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TheStreet Open House

How Canada Beats the U.S.

BOSTON ( TheStreet) -- The Great White North is a beauty, eh.

Throughout the financial crisis that pummeled most of the world, Canadian institutions not only survived, they thrived. That success, credited to a mix of regulatory and cultural forces, may offer insight to U.S. institutions and investors.

Canada avoided the Great Recession by adhering to conservative banking principles, a sense of community and a self-policing attitude among financiers.

"All we have to do is look north and we can see a really good model for how to do business as a country," says Peter Maris, CFP, founder and principal of Resource Financial Group in Wilmette, Ill.

"They are more conservative as a nation than we are and a lot less greedy, if I may use that term," he explains. "They don't have adjustable-rate mortgages in Canada. Ninety percent of the banks hold their mortgages to maturity, whereas in the U.S.a loan is originated and then sold off as soon as possible to get it off their books. They are more conservative, and that made for a more stable system when the bottom fell out. Eighty percent of their mortgages were prime mortgages, as opposed to what happened here in the U.S."

Maris points out that the Canadian banking system is ranked No. 1 in the world by the World Bank.

"They are very conservative in terms of who they lend to," he says. "If somebody wants an aggressive loan, they will probably come to the U.S. and head to the junk bond market here."

John Taft is CEO of RBC Wealth Management, a subsidiary of Royal Bank of Canada (RY) that has more than $160 billion of assets under administration. RBC is Canada's largest bank as measured by assets and market capitalization.

He believes three factors -- business practices, regulatory environment and the management cultures at financial institutions in Canada -- insulated the country during the financial crisis.

Looking at Canada, Taft says, the "biggest difference was that there really wasn't a securitization market for Canadian home mortgages."

"Also, Canadian home mortgages are not deductible against your income, so there isn't an implicit subsidy of mortgage finance and housing ownership the way it was in the U.S.," he says with a nod toward the subprime-mortgage-based origins of the recent Great Recession. "Most of the mortgages in Canada are also held on the balance sheets of financial institutions. They originate and hold, as opposed to originate and distribute the way it happens in the United States. The consequence of that is that underwriting standards were, in retrospect, a lot more rigorous and more prudent than they were in the United States."

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