Recently, Mark Carney sat back and failed to negate the claim that he deserved credit for having saved Canadian banks from the misadventures of our American neighbours during the 2008 financial crisis. Carney can claim no such credit. In actuality, there are historical reasons for Canada’s lack of vulnerability to such financial upsets, including a divergent institutional pathway and regulatory changes recommended by Canadian Supreme Court Judge Willard Estey that safe-guarded Canada’s banking system from the financial crisis.
According to a 2015 paper in the journal Economic History Review, the relative stability of Canadian banks during the 2008 economic crisis is a product of historical circumstances. According the the authors, as early as the 19th century, Canadian and American banking systems took different paths. Canada set up a strong, single-regulator-concentrated banking system which they say, “absorbed the key sources of economic risk — mortgage and investment banking,” while the U.S. developed what they refer to as a “relatively weak, fragmented, and crisis-prone” banking system. In contrast to Canada, what emerged in the U.S. was a lightly to unregulated banking system and ultimately many more smaller and less stable banks.
More importantly, the authors point out that the relative stability of Canada’s banking system in comparison to the U.S. during the 2008 crisis was not a “one-off event,” as Canadian banks were able to avoid other financial crises experienced in the U.S. from 1863-1914 (a period of panics and recessions) and the Great Depression of the 1930’s for the same reasons. These circumstances pre-date Liberal leadership and prime ministerial-hopeful Mark Carney by over a century.
That being said, the historical differences were not enough to stop two Alberta banks in the 1980’s — Northland Bank and Canadian Commercial Bank (CCB) from diverging from regulatory practices and engaging in behaviours similar to those that fuelled the U.S. 2008 financial crisis.
But the individual who stepped in to investigate and address these practices was not Mark Carney, who was living in Alberta and 21 years-old at the time, but former Supreme Court judge Willard Estey.
Willard Estey is not a household name like Mark Carney, but perhaps he should be. At the very least, the record needs to be set straight. Estey should be acknowledged for the regulatory changes that Mark Carney was more than happy to sit back and accept as his own on Jon Stewart’s The Daily Show when Stewart fawned over Carney: “I remember you from 2008,” he said. “And I truly mean this. Your work in helping Canada get through the economic crisis of 2008, the financial crisis that hit this country terribly, and I thought made a lot of really painful decisions for the people of this country, I thought Canada avoided the worst of that, and I believe you played a strong role in that.” Carney responded, “We di…_ I mean, thank you.”
As for Estey had a long distinguished career, but it’s Estey’s work in 1985, chairing the Commission of Inquiry into the Collapse of the CCB and Northland Bank, more commonly known as the Estey Commission, that Canadians should be particularly grateful for.
The Estey Commission was established on Sept. 29, 1985 to investigate the causes of the failures and regulatory response to the operation of Northland Bank and Canadian Commercial Bank (CCB).
Estey’s 1986 report found that management, auditors, and regulators were all derelict in the performance of their duties. The bank managers were accused of bizarre banking procedures, overstating income, creating misleading financial statements and improvident lending. Directors were found to have been relying heavily on management instead of exercising adequate oversight of these bank’s operations. Auditors were criticized for accepting inaccurate financial statements from that did not follow accepted practices.
Regulators were faulted for relying on the banks’ own reports instead of independently assessing loan portfolios themselves. This was referred to in the report as a “wink and nod system.” And the rot apparently went all the way to the top. The report claimed that the Inspector General of Banks bore much of the blame because he refused to act even though he had full knowledge of the situation.
As the investigating chair of the commission, it was Estey’s duty to assess these failures and recommend changes to improve Canada’s bank regulatory system to prevent anything like this from happening again. These changes included strengthened bank supervision to improve regulatory oversight, reforms in both management and governance to safeguard against bizarre banking and lending procedures as well as misleading financial statements. It was also made clear that auditors could no longer accept those inaccurate bank statements which did not follow accepted practices.
The major achievement of Etsey’s commission was the establishment of the Office of the Superintendent of Financial Institutions Act (OSFI) on July 2, 1987. Through this Act, the Department of Insurance and the Office of the Inspector General of Banks were merged resulting in one federal regulator with enhanced supervisory powers. Following the creation of this office, the Financial Institutions and Deposit Insurance System Amendment Act was enacted in 1987. In 1991, the act was revised to incorporate the strengthened regulatory insight advocated by Estey from his review of banking failures in the 1980’s.
Estey was ahead of his time and instrumental in making recommended changes to Canada’s banking system that protected the country from the 2008 crisis. Carney can make no such claim. Carney entered his role as Bank of Canada Governor in 2008, after the practices that caused the financial crisis in the U.S. were already in full swing. So, he could not have set up any protections against it.
If only U.S. regulators had read the Estey Report. They, too, may have avoided the banking schemes that caused an estimated 3.1 million Americans, or one in 54 homes at the time, to file for foreclosure in 2008.
What did Carney actually do in his role as Bank of Canada governor? He lowered interest rates. So, did pretty every other central bank at the time. This somehow got translated into him getting credit for steering Canada through an economic crisis, but that was only possible because of the historical circumstances and regulations that were in place before Carney.
I’m not even sure Carney can claim ignorance of Estey’s achievement either. Carney likely would have been aware of the mostly smaller Canadian banks that were failing due to collapsed real estate values primarily in Western Canada at the time, even at 21. At the very least, I’d expect that the Estey report would be required reading for any Bank of Canada Governor. Maybe he knew about Estey, and maybe he didn’t. It doesn’t matter. The point is, he accepted credit for the work of a great Canadian who we should all acknowledge.
X: @TLNewmanMTL