What the U.S. and ETFs Can Learn From Canada

May 20th at 1:00am by Tom Lydon

Canada ETFShould the United States be taking a cue from Canada when it comes to revamping its financial system and exchange traded funds (ETFs)?

Why has President Barack Obama praised Canada’s financial system? And why were all of Canada‘s main banks profitable in the quarter ending Jan. 31?

  • Cultural Differences. Evidently, the differences between the United States and Canada are deeply ingrained, with the U.S. taking on more risk and Canada remaining conservative, with a 20-30% band that the Royal Bank of Canada imposes on the share of earnings that its capital-markets business can contribute.
  • Structural Differences. The Economist explains that the structural differences within the two countries banking systems make a big impact also, with the most striking divergence between Canada and America is in their regulation of mortgages. There are five dominant banks in the country, which cuts down on price competition. In Canada, less than one-third of mortgages originate with independent brokers; at the height of the housing bubble, that number was around 70% in the United States.
  • Heavy Restrictions. Banks in Canada are subject to tight supervision, with maximum leverage ratios and a single regulator regime for commercial and investment bankers.
  • Mortgage Regulation Differences.While the interest paid on home loans is tax-deductible in America, this encourages people to borrow more. Canadians taking out mortgages with a loan-to-value ratio over 80% must also take out insurance on them from a federal agency. Banks insure the rest of their portfolios with the Canada Mortgage and Housing Corporation (CMHC). This insurance brings the risk weighting down to zero, and eliminates any capital advantage banks might get from securitization.
  • iShares MSCI Canada Index (EWC): up 19.9% year-to-date

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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