Episode 26 Money Matters: Canadian and Scottish Banks Shows Stability Can Come From Different Rules

[00:00:00]

[00:00:18] Emanuel: Hi there, and welcome to yet another episode of the Curious Pundits podcast. My name is Emanuel, one of the co-hosts.

[00:00:25] Kevin: My name is Kevin, the other co-host.

[00:00:28] Emanuel: And this is the third episode of Kevin's rants, as I call them, about the monetary and the financial system globally, about the central banks. And today's topic, as you probably know already since our previous episode, is the stability of the Canadian banks and similarities to other banks from other times throughout history.

[00:00:50] I'll let Kevin go into the details. For a reference, I'm based in Canada. Kevin is dual citizen, but he's living in the United States for the past few good years. And that being said...

[00:01:02] Kevin: Quite a few years.

[00:01:03] Emanuel: Curiouspundits.com is our website. Find links to our podcast, like, follow, subscribe, share, leave a comment, hopefully positive, and tell others so that we can grow.

[00:01:13] So let me ask you this, Kevin. Do you still have a Canadian bank account?

[00:01:17] Kevin: No. Although ironically, the bank I'm with in the United States inherited me through a Canadian bank account. So I came back to the States a few decades ago.

[00:01:27] Emanuel: TD?

[00:01:29] Kevin: No. So there was a branch of the Canadian Imperial Bank of Commerce in Santa Clara, California. I needed to be able to transact in both countries, so I opened up an account, stayed with it. It was US dollars in the account. It's in the American banking system. But then a few years later, they were acquired by a bank called Crocker, and few years later they were acquired by a bank called Wells Fargo, and I still have that account.

[00:01:55] Emanuel: Then why are the Canadian banks and overall the Canadian banking system perceived, at least perceived, we all know that it's not just the perception, but why are they more stable, more trusted, more viewed with a positive sentiment?

[00:02:16] Kevin: So I suspect it's because they live closer to what's called the 3-6-3 rule than American banks do. Have you ever heard of the 3-6-3 rule?

[00:02:29] Emanuel: Sounds familiar? Don't ask me to say the definition because I don't.

[00:02:33] Kevin: Okay, so banking used to be super boring, and the 3-6-3 rule is pay 3% on deposits, charge 6% on loans, and go play golf at 3:00. Like, that's the 3-6-3 rule for bankers, right? And back in the day, some of the more riskier activities that have been occurring for the past since Glass-Steagall was rolled back didn't used to occur, and that resulted in a stabler, less lucrative for the bankers, but stabler banking system for everybody else. So what I suspect is that Canadian bank management is much closer to the 3-6-3 rule than American bank management is today. But one thing that I found super interesting... So my ex-wife is from Scotland. I've been to Scotland a few times, and at some point I learned of the existence of Scottish money, and I'm like "what do you mean Scottish money? They're a part of the UK. You know, the Bank of England. What's the deal, right?"

[00:03:47] And the answer I got was that the three banks that still issue Scottish money are older than the Bank of England, and therefore they got grandfathered in. So it's the Royal Bank of Scotland, the Bank of Scotland, and Clydesdale Bank, and they are legal tender everywhere in the United Kingdom, but good luck trying to pass one in a store in England. They're like, "What is this? This is not real money." It's like, "Yes, it is," and you can argue with them, and I've actually tried to do that, but finally I just gave up and, OK, here's an English note," right? But they're legal tender, and I'm like how can it be that these banks simply refused to comply with the edict way back when that bank-issued banknotes were gonna cease to exist? And the short answer is they're from Scotland. The animosity between Scotland and England is still pretty intense and to a certain extent, kinda hard to fully appreciate. I can recall being in, I think it was Edinburgh, and there's a billboard that says, "Why do the English drink gin, but the Scots drink whiskey?" And the answer is, "We had first choice." They even make fun of the English-Scottish rivalry in advertisements.

[00:05:11] Emanuel: First choice being?

[00:05:14] Kevin: Scotch. Like apparently in Scotland gin is an inferior drink. I don't know, right?

[00:05:21] Emanuel: No, the name, the name. So I'm assuming people-- hopefully people are watching from all, all over the world, so some references don't make sense.

