How Regulating Risk and Eschewing Competition Can Ameliorate a Global Financial Crisis: Canada's Perspectives and Experiences

• Published date: 01 December 2013
• Date: 01 December 2013
• Author: Joanna R. Baron
• DOI: 10.1177/0003603X1305800404
• Subject Matter: Article

How regulating risk and eschewing

competition can ameliorate a global

financial crisis: Canada’s

perspectives and experiences

BY JOANNA R. BARON*

This article identifies several key aspects of the Canadian banking reg-

ulatory regime that contribute to its stability. At the same time, it calls

into questionthe current consensus that Canadian banking governance

has been uniformly more heavily regulated than that of the Unit ed

States. It is not the quantity of regulation that matters, but rather the

quality. After all, the agents at the heart of t he crisis in the United

States were themselves highly, if inappropriately, regulated. Thebanks

disclosed the types of instruments theyused and quantified their risks.

The article proceeds in a context of the overarching question of the

ostensible trade-off between financial sector entrepreneurship and

innovation on the one hand and stability in banking policy on the

other, calling into question the assertions of law-and-economics jurists

who argue that the true cost of stability in the financial sector is a less

competitiveand less dynamic capital market.

KEY WORDS:bankinglaw; regulation; Canadianbanking; 2008 financial crisis

THE ANTITRUST BUL L E T I N :Vol. 58, N o. 4/Winter 2 013 :597

* B.C.L./LL.B, McGill University, M.A., Classics, St. John’s College, B.A.

Political Science and Art History, McGill University.

AUTHOR’S NOTE: I thank Richard Janda, Tom Velk, Marc Lemieux, and Dov

Zigler for their enormously helpful comments. All errors are my own.

© 2013by Federal Legal Publications, Inc.

I. INTRODUCTION: CANADA, THE UNITED STATES, AND

THE GLOBAL FINANCIAL CRISIS

Banking in Canada is a highly regulated activity governed federally

by the Canada Bank Act.1That legislation, last amended in July 2013,

ensures the security of Canada’s financial services sector and protects

the myriad of relationships that Canadian consumers and indeed

domestic and global counterparties have with financial institutions.

In the wake of th e international financi al crisis, and t he Canadian

finan cial system’s widely n oted ex empla ry weathering of it, it is

timely and relevant to examine the regulatory system that governs

this sector. In the United States, the recently passed Dodd-Frank Wall

Street Reform and Consumer Protection Act marks the beginning of

an era of tighter regulation. Although Canada and the United States

share m any cu ltur al, so cial , and po liti cal characteris tics a nd are

closely integrated economically, the American banking sector is dra-

matically different from Canada’s. Most obviously, while the Ameri-

can banking landscape is fragmented, Canada has generally adhered

to the principles of nationwide branch ing and banking, permitting

greater diversification of investment portfolios and in turn a height-

ened resilience against losses. As well, the Canadian financial system

never experienced the well-noted proliferation in the United States of

a “shadow banking system.” While American and UK bank regula-

tory commentators consider how to broaden the regulatory regime so

as to cou nter the poss ibili ty of regulato ry arbi trage t hroug h this

“shadow system,” Canada seems to have had fundamentals in place

to avoid the problem alto gether. Finally, the “bi g five” Canadia n

banks, though global in the scope of their operations, ultimately are

less reliant on global capital markets for their continued funding, and

their assets seem to be more stable than those of global banks head-

quartered in other jurisdictions.

This article identifies several key aspects of the Canadian banking

regulatory regime that contribute to its stability. At the same time, it

calls into question the current consensus that Canadian banking gov-

ernance has been uniformly more heavily regulation than that of the

United States. It is not the quantity of regulation that matters, but

598 :THE ANT I T R U S T BULLETIN:Vol. 58, No. 4/Winter 2013

1Bank of Canada Act, R .S.C. 1985, c. B-2, available at http://laws-lois

.justice.gc.ca/eng/acts/B-2/page-9.html.