Braving the Storm

Unlike their American neighbours, Canada's banking system has held up superbly during the global banking crisis. In fact, they even made a profit during the last quarter when most would agree market conditions were at their worst. This has unsurprisingly led to many world leaders looking towards the Canadian model; not least Barack Obama.

What makes Canada so unique then? Well it seems that in Canada there are five major banks that dominate independent brokers. Compared to America, where 70% of mortgages were given by independents, Canada's smaller banks and lenders only originate 30% of the total. The result is that Canada's 'big five' are almost too big to fail although this in turn stifles competition.

Looking, for example, at the relatively short period of 1997-2008, RBS made 10 times as much as the Royal Bank of Canada. Furthermore, having such an oligopoly means the government has to supervise the banking system more than in other countries. Interest paid on home loans is tax-deductible in America but this is not the case in Canada plus most mortgages have to be insured by the 'Canada Mortgage and Housing Corporation'. Nevertheless, the scrutinisation that applies to new mortgages keeps the banks honest and has not got unnoticed in the American media. Some even suggest that the bigger housing-finance companies such as Fannie Mae and Freddie Mac should guarantee mortgages rather than buying them.

Overall though it seems unlikely that America will ever adopt such a conservative model. As one banker put it "the United States has an inherently higher risk appetite".