary policy. The Bank of Canada operates to have a straightforward impact on interest rates, while the United States Federal Reserve’s policy is to maneuver the amount of money supply.
American Financial System
In exchange for, the American system is agreed to be powerful but at the same time flawed one. According to Puzzanghera (July 7, 2015), “The United States financial system is stronger than it was five years ago but risks remain and regulators need to complete reforms, while policymakers should resist efforts to roll back some of the changes.” Some period of time the United States of America had an extremely low interest rates. This situation made may business institutions to take risks with the purpose of seeking better investment returns.
Bogle (November 3, 2010) stated, “The principal role of our nation’s financial institutions is to allocate scarce investment capital among our corporations and economic sectors in a way that maximizes the growth potential of our economy.”
Dollar Problem
It is a generally agreed phenomenon that many countries in the world tend to use American dollars in order to trade with each other. If we just spectate the reverse situation (states start altering their casual behavior), the United States of America seems to have a considerable amount of problems.
At the time the American government is capable of both loaning and printing new dollars, the debt-oriented default has no chances at all. Taking into account that the American dollar appears to be a most dominant reserve currency worldwide, it is more than just clear that American problems have a direct influence on the global financial system. Consequently, it is meaningful to note that “money for nothing” must be the most soft and short-form statement relating to the essence of the American financial system nowadays.
National Debt
The national debt occupies a prominent role in the general structure of the financial system here. This is according to the point of view that the USA influences the finance conditions, household conjuncture, both character and direction of the government’s economic policy. The debt is a paramount indicator considering long-term plans of banks and big corporations. Thus, its role is obvious regarding the tremendous amounts of the state expenditures. Directly and immediately, this money activity has a hold over a state of economy, activity of manufacturing and trading firms, and so on so forth.
Banks
As many other developed countries, the United States of America needs the effective movements of banks because they play an advances role. Here, banks are divided into commercial and investment ones. The Federal Reserve System reveals to be the most prominent financial establishment. Its role is persistently increasing together with the escalation of the macroeconomic responsibility of the local government.
2007-2008 Financial Crisis
In this research, the particular role should be assigned to the most crucial point relating to all the economies throughout the world. Obviously, the crisis resistance is a very delicate question for each country, as its impact is rather individual than common one. Correspondingly, the practices confronting this global problem are not the same. Still, some governments of developing countries manage to follow examples of how the crisis’s after-effects were brought to nothing or, at least, were weakened.
Once upon a time, Bernarke (n.d.) noted, “The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis.”
Bank Crisis Phenomenon
Comparing to the United States of America, Canada does not have a so-called conflict of banks’ interests. In order to support my words in a more sufficient way, I would like to make a short excursus to the history. During the last two and a half centuries, Canada have had no bank crises, while the United States of America have already had sixteen of them. This is due to the fact that Supreme Court of Canada does not allow banks to make any kind of contributions (of course, financial ones) for the benefit of either different organizations or political structures.
If we assume the situation around the USA, one should mention that the country appears to be a self-styled arena where two financial clans expostulate violently amid each other. They are old (European) money and young money. Here, the 2007-2008 bank crisis seems to be a grandiose attempt to redistribute funds and authority.
Crisis Consequences
Apart from the bank crisis, it is important to remember some information about continuing stresses after the crisis was experienced.
Canada. The global economic crisis has resulted in a sufficient decline that meant an unexpected budget deficit in 2009. It is interesting that during the previous twelve years there was a constant budget surplus. However, at the time the crisis was prospering, the country demonstrated a high level of steadiness. Went out of the recession, Canada improved its positions comparing to other world leaders in the volume of gross domestic product and investment prospects. Favorable conditions were made to increase the rate of business dealing. This led to perfecting of the effectiveness of the state regulation.
The United States of America. It is fairly understandable that the crisis was rooted here exactly. Its development began in 2006. There exists the generally agreed opinion that this one was the worst economic disaster since the Great Depression was survived. According to Lane (September 24, 2014), “The steps taken by the U.S. Federal Reserve, the central bank closest to the epicenter of the crisis, prevented the crisis and subsequent recession from being much worse.”
First, the United States of America had such an opportunity as to confront the developing mortgage crisis. It was caused by the increase of residential loans that were not returned. At that time, American banks disbursed loans to unreliable borrowers. Afterwards, the crisis led to lowering of the main economic indicators. It began to the gradual volume of production decrease, recession of demand and prices for raw materials, and unemployment increment.
In a word, the American dollar is that trade equivalent that sometimes influences the world economy more that the United States of America. The worst consequences of the certain phenomenon are not determined yet and can still become apparent in different parts of the globe at all.
