Shifting course on national bank regulation

Canada’s shift toward a universal banking model transpired amid the twin specter of rising international bank competitiveness and protectionism from its largest trading partner. The former was stoked by US reforms intended to foster comprehensive financial services groups alongside regulatory arbitrage amongst provincial securities regulators bent on establishing Toronto and Montreal as Canada’s pre-eminent securities supermarket (Thomas and Walter: Reference Thomas and Walter1991, 112; Harris, Reference Harris1998: 534–535).Footnote ³ In conjunction with pressure from its national business roundtable, the latter compelled the GoC into talks for a Canada-US Free Trade Agreement (CUSFTA) as the bite of protectionist measures were felt in earnest (Frizzell et al.: Reference Frizzell, Pammett and Westell1989, 8; Dyck and Cochrane, Reference Dyck and Cochrane2014: 222). The actual trigger for change came in November 1985 when the Bank of Nova Scotia (Scotiabank) blithely sidestepped federal restrictions barring commercial banks from participation in Canada’s investment banking industry.

For its part, Scotiabank was betting the GoC would refrain from enforcing the letter of a Bank Act provision allowing temporary ownership of distressed investment dealers. The scene had been set the foregoing year when proposals for federal financial reform were succeeded by a pledge from Ontario’s Minister of Finance to permit commercial bank ownership in provincially incorporated security dealers. That announcement was made without federal consultation and followed shortly thereafter by lobbying from the Canadian Bankers Associations (CBA) for complimentary federal provisions (Pauly, Reference Pauly1990: 36; Harris, Reference Harris1998: 537–541). An ensuing federal Cabinet shuffle accented prior signs of change as the incumbent Minister of State for Finance was replaced with another junior cabinet member seen as sympathetic to regulatory reversion (Thomas and Walter, Reference Thomas and Walter1991: 111). In conjunction with those events and the ‘Big Bang’ on London’s securities market, Scotiabank’s gambit compelled the GoC to abruptly reverse course on the prior trend toward enhancing domestic competitiveness.

In December 1986, the GoC unveiled its new approach for fostering internationally competitive universal banks, precipitating a comparatively ‘Little Bang’ with the de-segmentation of Canada’s financial system (Wood, Reference Wood1988). Together with the Ontario securities reform, the 1987 revision of Canada’s Bank Act precipitated the rise of universal banking by permitting commercial bank ownership of investment dealers and MMF subsidiaries (Freedman, Reference Freedman1998: 9–12; Bordo et al., Reference Bordo, Redish and Rockoff2015: 26–27). In short order, Canada’s five pillar system contracted into three as the Big Six moved to absorb the major investment banks and subsequently the non-bank loan and trust companies (Seccareccia and Pringle, Reference Seccareccia, Pringle and Whiteside2020: 327–328). Bank concentration continued apace through the ensuing decade with the Big Six gradually emerging as internationally competitive super-banks (Williams, Reference Williams, Howlett, Skogstad, Tellier and Hart2022: 249). Toward that same end, concurrent rounds of trade negotiations compelled federal officials into a defensive posture vis-à-vis foreign competition for Canadian banks.

Refracting foreign bank participation

In the run-up to CUSFTA, fears abounded that a prior trickle of liberalizing reforms would form a tide with freer continental trade (Frizzell et al., Reference Frizzell, Pammett and Westell1989: 9). The antecedent Bank Act revision had broken the mold of full-fledged barriers to cross-border banking in permitting market entry by foreign-owned subsidiaries up to a designated threshold. In doing so, it created a tiered system in which Canadian and foreign banks were respectively dubbed Schedule 1 and 2 institutions with differential statutory entitlements (Freedman, Reference Freedman1998: 5–9). Contrary to widespread expectation, the specter of a foreign competitive windfall never materialized as federal officials moved to refract substantive expansion of Schedule 2 privileges; initially through rules restricting foreign bank participation, and subsequently emulation of exclusionary US branching laws.

Along with its national treatment provision, the CUSFTA broke new ground via Canada’s retraction of the Schedule 2 threshold and a 25% foreign ownership limit for Schedule 1 banks (Chant, Reference Chant and Furstenburg1997: 17).Footnote ⁴ Rather than changing the immediate status of US banks, the subsequent North American Free Trade Agreement (NAFTA) entailed a principles-based approach for enhancing market access in the context of future trade revisions (White, Reference White1994: 4–12). Meanwhile Canadian negotiators continued to resist US pressure to relinquish standing barriers to foreign bank branching. For their part, federal regulators insisted on a Bank Act provision requiring foreign banks to register subsidiaries on the grounds that Canadian law should apply to entities operating within Canada (Jordan, Reference Jordan1993: 48). It was only during the 1997 WTO negotiations that the Bank Act provision disallowing foreign branching was relinquished.

