A Story About Canadian Banks

There is an argument floating around that the reason Canada has no suffered as much from the economic downturn as the American or European banking systems have been is that they were “more tightly” regulated. But as the Atlantic’s Megan McArdle points out, this just doesn’t seem to make sense; after all, Europe’s banks are pretty regulated. She comments:

“I hate to say it, but the best explanation I’ve heard comes from Canadian bankers, and people who have worked in/with Canadian banking. It’s that the Canadian bankers are, well, Canadian. They’re very conservative. And they don’t trust easy money.”

I’d have to agree, at least from personal experience. In March I decided to find out for myself how tight credit was in America by applying for a personal loan. From my assessment, one of the biggest problems at the banks over the past five to seven years has been the lack of lending standards. So I decided to see how easy it was to get an unsecured loan given the financial downturn.

I first visited TD Bank, partly because they have a branch in the same building as Reason’s DC office, partly because I have an account history with them, and partly because they are one of the healthier banks right now, having just bought Commerce Bank and some small others. I applied for a small, $2,500 unsecured personal loan. After much deliberation (it took about two weeks to get a final decision), I was denied.

At this point I’ll interject into the story that I have basically perfect credit, a strong history of repaying loans, and little debt. I am, in the words of the local TD Banker, a prime candidate for the kind of loan I was applying for. But the regional office said no. The local branch officer did inform me that I could probably go to Citibank and get the loan because “they have much looser standards.”

To Citibank’s credit—though limited because those loose standards got them into the mess they are in now—you have to have an account with them for two months. So I skipped applying there and went to the next bank closest to my home, BB&T.

I walked into BB&T at 4:30pm, introduced myself, and 30 minutes later was approved for up to $7,000 in unsecured lending. Same credit score. Same personal financial history.

So what was different? Well, in case you didn’t know already, TD Bank is Canadian. BB&T is based in Atlanta.

This is not necessarily to say that BB&T has poor standards. After all, I am not a subprime borrower (and in fact their Chairman John Allison has been one of the best voices in critiquing bailouts in the financial sector). But the systems in place and constrasts in processing between the two banks are telling. There is a reason why Canada’s banks are doing better, as McArdle points out. Of course there is a reason that American banks like BB&T thrived too—more efficient systems, less centralized decision making, and an eye for getting good customers like me into their branches. More wealth is created that way, though it comes with risks.