Archives of Ontario

By Joe Martin and Phyllis Scully

Moral hazard is embedded in both the American and Canadian financial systems . Yet the timing and implementation was very different . Within interventionist economies , moral hazard exists as financial institutions share the burden of risk beyond their organization . Moral hazard suggests that actors will behave recklessly

Casa Loma — a castle built in Toronto from 1911 to 1914 — was the residence of financier Sir Henry Pellatt . Pellatt went broke after the Home Bank failure of 1923 when there was a call for deposit insurance . This was the last bank failure in Canada until 1983 . if they are aware they will not be left entirely responsible for facing the consequences of their actions . The existence of deposit insurance , a “ lender of last resort ” and government intervention in the wake of a crisis suggest the presence of moral hazard at the core of a financial system .

Moral hazard can be limited through the acknowledgment of its existence in which institutions are rigorously supervised with little room for risk or innovation . It too can be limited through an entirely free market in which there is no government intervention . In this case , there could be no moral hazard as the government ’ s role would not include the bailing out of failing institutions .

Canada embedded Hamiltonian principles into its financial system from the beginning . The United States did not share the same dedication to limiting moral hazard and , instead , allowed for periods of deregulation and financial innovation which have been both fruitful and seeded with risk and instability . The American financial system is “ fragile by design ,” as Columbia University Professor Charles Calomiris has written . The First and Second Banks of the United States were both dissolved after facing political scrutiny , which left the United States with a decentralized banking system for much of the 19th century . Canada , on the other hand , recognized the need for central control

16 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org