By this time Canadian negotiators were keen to access to lucrative Asian and European markets amid an ongoing push to entrench most-favored-nation treatment amongst WTO members (Cornford, Reference Cornford2004: 2–3). At long last, the 1997 Bank Act revision permitted foreign branching in Canada, thereby eliminating all perceivable distinctions between Schedule 1 and 2 banks (Engert et al., Reference Engert, Fung, Nott and Selody1999: 152). However, this time Canadian regulators opted to emulate US laws through restriction of foreign-owned banks from retail deposit-taking as well as additional reporting and capital requirements (Gouvin, Reference Gouvin2001: 398–399). Simultaneous retention of the widely held rule limiting ownership of a Schedule 1 bank to just 10% for individual shareholders effectively precluded foreign takeover of any Canadian bank. Hence, with robust competitive exclusions still in place, Canadian banks continued to predominate the national marketplace.

The 1997 Bank Act revision marked the zenith of financial re-regulation in Canada as subsequent reviews took up ancillary issues like bank concentration and regulatory efficacy (Daniel, Reference Daniel2003: 3; Department of Finance, 2006: 6). In its immediate aftermath, the mentioned revisions were dubbed ‘essentially cosmetic – appearing to make foreign access more liberal while in reality changing the status quo very little’ (Gouvin, Reference Gouvin2001: 399–404). In the meantime, the regulatory shift toward international competitiveness necessitated additional structural and regulatory reforms for modernizing CAD securities markets.

Modernizing Canadian securities markets

Reform of national securities markets in line with trending global developments was accomplished in spite of sub-national jurisdiction over the regionally fragmented CAD market. For doing so, key FISC members moved to construct CAD repo market plumbing in line with the repo-liquid sovereign imperative in the immediate wake of provincial regulatory and market-based developments. Changes set in motion by the 1987 ‘Little Bang’ entailed consecutive structural and regulatory reforms, together culminating in the modernization of CAD securities markets (Nowlan, Reference Nowlan2001). In the near-term, however, market reforms entered a vortex of inter-governmental conflict that was eventually resolved through regulatory talks amongst the US Securities and Exchange Commission (SEC) and Canadian provincial regulators (Coleman, Reference Coleman1992).

In collapsing the barrier between commercial and investment banking, the 1987 Bank Act revision stoked a regulatory scrimmage amongst the Office of the Superintendent of Financial Institutions (OSFI) – Canada’s central financial regulator – and an Ontario Securities Commission (OSC) now jointly responsible for securities dealing chartered banks. Confusion over the precise milieu of inter-jurisdictional responsibility culminated in an accord clarifying the respective turfs of OSC and OSFI; a peace that transpired amid commencement of talks between provincial securities regulators and the SEC over a Multi-Jurisdictional Disclosure System (MJDS) for harmonizing national regulatory regimes. In response to the fragmented CAD marketplace, the ensuing bilateral scrum saw OSC christened as Canada’s de facto national regulator through the SEC proposing for it quasi-national power over domestic prospectus rulings. The SEC’s move prompted lesser provincial regulators to lobby Canada’s Department of Finance (DoF) for a centralized national authority, though by this time the feds were remiss to acquiesce, evidently satisfied with the de facto national solution for standardizing repo prospectuses (Jordan, Reference Jordan1995: 582–583). In the meantime, the DoF and BoC enacted adjacent structural and regulatory reforms for building out CAD repo market plumbing.

Initial demands from US-based dealers for repo market infrastructure was accommodated through consecutive reforms by the DoF and BoC in close conjunction with key market actors (Morrow, Reference Morrow1995: 68–69; Nowlan, Reference Nowlan2001: 6). Over the next half-decade, GoC bonds were placed on a centralized clearing platform while debt issuance practices were harmonized with those of the US Treasury via regularized benchmark auctions (Gravelle, Reference Gravelle1999: 7; Garriott and Gray, Reference Garriott and Gray2016: 6). In conjunction with talks for the MJDS, repo documentation was standardized by the Investment Dealers’ Association of Canada and broker screens were introduced on the trading desks of Canadian securities exchanges, greatly enhancing daily repo volumes (Morrow, Reference Morrow1995: 68–69). Regulatory changes included clarifying the status of CAD repos as loans rather than asset dispensations, exempting cross-border transactions from withholding taxes, and formal recognition of banks’ rights to pledge repo collateral (Morrow, Reference Morrow1995: 69–70; Boulay, Reference Boulay1997: 11). These were followed by revised primary and secondary market rules as well as changes to GoC debt issuance practice in line with federal efforts to reign-in Canada’s debt (Harvey, Reference Harvey1999: 30–34; Nowlan, Reference Nowlan2001: 6–7). By the turn of the millennium, Canada boasted a full-fledged market-based financing system and an accompanying array of CAD shadow money markets. However, unlike the US – where shadow banking proliferated outside the formal banking sector – CAD shadow banking proliferated within the regulatory perimeter of the Big Six banks.

In response to the foregoing policy interventions, Canada experienced a narrower set of evolutionary changes within its national liquidity regime and a truncated paradigmatic change in the public-private hybridity of its monetary-financial system vis-à-vis the US. The following section utilizes Murau’s money accommodation model for illuminating those changes in terms of their compositional impact on the CAD money supply.

