Exogenous Shocks in Subsystem Adjustment and Policy Change: The Credit Crunch and Canadian Banking Regulation
This paper explores the impact of internationalization on the financial services policy subsystem in Canada. It uses subsystem adjustment as a concept to bring some analytical clarity to how external factors like globalisation and international crises may affect existing policy regimes. It examines the globalisation-induced banking deregulation, which occurred in Canada from 1987–1991, and the current crisis of securitized banking and argues that the strength of this approach is that it integrates internal effects of the existing subsystem to explain policy changes in response to external shocks. It is necessary to differentiate the processes of external systemic upheavals from subsystem spillovers as these two processes of adjustment and policy change can lead to different policymaking dynamics over the long term.
The development of global financial markets in the mid 1980s put increased pressure on Canadian banks as corporate borrowers were able to borrow internationally from international financial service providers which could provide lower cost capital in part because they were free from domestic regulatory regimes, and in part because they were ‘non banks’ offering new ‘securitized‘ forms of capital. As well, waves of mergers internationally increased the size of financial services companies and created the possibility that Canadian banks would no longer be able to compete globally. The banks demanded that the federal government overhaul the banking rules. Canadian banks wanted to become involved in the provincially regulated securities industry, and the insurance industry, and the advent of securitization and globalisation made these goals achievable.
The collapse of the U.S. subprime mortgage market has prompted a reassessment of financial institution deregulation worldwide. The effect of this crisis has been less in Canada, but there has been a call to strengthen and centralize financial regulation. The 2008 amendments to the Bank of Canada Act, a call for national regulation of the securities industry, reducing the role of the Ontario Securities Commission supports this stance. While stimulated by external events, these have been policy goals in Canada for a substantial period.
Frequently changes in policy system processes are sparked by events external to the system. Factors internal to the system influenced the resulting changes. Systemic shocks and internal spillovers need to be distinguished clearly. The deregulation of the Canadian financial services industry introduced additional players and new policy goals within the system. The current securitization crisis has strengthened the federal government’s pre-existing policy goals of asserting federal jurisdiction over the industry.
Published in: Journal of Public Policy, v.29, no.1, pp. 29-53, 2009