Paul Martin, who was Canada’s finance minister before he became prime minister, is widely seen as implementing the policies that led Canada to get through the crisis virtually unscathed. This is the summary of Martin’s key actions as finance minister from INET:
In general, Martin has received justifiable plaudits but often for the wrong thing. Canada’s “fiscal austerity expansion,” which was praised by deficit hawks around the world, only succeeded because the country had, and still has, a free-floating exchange rate. As a result, the Canadian dollar dropped sharply in the mid-1990s, facilitating a huge turnaround in the country’s trade account and thereby offsetting the fiscal austerity embraced by the government at that time.
Where Paul Martin does deserve huge credit is the manner in which he handled Canada’s banking system, in particular his cautious approach to financial deregulation. Martin saw little social merit in following the then-prevailing trends toward greater financial liberalization. And he eschewed the notion that bigger was necessarily better.
In January 1998, the chief executive of the Bank of Montreal shocked Canada’s financiers by announcing his intention to merge with Royal Bank, Canada’s largest bank. Martin, then the finance minister, was not pleased, particularly as the announcement was seen as pre-empting the country’s financial services task-force, which had been set up in December 1996 and was scheduled to report in the autumn of 1998. In response to the proposed deal, Canada’s second-and fifth-largest banks, Canadian Imperial Bank of Commerce and Toronto-Dominion, then announced their own plans to merge.
Suddenly, the task force’s position on consolidation in Canada’s already highly concentrated banking sector was more than just a matter of theoretical interest. Bankers and markets assumed that the mergers were a done deal and that the government would roll over, as its counterparts in the U.S, when faced with similar pressures.
Not so. In contrast to the supine reaction of America’s politicians and regulators, who green-lighted mergers such as Traveller’s takeover of Citibank in spite of this being against the existing law, Martin rejected the two huge Canadian bank mergers of the late 1990s. And nothing has changed since, despite the political ascension of the Conservatives.
This interview gives more detail on Martin’s decision-making process. When 1998 merger plans were proposed, Martin and his colleagues gave considerable thought to “too big to fail” risk and saw it as one of the major reasons to reject the proposed merger. Similarly, Canada has kept banks as traditional banks; it’s not been tolerant of forays into what not long ago considered to be investment banking. The banks are allowed to have a nice profitable oligopoly and the quid pro quo is that they have to stay relatively boring. Canada has also required much higher capital levels that US and European banks.
Canada is admittedly in the midst of blowing a bigger and bigger real estate bubble, so the past may not be a predictor of future performance as far as Canadian banks are concerned. But given how much central bank induced liquidity is chasing returns, Canadian banks are hardly alone in being exposed to an asset price reset.