Pre-accommodation phase: Precipitating paradigmatic change

The initial development and par clearance sub-phases for CAD repos were effectively bypassed through procedural emulation in the wake of antecedent US innovations, initially on the balance sheets of Canadian NBFIs, and subsequently the Big Six (Morrow, Reference Morrow1995: 68; Boulay, Reference Boulay1997: 6).Footnote ⁵ Systemic relevance followed from sustained federal regulatory efforts to construct new plumbing for a CAD repo market.

The 1994 to 2008 period saw rapid expansion of GoC benchmarks and a corollary rise in gross repo volumes from C$1 trillion to C$5 trillion (Gravelle et al., Reference Gravelle, Grieder and Lavoie2013: 61). Exponential growth of government collateral ensured that virtually the entire CAD repo market was collateralized using investment-grade securities. Although concurrent efforts to reign-in the federal public debt precipitated an incipient market for non-investment-grade (i.e. credit desk) collateral, its growth was stemmed by consecutive monetary and fiscal interventions geared toward supplementing the decline in GoC benchmarks offerings (Harvey, Reference Harvey1999: 29; Coletti et al., Reference Coletti, Gosselin and MacDonald2016: 42). By the eve of the crisis, CAD repos comprised a core CAD funding market collateralized overwhelmingly by investment-grade securities (Fontaine et al., Reference Fontaine, Selody and Wilkins2009: 43; Gravelle et al., Reference Gravelle, Grieder and Lavoie2013: 61).Footnote ⁶ Criteria for interconnectedness and complexity were evidenced as an inherent function of the repo business model and exponential growth in cross-border transactions from 27% to 157% of Canadian GDP between 1985 and 1993 alone (Committee on Payment and Settlement Systems, 1995: 9; Morrow, Reference Morrow1995: 70). Non-substitutability was implicit in the BoC’s crises-era backstop support when the market dried out for all but the most liquid CAD collateral (Bank of Canada, 2008: 12). As with repos, the initial development and par clearance sub-phases for CAD ABCPs were effectively bypassed via the market’s emulation of US developments.

CAD ABCPs initially provided an outlet for excess bank funds. Only later were they used en masse to supplement cash shortfalls linked to GoC debt restructuring and a shift among depositors toward mutual funds (Freedman, Reference Freedman1998: 27; Toovey and Kiff, Reference Toovey and Kiff2003: 43–48). Bank domination was evidenced by the fact that 90% of the gross domestic market were issued by bank-sponsored conduits as of the early millennium. Interconnectedness was inherent in the ABCP business model, however complexity was evident only for a subset of ‘third-party’ ABCPs that emerged in the early millennium. Until that time, virtually the entire market was securitized with CAD assets, with a 10% withholding tax ensuring that it remained transversal strictly within Canada (Toovey and Kiff, Reference Toovey and Kiff2003: 43; Gravelle et al., Reference Gravelle, Grieder and Lavoie2013: 59–60). Proliferation of bank-sponsored ABCPs gradually exhausted underlying domestic asset supplies, prompting the rise of ‘third-party’ NBFI issues securitized with US MBSs (Posiewko, Reference Posiewko2008). In terms of size, the gross volume of CAD ABCPs rose exponentially from C$1 billion in the mid-1990s to just under C$110 billion by the first wave of the crisis (Business Development Bank, 2020: 10). Although it is not unambiguously clear whether this was sufficient for non-substitutability of the market at large, an ensuing series of events suggests the negative.

The decision by banks to absorb conduit liabilities at losses during the first wave of the crisis suggests that the C$78 billion bank-sponsored market segment was sufficiently small for them to autonomously support par clearance (Allen et al., Reference Allen, Hortaçsu and Kastl2011: 2). As for NBFI issuers, a DoF statement from December 2008 claiming Canada could withstand the failure of the C$32 billion third-party market is taken to mean that it embodied a non-systemic segment of the market at large (Halpern, Reference Halpern2016: 138). For similar reasons it is presumed that the C$70 billion bank-dominated CAD MMF market fell short of systemic relevance as the combined force of bank sponsorship and BoC backstop support for NBFI portfolio-end collateral stemmed a brief run on the market in September 2008 (Zorn et al., Reference Zorn, Wilkins and Engert2009: 15; Longworth, Reference Longworth2012: 10–11). Although interconnectedness and domestic transversality were satisfied for CAD MMFs, the overall volume of shares outstanding appears to have proliferated non-systemically (Toovey and Kiff, Reference Toovey and Kiff2003: 43; Canadian Foundation, 2010: 4). In August 2007, when the ABCP crisis took shape and US market instability precipitated a parallel series of crises in Canada, an ensuing truncated paradigmatic change revealed federal endeavors to contain new shadow money forms in the pre-crisis period.

