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The financial crisis of 2008 engulfed the banking system of the US and many large European countries. Canada was a notable exception. In this article we argue that the structure of financial systems is path-dependent. The relative stability of the Canadian banks in the recent crisis compared to the US in our view reflected the original institutional foundations laid in place in the early nineteenth century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk-the mortgage market and investment banking-and was tightly regulated by one overarching regulator. In contrast, the relatively weak, fragmented, and crisis-prone US banking system that had evolved since the early nineteenth century led to the rise of securities markets, investment banks, and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2007-8 was not contained. [ABSTRACT FROM AUTHOR]

Compares the banking system of the United States (US) with Canada over the period 1920 to 1980. Problems in the American banking system; Factors contributing to the stability of banking system in Canada; Comparison of bank failures, lending rates, interest paid on deposits and related variables.