The Impact Of The Canadian Banking System

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Although, Canada is a close neighbor of the US, its economy did not seem be much affected by the recent 2008 global crisis. For explanation, we need to take a look at Canada’s banking system and regulations. Bordo, Redish, and Rockoff explain that despite of the fact that both countries started out as colonies of Great Britain, their banking systems evolved differently. For example, Canada banking system was created as a system of large financial institutions that evolved into oligopoly due to the entry restrictions, whereas the US banking system was fragmented and fragile. Further, the Canadian banking system had absorbed the mortgage market, investment banking, and was tightly regulated by one overarching regulator. However, the US…show more content…
However, Alan Walks explains that Canadian banks managed the crisis fairly well due to the bailout, which was handled quickly without media attention and scrutiny through the government institutions and programs (Walks 2014).
Currently, Canadian financial sector is dominated by six large banks and a number of smaller institutions. The banks in Canada “are allowed to combine investment banking and deposit taking functions” (Walks 2014). Until 2006, the mortgage loans in Canada were issued for 25 years with minimum 5 percent down payment. When the homeowners default in their mortgage, they are still legally responsible of their debt even after they sell their property or abandon it. Walks points out: “All lenders issuing CMHC-insured mortgages are protected from losses on both principal and interest in the event of default” (Walks 2014).
Furthermore, the United States’ shadow banking sector entered Canadian market after 2001, offering interest-only and subprime mortgage loans. Due to not providing mortgage insurance, the shadow banking sector services were not accepted by the big banks and traditional lenders. However, in 2006, after the election of a new federal government and intense lobbying by the US firms, Canada changed its banking standards. New private competitors were allowed to enter Canadian mortgage insurance market and lending terms were extended to 40 years of amortization with no down payment. Some of the officials in Canada
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