[00:05:31] Kevin: Yeah. This was just a joke they were making in an advertising billboard. They were just saying, if you have to drink gin, if you're unlucky enough that you have to drink gin, that's your problem. That kind of deal. And in fact, so the first time I was in Scotland was in... I guess it was, like, around Christmas of 1991, my brother-in-law's driving me around and he's like, "And here's the parliament building," in Edinburgh, right? I'm like, "Wasn't parliament disbanded centuries ago?" And he's like "Yeah. But you never know. We might need to reopen it one day." Sure enough, some years later, there was this thing called, It had a weird name. It was called devolution or something, and it affected Scotland, Wales, and Northern Ireland, and they all opened up independent parliaments, and they needed to reopen the Scottish Parliament. And the irony is, when they finally needed to do it, and they went through the building, it would've been too expensive to modernize it for modern electricity and data communications, they ended up getting a new building anyway, right? But back in '91, thought he was nuts, right? And then later on, they reopened the Scottish Parliament.

[00:06:40] But anyway, I've been super interested to the point of fascination that banking in Scotland in the 19th century was very stable in terms of a very low rate of bank failures, and banking in Canada in the 20th and now in the 21st century has also been very stable in terms of a low rate of bank failures.

[00:07:02] So after the 2008 financial crisis, there were these bank bailouts happening all over the world, and I remember online someone making a comment about Canada did not bail out their banks and it proves that it was not necessary.

[00:07:21] And the part that kind of surprised me is he seemed completely unaware of the fact the Canadian banking system didn't fail. Like, why would you bail out a banking system that wasn't failing? So I pointed that out and I'm not sure if I ever heard from him again, but I just find it odd that people, I'm looking for the right way to say this, but express so much definitiveness in their opinions when they're missing big pieces of the story.

[00:07:52] So the Canadian banking system is sufficiently safe, stable, and responsible that even in the great financial crisis, the Canadian banking system didn't fail, and therefore didn't require a bailout. So then I'm like, okay, so what did Scottish banking in the 19th century have in common with Canadian banking in the 20 and 21st century? So now in the world of generative AI, I can go to ChatGPT, I can go to Claude, and I can say, "Summarize this for me." And in preparation for this episode, I redid that, and I'm gonna read a bit directly from the ChatGPT summary.

[00:08:32] " So both developed nationwide branch networks dominated by a relatively small number of large banks". I do think that's probably a very important similarity.

[00:08:46] And the next sentence to me is pretty wild. It's, "The principal difference is that 19th century Scotland relied heavily on competitive private note issue and comparatively limited formal supervision, whereas modern Canada relies on a central bank, federal prudential regulation, deposit insurance, and an explicit framework for managing systemic risk."

[00:09:11] Emanuel: Now, it won't be fair to say that we're not really comparing apples to apples, right? Obviously, the economy looks totally different since the nineteenth century. We're talking globally right now, right? We know that There's so many things that are different and influence the current financial environment that it wouldn't necessarily be fair to actually make that comparison.

[00:09:35] But for the sake of the argument, I think we can go ahead and explore and, you know.

[00:09:40] Kevin: We are are absolutely not comparing apples to apples, and and that's what makes this so interesting to me. Banks have been failing for centuries, right? So the fact that we have periods of stability is exceptional. And then the question is why were banks particularly stable during these periods? And in my mind, the important parts of that sentence that I read to you is " and comparatively limited formal supervision". That was Scotland in the 19th century. And "an explicit framework for managing systemic risk". That's Canada in the 20th and 21st century. Those are so diametrically opposed that in my mind it's like there's no way to really reconcile that. right? So the Scottish banks were in a free banking, kind of self-regulating environment, and the Canadian banks were in a much more heavy-handed, this is the way it's done kind of...

[00:10:46] Emanuel: You actually need in our times, right? We didn't have so many... .God knows how many banks are in the United States actually, right? How many banks are in just one state of the United States. Here in Canada, to give some context, there are five or six major, major banks. There are some smaller ones, there are some foreign ones, but it's safe to say that it's dominated by the six major banks and not as in the US where, you know, every state has its own, every corner has kinda like its own bank and so forth.

[00:11:16] So it's fairly, fairly different.

[00:11:20] Kevin: The benefits of what we might call more heavy-handed regulation are not limited to modern times. There are banks throughout the world for the past 600 years who probably would've benefited from some... maybe not individual banks, but banking systems, who maybe would've benefited from some more heavy-handed regulations on what risks banks can and cannot take.

[00:11:43] So the fact that we have these two eras of stability based on what to me look like a radically different set of rules, I'm like, "Okay, what's going on here?"

