February 28, 2009Op-Ed Contributor
The Great Solvent North
By THERESA
link

HAS the world turned upside down? America, the capital of capitalism, is pondering nationalizing a handful of banks. Meanwhile, Canada, whose banking system had long been notorious for its stodgy practices and government coddling, is now being celebrated for those very qualities.

The Canadian banking system, which proved resilient in the global economic crisis, is finally getting its day in the sun. A recent World Economic Forum report ranked it the soundest in the world, mostly as the result of its conservative practices. (The United States ranked 40th).

President Obama has joined the adoring throng. He recently said that Canada has “shown itself to be a pretty good manager of the financial system in the economy in ways that we haven’t always been here in the United States.” Paul Volcker, former chief of the United States Federal Reserve, commented that what he’s arguing for “looks more like the Canadian system than the American system.”

Most people don’t know that the vision behind Canada’s banking system, made up of a few large, national banks with branches from coast to coast, actually had its beginnings in the United States. Canada’s system is the product of a banking framework inspired by Alexander Hamilton, the first American secretary of the Treasury. Hamilton envisioned the First Bank of the United States, chartered in 1791, as a central bank modeled on the Bank of England.

Canadians found inspiration in Hamilton’s model, but not all Americans did. In the 1830s, President Andrew Jackson opposed extending the charter of the Second Bank of the United States, perceiving it as monopolistic. Money-lending functions were then assumed by local and state-chartered banks, eventually giving rise to the free-market, decentralized system that America has today.

Today, Canada’s system remains truer to Hamilton’s ideal. The five major chartered banks, the few regional banks and handful of large insurance companies are all regulated by the federal government. Canadian banks are relatively constrained in the amounts they can lend. Canadian banks are required to have a bigger cushion to absorb losses than American banks. In addition, Canadian government regulations protect the domestic banks by limiting foreign competition. They also keep banks broadly owned by public shareholders.

Since Canada’s financial services sector was deregulated in 1987, permitting the banks to buy brokerage houses, they have enjoyed vast earnings power because of their diverse businesses and operations. And in contrast to the recent shotgun marriages at bargain prices between ailing Wall Street brokerages and American banks, Canadian banks paid top dollar decades ago for profitable, blue-chip investment firms.

Canadian banks are known to be risk-averse, and this has served them well. While their American counterparts were loading up their books with risky mortgages, Canadian banks maintained their lending requirements, largely avoiding subprime mortgages. The buttoned-down banks in Canada also tended to keep these types of securities on their books, rather than packaging them and selling them to investors. This meant that the exposures they did have to weak mortgages were more visible to the marketplace.

The big five Canadian banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal — survived the recent turmoil relatively unscathed. Their balance sheets remain intact and their capital ratios are comfortably above requirements. Yes, Prime Minister Stephen Harper’s government may buy as much as 125 billion Canadian dollars (about $100 billion) worth of mortgages, increasing banks’ capacity to lend. But this is small change compared with the scale of Washington’s bailout.

Few would have predicted that Canadian banks, long derided as among the least autonomous because of stringent government oversight, would emerge from the global mayhem as some of the more independent international players.
Since Mr. Obama seems to admire the Canadian banking system, his administration might want to take a page out of its playbook.

This would entail building a national banking system based on a small number of large, broadly held, centrally and rigorously regulated firms. Imitating the Canadian model would require sweeping consolidation of American banks. This would be a very good thing. Washington had difficulty figuring out the magnitude of the financial crisis because there are so many thousands of banks that it was impossible for regulators to get into all of them.

Washington is already on the path to achieving consolidation. Eventually, some of the larger banks into which the government is injecting taxpayer money will probably be deemed beyond help, and will either be allowed to die or be partnered with other banks. The market will take its cues from this stress-testing, and make its own bets on which banks will survive. It’s hard to predict how many will have survived when the dust settles, but the new landscape might consist of only 50 or 60 banking institutions. More radically, Washington could take over the licensing of banks from the states, or, at the very least, consider more stringent regulation of global and super-regional banks. After all, the Canadian system is considered successful not only because it has fewer banks to regulate, but because regulation is based on the tenets of safety and soundness.

