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Ask Mark Williams to name his favourite financial stocks in the current tough climate, and he instantly rattles off four of them: Royal Bank of Canada , Toronto-Dominion Bank , Bank of Nova Scotia and Bank of Montreal . It's no coincidence that all are Canadian.

Ever since the Great Credit Crisis of 2008, Canadian banks and the folks who regulate them have attracted a flood of admirers for mostly steering clear of the trouble that sank or badly tarnished so many of their counterparts in the U.S. and Europe. But none has been more enthusiastic than the Boston University finance professor, who has been heaping praise on our healthy little oligopoly at every opportunity.

"It's not that I have a love affair with Canadian banks," Prof. Williams was saying the other day while strolling along a beach in Newport, R.I. "I just really think that they are a well-positioned and oiled machine."

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He notes, for example, that before the meltdown, RBC was the only Canadian bank in the top 10 in North America. Now all four of his picks are on the list and gaining steadily on their badly mauled rivals.



What I find so fascinating about Canada is the fact that throughout the whole system, not just the oversight system, not just the bank executives themselves, but also the customers, there is risk aversion. Mark Williams


"From a risk perspective, Canadian bankers and regulators passed a real-life stress test," Prof. Williams wrote in a recent commentary for The Motley Fool. "They proved that, as in a 15-round boxing match, taking a more cautious strategy and protecting themselves against excessive risk prevented a knockout. And when the final bell rang and the financial crisis had subsided, they had won."

Now, the Canadians are better positioned to score even bigger wins when the economy rebounds, he says.

Speaking of the Canadian banks' image, he says being labelled boring is better than "banksters," an increasingly popular description south of the border.

"What I find so fascinating about Canada is the fact that throughout the whole system, not just the oversight system, not just the bank executives themselves, but also the customers, there is risk aversion. That's part of the stronger system you have."



The crisis was 'basically caused by very low credit standards and cheap capital laced with lots of toxic derivatives.'


Prof. Williams is not your typical ivory tower type. He began his working life as a banker and later jumped into the regulatory trenches as a bank examiner with the Federal Reserve. His specialty is assessing financial system risk; and he doesn't mince words when discussing the dangers still lurking in the aftermath of the biggest financial disaster since the Great Depression.

The crisis was "basically caused by very low credit standards and cheap capital laced with lots of toxic derivatives," says Prof. Williams, who is the author of Uncontrolled Risk. The book, which delves into the collapse of Lehman Bros. and the Wall Street money machine, carries a sobering subtitle: How systemic risk can still bring down the world financial system.

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The proposed U.S. financial reform legislation awaiting final Senate approval does not address the crucial issues of lousy lending criteria or stronger oversight by better-equipped and paid watchdogs. There are no penalties, for instance, for getting things wrong at ground level.

"Banks have a propensity to get themselves in trouble," he says. The key is catching it early.

Yet examiners are treated like "second-class citizens." That's particularly the case at the Fed, where all the glory and much of the reward goes to those responsible for monetary policy. Now the central bank is poised to acquire wider oversight powers.

Will that prevent another disaster in the future? Not in his book.

The crisis showed that when field examiners "fail in their duty" of early detection, "banks quickly can overdose on risk." There's a good reason that some 200 American banks have failed since the crisis, but none in Canada or other countries with sounder, more conservative capital standards and rules of engagement.

And the American system is not the only focus of his concern. Of the 30 banks identified last year as being most at risk, only four were based in the U.S. Most of the others are in Europe, which is why he advocates a risk overseer for the entire global financial system.

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Still, he understands why Canada would oppose such multi-jurisdictional regulation. "It's one thing joining a group if they are elevating you. But if you are an A player, and you're joining a bunch of B players, as measured by your ability to manage your own financial system, then what's the benefit?"

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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