derryl

Against Big, Public Banks

I agree with the principle that small scale privately held banks are more likely to manage money prudently than large public banks. Private banks are free market businesses in the ordinary sense. They have limited means and to stay in business they have to mind the store. Some will be lucky and get away with bad moves. Some will be unlucky and suffer from unpredictable events. But for the most part good business will prevail and bad business will go under.

Canada's large public banks and branch banking system is a little different story. A significant portion of bank shares are held by institutional investors like pension funds who demand low risk even if that means unspectacular returns. Even when they wanted to expand and merge/acquire, Canadian banks were prevented both by their owners/stockholders and the federal government. Luckily these conservative constraints prevented Cdn banks from overextending into high risk/high reward and ultimately failed investments.

Canada's Finance Minister is now enjoying bragging rights and offering the Cdn system as a model of prudence for the G20 to emulate. But really, Cdn banks just got lucky, and were constrained in spite of their ambitions. I don't think human nature can resist jumping on what looks like a gravy train so the checks and balances that happen to exist in Canada have served Cdn banks well.