Accommodation phase: Truncating paradigmatic change

Just days after the default of Countrywide securities, cross-border panic precipitated the failure of a major third-party CAD issuer. In short order, a consortium was organized amongst bank and NBFI sponsors with the aim of stemming a generalized run on CAD ABCPs. Ensuing negotiations produced a market-based backstop for the frozen NBFI market, while bank sponsors agreed to absorb their conduits’ losses for reputational reasons (Scavone and Waters, Reference Scavone and Waters2009; Allen et al., Reference Allen, Hortaçsu and Kastl2011: 2). In the interim, the BoC consecutively unveiled and expanded new emergency and standing facilities for repo-issuing banks.

In the first instance, repo market contagion transpired through de-leveraging Canadian banks with significant cross-border US operations and concurrent knock-on effects in the form of increased market funding costs and abbreviated repo collateral requirements; driving all but the most liquid CAD collateral out of the market (Bank of Canada, 2008: 12). Repo accommodation first occurred in December 2007 when the BoC unveiled its emergency Term Purchase and Resale Agreement (PRA) facility for primary dealers and members of the national payments system.Footnote ⁷ At that time, the Term PRA was merely intended to enhance Canadian banks’ market-making capacities through support for funding liquidity. Subsequent Term PRA expansions were intended to support market liquidity once it became apparent that traditional backstops were insufficient for getting liquidity to market (Zorn et al., Reference Zorn, Wilkins and Engert2009: 7; Allen et al., Reference Allen, Hortaçsu and Kastl2011: 8–9).

The Term PRA was twice expanded in terms of collateral eligibility and auction frequency during waves two and three of the crisis. The first occurred alongside expansion of the BoCs Standing Liquidity Facility (SLF); intended for upgrading collateral that could subsequently be pledged in Term PRA auctions or unimpaired segments of the repo market (Zorn et al., Reference Zorn, Wilkins and Engert2009: 7; Allen et al., Reference Allen, Hortaçsu and Kastl2011: 9). Together the SLF and Term PRA functioned like the Fed’s Term Securities Lending Facility (TSLF) and Primary Dealer Credit Facility (PDCF); with the Term PRA emulating the PDCF by enabling banks to pledge repo collateral that was no longer trading in the open market (Murau, Reference Murau2017b: 818–820). The BoC’s post-mortem depicts the Term PRA as the ‘backbone’ of its crisis response, overwhelmingly in support of provincial and federal agency debt (Zorn et al., Reference Zorn, Wilkins and Engert2009: 8, 13). Although the ensuing credit crunch was less dramatic in Canada compared with other AEs, the freezing of CAD repo markets for all but the shortest terms using only GoC bonds compelled the BoC to drag a critical segment of that market onto its balance sheet. Though this has never been officially acknowledged in such stark terminology, it is evidenced by the fact that federal agency MBSs and provincial government securities together comprised 30% of gross CAD repo collateral in the run-up to the crisis and into the post-crisis period (Zorn et al., Reference Zorn, Wilkins and Engert2009: 7–11; endnote 6). An adjacent run on CAD MMFs was swiftly backstopped through bank sponsors and portfolio-end emergency support by the BoC.

The period between August 2007 and September 2008 saw CAD MMF sales jump from C$50 to C$70 billion in response to the ABCP-induced dash-for-cash. By the third wave of the crisis, a sudden reversal was promoted when the US Primary Reverse Fund ‘broke the buck’. Ensuing cross-border panic amongst CAD investors was quickly stemmed by concurrent public and private backstops, the former through a separate Term PRA for Private Sector Money Market Instruments (PSMII) available to NBFIs with demonstrably large money market activities and the latter through bank-sponsor balance sheets. The Term PRA-PSMII enabled NBFIs to pledge investment-grade portfolio collateral through primary dealers’ intermediaries in exchange for cash with which to manage investor redemptions (Zorn et al., Reference Zorn, Wilkins and Engert2009: 15; Longworth, Reference Longworth2012: 10–11). Though the backstops unveiled during the 2007–2009 period were intended as a temporary fix to an unprecedented crisis, their impact entailed permanent transformation of the CAD money supply in conjunction with corollary post-crisis regulatory changes.

Post-crisis re-regulation: Consolidating paradigmatic change

For illuminating the microeconomic composition of inter-temporal structural change, the accommodation model utilizes a matrix of money forms depicting the gross money supply in an archetypal currency-issuing monetary jurisdiction. In line with the model’s two-phase periodization, the matrix conceptualizes money in its pre- and post-accommodation forms as private (i.e. shadow money) and public (i.e. money proper) monies respectively (Murau, Reference Murau2017a: 78–82).Footnote ⁸ Figures 1 and 2 depict the US and Canadian money matrices on both ends of the crisis.

Figure 1. The USD money matrix. Source: Author’s own, adapted from Murau (Reference Murau2017b).

Figure 2. The CAD money matrix. Source: Author’s own.

