Canada’s new bank bargain is old

As I sipped my third espresso at Little Victories, a boisterous coffee shop near Parliament Hill, Andrew Moor still wasn’t done teaching me about capital requirements. I had switched to marigold tea by the time he looked at his watch and realized he was late for an appointment. We said our goodbyes and off he went for the door, but he paused before opening it. Unzipping his bag as he turned around, he dug out a book called Fragile By Design and handed it to me. I read the first chunk as I finished my tea, scribbling thoughts in my notebook for the next drinks we’d never have. Andrew, who had been the CEO of EQ Bank, passed away last year.

I thought about him the last time I was at Little Victories. On the walk there, the copper and sea-foam towers of Canada’s parliament buildings loomed large in the background. Around the corner is the James Michael Flaherty Building, where the finance minister’s staffers and Department of Finance policymakers are hard at work. They go to Little Victories, too. I’ve joked one too many times that it’s the place to eavesdrop on conversations you shouldn’t be privy to.

According to Fragile By Design, the banking system emerges from a political bargain, a quid pro quo among different people with different aspirations. And what is a more natural place for such a bargain to begin than a coffeehouse near the seat of power?

The book feels more relevant now than when Andrew gave it to me.

There are signs the political bargain of Canadian banking is coming undone. Since Mark Carney became prime minister, regulators have suggested the trauma of the 2008 financial crisis is waning. Peter Routledge, the head of Canada’s banking regulator, announced his agency will fast-track bank applications from financial technology companies, which want to give banks a run for their money. The Office of the Superintendent of Financial Institutions is also loosening capital requirements for smaller banks, which will help them better compete with the biggest.

Competition in banking is no longer the marginalized objective it once was. In the Justin Trudeau years, it was more important to protect consumers, fight financial crime, and keep the financial system stable. That’s why open banking — an initiative from the Trudeau years to boost competition — moved at the pace of that slug in the Wealthsimple ad, irritating financial technology companies along the way.

Though things seem different now, the objects in the mirror are more familiar than they appear. The Carney-era banking agenda, despite the fresh rhetoric around it, isn’t so much a deviation from the political bargain of Canadian banking as it is an alternative expression thereof.

At a Sherbrooke courthouse in 1864, Alexander Galt had assembled his constituents to present a plan for confederation. He promised a glorious future, a nation more impressive than those once ruled by kings and emperors; he outlined a new political system, detailing the composition of the legislature, and how powers would be divided between the federal and provincial governments; the federal government would control the military, he explained, and the provinces would handle education; Galt also explained why the power to charter and supervise banks wouldn’t be given to the provinces: everyone should be guaranteed access to currency and credit, no matter where they lived, or how far across Canada their business travelled.

According to the authors of Fragile By Design, Charles Calomiris and Stephen Haber, national control of the banking system protected it from the excesses of regional populism.

Ottawa couldn’t cave in to the demands of the farmers out west, who complained of usurious interest rates. To do so would have been to deprive the merchants who traded along the St. Lawrence of their access to credit. Prairie farmers as a bloc weren’t formidable enough to hijack the banking system and force it to make relatively bad bets on them.

To see the opposite at work, look to the United States. Control of the American banking system was left to the states, making it sensitive to regional populism by design.

In the early years, American farmers lobbied for restrictions on how far and wide banks could do business. Banks were banned from branching out nationally, which meant their books of business were locally concentrated and protected from competition. It seemed like a clever political bargain for investors and shareholders who needed banks to be profitable, and for farmers who needed cheap credit. It was, in fact, a bad one because it left banks unable to diversify risk. It’s why the U.S. has had several system-wide banking failures since the 1800s, while Canada, with its national banking system, has had none.

Though America’s bank bargain has evolved since then, it still wears the residue of its populist origins. After lifting restrictions on cross-state banking, the U.S. government pumped air into a subprime lending bubble that blew up the financial system in 2008. This was to appease urbanites who wanted to own the roofs above their heads, not pitchfork-waving farmers. Now the Trump administration may do it again.

