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Canadian and US Financial Sector Stability Differences over Long History: Is There a Unifying Explanation?

Ciuriak Consulting Working Paper

38 Pages Posted: 6 Apr 2013 Last revised: 23 Apr 2015

Dan Ciuriak

Ciuriak Consulting Inc.; C.D. Howe Institute; Centre for International Governance Innovation (CIGI); BKP Development Research & Consulting GmbH

Date Written: April 6, 2013

Abstract

Canada and the United States are highly similar economies, as would be expected given the many common historical influences on economic policy and regulation, the shared geography and the high degree of economic interaction, amplified powerfully in recent decades by the 1989 Canada-US Free Trade Agreement. However, in the financial sector, and particularly in banking, the experience of the crisis-prone United States contrasts starkly with Canada’s stability. For each major US crisis – the Great Depression, the S&L crisis and the sub-prime mortgage debacle as well as others – different sets of micro reasons have been put forward to explain Canada’s comparative stability in the face of broadly similar shocks. This paper examines whether there is a unifying explanation for these contrasting outcomes. It identifies the tipping points early in Canada’s history that led Canada to manage banking sector problems in a cooperative arrangement between the banks and the Canadian authorities directly addressing the externalities generated by bank failures while controlling the resultant moral hazard through social networks rather than market disciplines. Importantly, the system ensured enough competition to be efficient.

Keywords: Canada, United States, financial regulation, financial crises, industrial policy

JEL Classification: G21, G28

Suggested Citation

Ciuriak, Dan, Canadian and US Financial Sector Stability Differences over Long History: Is There a Unifying Explanation? (April 6, 2013). Ciuriak Consulting Working Paper. Available at SSRN: https://ssrn.com/abstract=2246150 or http://dx.doi.org/10.2139/ssrn.2246150

Dan Ciuriak (Contact Author)

Ciuriak Consulting Inc. ( email )

83 Stewart St.
Ottawa, Ontario K1N 6H9
Canada

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

BKP Development Research & Consulting GmbH ( email )

Romanstrasse 74
München, 80639
Germany

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