Drawing from Murau’s (Reference Murau2017b) analysis of the US crisis experience, Figure 1 depicts multiple systemic shadow monies in the pre- and post-crisis periods. The left-hand cell depicts the pre-crisis USD money supply as encompassing various familiar shadow monies; repos collateralized with investment- and non-investment-grade securities, ABCPs, and shares issued by government and prime MMFs. The right-hand cell depicts the post-crisis money supply in the wake of accommodation and post-crisis regulations that elevated government MMFs and both grades of repo to the status of money proper while effectively de-monetizing ABCPs and prime MMFs (Murau, Reference Murau2017b: 823–829). Conversely, only investment-grade repos attained ‘money proper’ status in the CAD system.

In conjunction with the foregoing analysis, Figure 2 shows that their ascension to the public CAD money supply and subsequent accommodation as money proper was affirmed unambiguously during the crisis when the BoC dragged approximately one-third of the CAD repo market onto its balance sheet. In conjunction with the fact that the vast majority of repos are issued at terms ranging from one to seven days, it is implausible that even the mighty Big Six could have maintained par for a core funding market in which liquidity was constrained along all funding terms (Bank of Canada, 2008: 12; Zorn et al., Reference Zorn, Wilkins and Engert2009: 7). Accordingly, the contrasting cells in Figure 2 illustrate the paradigmatic change induced in the public-private hybridity of CAD system via the BoC’s SLF and Term PRA facilities.

By extending the public-private framework for backstopping private credit money to repos, the BoC effectively elevated investment-grade repos to a privately issued form of money proper alongside publicly insured bank deposits. However, as in the US, extension of the analogous framework for deposit creation on shadow money remains an ongoing project as neither liquidity nor solvency backstops have accrued to CAD repos. Instead, the framework for backstopping repos was made permanent in a similar fashion to the Fed’s Reverse Repo Facility as the Term PRA remains a permanent part of the BoC’s toolkit (Zorn et al., Reference Zorn, Wilkins and Engert2009: 9). Consecutive developments included an unsuccessful effort by the GoC to establish a national Securities Act that was subsequently deemed unconstitutional and additional perfunctory efforts to establish a macro-prudential authority in line with Basel 3 guidelines. As with the ongoing efforts for a central repo counterparty platform, the latter were hamstrung by sub-national fragmentation of CAD securities markets and the corollary vortex of inter-governmental conflict (Anand and Peihani, Reference Anand, Peihani, Arner, Avgouleas, Busch and Schwarc2019: 18–27; Coleman, Reference Coleman1992: 140). As for the remaining shadow monies, their market-based proliferation at a sub-systemic level effectively excludes them from the CAD money matrix.

If the systemic standing of CAD MMFs and ABCPs was ambiguous before the crisis, their ensuing relative statuses was clear in its aftermath. From a crisis-era peak of C$110 billion, the remaining bank-sponsored market for CAD ABCPs declined to just under C$40 billion where it remained through the 2010s (Business Development Bank, 2020: 10).Footnote ⁹ Contrasted against the DoFs crisis-era declaration – that the C$32 billion third-party market comprises a marginal CAD market segment – it is clear that the outstanding bank-sponsored market persists sub-systemically. Similarly, the gross volume of CAD MMFs outstanding issues had fallen from a crisis-era high of C$70 billion to just C$30 billion in 2012 while declining still further thereafter (Gravelle et al., Reference Gravelle, Grieder and Lavoie2013: 63; Investment Funds Institute, 2021: 10). Hence, each of these shadow money forms is categorically unfit for inclusion in the post-crisis CAD money matrix. Based on comparison with Figure 1, it is clear that the CAD system experienced a truncated convergence toward the US model of financial capitalism in the post-war period of financial globalization.

For systematically explaining how truncation was achieved, the following section builds on prior research comparing divergent US-Canadian developments in relation to key state power structures. In doing so, it illuminates new aspects familiar state power structures at the heart of modern finance. Four theoretical propositions are drawn for future empirical stress-testing.

On the nature of resistance

The first proposition states that resistance entails strategic truncation of market-based financial innovations in line with incumbent political profit-sharing arrangements amongst the national government, domestic bankers and other coalitional interests locked in a perennial game of bank bargains. The overarching logic derives from Calomiris and Haber’s (Reference Calomiris and Haber2014) study on the political determinates of financial stability among different types of representative democracy.

Those authors identify the underlying constitutional structure of politics as the key determinate of long-run financial stability. They find that countries like Canada whose parliamentary institutions eschew populism by design are much less prone to domestically rooted financial crises with corollary prospects for long-term stability. Conversely, countries like the US with Congressional institutions designed to empower populist coalitions tend toward frequent crises of systemic proportion (Calomiris and Haber, Reference Calomiris and Haber2014: 20–21). The key source of outcome variability across is the property-rights system underlying nationally chartered banks, which is inexorably contingent upon political deal-making endemic to democratic politics.