[00:11:56] And interestingly enough, I may have gotten the answer on a recent episode of a podcast called Macro Musings. But before I get to that, I wanna use the American banking system as an example. So commercial banking is basically loans and deposits, and investment banking is securities, so stocks, bonds, all that kind of stuff, right?

[00:12:24] And banks in the United States used to be able to do both, and being able to do both led to the speculative bubble of stocks in the 1920s. So part of the response to the Great Depression was banking regulations that meant that banks had to either do deposits and loans or do securities, but banks were not allowed to do both. That was called the Glass-Steagall Act, and it was passed in 1933. And then the Glass-Steagall Act was what's the word? Reversed, undone. I'd have to look up exactly when, but I think it was, like, in the early 1990s during Clinton's administration. And then American banks are now able to take greater risks, and they just immediately started doing so, and then we got to the savings and loan crisis and other activities leading up to the great financial crisis.

[00:13:25] So the answer that may be the answer was provided to me and to anybody who listened on an episode of The Macro Musings Podcast with David Beckworth, and I'll put in a link both to the podcast and to the episode. And the episode is called Steven Luck on What History Can Teach Us About Financial Stability. And basically, this guy, Steven Luck, is a New York Fed researcher, and he explains that he and his co-authors downloaded approximately three hundred and seventy-two million historical newspaper articles and then had AI software sift through them, categorize them, turn them into data series that they could feed into algorithms and blah, blah, blah. And what they came up with-- And it's kinda funny because it's the ultimate in common sense backed up by empirical data, that the difference that makes the difference is banks have significant assets above and beyond their liabilities, that they have a strong balance sheet. Like, when a banking crisis hits, which banks fail and which banks survive? The banks with the strongest balance sheets survive, and the banks with the weakest balance sheets fail.

[00:14:59] Emanuel: Who would have thought of that?

[00:15:01] Kevin: And yeah, who would have thought of that, right? But now we actually have empirical data on these three hundred and seventy-two million newspaper articles going back so long saying that in nineteenth century Scotland, even though the regulatory framework was very light touch, these guys ran banks well. And in twentieth and twenty-first century Canada, they don't really have the ability to run banks poorly because they have that heavy regulatory framework that they have to deal with.

[00:15:36] Emanuel: Funny enough, we have our current Canadian prime minister is a gentleman by the name of Mark Carney, or it's...

[00:15:42] Kevin: Oh yeah, cousin Mark, yeah.

[00:15:43] Emanuel: Yeah. Because Mark and he used to be, funny enough, not in Canada, but he used to be the chief the how you call it? One of the jobs he held...

[00:15:52] Kevin: In Canada too. He was the governor of the Bank of Canada first, and he was the

[00:15:59] Emanuel: Oh, okay.

[00:15:59] Kevin: Governor of the Bank of England later.

[00:16:01] Emanuel: Fun fact.

[00:16:03] Kevin: Yeah, he knows his stuff. I know I've said this in prior episodes, but I really think Canada dodged a bullet when he threw his hat in the ring to run for Liberal Party leader.

[00:16:12] Emanuel: I agree with you. They dodge the Poilievre bullet.

[00:16:18] Kevin: Yeah, so I don't know a whole bit about Poilievre, but I know that when it comes to macroeconomics, he just spouts stuff from the textbook that fits the paradigm of things we know to be true that aren't true. Whereas Mark Carney knows. Now, he still reads from the neoclassical economic hymnbook, but sometimes I find myself wondering.

[00:16:48] He says things that leads me to believe knows that the neoclassical assumptions and definitions are not rooted in reality, but he has to pretend in order to keep his job. And sometimes I can't help but wonder if he's putting on a bit of a facade for the world. Because in order to be taken seriously as an economist, you have to assume that some of the assumptions inherent in neoclassical economics are true. But sometimes I think he knows they're not, and he just works around it. I could be wrong. He may be a true believer, but sometimes I'm like, "Oh, that was interesting."

[00:17:26] Emanuel: Remember he's the prime minister now. So that means what? That he's a politician. So...

[00:17:32] Kevin: Being the head of a central bank is a very political thing, so he's been a political animal for a long time.

[00:17:39] Emanuel: But I feel like we're already twenty something minutes in, and we haven't actually discussed that much the Canadian banking system that it is today currently. So maybe you have a few words on this topic and, you know, some words of wisdom and, should you keep some money in a Canadian bank account?

