The Great Solvent North

[JODO 2]

Op-Ed Contributor

The Great Solvent North

By THERESA TEDESCO

Published: February 27, 2009 Toronto

HAS the world turned upside down? America, the capital of capitalism, is pondering nationalizing a handful of banks. Meanwhile, Canada, whose banking system had long been notorious for its stodgy practices and government coddling, is now being celebrated for those very qualities.

The Canadian banking system, which proved resilient in the global economic crisis, is finally getting its day in the sun. A recent World Economic Forum report ranked it the soundest in the world, mostly as the result of its conservative practices. (The United States ranked 40th).

President Obama has joined the adoring throng. He recently said that Canada has "shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States." Paul Volcker, former chief of the United States Federal Reserve, commented that what he's arguing for "looks more like the Canadian system than the American system."

Most people don't know that the vision behind Canada's banking system, made up of a few large, national banks with branches from coast to coast, actually had its beginnings in the United States. Canada's system is the product of a banking framework inspired by Alexander Hamilton, the first American secretary of the Treasury. Hamilton envisioned the First Bank of the United States, chartered in 1791, as a central bank modeled on the Bank of England.

Canadians found inspiration in Hamilton's model, but not all Americans did. In the 1830s, President Andrew Jackson opposed extending the charter of the Second Bank of the United States, perceiving it as monopolistic. Money-lending functions were then assumed by local and state-chartered banks, eventually giving rise to the free-market, decentralized system that America has today.

Today, Canada's system remains truer to Hamilton's ideal. The five major chartered banks, the few regional banks and handful of large insurance companies are all regulated by the federal government. Canadian banks are relatively constrained in the amounts they can lend. Canadian banks are required to have a bigger cushion to absorb losses than American banks. In addition, Canadian government regulations protect the domestic banks by limiting foreign competition. They also keep banks broadly owned by public shareholders.

http://www.nytimes.com/2009/02/28/opinion/28tedesco.html?em

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