The Characterization of Canadian Commercial Banking as a Regulated Monopoly Is Not a Controversial One

Canada’s mortgage market was (and continues to be) structured to provide a steady source of rents to a small number of large financial institutions. Around 70% of residential mortgage debt was held by commercial banks, and the five largest Canadian banks accounted for nearly 90% of that share of mortgage debt. Around 60% of Canadian mortgage debt, then, was essentially held by an oligopoly regulated by the OSFI [Office of the Superintendent of Financial Institutions]. This oligopoly enjoyed a benchmark mortgage rate that was about 110 basis points above that of the United States. This was true despite the Canadian benchmark being a 5-year rate while the US benchmark is for the 30-year fixed rate on conforming mortgages. Furthermore, in the case of default holders of Canadian mortgage debt generally had recourse to all of a borrower’s assets. In the United States recourse was limited to foreclosure on the mortgaged property and home.

The five largest Canadian banks had a privileged position in the mortgage market that included insurance provided by the government-owned CMHC [Canada Mortgage and Housing Corporation]. The CMHC was essentially a monopoly insurer of Canadian mortgage debt. The CMHC insured directly almost half of that debt. Another 13% of that mortgage debt was insured by private companies for which the CMHC guaranteed the vast majority of any losses. Furthermore, 90% of securitizations were guaranteed by the CMHC. Not only did a regulated oligopoly of commercial banks hold most Canadian mortgage debt and enjoy relatively (to the United States) high interest rates. The CMHC also covered potential losses on the vast majority of that mortgage debt.

The characterization of Canadian commercial banking as a regulated monopoly is not a controversial one. As Bhushan (2010) states, the Canadian banking system “has been described a oligopolistic with six large banks accounting for over 85% of bank assets” and during the 1990s “growth in financial sector concentration in Canada was unmatched by any other major economy[.]” This protected oligopoly was given room to expand by a 1992 amendment to the Canadian Bank Act permitting banks to acquire trust and loan companies that had previously been important players in the mortgage market (Bhushan, 2010). Compare this to US policy innovations regarding the GSEs [Government-Sponsored Entities] that promoted the proliferation of mortgage companies and brokers. Even though government intervention into the mortgage market expanded in both the United States and Canada, only in the latter did it lead to the bulk of both mortgage origination and debt being concentrated in a handful of large commercial banks.

—Andrew T. Young, “Canadian Versus US Mortgage Markets: A Comparative Study from an Austrian Perspective,” in Studies in Austrian Macroeconomics, ed. Steven Horwitz, Advances in Austrian Economics 20 (Bingley, UK: Emerald Group Publishing, 2016), 204-205.