Historicist: "The city that nobody loves"
Elsewhere in the Ist-a-Verse
People work hard for their money, but they don't make their money work hard for them. It's time to fix that. Economist whips your income into shape with smart, practical advice.
E.F. Schumacher got it right: small is beautiful. While this past year has been full of global bank failures and financial bailouts, Canada's once relatively-small Big Five banks have remained financially sound—so much so that we here at Economist are surprised by the number of people who aren't aware of their superlative standing in the world today.
Just recently, our banks caught the attention of some venerable blogs and news publications. In an article last month, Newsweek's Fareed Zakaria wondered, "So what accounts for the genius of the Canadians?" His answer: "Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers." Our banks abstained from the quick profits (and long-term risks) associated with complex derivatives that bet on the safety of sub-prime mortgages lent to financially unstable borrowers; instead, they kept their focus on stable retail banking operations that service ordinary Canadians. This isn't to say that our banks didn't experiment with the lucrative products—they just never bought in as substantially as their competitors.
Canadian banks also remained small relative to their peers when most global banks expanded. Why? Because they weren’t permitted to merge. That decision was censured by those to the right of the political centre over the past fifteen years, but it’s now lauded. While global financials bought other firms and used lax regulations to undertake risks that totalled more than the value of their entire company (i.e. AIG), Canada’s Big Five remained the Big Five. Now that the massive international banks have gotten hit by the recession and have witnessed their market values plummet, both Royal Bank and Toronto Dominion have crept into the top ten of North American banks based on size, with very little effort to boot.
So how does any of this help you? For starters, know that your money is safe. Not only are our banks at a very, very low risk of going under, up to one hundred thousand dollars of your money in a single bank account is insured by the Canada Deposit Insurance Corporation (the federal government). Yesterday's announcement of another 0.5% cut to the Bank of Canada's key lending rate will also decrease the interest rate on small loans and mortgages. The Big Five can now borrow from the Bank of Canada (a common activity) at a lower interest rate and all five of them have all agreed to pass this saving on to their clients instead of hoarding it to benefit their financial standing. (Theoertically, nothing prevents the banks from colluding and saving the difference between their old and new borrowing rates.) On a bigger scale, Canada is now recognized globally for something other than maple syrup and “eh!”
Of course, none of this means that there are no risks to Canada’s banking system. Forty-year mortgages (specifically, their minimal down payments and extra years of interest) are just one example of the potential threats that have crept inside our borders. What are we, England? Personal bankruptcy rates in Canada have also been rising at an increasing rate and calls to Credit Canada, a credit counsellor, were up thirty-five percent in January. But even with these worries, we’re much better off than every other country in the world, and we should be proud of it. Even Obama thinks so.
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From the IHT article, last line: My suspicion is that the Canadian banks deeply desire to behave as badly or stupidly as the British or American banks but government wouldn't let him," Bothwell said.
I suspect he's right.
I just read that and I was just going to say the same thing. I feel you and I are really synchronizing, Rek.
Maybe soon we shall menstruate together.
I truly hope that never happens.
Yep. Thanks Paul Martin!
Makes me feel good to be a Canadian, and to say, 'I.AM. CANADIAN!'
This is yet another horrible article that completely fails on a factual basis. Canadian banks were tightly coupled to various CDO markets and having someone in The Star celebrate a decision by Paul Martin doesn't count as "lauded", especially as a counterpoint to the criticism that has been leveled at the blocking of mergers. It seems like you don't even understand why people disliked that decision or what they wanted to happen.
"Our banks abstained from the quick profits (and long-term risks) associated with complex derivatives that bet on the safety of sub-prime mortgages lent to financially unstable borrowers; instead, they kept their focus on stable retail banking operations that service ordinary Canadians." No, No, a thousand times NO! Just Google CIBC & CDO, and you'll find a number of articles highlighting the problem that the bank had in that market, including a $2B exposure to sub-prime CDOs in 07. Google TD & MBS and you'll find analysis from 07 of the heavy exposure of its US unit and US acquisitions to the mortgage backed security market.
Canadian banks are fully integrated financial supermarkets. They have had minimal success in penetrating US Investment Banking markets, and suffered regulatory reverses with some of those efforts (primarily CIBC and its involvement with Enron). RBC, BMO, and TD have focused their US expansions on consolidating regional banks (SunTrust, Harris, and BankNorth being the primary respective brands) as a fall back, rather than a primary strategy (RBC Dain Rauscher, now RBC Wealth Management, being an example of this failure).
The big 5's success is mostly due to the conservatism of Canadian Banks. High ratio mortgages haven't been popular in Canada irrespective of the regulatory environment, never mind the Ninja loans that were so common in the US. Attempts to become continental players failed because the investments required were far too big for the size of bank that we had, which was the driver behind the mergers. With the parlous state of all of their global competitors, expect to see Canadian banks being very acquisitive and expansion focused in the short to medium term.
As to the "lauding" of Martin's decision - it's just yet another Leftist article in The Star. It doesn't represent a change in position by anyone. Those of us who supported mergers saw them as a precursor to opening our markets to foreign competition. We wanted to break-up the cozy oligopoly, but knew that we'd to let the banks get big enough to fight for a spot on the global table. The Left opposed it because they always hate bankers. Those firms that were left out opposed it out of self-interest, while the insurers wanted to extract guarantees that they'd be able to cross compete.
If Torontoist is going to try writing about business, could you find someone who actually knows what the hell they are talking about? None of this is all that hard, it just takes a few minutes of Googling (and remembering that The Star is not a serious source when it comes to finance). The city is rather filled with people who can explain what is happening and who are more than familiar with all of the machinations around bank mergers, regulation, and the global downturn. It's just not a subject where the usual hipster arts-grad NDP supporter has any ability to contribute beyond "grr banks bad, conservatives bad, hippies good".
RealityCheck: I've worked in investment banking, securitization, and fixed-income origination and sales, so I'm probably the furthest thing from a "hipster arts-grad NDP supporter [that] has any ability to contribute beyond 'grr banks bad, conservatives bad, hippies good.'" You attack my knowledge because I mentioned that our banks abstained from complex derivatives, but if you look again, you'll see the last line of that paragraph says "This isn't to say that our banks didn't experiment with the lucrative products—they just never bought in as substantially as their competitors." CIBC's $2 billion CDO exposure you cited was petty compared to the disaster at Lehman or AIG etc (which regulators are having trouble even valuing), especially given CIBC's market cap at the time. And the key thing about Canadian banks is that most were able to shut down or severely minimize their securitization and structured product operations, take the hit, and walk away. DS, for example, has essentially removed itself from any new securitization, preferring to simply monitor what it bought into its conduits--and the bank's still making money.
You're also extremely focused on the link to the Star, which is blinding you; remove that link and what I say still stands. My entire premise is that by not merging, our banks were unable to get into the race to the bottom that created such a mess for other financials. I agree with you that our banks are more conservative but your argument for merging (i.e. "to let the banks get big enough to fight for a spot on the global table") completely corroborates my entire 'thesis' without you even seeing it: not merging is actually what allowed the banks to achieve global clout.
Hey, you can both be right! The point is moot since we'll never know whether a Canadian superbank would have piled into subprime and derivatives crap with the enthusiasm of some of their counterparts and ended up in the same dumpster. Maybe they would have maintained our Canadian tradition of conservatism and good governance, and not been overcome by greed and stupidity. Maybe.
In any case, while it's cool to have 2 banks in the top ten in NA, it's kind of like winning because the other team got in a bus crash on the way to the game.
Pro-merger is inherently anti-competition and anti-consumer's choice.