Canadian Banks Rely More on Deposits to Finance Their Operations Than on Repurchase Agreements (Repos) in the Money Markets

The government ends up with a more subdued competition among the banks. It is a situation in which the banks are not obliged to extend especially risky loans in the pursuit of profit. This risk reduction is compounded by the Canadian regime’s long-standing sanctioning of national branch banking, which enables financial institutions to geographically diversify their loans. As if that were not enough, the banks are left with a secure source of funding, with much of the public’s savings deposited with them, a circumstance aided by the historical accident of Canada not having developed deep financial markets that could otherwise entice away more of people’s nest eggs. Indeed, an IMF research paper identified the Canadian banks’ greater reliance on deposits to finance their operations, instead of repurchase agreements (repos) in the money markets, as decisive in rendering them sturdier than their American counterparts during the recent financial maelstrom (Ratnovski & Huang, 2009). What the IMF only hinted at was that this source of over-all stability on the liabilities side of bank balance sheets was reinforced by an analogous source on the assets side, and that both were the consequence of political dynamics culminating in the maintenance of an oligopoly in banking.

—George Bragues, “The Political Regime Factor in Austrian Business Cycle Theory: Historically Accounting for the US and Canadian Experiences of the 2007-2009 Financial Crisis,” in Studies in Austrian Macroeconomics, ed. Steven Horwitz, Advances in Austrian Economics 20 (Bingley, UK: Emerald Group Publishing, 2016), 153-154.