Ahead of the midterms, Michelle Bowman, head of regulation at the Federal Reserve, has vowed to boost mortgage lending. Donald Trump has talked of lowering credit card interest rates, indulging in an impulse shared by the populist left. He has ordered Fannie Mae and Freddie Mac to buy $200 billion in mortgage-backed securities to lower the cost of borrowing. He has also weaponized the law in an attempt to bully the Federal Reserve into lowering the federal funds rate.

While the body is always changing, the spirit lags behind. “Let them eat credit” is how Raghuram Rajan described the ethos before the 2008 financial crisis. After the crisis, the Trump administration wants the masses to eat it again.

The last time I saw Andrew Moor, he was likening banking modernization to nation building at a conference for financial-industry insiders. The railway made Canada possible by moving people and their wares across the inhospitable expanse. So did the banking system by moving money and extending credit.

The lesson of Fragile By Design was right there in Andrew’s words: the institutions that govern the Canadian banking system are susceptible to national pressure more than regional. Separatists in Quebec or Alberta can scream. So can financial entrepreneurs from the region of the banking system where the big six banks don’t dominate. Either can demand more rights, but it’s not until those rights can build or protect the nation that they become bargaining chips.

Just as separatist movements can become a national issue, so can competition in banking.

When the senior deputy governor of the Bank of Canada, Carolyn Rogers, warned of lagging Canadian productivity in 2024, it seemed as if competition in banking could become a national issue. The C.D. Howe Institute, a Canadian think tank, had already described the financial sector’s contribution to Canadian productivity growth as “underwhelming” all the way back in 2019. It continued to put out research, showing that small and medium-sized Canadian businesses pay more for credit than their peers in other countries do.

At the same time, the Trump administration retreated from the international plan to raise capital requirements for banks, which made everyone else do the same. No one wanted to be the only country that was making life harder for its banks. European giants, such as Germany and France, called for reprieve from their supranational regulator. OSFI halted its own plans to toughen bank oversight.

The result was a shift in power. The negotiating table in Basel, Switzerland, where global banking standards are set, came to matter a little less. The negotiating table in Ottawa, Canada, came to matter a little more.

In a speech Rogers gave more than a year later, she said, “as the world heads into a period of greater economic nationalism and more industrial policy, we need to resist the urge to add protections. Instead, we should look for ways to encourage more innovation and greater competition.”

In banking, that’s what Ottawa is now doing. It’s doing what should be expected of a nationally-minded government, under the watch of a prime minister who is a smart economist. Research says commercial lending boosts economic growth more than mortgages and personal credit cards. So it should come as little surprise that OSFI is fast-tracking bank applications and tweaking capital requirements to boost small- and medium-sized business lending.

In Canada, parochialism is punished. As utilitarian in its motif as it is technocratic, the Canadian bank bargain must bring the greatest good to the greatest number, as decided by those at the centre, where the balancing act of governing a nation constrains them to what the whole of Canada needs to thrive.

I wish I hadn’t waited to meet Andrew over drinks again to tell him what I thought of the book. I’d have told him that Calomiris and Haber underestimated the role of ideas in the evolution of the banking system, as George Selgin argued. Ideas are what people discuss in cafés such as Little Victories over coffee, before walking into private boardrooms to strike political bargains. Though the walls of boardrooms keep the sounds from getting out, they don’t stop the ideas from seeping in like smoke under the door.

“Andrew was a true Canadian pioneer driven by an unwavering belief that banks should, above all else, serve their clients and serve Canadians,” said Leslie Church, a Canadian politician who rose in the House of Commons last year to say a few posthumous words about her constituent. “He was an innovator that advocated for greater competition in the financial industry to give Canadians more options and more control over their finances.”

While the people who strike political bargains come and go, the ideas that animated them can linger long after they’re gone. That’s why the Trump administration is populist like its predecessors, trying to hand out credit like bread. That’s why Carney’s office is balancing the needs of an expansive nation from the centre. And that’s why I can still see Andrew in the banking system he left behind.