For explaining this functionalist aspect political deal-making, Calomiris and Haber (Reference Calomiris and Haber2014) envisage a perennial ‘game of bank bargains’ in which governments, bankers, and other potential coalitional partners instantiate exclusive profit-sharing arrangements with pervasive ramifications for financial stability. For their part, governments are driven by a multifaceted political imperative for financing growth, trade, welfare and security ventures required for fostering political stability. Conversely, private-sector agents seek to maximize their pecuniary imperatives through political rent-seeking in concert with coalitional collaborators (Calomiris and Haber, Reference Calomiris and Haber2014: 12–14). Hence, in spite of their common political, economic, cultural, and colonial traditions, the game of bank bargains yields unique structural proclivities toward financial stability in the US and Canada in line with their respective democratic traditions.

In conjunction with its aristocratic Parliamentary tradition, the early consolidation Canada’s banking system around an oligopoly of large banks enabled the rise of a robust profit-sharing arrangement geared toward long-run financial stability. This enduring ‘grand bargain’ hinges on a political executive capable of mediating distributional demands amongst the GoCs electoral constituents and its Big Six coalitional partners, all while satisfying its own stability imperative (Chant, Reference Chant and Furstenburg1997: 38–39; Calomiris and Haber, Reference Calomiris and Haber2014: 20–21; Bordo et al., Reference Bordo, Redish and Rockoff2015: 33). It is this characteristic of Canada’s political economy that enabled the GoC to embrace financial globalization while containing the proliferation of shadow banking, simultaneously enhancing Big Six competitiveness both at home and abroad with diminishing associated systemic risks. In doing so, the GoC effectively truncated the convergence of the CAD system toward the US model of financial capitalism.

The foregoing analysis shows that truncation occurred along three policy frontiers: national banking regulation, foreign bank participation, and modernization of CAD securities markets. Together those efforts contained the rise and systemic spread of new shadow money forms within the domestic regulatory perimeter. By ensuring that the regulated banking sector subsumed emergent shadow money markets, the GoC preserved its longstanding profit-sharing arrangement with Canada’s Big Six banks; reinforcing an already oligopolistic banking sector in exchange for strong regulation and long-term financial stability.

On the power structures of resistance

The second proposition proclaims that resistance by AE states to the Americanization of national finance transpires via two key power structures in the national architecture for economic statecraft: the political executive and the financial supervisory system. In Canada’s Parliamentary system, both are politically subordinated to the federal Minister of Finance (MoF).

Next to the Prime Minister, the MoF is Canada’s most powerful Parliamentarian and member of Cabinet owing to their mandates for federal monetary, banking, fiscal and financial policymaking (Lang and Schmidt, Reference Lang and Schmidt2020). As the chief executive political officer in Canada’s economic policy architecture, the MoF resides atop its national coordinating body for regulating and supervising domestic financial institutions. Figure 3 depicts the institutional structure of Canada’s financial supervisory system essentially as it lay in the immediate wake of the ‘Little Bang’.Footnote ¹⁰ In conjunction with their statutory responsibility for the entire FISC ecosystem, the MoF possesses incredible power with which to contain the rise and spread of financial innovations in Canada. The analysis in section 1 shows that this process was initiated through the July 1986 Cabinet shuffle at the behest of the CBA. The ensuing replacement of Canada’s Minister of State for Finance with a more amenable junior cabinet member was followed in short order by interventions along three policy frontiers.

Figure 3. The Canadian financial supervisory system. Source: Jackson (Reference Jackson2013).

In the realm of national banking regulation, these entailed successive revisions of Canada’s Bank Act for enabling domestic bank participation in previously segmented securities and investment fund markets (Freedman, Reference Freedman1998: 9–15). By the mid-1990s, the Big Six came to dominate CAD repo markets to such an extent that the entire cohort of US dealers closed down their Canadian operations (White, Reference White1994: 10). By the turn of the millennium, those same banks predominated the CAD MMF market so thoroughly that it effectively served to supplement their traditional deposit bases rather than entailing a market-based substitute for bank deposits. Meanwhile, the OSFI moved to contain the proliferation of ABCPs through limiting the extent of securitizations and off-balance-sheet activities by conduits and bank sponsors (Bordo et al., Reference Bordo, Redish and Rockoff2015: 26, 33). Those developments transpired alongside intensified efforts by the Big Six to preserve their hold on CAD money markets amid creeping foreign competition (White, Reference White1994: 10).

The incipient tide of foreign incursion let loose by the 1980 Bank Act revision met successive protectionist breaks in the form of an intransigent MoF bent on refracting substantive competition from foreign-owned banks. Initial reforms for relinquishing the size threshold on Schedule 2 banks entailed little to no discernible effect as it was never constraining in the first place (White, Reference White1994: 9–10). Meanwhile, successive rounds of trade negotiations saw Canadian negotiators resist US demands for extending market access privileges at the behest of their political masters in Ottawa. For their part, Canadian regulators saw the CUSFTA and subsequent NAFTA negotiations as clandestine venues for extraterritorial application of US banking laws and insisted that foreign participants register subsidiaries enclosed within Canada’s regulatory perimeter (Jordan, Reference Jordan1993: 48). It was only with the specter of a global competitive disadvantage that they relented on their historic aversion to foreign branching (Engert et al., Reference Engert, Fung, Nott and Selody1999: 152; Gouvin, Reference Gouvin2001: 398). However, the MoF’s retention of the widely held rule alongside exclusive foreign branching provisions continue to entail formidable non-tariff barriers that blunt the competitive potential of foreign rivals (Gouvin, Reference Gouvin2001: 399). The final frontier of Canada’s policy response was the modernization of Canadian securities markets in line with trending global developments.

