Reading Andrew Coyne never fails to make me to think harder. His current piece “Our so-called genius banks,” a welcome assault on conventional wisdom, is no exception. After mulling it over, though, I don’t buy key parts of my colleague’s bid to debunk the by now familiar story of how, in the financial crisis, Canada’s banking regulation and culture have proven superior to other systems, notably the American alternative.
Andrew calls it a “historical accident—dumb luck, in other words” that U.S. banking policy tilts toward encouraging borrowers, while Canadian regulation leans toward making sure lenders are sound. But wouldn’t that distinction—which of course is grounded in different national histories—be better described as a fundamental contrast in policy aims and regulatory philosophy? It’s no more accidental, dumb, or lucky than any difference in the way the two countries are run.
Largely as result of this particular difference, Canadian regulators have tended to be more assertive. Consider this observation from the New York Review of Book’s Feb. 12 article “How We Were Ruined & What We Can Do”: “[Allan] Greenspan had been given the authority to examine the quality of mortgage lending by Congress in the 1990s, but simply did not use it, pleading free-market principles. The SEC under Bush appointee [Christopher] Cox could have examined the books of investment banks, but again mostly did not bother.” Here in Ottawa, I’ve never heard of Office of the Superindendent of Financial Institutions shrinking from scrutinizing our banks, or the brokerage houses they bought after 1987.
One way in which American banking regulation is more intrusive than the Canadian system is the U.S. federal Community Reinvestment Act, which forces banks to lend in low-income areas. Andrew points to this as a mistake, which perhaps it is, but I haven’t read a persuasive case for the CRA being much of a factor in the subprime meltdown. On the contrary, Businessweek’s Aaron Pressman wrote last fall that the CRA can’t be plausibly blamed, since “50 per cent of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30 per cent were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations.” Pressman went on: “Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans.”
Andrew cites Washington’s sponsorship of the mortgage giants Freddie Mae and Fannie Mac as another dubious U.S. government intrusion in lending markets that’s not paralleled in Canada. He’s got a point here. Yet it’s worth noting that Freddie and Fannie have been publicly traded companies since 1989, and thus driven by the usual stock market forces. For example, the New York Times reported on how Fannie’s big plunge into the risky end of the loan market in 2000 “helped supercharge Fannie’s stock price and rewarded top executives with tens of millions of dollars.” The Times concluded that Fannie “was under pressure from Wall Street firms, Congress and company shareholders.” To me, it sounds as if they were driven largely, though not wholly, by the the same distorted incentives as the rest of the subprime circus.
Overall, it seems to me that the broad thrust of Canadian banking regulation, and the resulting banking culture, while hardly perfect, stand up pretty well. As for the idea that what was really wrong in the States was too much regulation, rather than too little—that still looks to me like a stretch.