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Then-Bank of Israel Governor Stanley Fischer pauses during a news conference in Jerusalem January 30, 2013.

Baz Ratner/Reuters

It's not often that Canada makes it into a speech by an American policy maker, so when it happens, it's worth noting.

Stanley Fischer, the new vice-chairman of the Federal Reserve Board, used his first speech as a Senate-confirmed member of the U.S. central bank to talk about financial regulation. Mr. Fischer, a former governor of the Bank of Israel, referenced Canada and Australia as counterpoints that big private banks necessarily are financial time bombs. The former Massachusetts Institute of Technology economics professor noted that both countries have "several very large banks," yet neither system is prone to meltdowns.

Mr. Fischer's read of things is that a collection of too-big-to-fail banks that don't fail has served Canada well. He cites a new book by Charles Calomiris and Stephen Haber that argues the U.S. banking system was destined to be fragile because the founding fathers gave states power to regulate finance, whereas the fathers of confederation opted to make the central government the primary authority over banking.

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In the United States, that led to a prohibition on nationwide branch banking, creating the political conditions for regional business elites to strong-arm governments into allowing lots of small lenders. In Canada, by contrast, banks could set up wherever they wanted, achieving economies of scale that made them stronger and less prone to economic downturns. Mr. Fischer supplements the historical explanation of Canada's financial stability with an observation shared with him by a counterpart in the central banking fraternity: "I put serious weight on another explanation offered in private conversation by a veteran of the international banking community: 'Those Canadian banks aren't very adventurous,' which I take to be a compliment."

Was it a compliment? The late Jim Flaherty, Canada's finance minister during the financial crisis, tried for a time to highlight Canada's "boring" banking system as a comparative advantage over other countries. That seemed a good argument at a time when the world's investors were desperate for fallout shelters. Now, the world again is looking for growth and profits. That requires a certain sense of adventure. Canada's two biggest banks, Toronto-Dominion Bank and Royal Bank of Canada, are the 36th and 37th largest in the world, according to an analysis by SNL Financial, a research firm. That's boring, alright.

Canada takes great pride in how its banking system regularly tops the international rankings of safety and soundness. There is much less discussion about the extent to which a credit system built on caution dulls a country's economic dynamism. All those American community banks are more susceptible to failure, but they also are more likely to lend to smaller companies and entrepreneurs – if they don't, they won't make any money.

Just as it is noteworthy when a policy maker such as Mr. Fischer's seeks lessons from Canada, it also is a rare event when someone of stature stands up to ask questions about whether Canada has sacrificed too much in the name of financial stability. David Longworth, an economics professor at Carleton University and a former deputy governor at the Bank of Canada, has done so.

Mr. Longworth, who was former Bank of Canada governor Mark Carney's point man on financial markets during the crisis, contributed an essay on financial regulation to a collection published this spring by the Centre for International Governance Innovation and Carleton's Norman Paterson School of International Affairs. In his conclusion, Mr. Longworth deviates slightly off the topic he was asked to cover.

"Canada has historically tended to choose to emphasize stability more than efficiency in both regulation and banking competition policy," Mr. Longworth wrote. "This has led to good results on the stability side, including during the recent global crisis. Questions remain, however, as to whether too much is being sacrificed on the efficiency side in competition policy, with the recent takeovers of ING Direct Canada and Ally Canada by the Big Six banks being a case in point."

In an interview, Mr. Longworth said he was puzzled the purchases of ING by Bank of Nova Scotia and Ally by Royal were greeted with indifference. ING, especially, was a rare example of an outsider causing the big incumbents to take notice. But rather than compete, Canada's banking oligopoly simply swallowed it up.

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"ING was an innovator," Mr. Longworth said in a telephone interview from Ottawa. "Why should we let the Big Six get any bigger? They are big enough to innovate on their own."

Mr. Longworth is raising these concerns on theoretical grounds; he hasn't done the empirical work to state with certainty that the concentrated nature of Canada's banking system is impeding the ability of households and businesses to obtain credit. Mr. Longworth mostly would like Canadians and their policy makers to think more critically about what they want from their financial system.

A fortress is a wonderful thing when the world is on fire. It also is a fine perch to watch the world move by, forgetting that those people are moving forward and you are sitting still.

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