Why have the Canadian banks fared better than American or British ones in the financial crisis? New York Times columnist Paul Krugman asks and answers the question in this morning's column: "Consider the counterexample of Canada — a mostly English-speaking country, every bit as much in the American cultural orbit as Britain, but one where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis."
But there are differences and similarities in the various banking markets other than regulation and deregulation. As Fareed Zakaria pointed out in a Newsweek column, home mortgage interest in Canada is not tax deductible. That has not put a damper on Canada's home-ownership rate, which is on level with America's. Also, as Mr. Zakaria explains, "home loans in the United States are 'non-recourse,' which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours." These aren't so much questions of regulation or de-regulation but of law and public policy.
What's more, as another, non-Krugman New York Times op-ed piece pointed out, "Canadian government regulations protect the domestic banks by limiting foreign competition." That's protectionism that runs counter to the spirit of free trade that was important to the work for which Mr. Krugman won his Nobel Prize in economics. It also means less competition and higher prices in banking for Canadian consumers. The rate on a 15-year mortgage in Canada is now 9.45%, according to this page; in America, it is 4.87%, according to this page. The average rate on a one year certificate of deposit in America averages 2.11%; in Canada, banks are offering 0.4% for a Guaranteed Investment Certificate, the Canadian equivalent. It may be good to be a Canadian banker, but not so good to be a Canadian consumer.
That same non-Krugman New York Times op-ed piece also credits deregulation for some of the stability and health of Canada's banks: "Since Canada's financial services sector was deregulated in 1987, permitting the banks to buy brokerage houses, they have enjoyed vast earnings power because of their diverse businesses and operations." Hmm, 1987. Wonder who was in office then? Could it have been Reagan and Thatcher?
Before rushing to agree with Mr. Krugman and blaming America and Britain's banking problems and Canada's lack of them on "Reagan/Thatcher-type financial deregulation," it's worth thinking through the issue.