Friday, December 07, 2012
Canadian Banking System vs. American Banking System
The latest recession has shown the world that no economy is stable. The global power house that is the United States was damaged so critically that it still has not completely recovered to this date. Other areas of the world such as Europe are still feeling the effects of the recession and their immense amount of debt has led the world to an unbalanced point. The Canadian economy was the least affected by this economic decline. A Comparison of mortgages and methods of diversification and concentration used in Canadian and U.S. banking systems helps one understand why the Canadian economy survived the recession, and ultimately why it is the superior banking system. Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure. One of the key reasons for Canada’s banking system being dominant over its counterpart; the United States is their lending regulations, specifically in the housing and mortgage markets. U.S banking policies also lean towards encouraging borrowers whereas Canadian regulators lean towards making sure lenders are sound. In the Untied States, loan originations by mortgage brokers was at a substantial 70% before the economic crisis vs. Canada’s being at only 35%. During the housing boom of 2006/2007, American banks were blinded by optimism in the currently prosperous housing market and wanted to loan out as much money as possible. Loans were being granted with lower-than-market interest rates to anyone and everyone, regardless of their income and ability to repay the loan. In Canada however loans are always granted with prudence on an individual, case by case basis. Along with this, U.S banks had a mix of recourse and non-recourse laws which differ depending on the state. In other...