ADMS 1010 Midterm - Question 1 In the midst of the world...

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Question 1: In the midst of the world financial crisis and global credit crunch, the World Economic Forum reported that Canada has the world’s soundest and healthiest banking system while U.S. has fallen to 40 th position in the world due to crises of bad mortgages in the United States and mutant debt securities on Wall Street. By comparing the effects of liberalism to U.S. banking system, this article is aimed at investigating how the conservatism has influenced the public policy and development of Canadian chartered banks which lead to the healthy system today. In general, Canada and the United States have very different banking systems. The United States traditionally has an overabundance of small banks (some of them with very few branches), which do not exist in markets like Canada (Heinrich, p. 1). In Canada, the domestic banking assets (about 90% in 2002) are primarily controlled by six largest banks - RBC, TD Bank, BOM, CIBC, Bank of Nova Scotia, and National Bank of Canada (Heinrich, p. 1). In contract, Heinrich pointed out that the five largest U.S. banks only controlled only 9.7% of the domestic asset. U.S. practically follows the belief of Adam Smith in Economic liberalism, which “government can rarely be more effective than when it is negative or does not interfere” (Eaton, p.17). The objective of the liberalism is to encourage competition and innovation. However, too much competition in banking system could “erode the profitability needed to promote market confidence and a strong, growing capital based in all institutions” (Darroch and Kerr, p. 292). Moreover, Competition might promote innovation that could lead to greater uncertainty since they were performing without a safety net (Jaksic, p.1). Darroch and Kerr described Canadian public policy toward its chartered bank system as a “centuries-old goals of establishing domestically owned, stable, and globally competitive banks” (p. 288). They also pointed out that, from the origins and development of banking in Canada, “stability was the dominant concern of public policy makers” (p. 288). This concept of stability followed the classical conservatism which emphasized on the importance of tradition and continuity (Eaton, p. 21). The purpose of stability is to prevent the failures of individual banks. It is quite different in U.S. where bank failures have been relatively common (Darroch and Kerr, p. 1
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291). U.S. policy makers, who believe in classical liberalism, have “chosen to unfetter their financial institutes and let capital markets choose winners and losers” (Darroch and Kerr, p. 289). They believed that free market economies will correct for seemingly unsuccessful situations itself by invisible hand (Eaton, p. 17). This has led to a more competitive and freer market as the notion of liberalism but it was also less stable and eventually led to financial crisis today. Darroch and Kerr added that in order to attain stability, the Canadian federal government
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ADMS 1010 Midterm - Question 1 In the midst of the world...

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