Post-1987 efforts to build new plumbing for CAD repo markets were co-led by the DoF of the Ministry of Finance and the BoC in close conjunction with key market actors (Morrow, Reference Morrow1995: 68–69; Nowlan, Reference Nowlan2001: 6). The ensuing structural and regulatory reforms transpired alongside Bank Act and OSFI rulings clarifying the right of banks to make collateralized repo transactions, while consecutive monetary and fiscal policy interventions served to offset the decline in GoC benchmark offerings (Morrow, Reference Morrow1995: 70). The latter included a BoC buy-back program for preserving the average maturity of GoC debt along the yield curve and a liquidity enhancement program for federal agency MBSs (Harvey, Reference Harvey1999: 29; Coletti et al., Reference Coletti, Gosselin and MacDonald2016: 42). With the benefit of hindsight, it is possible to holistically assess the precise manner in which FISC and Cabinet members enacted this series of policy changes.

On the method of resistance

The third proposition proclaims that resistance to the Americanization of national finance entails shrewd political bricolage amid idiosyncratic enabling and constraining factors comprising the broader public policy environment. At a general level, bricolage refers to the use of pre-existing and readily available materials for constructing new works or objects (Oxford Reference, n.d.). In the context of policymaking, it refers to construction of solutions for novel problems through reorganization of existing institutional structures that simultaneously differ from and resemble old ones (Campbell, Reference Campbell, Magnusson and Ottoson1997: 22). Bricolage as such was evident in the efforts of key Cabinet and FISC members to reorganize the Canadian finance system in line with trending globalization pressures.

Bricolage in national bank regulation entailed re-regulating the Canadian financial system toward a universal banking model and internationally competitive banks, all while containing systemic risks. Re-regulation ensued from a battery of enabling factors reflecting higher order structural changes in the global political economy. These were consecutive liberalization pressures from provincial securities regulators and a CBA seeking complimentary national reforms alongside pressure from Canada’s business roundtable for freer continental trade (Harris, Reference Harris1998: 537–541; Dyck and Cochrane, Reference Dyck and Cochrane2014, 222). Constraining factors included a prior trend toward greater domestic competitiveness and campaign-era rhetoric against freer trade and expansion of chartered bank powers (Frizzell et al., Reference Frizzell, Pammett and Westell1989, 8; Thomas and Walter, Reference Thomas and Walter1991, 111). By the summer of 1986, those constraints ceased to bind as the GoC found itself burdened with more new imperatives for revitalizing domestic growth and international competitiveness. The ensuing Cabinet shuffle marked the beginning of a wholesale reorganization of Canada’s financial system that was implemented without further constraints in the realm of national bank regulation owing to the MoF’s statutory prerogative over the Bank Act. Toward that same end, federal efforts to refract substantive foreign competition were met with a consecutive flow self-imposed constraints in the form of intercessional US demands for a liberalized financial sector.

In their initial approach to liberalizing trade rounds, Canadian regulators bargained with a successive ebb of inconsequential regulatory concessions followed by shrewd emulation of exclusive US branching laws. In conjunction with its imperative for upholding the federal bank bargain, the MoF’s statutory prerogative enabled a piecemeal strategy of trade concessions on liberalized banking reforms that did little to change the market power of foreign-owned firms (White, Reference White1994: 9; Chant, Reference Chant and Furstenburg1997: 17). Only once the specter of competitive disadvantage threatened to compromise Canada’s position vis-à-vis its trading partners did federal regulators relinquish longstanding barriers to foreign branching. Even then, posterior analysis revealed these to be ‘essentially cosmetic’ as the MoF retains formidable non-tariff barriers in the form of the widely held rule and corollary exclusive provisions in the mirror of US branching laws (Gouvin, Reference Gouvin2001: 399). By the late 1990s, the liberalizing trend in Canadian financial services culminated in a domestic marketplace dominated by six global super-banks and a financial system subsequently ranked as the world’s safest (Bordo et al., Reference Bordo, Redish and Rockoff2015; Williams, Reference Williams, Howlett, Skogstad, Tellier and Hart2022: 249). Meanwhile, consecutive bricolage efforts entailed construction of new plumbing for CAD repo market via FISC-led structural and regulatory reforms.

