Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)?
The financial crisis of 2008 engulfed the banking system of the United States and many large European countries. Canada was a notable exception. In this paper we argue that the structure of financial systems is path dependent. The relative stability of the Canadian banks in the recent crisis compared to the United States in our view reflected the original institutional foundations laid in place in the early 19th century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk -- the mortgage market and investment banking -- and was tightly regulated by one overarching regulator. In contrast the relatively weak, fragmented, and crisis prone U.S. banking system that had evolved since the early nineteenth century, led to the rise of securities markets, investment banks and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2007-2008 was not contained.
The authors would like to thank participants in a session at the Economic History Association Meetings at Chicago in September 2010, and especially our discussant David C. Wheelock; participants at the Norges bank, Federal Reserve Bank of Dallas and the CNEH conference in Ottawa, June 2011, and at Development of the American Economy meetings at the NBER summer institute, Cambridge Mass., July 2011. Michael Bordo was a consultant to the Bank of Canada in 2011. This paper was not funded, sponsored, or endorsed by the Bank. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Michael D. Bordo & Angela Redish & Hugh Rockoff, 2015. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or …)?," The Economic History Review, vol 68(1), pages 218-243.