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'Good and boring:' Canadian banks win praise

Janet Whitman, Financial Post Published: Tuesday, February 02, 2010
NEW YORK -- Paul Volcker, the former U.S. Federal Reserve Board chairman who's now a key economic advisor to the White House, told U.S. lawmakers Tuesday they ought to learn from Canada's banking system as they seek to overhaul rules governing the biggest U.S. banks.

Speaking at a hearing to tout his proposal to rein in risky investing activities by large U.S. commercial banks, Mr. Volcker said the life's work of Canadian banks is retail banking: "That's no longer true of great big American banks."

With just five or six banks dominating the industry, Canada's banks benefit from having less competition, Mr. Volcker said. "It's a stable oligopoly."

Canada's banking system also has been shielded by the fact that it has less government interference in its mortgage market, unlike in the United States, where banks have been pressured by the government to make low-cost loans to the economically disadvantaged, he said.

Mr. Volcker's endorsement of Canada's banking system - the only Group of Seven nation that didn't need taxpayers to bail out its banks - came two days after The New York Times published a piece by Nobel Prize-winning economist and columnist Paul Krugman that said the United States should emulate Canada's financial regulatory regime.

After its publication, the article, entitled "Good and Boring," became the most emailed on the Times website.

Mr. Volcker made his positive comments about Canada toward the end of Tuesday's Capital Hill hearing after Charles Schumer, a Democrat from New York, asked whether the United States should form a consumer protection agency similar to Canada's to fix the banking system.

Mr. Volcker declined to comment directly on the consumer agency question, but said Canada's mortgage market is more privately owned than in the United States, which has government-sponsored Fannie Mae and Freddie Mac backing home mortgages.
Canada has much less securitization - the practice of banks bundling off loans and selling them off to investors -than the United States, which might give Canada an incentive to stay with more conservative practices, he said.

Mr.. Volcker, widely credited with taming inflation as Federal Reserve Bank chairman under U.S. presidents Jimmy Carter and Ronald Reagan, said Canada hasn't been completely immune to fallout in its banking sector
He noted a couple of its regional banks went bankrupt some years ago after getting into trouble, an apparent reference to the collapse of Northland Bank and the Canadian Commercial Bank in 1985.

"At that point, people were not so proud of the regulatory system in Canada," he said.

U.S. lawmakers didn't seem impressed Tuesday by the case Mr. Volcker tried to make that big U.S. commercial banks should be barred from high-risk trading in a bid to curb the problem of financial firms that are "too big to fail" without putting the entire financial system at risk.

The Volcker Rule would ban large commercial banks from "proprietary trading," in which they use their private-equity arms or hedge funds to rack up their own profits.
Christopher Dodd, a senator from Connecticut heading up the proposed revamp of the U.S. financial system, said at the end of the hearing he would need more specific details on how such a ban would work before making its part of the draft overhaul plan he introduced last year..

Financial Post
Barack Obama, the U.S. president, unveiled the Volcker Rule proposal after a stunning U.S. Senate seat upset in Massachusetts.

Mr. Volcker said Tuesday the announcement was in the works weeks before the seat long held by Democrat Ted Kennedy went to a Republican..

"I want the American public to know that," he said.