[00:17:56] The reason I'm saying this is because I come from East Europe, and God knows that many things have happened in the past, especially with the banks. You cannot leave your money, even if it's one dollar or ten dollars. You know, your savings in cash is not good, in the mattress not good, in some assets not good.

[00:18:15] Real estate, you know, people in Ukraine had real estate, and then what happened, right? So that's a reality in some parts of the world. Now I give again the example of Greece and Cyprus because many of the people I knew back home had some money, cash in some of the banks in Cyprus, which was the closest fiscal heaven you might say.

[00:18:37] So as North America has the Caymans, the Seychelles and Panama and all the other places where there the tax is more entrepreneurial friendly, one might say. Cyprus was the kinda like alternative and very close by. And also Greece, which is fairly close to Romania, and the population obviously had money, their own money in Greece banks.

[00:18:59] What happened in, I think 2012, right? Was it? Or 2015, 2014. Anyway, Greece was on the verge of become bankrupt completely. They weren't. The European Union overall, Germany saved them. We won't get into a debate, but what happened really is that people couldn't access their money, right? So you said you have a liquidity problem.

[00:19:24] You said it in a previous episode, and you cannot access the money, but you have them or you don't have the money at all. And it's fairly frustrating, right? To have a limit. You cannot withdraw more than... Even right now people have limits, but good limits. It's not that every day I withdraw, let's say, two thousand dollars cash from the ATM or whatever is the limit.

[00:19:45] I'm assuming in US it's something similar, right? So, or I cannot transfer more than two thousand or three thousand dollars to someone unless there's a check or I make a special request, I call the bank and whatnot. So these guardrails are still in place. But, but, but the reality is that anything can happen at any time.

[00:20:02] And God knows the sentiment right now back home in Romania is very negative overall. What happened is already drones are being taken down over Romanian territory, something that didn't happen up until a couple of months ago. Either Russians, either some say that they're kinda like Ukrainian disguised in Russians so that, you know, they get Romania into war and then, you know, Romanian being part of NATO, hence NATO into war. There's all, all kinds of stories.

[00:20:30] Maybe that could be a topic for another episode, where I'm going with. And also I learned right now that they shut down because of drought, two of the nuclear reactors that are producing energy. It's in Cernavodă next to the seaside. And actually the Prime Minister, who is interim Prime Minister because he got suspended, but they couldn't put somebody else in place, so he's still Prime Minister for like two months now because they couldn't put somebody, said, you know, "You might wanna tune down your electricity consumption."

[00:20:59] Said this to the population. It's 2026 right? Here in Canada, you know, they push everything electric. Go buy your electric car your furnace, your heating, your cooling, and whatnot. And then the reality is back in the other part of the world, and This is my rant now. I'm connected obviously to Romania.

[00:21:17] I have friends, family there. So there it is. It's not uncommon at one point to say, "Tune down the electricity consumption," you know, and tune down how much money you can actually take out, you know? It's a very applicable scenario. Maybe I'm exaggerating at this stage. I hope I am. There it is. But...

[00:21:36] And this is just one example that I'm very related to. But do you wanna talk, I don't know Venezuela? Twenty years ago, Venezuela was probably one of the places you would want to live and keep some of your assets, I think. Wanna talk about many, many, many similar countries around the world.

[00:21:55] So why Canada? Not going into the politics, that was my rant. But why would you keep even if it's like a hundred bucks? What are your thoughts on this? I don't know if there's a question there, but...

[00:22:08] Kevin: Well, I think that if you put money in a Canadian bank, you can feel very comfortable that the odds of that money being unavailable to you ever are slim to none. Now, running a safe, stable banking system costs more than the... in the aggregate, maybe it's not true, but in the short term, it costs more than the more freewheeling banking system that we have now in the United States. So as a result, you're probably gonna pay more in fees, and you're probably gonna receive less in interest. But in exchange for that, the odds of your money not being available to you ever is slim to none. Now, in the United States, we have deposit insurance, so most depositors, their money is safe. But let's talk a little bit about Silicon Valley Bank.

[00:23:04] It failed a couple of years ago, and for reasons that I don't fully understand, a lot of depositors had deposits significantly in excess of the deposit insurance limits. So there was a distinct possibility that some companies could lose millions of dollars and, as a result, be unable to meet payroll on Friday. And that bank was specifically bailed out by the US Treasury in order to prevent that from happening.

