The Canadian Keiretsu

This article describes the Canadian keiretsu, in which a main Chartered Bank dominates an interlocking group of corporate clients, investment dealers, trust companies, and professional advisors. Such a network facilitates information‐sharing and monitoring among group members, while also reducing the agency costs of banker misbehavior. Most major Canadian firms are members of a keiretsu, and stock ownership of Canadian corporations is far more concentrated than ownership of U.S. companies. Given their many similarities of history, law, and geography, Canada and the United States should have ended up with similar corporate ownership and governance structures. But they did not, and the difference was Canada's less restrictive banking and bankruptcy laws, which in turn can be traced to Canada's distinctly non‐populist historical experience. The Canadian keiretsu arose primarily for two reasons: (1) the larger concentration of commercial banking (the six largest Canadian banks today account for 98% of the industry's assets) allowed by Canadian law; and (2) the greater powers of Canadian secured lenders in the event of default. Unlike a U.S. Chapter 11 filing, in a Canadian bankruptcy the lender's right to assume control of the assets was not stayed until quite recently. And, even with the recent change in Canadian bankruptcy law, Canadian secured lenders have much stronger protection of their claims in bankruptcy than their U.S. counterparts in Chapter 11.