Regulation and bank stability: Canada and the United States, 1870-1980

Canada and the United States are probably as similar as any two countries in the world, but they have always had very different banking systems. First, the United States has had a unit banking system due to the restrictions on branch banking, which created many small banks. Canada, however, has always had unlimited branching, which led to the emergence of a few large nationwide banks. The author contends that, if one system performs better (in terms of stability and efficiency), this is due to their different regulatory system. Indeed, the two countries are different in terms of: 1) reserve requirements; 2) capital ratios; and 3) requirements to opening a new bank. When the United States has eliminated the barriers to interstate branching, U.S. banking will follow a route similar to that taken earlier by Canada and earlier yet by the United Kingdom. However, since problems may arise during the merger, the monetary authorities must protect the payment system at large as well as small depositors. Canada's banking system may be both more stable and more efficient than the U.S. banking system, but the United States has compensated by developing more open and deep capital markets.