The Case for Constructive Ambiguity in a Regulated System: Canadian Banks and the ‘Too Big To Fail’ Problem

Ellen Russell

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: This brief focuses on the purported Canadian virtues of risk aversion and regulatory caution in light of one important characteristic of the banking system: it is dominated by only five large banks that are “too big to fail.” I address the issue using a concept – ambiguity – which is often mentioned but relatively neglected analytically in the scholarly literature on bank regulation. I argue that the capacity of the Canadian banking system to successfully navigate the “too big to fail” problem presents an instance in which this form of ambiguity may contribute to helpful dynamics in the regulatory landscape, in that it can attenuate the moral hazard dilemma posed by banks that are “too big to fail.” I discuss the ways in which the refusal to permit mergers among the large Canadian banks in the late 1990s shaped the constructive ambiguity animating the relationships among the banks, the Bank of Canada, and bank regulators. I will argue that this policy decision both enhanced the credibility of the government’s constructive ambiguity and attenuated the moral hazard implications of banks that are “too big to fail” in Canada. I conclude with a discussion of the implications of this analysis for regulatory initiatives going forward.

JEL-codes: G28 L5 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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