There is no time to waste. Reconfiguring the American banking structure to look more like the Canadian model would help restore much-needed confidence in a beleaguered financial system. Why not emulate the best in the world, which happens to be right next door? At the very least, Hamilton would have approved.

Theresa Tedesco is the chief business correspondent for The National Post.

IMF warns crisis has shifted to poor countries
By Lesley Wroughton link

WASHINGTON, (Reuters) - The International Monetary Fund (IMF) has warned that the global crisis had shifted to the world's poorest nations and 22 countries may need as much as $25 billion in additional funding in 2009 to cope with the downturn.

The IMF said, based on its projections, the 22 countries could need up to $140 billion if global conditions were to deteriorate sharply.


"I foresee mounting problems for developing countries," IMF Managing Director Dominique Strauss-Kahn said, calling it the "third wave" of the crisis, which has spread from financial and credit markets into the consumer economy.


He said he expected more countries to turn to the fund for financing and those with IMF aid packages to increase their borrowing.


"I'm expecting a number of new or scaled-up loan agreements will appear very soon," Strauss-Kahn told the Brookings Institution, a Washington-based think tank. He made the comment during a discussion of the launch of a new IMF report, which looks at the impact of the crisis on low-income countries.


Under current IMF projections, a total balance-of-payments shock in 38 developing countries could amount to around $165 billion, and increase to as much as $216 billion under a worst case scenario.


The IMF said reserves in the 22 countries are expected to fall below three months of imports with losses amounting to $25 billion -- equivalent to about 80 percent of annual aid to poor countries over the past five years.


Developing countries have been affected by falling demand for exports and a dramatic slowing in remittances from overseas workers as the economies of the United States and Europe have contracted. A sharp drop in foreign direct investment is expected in about half of all low-income countries.


Strauss-Kahn said the decline in food and fuel prices should provide some relief to countries as inflation declines.


'VULNERABLE' COMMODITY EXPORTERS
In addition, the IMF has identified 26 countries that are "highly vulnerable" to the crisis but may not immediately need additional financing.


Among the 26 countries are: Zambia; Vietnam; Angola; Ghana; Burundi; Ivory Coast; Haiti; Honduras; Liberia; Nigeria; Mongolia; Moldova; Papua New Guinea; Sudan; Albania and Kyrgyzstan.


The overall fiscal balance of developing countries is likely to deteriorate on average by 2.5 percentage points of GDP in 2009, the IMF said. Commodity exporters will be hardest hit, with a decline in fiscal positions of about 5 percentage points of GDP on average.


The Fund said it did not expect commodity prices to recover while global activity is still slowing, adding that production cuts in the Organization of the Petroleum Exporting Countries, or OPEC, members could eventually help support oil prices "if implemented close to target."


Strauss-Kahn called on donor countries to step up their assistance to poor countries and to adhere to their 2005 commitments to double aid to Africa by 2010.


However, the IMF is concerned that aid could shrink by as much as 30 percent this year relative to their 2008 value, amid increased budgetary strains in advanced economies.


Strauss-Kahn said he was worried about the possibility of a humanitarian crisis if social programs are affected by budget constraints.


World Bank research has shown that weaker growth will push an estimated 46 million more people in developing countries below the poverty line, more than was expected before the crisis emerged in 2007.


The Fund said while the banking systems in developing countries had little exposure to problematic financial instruments, the performance of banks could be affected by an increase in the number of borrowers unable to repay their loans.


It said many developing countries have little room for counter-cyclical policies to address the crisis.


The Fund said domestic policy responses should include spending on social programs to protect the poor, exchange-rate flexibility to facilitate the adjustment and vigilant financial supervision.