No, Canada's Big Banks Don't Justify America's Too Big to Fails

In response to the chorus of experts
calling for the mega-banks to be broken up, defenders of our current
banking system argue that because Canada's banking system is pretty
stable, and Canada has some giant banks, size isn't the issue.

This might be a great argument ... except that Canada's banking system is completely different from America's banking system.

Instead of listing numerous differences, I'll just raise two.

First, as Newsweek points out:

Canadian
banks are typically leveraged at 18 to 1—compared with U.S. banks at 26
to 1 and European banks at a frightening 61 to 1.

Of course, Congress or regulators could demand lower leverage ratios.

But
the second difference is harder to fix. Specifically, 5 American banks
hold virtually all of the world-wide exposure to derivatives,
especially credit default swaps. See this, this, this and this.

Unlike the 5 giant derivative dealers in the U.S. who pretend - because they want to keep their derivative sale profits high - that reining in derivatives would be bad for the economy, Canada's banks don't see much need for much exposure.

As the Bank of Canada wrote in 2000:

Anecdotal
evidence also suggests that Canadian banks have been slower to embrace
credit derivatives than their international counterparts. Reasons cited
for
the slow emergence of credit derivatives in Canada include the Canadian
banks’ access to cost-effective funding through their retail deposit
base, as well as their ability to achieve a broad diversification of credit risk internally through their national branch networks.

Can't congress or regulators fix this?

No.

Derivatives will never be reined in until the too big to fails are broken up. The banks are so big and politically powerful that they have bought the politicians and captured the regulators.

So the American banking giants - which have repeatedly gone bankrupt due to wild speculation
- are a totally different animal than the Canadian banks. The former is
up to their ears in derivatives while the latter isn't. And the former
is preventing any transparency or regulation of derivatives.

Unless the too big to fails are broken up, they will go bust again - and bring the system down with them.

As the Newsweek article also points
out, Canada's real estate bubble hasn't popped yet.  Even with lower
leverage and derivatives holdings, the big Canadian banks might not
fare so well when that happens.