In line with the repo-liquid sovereign imperative, reforms were a function of FISC member mandates over fiscal and monetary policies required for modernizing CAD market infrastructures. The sole constraint along this policy frontier was provincial jurisdiction over the regionally fragmented domestic marketplace that was overcome unwittingly through the OSCs emergence as Canada’s de facto regulator (Jordan, Reference Jordan1995: 600–601). Concurrent regulatory and structural developments were enabled by a battery of enabling factors collectively embodying the repo-liquid sovereign imperative: investment dealer pressure for modernized securities markets, the revolution in financial information technology, a shift from deposits toward market-based portfolio investment amongst the baby boom generation and corollary structural demand for market liquidity ensuing from ongoing interest rate volatility (Morrow, Reference Morrow1995: 68–69; Engert et al., Reference Engert, Fung, Nott and Selody1999: 142). Stability of the expanding CAD repo market was enhanced through BoC and DoF interventions to supplement the decline in GoC benchmarks through collateral enhancement strategies that subsequently dried out the incipient non-investment-grade repo market (Harvey, Reference Harvey1999: 29; Coletti et al., Reference Coletti, Gosselin and MacDonald2016: 42). By the early millennium, Canada boasted a modernized repo financing system under the regulatory auspices of a coherent financial supervisory system. In addition to the ebb and flow of situational factors, Cabinet and FISC members were at the whim of inborn structural constraints endemic to Canadian Parliamentary democracy.

On the capacity for resistance

The final proposition proclaims that resistive capacity by state bricoleurs is contingent on political leeway for executive power and coherence of the financial supervisory system in relation to the underlying system of representative democracy. Together these entail functional capacity limits on the aperture and consequent effectiveness of state efforts to resist the Americanization of national finance. Returning to Calomiris and Haber (Reference Calomiris and Haber2014) regarding the functional characteristics of constitutional systems, we see that the aristocratic foundations of Parliamentary democracies entail an edge for executive resistive capacity compared to Congressional ones.

In Canada’s case, systemic insulation of senior Parliamentarians from populist pressure enabled the federal Cabinet to coordinate a sustained three-front effort for truncating Americanization (Calomiris and Haber, Reference Calomiris and Haber2014: 20–21). In contrast to the US Congressional system, where executive and legislative powers are clearly delineated, Canada’s Parliamentary system confers both functions upon Cabinet. For maintaining legislative continuity, the Cabinet enforces party discipline over incumbent Parliamentarians through veto over major legislation, entailing a singular pathway for partisan lobbying efforts (Chant, Reference Chant and Furstenburg1997: 36–37). It is this intense concentration of power that makes the GoC an effective policy bricoleur and coalitional accomplice in the interminable game of bank bargains. Conversely, Congressional democracies like the US lack such acute capacity for fostering legislative continuity and thus financial stability.

In line with its bifurcated power-sharing system, the US executive lacks sufficient disciplinary capacity to balance the demands of electoral constituents and coalitional collaborators. Accordingly, political lobbying is broadly directed at individual legislators whose constituent interests align with those of specific firms and industries (Chant, Reference Chant and Furstenburg1997: 36–37). This peculiar profit-sharing arrangement was enshrined by a 19th century agrarian populist-unit banker alliance that successfully exploited the federal legislative structure to its advantage; first at the state-level where banks were regulated, and subsequently through federal banking laws. In the post-war era of financial globalization, profit-sharing amongst government, banks, and partisan interests involved in unregulated securitization markets entailed mutual prosperity amid an excess of cheap credit (Calomiris and Haber, Reference Calomiris and Haber2014: 18–19). In other words, the Executive Branch lacks sufficient disciplinary authority to ensure legislative and policy continuity. Out of their differential bank bargaining arrangements the US and Canada developed divergent regulatory cultures and proclivities for containing the rise of new shadow money forms. Figures 3 and 4 depict the relative institutional coherence and capacities for fostering stability amongst US and Canadian regulators.

Figure 4. The US financial supervisory system. Source: Jackson (Reference Jackson2013).

Per its unique political profit-sharing model, systemic financial instability is a recurrent US phenomenon ensuing from its fragmented financial supervisory system. Figure 4 depicts the patchwork of federal agencies comprising its bank and non-bank components. This fragmented regulatory ecosystem effectively invites regulatory venue shopping amongst private-sector interest groups and a corollary dearth of collective resolve for systemic regulatory consistency. Accordingly, the US financial supervisory system was in no position to stem the systemic proliferation of new shadow money forms in the post-Bretton Woods period, enabling the proliferation of shadow banking beyond its regulatory perimeter (Bordo et al., Reference Bordo, Redish and Rockoff2015: 24–25). Conversely, Canada’s supervisory system is headed by a coherent committee of five arms-length agencies that are collectively responsible for regulatory policymaking and financial supervision. Each agency reports either directly or indirectly to the MoF, who in turn reports to Parliament. However, in the daily course of political life, OSFI plays a lead coordinating role that effectively rouses a unified supervisory framework (Jackson, Reference Jackson2013: 12–14). Bordo et al. (Reference Bordo, Redish and Rockoff2015: 3) identify this as a key factor behind Canada’s enduring record of financial stability and an essential component of its historic ‘grand bargain’.