[00:23:38] But in theory, if you as a depositor... so a company, when they deposit millions of dollars into a banking system where deposit insurance limits are significantly lower than that, the companies have something called treasury operations, where somebody puts a little money in this bank, a little money in this bank, a little money in that bank, and you spread it out to make sure that all of your deposits are covered by deposit insurance. And for whatever reason, a whole bunch of Silicon Valley Bank customers did not do that. And they didn't want the failure of the bank to cause all that money to cease to exist because it wasn't covered by deposit insurance, so they just made them whole. Which a lot of people-- It pissed a lot of people off.

[00:24:31] But if they hadn't have made them whole, the ripple effects through the economy, all of these companies would have failed, their employees would have been laid off, they would have gone on unemployment. It would have had ripple effects that have been worse than just bailing them out. At least that's the rationale.

[00:24:48] But in theory, if you as a depositor don't do, quote unquote, "the right thing" according to the rules of depositor insurance, and then your money ceases to exist as a result, like in theory, that's on you. But in this particular case, we took a different approach, and we just bailed them all out.

[00:25:12] Emanuel: So how about the Canadian banks and then the Silicon Valley Bank example.

[00:25:18] Kevin: I actually do not, I have not, and I probably should have in preparation for this episode, read the details of the rules of Canadian banking that make it so safe.

[00:25:29] Emanuel: Safer.

[00:25:31] Kevin: But typically, what makes banks safer is the fact that they're stricter about making loans. The worst thing that can happen to a bank is you make a bunch of loans that don't get paid. So to the bank, those loans are assets because the people who have those loans are gonna be giving you money every month for the duration of the loan. And when a loan simply gets defaulted on, the value of that loan drops from whatever to, in some cases, zero or near zero. I don't know about in Canada, but in the United States it's very common, if a bank has a bad loan, they can sell it for five cents on the dollar to a debt collector, and then the debt collector assumes the responsibility of trying to get money out of the debtor. It's no longer the bank's responsibility, but the bank has to take a write-down. So a hundred thousand dollar loan asset can become a five thousand dollar asset as a result of that sale. And when the bank has to write down too many of their assets, it squeezes their solvency, their equity, and if they go past the threshold of being solvent, the banking regulators by law have to close them down. So my guess...

[00:26:53] Emanuel: Fair enough.

[00:26:54] Kevin: Is that Canadian bankers are just much more careful about the loans that they make.

[00:27:00] Emanuel: I would love to think so, and I think we should leave it at that. At least the thought of being more careful and being more responsible. We all know that the reality might be different, but at least we like to think that they're a little bit more responsible. That being said, this was another interesting episode where I learned.

[00:27:18] Kevin: Can I ask you a personal question?

[00:27:19] Emanuel: Please do.

[00:27:20] Kevin: How often do you get a credit card solicitation in the mail?

[00:27:25] Emanuel: Not as many as you might get in the US. There aren't all of them, but I would say fair a fair amount of numbers, mostly in stores. They have either even the small ones like the pharmacy and we have here Shoppers Drug Mart. You know, they have their own cards for gas stations and whatnot, but not by far very different than the US.

[00:27:47] I'm assuming in the US you get every other day, you get one new ones and..

[00:27:54] Kevin: A couple times a week. Maybe two, three times a week. I don't get them literally every day, but...

[00:27:58] Emanuel: And they do for 16 years, right?

[00:28:01] Kevin: The banks hand out credit card applications like they were Halloween candy. And what they want is they want people to take out credit cards, not pay the balance in full at the end of the month, and then pay them interest.

[00:28:13] Emanuel: Maximize it first. Then live on the interest. And most people are decent, and they actually do pay the interest, not pay their full amount, which is what they are after. And this is the rule of the game. I'm not here to, to judge, but no, Canada is more decent so far in this one.

[00:28:30] Now, I am bombarded with my own banks trying to sell me an upgrade or an update, or I recently transferred some money from one account to the other, and they came like, "What we are doing them? We have some GICs for you. What, what about this investment? What about this one?" So obviously they're a bank.

[00:28:48] They want to make money. They wanna put the money in circulations and whatnot, but probably not as aggressive as in US. That being said probably the next episode will still be related to this topic. Until then, my name is Emanuel.

[00:29:02] Kevin: My name is Kevin.

[00:29:03] Emanuel: Curiouspundits.com is the place where you can find us, links to subscribe, previous episodes and future episodes. Until the next time.

[00:29:13] Kevin: Thank you for listening. But before we're done, if you like the podcast, please give us a four, preferably five-star rating on whatever app you use to listen to podcasts, as that will help other thoughtful people find us.

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