Financial heaven and hell

May 26, 2009

denmark1— Christopher Swann is a Reuters columnist. The views expressed are his own —

There is nothing like a home-grown financial crisis to undermine a superpower’s sense of superiority. The United States is finding it has something to learn from some of the world’s lowest profile countries.

Among those that are now being held up as role models are Denmark, Canada and Sweden.

This brings to mind the old joke about the European heaven and hell. In a financial heaven you would have Danish mortgages, Canadian regulators and bank rescues would be orchestrated by the Swedes. In a financial hell the mortgages would be Hungarian, the bank regulators would be from Iceland and the Americans would manage bank rescues.

Imitation is the sincerest form of flattery, yet there has been precious little of this. This is probably a result of the continued political influence of the financial oligopoly.

The common thread linking Danish mortgages, Canadian bank regulation and Swedish bank rescues is that they are all less favourable to the financial services sector.

The Danish mortgage system has huge appeal to everybody but entrenched interests. Emulating it in the United states would involve finally putting Fannie Mae and Freddie Mac out of their misery. It would also force mortgage originators to retain the full credit risk of loans, allowing them to palm off only interest rate risk.

For the public, the system offers considerable benefits since the way mortgages are securitized would greatly reduce the threat of negative equity. Similarly the Swedish bank rescue in the 1990s enabled the taxpayer to recoup almost all of its bailout investment.

Obviously it was less good news for shareholders of the hapless Nordbanken and Gota, who were wiped out.

It is not hard to understand why the Swedish model might not have appealed to the financial services sector, even though the International Monetary Fund ranked it as one of history’s most successful bank rescues.

Although it is not universally accepted, Canada’s more old-fashioned banking regulation almost certainly helped prevent a U.S.-style collapse. Canadian bankers and regulators even achieved a touch of celebrity after the World Economic Forum ranked their system as the most stable in the world in 2008.

Here at least, U.S. policy makers seem inclined to follow the example set by their less glamorous northern neighbour. But as banking profits recover, they are likely to encounter some push-back.

Obviously no foreign system can be incorporated wholesale into the United States. But if policy makers in Washington are to be free to learn from the world’s best practices in the future, they need to break the political power of the banks.


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what a great article, a real journalistic piece that offers insight into both sides and lets the reader decide for themselves what banking/financial/economic/ system they would wish. We should vote on it, like Americans.

Posted by C.D. Walker | Report as abusive

Perhaps we should all support Ron Paul’s legislation to audit the Federal Reserve Board. That would give the American public a clearer understanding of how their banking system works and who really benefits.

Posted by Anubis | Report as abusive

A country with a population the size of the US cannot cannot learn much from the Canadian model, which is relatively strong due to lack of competition, diversification and exposure. Also because there are fewer large companies in Canada, institutional investors are forced to place a disproportionally higher amount of capital on the Canadian banking sector. So these companies are strong almost by default as opposed to tangible superior qualities.

What Canada has however is less dependence on manufacturing and more exposure to natural resources. This means that the financial players in the market likewise are supported by this economic profile. The dollars held in Canadian banks are backed up differently than US dollars in US banks from the standpoint of industrial dependency.

I suggest that the US has not done anything wrong in terms of its model for banks. The US is suffering from a geometric law that traders probably understand well: The entity with the most has the most to lose. Those with the least have little to lose and everything to gain. The US has its share of problems. But I think that analysts have distorted reality so there can be a sense of better things ahead from the models of other nations.

Posted by Don | Report as abusive

Indeed, what the US needs is not more regulations but better regulations based upon the best practices of other countries and adapted to the US economy and political climate. That the original holder of a mortgage be required to retain a large portion of the financial and legal risk of default, at least for a certain period, appears to be a simple and effective way of limiting lending that is based upon the unrealistic expectation that real estate will on the long term appreciate at a much faster rate than that of inflation. A minimum down payment of say 20-25% would also decrease the risk of negative value during a recession. However, to promote home ownership and stimulate the economy, the Federal government could lend at attractive terms the first 10-15% of the down payment to the homeowner.

Posted by Charles Roy | Report as abusive

while C.D.’s comment is objective, Don’s comment clearly shows the usual US arrogance. They just cannot admit their own mistakes – and there are many of those.

Congratulations to the smaller countries with bigger brains and a higher rating of personal freedom as compared to corporate freedom (power).

Posted by Hans | Report as abusive

While I agree with some of what Don has to say about part of the success of the Canadian system in riding this storm out, I think he is too dismissive of the lessons that can be learnt from it. Canadian banks were never allowed to get as leveraged as many of their international counterparts and their M&A activities were overseen by a sceptical government watchdog which stopped them dead in their tracks on a couple of occasions.

While I do believe that Canadian banks stifle commercial and industrial innovation in Canada, and they are some of the most opportunistic fee-chargers in the world, their conservative culture and traditional regulatory framework did serve this country well over the last decade or so.

Posted by Aidanist | Report as abusive

The US could learn the Canadian model. Canadian banks have all 3 that you mentioned above, with there being many banks and credit unions in Canada, including 7 National banks. These banks own banking properties in different countries outside Canada; including Harris Bank based in Chicago and RBC Bank (formerly Centura) in the US South’ plus large holdings in Caribbean islands like Jamaica.

The main thing that kept the banks in Canada from falling into the same hole as US banks was regulations, the doors were not flung open like in the US. There looked to be very little regulation, and the banks were basically allowed to do whatever they wanted. The way mortgages were also handled in the US seemed to be also with little regulation.

If there had been the regulations and oversight that is on Canadian banks, this problem might not have been as big as it was.

