International Banking and Finance
Canada and the United States are similar in many aspects. However, they exhibit some financial policy differences. In the past decade, both countries were faced with the same problems in the global business environment. These comprised of flooding of the market with cheap commodities and money from the Asian countries. Economists in both countries even agreed that the period of the severe recession was over. But when everything went wrong, the consequences in both countries were very different. The United States suffered the consequences while Canada did not.
It has been speculated that this happened because of the scale and scope of the Canadian financial institutions. The banks in Canada were essentially too big to fail since there were only five banking institutions dominating the financial scene. In addition, Canada had a Financial Consumer Agency that was independent. This greatly prevented sub-prime type of lending. Canada’s experience also supported putting a limit on the extent to which banks took risks. The United States, on the other hand, adopted the Reagan-era deregulation.
Canada is very strict on limiting the leverage of commercial banks such that they cannot even rely on borrowed funds. It has also limited the process of using securities as it has turned out as a way of banks making money instead of using them to diversify risks. These restrictions have led to fewer opportunities for bankers, which has turned out to be good for the economy.
The fact that Canada’s economy remained intact even during the crisis showed that their model worked well. This means that if the United States can adopt financial reforms that emulate some of these policies, it would be able to considerably prevent future banking crises.
