Once upon a time, Canadians engaged in self-criticism and did not feel themselves a nation of 'flag-wavers,' or at least not to the tune of what was typically observed south of the border.
We may have ruled the hockey rink and contributed many important scientific firsts, but our perception of where we stood on the world economic stage was always subdued. We were the junior member of the G7 and didn't always have a fiscal record to cheer about, despite having a relatively high tax system. In the early 1990s, as Canada ran into its own debt wall, a newfound sense of urgency for improvement emerged, carrying the country through a two-decade journey of self-improvement. Deficits were brought under control, alongside a disciplined monetary policy framework, eventually leading to lower taxes and a more competitive corporate environment.
Where having an overweight resource sector used to be viewed as Canada's Achilles heel, the country has since realized that this is a strength and not a weakness in a world where developing nations look to satisfy their massive appetites for the things Canadian resource firms produce, whether it be oil and gas or base metals.
During the credit crisis of a few years ago, Canadians also began to realize the benefits of a well-oiled financial regulatory environment. While bank shares didn't escape the pummeling that took place in the U.S., the fact that these banks remained viable and strong throughout the crisis and ensuing recession is testimony to the value of said environment. Where other global institutions disappeared or made their dividends vanish, Canadian banks kept theirs intact.
Now I spend a great deal of my time preaching to clients how they should not be complacent about this experience and that a true shock to Canada's domestic economy (i.e., housing) could easily cause a dividend haircut. Dodging the real estate bullet in 2007-08 was one factor, therefore, in creating the shine among Canadian banks; however, there was a more preventative factor at play and that was the stronger regulatory foundation.
It was hardly surprising then that we heard of the spat between Bank of Canada Governor Mark Carney and JP Morgan's chief, Jamie Dimon, during meetings of global bank execs. Dimon's bone of contention was Carney's explicit support for the new Basel III capital rules and how these were effectively "anti-American" in how they discriminated against U.S. banks versus global banks. Of course, the notion of a standardized set of regulations being discriminatory is a tad ridiculous, especially in light of what happened south of the border. Requiring banks to hold more and higher quality capital as a defense against credit market dislocations is a good thing, although the only true criticism is that such tougher rules probably wouldn't have prevented some of the misguided practices among financial institutions across the States. Giving an individual a 40-year mortgage when there is no income is stupid, regardless of how much capital is on the books.
We're pretty sure that Carney didn't rub Dimon's nose in the fact that Canadian firms held up better than the U.S. because of this country's more stringent regulations and better capitalized banks, and Carney would be the first to admit that complacency has no place in this ever-changing world of finance. What is likely, however, is that Canadian banks will maintain their dominance in terms of being some of the best quality financial institutions in the world. And that is yet another reason why Canada as a whole continues to weather the recent storm better than others.
Case in point, Forbes Magazine has just ranked Canada as the number one place in the world to do business, which is a promotion from last year's spot of fourth place. The recently harmonized federal-provincial sales tax is one factor, in addition to competitive corporate tax rates and a stable government. Considering the fiasco which took place in Washington over the summer, not to mention the immensely painful fence-sitting taking place in Europe, Canada deserves this accolade.
Assuming Mr. Carney and his fiscal policy counterparts maintain their credibility, the country may very well hang on to number one for another year at least. That's good news for business and it might just be the thing that softens the blow to our equity market should the gyrations of the past few months continue.