Comparison of Financial Systems
Pruss (October 2, 2015) highlighted, “Canadian banks, which are generally regarded as some of the safest and most stable in the world, avoided taxpayer-funded bailouts, and Canada’s economy enjoyed a faster recovery than its neighbor to the south.” Some of the aspects I will mention are the quantity of domestic banks by countries, banking regulation, distinct consumers’ list, and, surely, international affairs.
Domestic Banks
With a little bit of exaggeration, I would say that you can actually count the quantity of the Canadian domestic banks on the fingers of one hand. To be more realistic, there are twenty eight of them only. Now, how do you feel about seven thousand banks in the neighboring state? The United States of America is more crowded than Canada is. Hence, the level of competition amid banks is certainly bigger. Having taken more chances, United States banks created the saving and loan crisis that meant a less stable financial system comparing to the Canadian one. In such a way, many economics and financiers assume Canada to preserve more concentrated financial system. Moreover, they are more diversified. The way Canadian regulators act is sophisticated enough. They stand their ground saying that having a banking license is not a right but a privilege.
Regulation
First of all, I have to say that banking regulation within the USA is more obtrusive than the Canadian one. Due to the mandates of the last decades, it is clear that the majority of Americans have access to banking. Apart from this, America provides its clients with the old banking system. The Canadian banking is something accordant to safety and soundness, while the American one is concordant with a focus on privacy, banking access, and protection of consumers.
Simultaneously, both systems are very similar to some extent. By the way, other countries presenting the G7 group generally have one leading bank regulator. Probably, the main difference between two chosen countries is that the Canadian banking is managed at provincial and federal levels, when the United States of America tends to regulate it at federal and state levels.
Different Consumers
People residing in Canada pay more taxes, but receive more universal benefits. Also, the predominant majority of Canadians use debit card, as they are not disposed towards credit using in general.
Unlike the United States of America, Canada has the richest middle class, and it is rather large. Canada’s social programs are more beneficial than the ones revealing in the United States. If we just manage to compare correlation between the national debt and income levels, we will definitely say that the indicators are still smaller than the American ones.
International Affairs
As is known, Canada has its special trade agreements with both the European Union and NAFTA countries. For this, the government let some external subsidiaries to be run within its territory. As a bright consequence, the Canadian banking has benefited from such interstate deals sufficiently.
Conclusion
My point of view is that Canada is better completed concerning the financial system. This surely makes more Canadians and foreign business people inclined to the economic activity within any part of the country. The United States of America has also a favorable climate comparing to other developed and developing countries worldwide.
Because of all the visible differences comprising each of the financial system, I tend to think that both Canada and the United States of America should learn more from each other, as in some way or another their economies are interlocked in a tough way. Though Canada seems to be more attractive for people investigating both of these countries, I would not be too sure about it. Maybe that is why the USA is generally called as a super state.
Last but not least is that Canada keeps on developing the policy of multiculturalism. Such intensions show us that the state is “in a good mood” to take care of people presenting different religions, customs, and languages. For the local government, they are all Canadians or just honored oversee residents who can be always supplied with all the necessary public services. In a word, this is all due to the rational management of the financial system and law amendments.
References
Central Intelligence Agency. (February 25, 2016). The World Factbook. Economy: United States. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
Forbes.com. (2010). Best Countries for Business. #1 Canada. Retrieved from http://www.forbes.com/lists/2011/6/best-countries-11_Canada_CHI019.html
Bank of Canada. (n.d.). Core Functions. Financial System. Retrieved from http://www.bankofcanada.ca/core-functions/financial-system/
Canada’s Economic Action Plan. (2015). Business. Financial Sector. Retrieved from http://actionplan.gc.ca/en/initiative-section/financial-sector
Puzzanghera, J. (July 7, 2015). Los Angeles Times. Financial System. Retrieved from http://www.latimes.com/business/la-fi-imf-financial-system-dodd-frank-20150707- story.html
Bogle, J.C. (November 3, 2010). America’s Financial System – Powerful but Flawed. Retrieved from http://johncbogle.com/wordpress/wp-content/uploads/2006/02/Phi-Beta-Kappa-11-2- 10.pdf
Bernarke, B. (n.d.). Brainy Quote. Financial System Quotes. Retrieved from http://www.brainyquote.com/quotes/keywords/financial_system.html
Lane, T. (September 24, 2014). Bank of Canada. Are We There Yet? The United States and Canada after the Global Financial Crisis. Retrieved from http://www.bankofcanada.ca/2014/09/are- we-there-yet/
Pruss, L. (October 2, 2015). The Financial Brand. The Differences between Banking in the US and Canada. Retrieved from http://thefinancialbrand.com/54467/comparing-united-states- canadian-banking-systems/
