Revisiting the 1982 Global Banking Crisis

Somebody in my Google Reader (I think Chris Blattman) pointed to this hour-long 1983 Canadian documentary on the 1982 sovereign debt crisis that threatened the global banking system. It's pretty good. The first half is mostly about the bailout of Dome Petroleum, which affected Canadian banks much more than others. Think auto bailouts in the U.S. for analogue. The last 15-20 minutes are more interesting to me, however. A lot of parallels to the current crisis, including the politics of bailouts, who funds international institutions (and therefore who calls the shots), the need for international coordination but difficulty in reaching it, etc. All common themes on this blog.

Anyway, it's a nice perspective on the last major global banking crisis, while it was ongoing.

O Canada

Remember when some American liberals like Alec Baldwin were threatening to move to Canada if George W. Bush was elected president? Well maybe tea party conservatives should start thinking about it:

According to the Heritage Foundation’s 2010 Index of Economic Freedom, Canada now enjoys a greater degree of economic freedom than the United States. ...

Where you getting all this economic freedom all the sudden Canada? Just happen to find it laying around in the snow somewhere? Well it turns out we’ve recently misplaced a good deal of it around here. A little suspicious if you ask me.

Whatever. I hear it's cold up there this time of year.

Why Canada Is Better

Yes, yes, Tim Horton's and poutine and health care and immigration and Oatley's beloved Habs. But why has Canada's banking sector held up so much better than... everyone else's?

The first answer given, like that given by Canadian Prime Minister Steven Harper, is often that they have a much stronger regulatory regime than the U.S. This is not entirely false... Canada does have stricter capital adequacy requirements for Tier 1 capital than the U.S. But as this Economix post describes, there is more to the story:

[G]overnment rules prohibit anyone or any company from owning more than 20 percent of a Canadian bank, effectively making it impossible for foreign competitors to enter the market through an acquisition.

All that makes for what Ms. Lum described as “an orderly market.”

While such order may seem desirable compared with the current alternative in the United States, it is not without significant side effects.

A report by the International Monetary Fund last year found that the resulting lack of competition makes life difficult for small borrowers.

“A range of analysts and business representatives have argued that the major banks, comfortable in their entrenched positions, have little incentive to venture into areas where borrowers are small, the cost of ascertaining creditworthiness may be higher and returns are more uncertain,” the I.M.F. paper said.
Catherine S. Swift, a former government and bank economist who is now the chairwoman and chief executive of the Canadian Federation of Independent Business, a lobbying group, criticized the banks for “going around and beating their chests right now.”

“While the United States has what we economists refer to as destructive competition, in Canada we have the opposite: ultraconservative financial institutions,” she said. “What we’d like to see is some true competition in the Canadian market.”

There is a tradeoff between competitiveness and stability. Taking one approach over the other may seem prudent or prudish, depending on the course of events. But perhaps a more flexible system -- balancing competitiveness against risk as times change -- would be best. It may not be possible, but a counter-cyclical regulatory regime, similar to a counter-cyclical central bank, would stand a better chance of allowing greater competitiveness and systemic stability.