Working Paper: NBER ID: w17312
Authors: Michael D. Bordo; Angela Redish; Hugh Rockoff
Abstract: The financial crisis of 2008 engulfed the banking system of the United States and many large European countries. Canada was a notable exception. In this paper we argue that the structure of financial systems is path dependent. The relative stability of the Canadian banks in the recent crisis compared to the United States in our view reflected the original institutional foundations laid in place in the early 19th century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk -- the mortgage market and investment banking -- and was tightly regulated by one overarching regulator. In contrast the relatively weak, fragmented, and crisis prone U.S. banking system that had evolved since the early nineteenth century, led to the rise of securities markets, investment banks and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2007-2008 was not contained.
Keywords: No keywords provided
JEL Codes: N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional foundations of the Canadian banking system (N22) | Relative stability during financial crises (G01) |
| Regulatory framework in Canada (L59) | Unified approach to systemic risk (E44) |
| Regulatory framework in Canada (L59) | Stability of the Canadian financial system (N22) |
| Differences in regulatory structures (L59) | Divergent outcomes of financial crises in Canada and U.S. (N22) |
| Concentrated and regulated structure of Canadian banking (N22) | Absorption of systemic risks (F65) |
| Fragmentation of U.S. banking system (F65) | Inability to contain systemic risks (F65) |
| Path dependence in banking systems (G21) | Stability of the Canadian financial system compared to the U.S. system (N22) |
| Regulatory frameworks (G38) | Financial stability (G28) |