Skip to content

Why our banking system is in trouble

This week, the World Economic Forum rated Canada as having the soundest banking system in the world. The US was rated #40. Even Switzerland, which is known for their banks, ranked #16. According to Canadian Finance Minister Jim Flaherty, “We’re a relative rock of stability in this situation, but of course we’re vulnerable to spillovers from what’s happening elsewhere.”

Why is Canada managing to avoid the financial meltdown that is affecting the US, Europe, and much of the rest of the world? Because of “strict regulation“. That’s right, their government regulates banks much more than most countries. And rather than hurt their economy, it has protected it.

Canada has some of the strictest capitalization requirements in the world — the amount of money a bank has to hang onto to be able to deal with bad loans or other financial problems. Canada has also refused to approve the merger of any of Canada’s big banks. And finally, banking regulations kept Canadian banks from catching the fever for subprime mortgages that spread like a plague across the rest of the world.

Compare this to the US, where deregulation, mergers, and subprime mortgages have been all the rage, but are leading to the end of American capitalism.

So the next time someone says that there wasn’t anything the government could have done to prevent the current financial crisis, or claims that government regulation of business is always bad, all you have to do is point next door.