Posted by Jon C | Report as abusive

The US banking system better learn something from someone, and fast. The Canadian model is strong because of tighter controls over their capitalization, and what risks they can take with it. Institutional investors are in no way “forced” to invest in banks. Major pension funds invest in banks because of their security and return but can, and do, invest strongly in other areas and other countries. Locally, real estate, energy, insurance, and communications come to mind. One of them seems to like international airports around the world. There’s good support for smaller-cap businesses as well. They have expanded into the US financial industry – and regretted it.
Less dependance on manufacturing, and more on energy, is not a good thing as you suggest. Energy is highly volatile, and not something that a bank needs a lot of in their portfolios. A lack of diversification is generally a negative, not a positive. A lack of exposure is due to the regulatory limits in place to protect the investments they hold for safekeeping, and is the whole point of the issue.
“The entity with the most has the most to lose” is true in absolute terms, but not in relative terms. 50% of a large pie is bigger than 50% of a small pie, but it’s still half of the pie.
World bankers trusted the US model and invested in it. They got their sensitive parts handed to them on a platter as a result. That’s not a distortion, that’s a fact. They won’t be doing that again. China (and other countries) is already replacing the US dollar with others in international trade.

Posted by Rufus | Report as abusive

China has to support the dollar in it’s own self interest. Replacing currencies takes decades ( 1-2) . US has to and will not true global player till it can hold an upper hand in anything.

Posted by J Fernandes | Report as abusive


“Also because there are fewer large companies in Canada, institutional investors are forced to place a disproportionally higher amount of capital on the Canadian banking sector.”

Would we have a lack of CAPITAL in our CREDIT institutions if they were forced to carry a high amount of capital to INSURE investments of CREDIT?

Posted by C.D. Walker | Report as abusive

Kudos to Christopher Swann. He nailed it. Let’s forget about the country comparison and look at the real meat of the story………. IT WAS ALL THE BANKS FAULT.

I absolutely agree, unadulterated greed, derivatives and swaps + lousy oversight courtesy of Barney Franks and his lover at FREDDIE MAC and Congress agreeing with Barney Franks are the reason for AAAAALLLLLL of our problems.

Of course us (most not all)commoners also agreed to buy what we knew we couldn’t afford hoping to flip it and get rich. Ha, ha, we bought into the hype.

Can anybody answer and prove my burning question: “WHERE IS THE MONEY?” I would love to know where all the money is and who has it. If it never existed in the first place then why do we miss it now?? Seems like a bunch of smoke and mirrors and deception to me. WHERE IS THE MONEY AND WHO HAS IT???? If I have $100.00 and you take it from me I am now poor but you have my 100 and are now rich. SO AGAIN, WHERE IS THE MONEY AND WHO HAS IT?? If it ever even existed. It’s like the endless trillions that we are printing to bring the economy back to life. Where did those trillions come from?? Do we pay them back??? Or do we pay with unfathomable inflation down the line?? Follow the money!!!!!!!!!!!!!!

Posted by Carmen | Report as abusive

is u.s. banks being forced to carry excess capitol, on a what if basis, and is this a undo stress on the system?

Posted by WILLIAM H SCOTT SR | Report as abusive


I fail to see how banks carrying excess capitol could be a stress on the system. If anything, banks should carry excess capital to relieve stress on the system by shoring up their loans. The more capital a bank has, the stronger its position as a lender.

Posted by C.D. Walker | Report as abusive

most of the ‘money’ that was lost was never real. Items like houses are only worth what people will pay. Just because you pay $100,000 for a house doesn’t mean it’s worth it. When (most) people say they lost money in the crisis, it means they thought their possessions were worth more. There’s no money to be followed.

Posted by Drewbie | Report as abusive

All countries listed as examples are living off of oil wealth. When this dries up, so will the “great” systems that have harbored them.

Posted by Patrick | Report as abusive

It seems that no one is really willing to address the culture of greed, high and quick returns equals even higher bonuses. That is a formula for disaster since there is no accountability in the system for irresponsible lending. In the rest of world if people screw up they usually pay for their mistake.
When top bankers become top regulators and back again that just creates an incestuous self protecting clique that will not improve for it only has the interests of it’s own at heart. Printing money which is no longer backed by gold, or anything else as a matter of fact, can only lead to inflation and debt to be paid by future generations which do not stand to reap any benefit at all.
Mortgages without down payment, ie a personal stake, is also a formula for disaster. It is human nature to want to protect what they have had to earn and to care much less for things just given to them.
In short the banking system in the US is still fundamentally flawed since the regulators can not point a finger at the bankers or they would be pointing at themselves.
The rest of the bankers outside the US who bought into what was obviously a balloon have no one to blame but themselves. It’s just a pity that the common folks are the victims, the ones on the hook for all that greed.

Posted by stavros | Report as abusive

The massive failure by the regulators reflects serious structural problems in the regulatory environment. I am a former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There has been a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. Let me offer the following comments:

1. The bank regulators had the authority to examine any aspect of a bankĀ¹s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper or hiring additional analysts or creating new “early warning statistics” will mean nothing if the regulators cannot or will not do their jobs.

2. Sending a regulator who makes $60,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There are dim bulbs and deadwood at the top of the agencies and all of it needs to be cleaned out. A Herculean task if there ever was one.

3. We recently saw the regulators “stress-test” the major banks and compute the additional capital that the banks required to weather the economic turmoil. Then some of the largest banks complained vociferously about the additional capital requirements and the regulators backed off. So much for firm regulation.

Posted by Steve | Report as abusive