THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 244

212 PA R T I I I Why Canada s Banking System Is the Envy of the World Financial Institutions Canadian banks also had their problems during the recent turbulent financial conditions Their shares fell by almost 50% and some of them experienced huge losses in derivatives trading; for example, CIBC lost $2.1 billion in derivatives trading in 2008 However, while governments in the United States and Europe have been working on full scale banking bailouts and rescue packages (in the trillions of dollars), the Canadian government did not have to bail out any banks One reason that Canada s banks have fared better than banks in other countries is the structure of the Canadian mortgage market Unlike banks in the United States that sold the bulk of their mortgages, banks in Canada held a large proportion of their mortgages on their balance sheets This practice gave Canadian banks an incentive to make sure that their mortgage loans were good loans In addition, law in Canada allows banks to go after other assets when a consumer walks away from a mortgage, thereby making it difficult for consumers to so Another reason is that Canada s big banks have been more conservative in their lending and acquisition practices in comparison with major banks around the world Also, Canada s top banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has been more conservative than banking regulators in the United States and Europe For example, at the beginning of the financial crisis, Canada s banks had higher capital requirements than their global peers As a result, they had stronger reserves to cushion potential losses Although this conservative regulatory regime enabled Canadian banks to withstand the financial crisis better than banks in other countries, it has been argued that it makes the Canadian banking sector less competitive because of the lower leverage and a lower rate of return on capital than in other jurisdictions Moreover, the activities of Canada s banks are well diversified and are not limited to traditional retail banking In particular, the federal government s decision in the late 1980s to allow banks to acquire investment brokers on Bay Street and to engage in the mutual fund and insurance businesses created a more diversified financial services marketplace for Canada s banks In addition, these arm s-length institutions are subject to the same strict rules and regulations as the banks, unlike investment dealers in the United States that had been subject to very relaxed and minimal regulation from the Securities and Exchange Commission Overall, in the aftermath of the global economic meltdown, Canada s banking system has been viewed as the soundest in the world In fact, many countries around the world are now considering Canadian-style reforms of their financial markets DYN AMI CS O F FI N AN CIA L CRIS ES IN EM ERG IN G - MAR KET E CO N OM IE S Before the subprime crisis in the United States, economists looked in other countries for recent examples of financial crises Emerging-market economies, economies in an earlier stage of market development that have recently opened up to the flow of goods, services, and capital from the rest of the world, are particularly vulnerable With the opening up of their economies to markets, emerging-market economies have been no stranger to devastating financial crises in recent years The dynamics of financial crises in emerging-market economies have many of the same elements as those found in Canada and the United States, but with some important differences Figure 9-3 outlines the key stages and sequence of events in financial crises in these economies that we will address in this section