Why don’t Canadian Banks Fail, Eh?
What about the Canadian banking system allowed it to survive the recent worldwide slowdown without a single bank failure? What can the United States learn from Canada about sound banking?
Mark Perry speculates:
- Full Recourse Mortgages in Canada
- Shorter-Term Fixed Rates in Canada.
- Mortgage Insurance Is More Common in Canada than in the United States.
- No Tax Deductibility of Mortgage Interest in Canada.
- Higher Prepayment Penalties in Canada
- Public Policy Differences for Low-Income Housing.
- Differences in Canada’s Bank Concentration and Greater Diversification.
- A Few Other Differences that Contribute to Bank Safety in Canada. (lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. )
Bottom Line (according to Perry): Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.
Read the full article.