Demystifying the Canadian Financial Regulation Success: in
Comparison with the American Financial Regulation Struggle, and
Possible Lessons for China – Robert Xia
Context
The context of this research is the 2007-08 global financial crisis (the Crisis), which
featured the collapse (or near collapse) of Wall Street and unprecedented
government intervention since The Great Depression, and its subsequent reform
efforts in America and beyond. In a stark contrast with the experience of Wall Street,
Bay Street – the synonym of the Canadian Financial Industry, dominated by six
financial conglomerates flag-shipped by six major chartered banks – weathered the
shock of the Crisis and the subsequent Global Recession very well. By September
2014, in recognition of the strength and resilience of the Canadian banking system,
the World Economic Forum has rated it the soundest of the world for seven
consecutive years since 2008.
China, now the second largest economy of the world, had been on the track of
Americanization of its financial industry before the Crisis. China luckily avoided the
hit of the Crisis critically because of a strictly protected financial industry and a not
yet freely exchangeable currency. China’s financial industry is now at a crossroads
in the post-Crisis age.
Focus and “Originality”
Financial regulation is a not a small topic, let alone when this thesis appears to
involve three counties’ financial regulation (or even more, because inevitably, UK is
also frequently referred to when analyzing the formative years of the Canadian
banking industry).
Canadian financial regulation success, looking at its core, is a super-conservative
approach to risk control from the industry practitioners to the regulators.
One of the key hypotheses first conceived in late 2011 was that the success of the
Canadian financial regulation is rooted in Canadian culture and its political economy
environment – in short, the socialism-friendly cultural and political economy
environment has fostered a type of anti-speculation or more risk-averse approach
to financial regulation. (At that time, I had never been on the soil of Canada, or had
had any serious study of Canadian history or other subjects)
In contrast, the much more liberal environment in America bears the fruits of a
more laissez-faire approach to financial industry, regardless of some temporary
tightening in its history (e.g. New Deal era’s Glass-Steagall).
After more than three years, the American part of the hypothesis is sort of proved by
the findings from existing literature of a dozen scholars in financial regulation; the
Canadian part is still a job to be done – there is not much existing research focused
on this interaction between Canadian culture, political economy and financial
regulation.
Some recent readings about the history of the Canadian political movement appear
to support my hypothesis: the defining forces of the Canadian styled capitalism
(which features mixed economy and a relatively complete social welfare system),
from Red Tory to welfare liberalism to CCF/NDP, effectively counter weighted the
influence of the rivalry forces like (the local) business liberalism and American
liberalism. General Canadian nationalism and the Quebec nationalism is another
force that stood up to Americanization.
To get the job done, I need to dive deeper into Canadian history to find more direct
evidence of the continued dialogues between anti-speculation political forces and
the financial industry at the venues like the legislature, courtrooms and academic
debates.
What can China learn?
China is now a mixed economy although the state still overshadows the private. The
more probable direction of the economy is a further increase of the private sector by
while scaling back state from non-strategic sectors. The latest slowdown of China’s
economy seems to have increased the resolve of the top leadership to let the private
sector to play a bigger role.
A consensus has been built in China’s non-financial sectors that the financial
industry has taken a too large piece from the pie belonging to the people – the
master-servant debate in the West has found the same audience in China.
Americanization of the Chinese financial industry has also worsened inequality in
China. The global financial crisis broke the momentum of Americanization and the
recent anti-corruption efforts by the new leadership created a new environment and
momentum to reposition the financial industry and its regulation approach.
In comparative terms, China and Canada share more common values than as
between China and America – the critical similarities between these two countries
include both are more “government dependent”, rather than the American styled
“government is the problem, not the solution”, and the influence of socialism is
much bigger in these two countries than in America (where socialism is close to
written off in mainstream politics).
In recasting the path of China’s financial industry, the “utility” scenario advocated by
Paul Volcker (the namesake of Volcker Rule in American post-Crisis financial
regulation efforts) appears to be off the table. The Canadian model of financial
regulation appears to be more applicable to China.