Diverse Experiences with Banking System
Tale of Two Countries: Canadian and American Banking Systems
J.D. Han
King’s College, UWO

 Pre-1863 State Banking only
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1) Dual Banking System
Some banks are regulated by the state agency and others by the Federal agency
1863
1913
1934
National Banks (Act) emerging
Federal Reserve System
Federal Deposit Insurance Corporation

2) Multiple Regulatory Agencies: “Crazy Quilt System”
 The Office of the Comptroller of the Currency
: in primary charge of “Charter” for national banks
 Fed
:in secondary charge of national banks, and in sole charge of bank holding companies
 FDIC and State Banking Authorities
: in charge of state banks with FDIC insurance
 State Banking Authorities
: in sole charge of state banks without FDIC insurance

3) Fractured Banking Industry
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A Large # of Banks: 12,000 until the early 1990
Many Lacking “Scales of Economies
> only 325 banks have assets above $1 billion (’94)
-> until recently, some states had “Unit Banking System”.
-> Consolidation and Simplification: Key Issue of
Presidential Reforms

1) Federa l versus State Struggles for Hegemony
-
“The Wizard of Oz as a Monetary Allegory” by H. Rockoff
 Background: Depression in the 1890s
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Allegories:
Dorothy: an Average conscientious true American
Tornado
Wicked Witch of the East- Eastern Business and Financial Interests
Munchkins -Average Americans
Scarecrow -Western Farmer
Tin Woodman- Unemployed Industrial Workers
Cowardly Lion “William Jennings Bryan”
Wicked Witch of the West - Grover Cleveland silver shoes: magic water that melt the witch: solution – watershed – inflation (through printing money)
A Lesson: So much socio-political problems and regional interests were intertwined with
Monetary policies (and banking practices):
The complexity of the current banking system of the U.S. is a on-goint legacy of the long tradition of these complicated political Struggles between regions, parties and interest groups.

2) Anti Trust Acts of 1920s to 1930s have shaped the U. S. Banking System
 McFadden Act of 1927: limits and prohibits inter-state banking and branching
 Glass-Steagall Act of 1933: Anti-Trust Act separating Banks and Commerce

* Apparent Rationale Underlying the Separation of
Commercial and Investment Banking: Glass-Steagall
Act
In favor of Specialized Banking as opposed to Universal Banking
If banks are engaged in securities business, there may occur
 Conflicts of Interests;
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Unfair Competition;
Risk of Safety and Soundness;
Concentration of Power;
Unfair Stretch of Federal safety net

1.Evolution of Bank Holding Companies
2. Reigle-Neal Act of Interstate Banking and Branching Act
(1994)
: Opening up M & A for “Efficiency” in banking sectors
2.
Gramm-Leach-Bliley Financial Modernization Act (1999)
: Banks are allowed to form Financial Holding Companies across industries and even to carry out “merchant banking” or equity investments in nonfinancial firms.

-Economics
: Cost Savings
: Risk Diversification
-Legal Issues on Conflict of Interests can be resolved by “Mezzanine Finance” and “Lender
Liability and Equitable Subordination”

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The number of banks has been decreasing
16000
While mergers between banking groups have slowed, there has been a move towards diversification as the barriers between commercial and investment banking have finally broken down.
14000
12000
10000
8000
6000
4000
2000
0
'75 '80
# of Banks
'85 '90 '95 '00

Tradition of
“Four Pillar System” :
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Trust, Mortgage, Fiduciary Business
Chartered Banks
Insurance
Securities Industry
(Credit Unions)
Towards
Full Service Banking

2. Reforms in the Canadian Bank Act
 1954
: Banks were allowed to go for household lending and to make mortgage loans insured by NHA
 1967
: the 6% ceiling on the mortgage loans was removed
 1980
: banks were allowed to have mortgage loan companies and venture capital companies.

 1987
:banks were allowed to underwrite corporate securities
: abolishing the Canadian equivalent of “Glass-
Steagall Act”
 1992
: banks were allowed to own trust companies
: banks were permitted to offer a number of inhouse activities, such as portfolio management, and investment counseling .
: required reserves are to be phased out.
 1999
:Bill C-67
 2000-2001
Bill C-38 and Bill C-8

 A Small # of Banks
 Big Five Sisters dominate market
 Highly Regulated and Protected Inbound from
International Competition
 Highly International Outbound

U.S.
 Big Increases in Mortgage
Backed Securities
<S & L companies’ mismatch of maturity terms of Assets and
Liabilities
 Big Surge of Money Market
Mutual Funds
<- way to get around `Regulation
Q’
Canada
 Not Much
 No Big Surge

 Chart 9 of C. Freedman

 Post WWII Japanese banks were reorganized by the U.S. Occupying Army
 Yet, they have been distinct from the U.S, banks
 Notably, Japanese banks have been allowed to hold equities and to participate in management of non-financial corporations

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Reduces bankruptcy costs for society (legal cost; disruption cost)
Sumitomo Bank revived Mazda in the 1970s
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Reduces monitoring cost of Principal-Agent Problem
(Sun Bae Kim, Banking and Commerce: The Japanese
Case)
Makes banks share ‘Upside Returns’ and ‘Calculated
Entrepreneurial Risk and Venture’

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Stock Market Crash leads to Loss of Bank
Assets
Moral Hazards: “Too Big to go bankrupt”

 Universal Banking offering a wide spectrum of services and products
as opposed to “Specialized Banking”
 Fully Merged