Evolution of Canadian and the US Banking System
Canada and the US both were the colonies of Great Britain, but their banking systems evolved differently. The banks in Canada were regulated by the federal government, whereas in the US the state governments has power over banks. Further, during the Civil War, the national banking system in the US was established. It did not replace the states banking system, but rather created a dual system. Therefore, the banking system in the US was always a weak and fragmented. The development of securities markets and emergence of financial intermediaries evolved into the shadow banks. Contrary, Canadian securities markets evolved at a lower pace and regulation was unified.
Entry of the U.S. Banking Sector
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The Bank of Canada was cautious of raising interest rates, keeping in mind that Canada and the US economies are very tightly integrated and depreciation of the US Dollar will affect Canada’s economy. IMF observed that in 2008 strong exchange rate passthrough could complicate policy decision by temporarily lowering inflation. In 2009, the monetary policy was effective and bank officials keep monitoring economic and financial developments “to meet the 2 percent inflation target over the medium …show more content…
When the US shadow banking was allowed to enter the Canadian housing market, the loan terms were extended to 40 years with no down payment. Moreover, with the new National Housing Act (NHA) guidelines, lenders were able to securitize as many mortgages as they could into mortgage-backed securities (MBS) and selling them to the third party. Relaxed lending standards lured new home buyers, who were not able to qualify for a loan under the old rules. Since the Canadian banks were not planning to hold the notes, they had no incentives to worry about the borrowers’ ability to pay back the loans. The banks started issuing a lot more mortgages than previously at a very low rate. Borrowers were not penalized for a very small down payment, if any. The borrowing costs were low allowing the potential buyers to bid more for houses, which drove up the prices. The loan terms were reinstated back to 25 years with 5 percent down payment during the 2008 global financial crisis. Moreover, when the homeowners default on their mortgages, they are still legally responsible of their debt even after they sell their property or abandon it. Lenders, who are issuing CMHC-insured mortgages, are protected from losses in the event of
Flaherty, Edward. 1997. A Brief History of Banking in the United States <http://odur.let.rug.nl/~usa/E/usbank/bank03.htm> (accessed 12-12-99)
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Leading up to the crisis of the housing market, borrowers got mortgages without understanding the terms. Banks were giving out loans to people the banks weren't sure could pay the money back. The closer to the crisis, the higher the frequency of illegitimate loans and mortgages. Because there were so many mortgages on houses that could not be paid back, millions of mortgages were foreclosed on, and the houses we...
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
“The housing market will get worse before it gets better” –James Wilson. The collapse of the United States housing market in in 2008 was one of the most devastating moments for the world economy. The United Sates being arguably the most important and powerful nation in the world really brought everyone down with this event. Canada was very lucky, thanks to good planning and proper preventatives to avoid what happened to the United States. There were many precursor events that occurred that showed a distinct path that led to the collapse of the housing market. People were buying house way out of their range because of low interest rates, the banks seemingly easily giving out massive loans and banks betting against the housing market. There were
The global financial crisis affected the many advance economies, particularly the United States. Unemployment significantly increased, people were evicted from their homes, and the search for employment was a dead end. However, Canada was not affected with the same force as the United States: “Canada’s financial sector was less affected than most advanced economies and it had the highest bank soundness rating in the World Economic Forum surveys from 2007-2008 through 2012-2013.” Despite the relatively stable status of the Canadian economy, Canada was very much involved in the review and improvement of international financial regulations. Canada was in a position to make changes to financial regulations due to their perceived experience in the matter, as Canada escaped the crisis relatively unscathed. Canadian delegates were placed in charge of four core areas in the reformation of financial policy and, “in all these areas, Canada was able to successfully push for reforms that resonated with its experiences and interests in enhanced financial sector regulation and supervision.” This crisis, and the successful reformations that came out of it, further installed Canada as a leader in economics, firmly inaugurating them as the world’s best bankers.
The years 2008 shined a light on a group of people who were considered high society. When the stock market crashed in September 2008, the world shines a spotlight on the financial corporation. Words such as hedge fund manager and financial instrument such as credit default swaps are not words not known to everyday citizens. The economic downturn forced society to ask question not normally asked.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
In the early 2000’s the housing market boomed, real estate was a hot investment and everyone was looking to buy a home. However not everyone can afford a home and a majority of people were forced to take out a mortgage to purchase real estate. During the housing boom banks were supplying subprime loans and upping the risk in the real estate market. These loans were not only risky but irresponsible on the part of the banks’ lending them, and although individuals receiving the loans thought they were being helped at the time, these loans were a major reason why so many people their homes, almost crippling toe U.S economy as a whole.
The early decades of the nineteenth century saw the establishment of banks in the Caribbean largely as a convenience for the local governments. Throughout much of the nineteenth century, most Caribbean banks operated as an oligopoly with limited government influence – this directly translated into higher profits. However, over time, the banking environment could best be described as complex and dynamic. Competition increased, resulting into greater need for improved customer service, product innovation and cost reduction strategies. In order to achieve this, the banking sector was undergoing major structural reforms characterized by mergers and acquisitions. On July 23, 2001 Barclays and CIBC announced that they were in advanced discussions which were intended to lead to the combination of their retail, corporate and offshore banking operations in the Caribbean.
Flawed financial innovations: the implementation of innovations in investment instruments such as derivatives, securitization and auction-rate securities before markets. The indispensable fault in them is that it was difficult to determine their prices. “Originate to distribute securities” was substituted by securitization which facilitated the increase in ...
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
The subprime mortgage crisis is an ongoing event that is affecting buyers who purchased homes in the early 2000s. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from 2000-2005. Home loans were given at a subprime rate, and have now led to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. The cause and effect of this crisis can be broken down into five major reasons. When subprime mortgages began to flourish, the term housing bubble came into existence.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
The Bank of Canada is Canada’s central bank, whose current Governor is Mike Carney. It was founded in 1934 by the Bank of Canada Act of the same year. The country’s banking system was quite stable even before the Bank of Canada was established, mainly thanks to its branch banking structure, and showed little interest in central banking in the early 1900s. In addition, the banking system was somewhat being regulated by the Canadians Bankers’ Association. However, as the Great Depression took Canada by storm, talks about its then financial state were brewing. Some even questioned the country’s ability to meet larger demands. The central bank was formed from the Act in 1934, and starting running in 1935, but as a privately owned institution. Then, when William Mackenzie King was re-elected as Prime Minister after a full term by Richard Bennet, the new government made an amendment to the Bank of Canada Act, making the bank publicly owned by 1938, as it is today (Bank of Canada: History). Its primary objective was to be able to support financial and economic wellbeing of our country (Go Currency: Bank of Canada). In that way, it has many roles and functions as a central bank, which I will expand in the coming paragraphs.