Canada has long received credit for its economic turnaround under the stewardship of Paul Martin, the country’s former prime minister and finance minister. In general, Martin has received justifiable plaudits but often for the wrong thing. Canada’s “fiscal austerity expansion,” which was praised by deficit hawks around the world, only succeeded because the country had, and still has, a free-floating exchange rate. As a result, the Canadian dollar dropped sharply in the mid-1990s, facilitating a huge turnaround in the country’s trade account and thereby offsetting the fiscal austerity embraced by the government at that time. Where Paul Martin does deserve huge credit is the manner in which he handled Canada’s banking system, in particular his cautious approach to financial deregulation. Martin saw little social merit in following the then-prevailing trends toward greater financial liberalization. And he eschewed the notion that bigger was necessarily better. In January 1998, the chief executive of the Bank of Montreal shocked Canada's financiers by announcing his intention to merge with Royal Bank, Canada's largest bank. Martin, then the finance minister, was not pleased, particularly as the announcement was seen as pre-empting the country’s financial services task-force, which had been set up in December 1996 and was scheduled to report in the autumn of 1998. In response to the proposed deal, Canada's second-and fifth-largest banks, Canadian Imperial Bank of Commerce and Toronto-Dominion, then announced their own plans to merge. Suddenly, the task force's position on consolidation in Canada's already highly concentrated banking sector was more than just a matter of theoretical interest. Bankers and markets assumed that the mergers were a done deal and that the government would roll over, as its counterparts in the U.S, when faced with similar pressures. Not so. In contrast to the supine reaction of America’s politicians and regulators, who green-lighted mergers such as Traveller’s takeover of Citibank in spite of this being against the existing law, Martin rejected the two huge Canadian bank mergers of the late 1990s. And nothing has changed since, despite the political ascension of the Conservatives. Martin killed the proposed mergers on grounds that there would be too much power concentrated in the hands of too few banks. This would result in reduced competition and troubles for the government when problems arose. These warnings seem remarkably prescient today, and the former Prime Minister rightly deserves credit for his foresight and political courage. In this interview, Martin discusses the history of this period and contrasts the regulatory environment in Canada with its American counterpart. Given how relatively well Canada withstood the 2008 meltdown, Martin’s words are well worth heeding.

• published: 22 Nov 2014
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