Stability in the Absence of Deposit Insurance: The Canadian Banking System, 1890-1966

Abstract

The Canadian banking system experienced a prolonged period of stability prior to the introduction of deposit insurance in 1967. Documenting the reasons for this stability provides important evidence in the debate over the impact of mandatory flat-rate deposit insurance. In this paper we use new archival data to refute recent claims that this stability resulted from an implicit deposit insurance scheme managed by Canada's largest banks and guaranteed by the federal government. We argue that the Canadian banking system was stable for two reasons. First, the absence of deposit insurance provided incentives for both prudence on the part of management, and monitoring by depositors and regulators. Second, the absence of unit banking and other regulatory barriers to competition facilitated efficient mergers which produced a relatively small number of well-managed banks. Copyright 1995 by Ohio State University Press.