The 2008 worldwide financial crisis sent economies across the globe reeling and led to the failure of hundreds of banks, primarily in the U.S., as they collapsed under the weight of bad subprime mortgage loans. Between 2008 and 2012, a total of 465 banks went bankrupt, forcing government interventions and massive bailouts. The worst years were 2009 and 2010, when over 140 and 157 banks failed, respectively.
But, compared to most other G7 nations, Canada came through largely unscathed. The reason for this? A sound banking system, solid financial rules, and, perhaps most importantly, the leadership of then-Bank of Canada Governor Mark Carney, whose sharp actions not only saved Canada from the worst of the crisis but also averted what could have been a truly national economic disaster.
The Global Crisis and Canada’s Position
The U.S. housing bubble burst in 2008, and the subsequent crisis was set into motion by the collapse of a number of financial institutions, most notably Lehman Brothers. Panic spread through the financial markets, causing some banks to suspend withdrawals and others to fail outright. Credit dried up, and people everywhere started to lose their jobs. Almost as a side effect, the major economies of the world slipped into recession.
Although Canada’s financial sector was regulated better than that of the U.S., it was still susceptible to the international credit crunch. Canadian banks looked to the global capital markets for their short-term funding needs, and as those markets dried up during the fall of 2008, there was a real danger that a “Great Recession” takes down several major banks along with it.
Mark Carney’s Strategy: Aggressive Rate Cuts and Liquidity Measures
In February 2008, just months before the crisis hit, Mark Carney became the Governor of the Bank of Canada. Although he was relatively new to the role, his actions conveyed both urgency and confidence. The first major move he made came in October 2008, when he cut interest rates with what could only be described as vigor and aggressiveness. In fact, he and his Policy Committee slashed rates so that the Bank of Canada’s key overnight lending rate was aligned with that of the U.S. Federal Reserve at a time when Canada and the U.S. were experiencing very different economic conditions.
Carney’s subsequent actions to ensure there was liquidity in Canada’s banking system meant that our financial institutions – contrary to what was happening in the U.S. – were able to access cash and operate normally.
To accomplish this, Carney injected (and authorized) measures like:
- The Term Loan Facility, under which banks could access cash at very low interest rates.
- The Insured Mortgage Purchase Program (IMPP), which allowed the government to buy up to $125 billion worth of mortgages from financial institutions, thereby ensuring that they could finance loans to businesses and individuals in a depressed economy.
After the release of the October 2008 Monetary Policy Report, Carney held a press conference to explain the Bank’s position on the global financial crisis. He stated, “We realize that this has created a great deal of uncertainty and stress. We understand the severity of the situation, and we are taking action to address it.” He went on to say that the most critical thing was to work with international colleagues across the world and to have as many countries as possible “on the same page and, absolutely, in the same boat.” To reassure the Canadian public about the strength of the financial system here, Carney stated, “In Canada, our financial system is sound, and our financial institutions are already well capitalized.”
Jim Flaherty, then-Canada’s finance minister, was among those who recognized Carney’s leadership. In a 2009 statement, he praised Carney and the Bank of Canada for their efforts, saying:
“Mark Carney’s steady hand and quick action were instrumental in keeping Canada’s financial system stable during one of the most challenging economic periods in modern history.”
Why Canada Avoided a Housing Collapse
Thanks to stricter regulations on banks and lenders, the reckless subprime lending hadn’t saturated the Canadian market with bad loans like it had in the U.S.
“Our banks were not taking the same level of risk as the U.S. banks were taking; they were not engaged in the same kind of lending practices,” said Carney in a 2009 speech.
Canadian banks, however, were still exposed to the economic downturn. Had Carney not acted quickly to ensure liquidity, would businesses have struggled to access credit? Would unemployment have surged? Would home foreclosures have spiked? By maintaining confidence in the financial system and preventing a banking freeze, Carney effectively insulated Canada from the worst of the crisis.
Reflecting on Canada’s resilience in 2010, Carney remarked, “Canada did not need to bail out its banks. We did not experience a banking crisis because we have a system that is prudent by design and responsive when needed.”
One of the most striking consequences of Canada’s financial resilience was the strength of the Canadian dollar following the crisis.
Remember in 2011 when the Canadian dollar was at $1.05 USD?
That surge in value wasn’t a coincidence. While the U.S. and European economies were struggling with bailouts and deep recessions, Canada’s relative economic stability made the loonie an attractive currency for investors. Carney’s handling of the crisis not only preserved financial stability but also enhanced global confidence in the Canadian economy:
A stronger dollar meant cheaper imports for Canadians, greater purchasing power abroad, and a significant boost to national pride. It was a rare moment when Canada’s economy, rather than being overshadowed by the U.S., was actually outperforming it.
Canada’s Recovery: A Model for the World
By the middle of 2009, Canada was revealing signs of recovery. The country managed to elude the colossal bank bailouts that beset the U.S. and Europe, and its economy bounced back more rapidly than that of most other G7 countries. Carney’s management of the crisis garnered him international attention and accolades, in no small part because he was steering a national economy that rebounded so much faster than those of many other advanced countries.
Carney earned such recognition and respect that he received and accepted the offer to become the Governor of the Bank of England.
Carney later reflected on the lessons the crisis taught and said:
“We can never eliminate financial crises, but we can reduce their likelihood and severity. In my opinion, the key to success in this regard is to seek to build continuously open markets.”
The Canadian government continued to highlight Carney’s role in shaping the country’s economic resilience. In a November 2011 statement, then-Prime Minister Stephen Harper said:
“Mark Carney’s leadership at the Bank of Canada was a key factor in Canada’s superior performance during the global financial crisis. His appointment as Chairman of the Financial Stability Board is a testament to his expertise and Canada’s strong financial system.” (Government of Canada, 2011).
Looking back, Carney’s leadership proved a defining moment in our economic history. His fast rate reductions, injections of liquidity, and head-shakingly common-sensical approach to financial stability kept us from sliding into recession for long. At the same time, they protected us from the bankruptcies and economic mayhem that we saw elsewhere.
The 2008 financial crisis was a dark chapter for the worldwide economy, but Canada’s ability to weather that particular storm said a lot about not just strong financial regulation but also the steady hand Mark Carney had at the helm of the Bank of Canada during the worst of the crisis.
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