MARCH 3, 1983
Canadian Banks—Myth and Reality
AN ADDRESS BY Walter Stewart, JOURNALIST, EDITOR, AND AUTHOR
CHAIRMAN The First Vice-President, The Empire Club of Canada, Douglas L. Derry, F.C.A.
Distinguished members and guests, ladies and gentlemen: Banks and banking are subjects which always generate great interest among Canadians. Some might feel that this is because of the size of banks and their influence upon our entire economy. Others maintain that it is because of the all-pervasive influence of banks upon each of our lives.
In the last several years, banks have received particular attention in the press due first to the protracted debate leading to the revision of the Bank Act in 1980, then due to concern a year ago over the profitability of banks, which some considered to be excessive; ironically, more recently it has been over their solvency as the economy plummeted and provisions for loan losses soared.
The concern over the possible excess profits of banks led to a review by the House of Commons Standing Committee on Finance, Trade, and Economic Affairs. In its report last July, it was stated as follows:
On the whole, Canadian banks have proven to be efficient instruments through which the savings of Canadians are channelled into productive investments. Their large-scale branch network has given developing regions of the country adequate access to financial resources from other regions where surplus funds have accumulated. Such an efficient financial market is essential for recovery from the recent recession and for continued economic growth.
However, Canadians have always had differing views with respect to banks. For instance, some years ago in describing his financial career, Stephen Leacock wrote as follows:
When I go into a bank I get rattled. The clerks rattle me: the wickets rattle me: everything rattles me. The moment I cross the threshold of the bank and attempt to transact business there, I become an irresponsible idiot.
Today's speaker also has strong views on banks. In his recent book, Towers of Gold, Feet of Clay: The Canadian Banks, Mr. Stewart looks critically at Canada's banks, noting their collective influence and overpowering financial clout; also, what he believes to be their apparent support for free enterprise, while at the same time devoting vast amounts of time and effort to protecting themselves from foreign banks and other domestic financial institutions such as trust companies.
Mr. Stewart is an experienced journalist, editor, and author with wide-ranging interests.
As an editor, the positions he has held over the years have included those of feature editor of The Toronto Telegram; Ottawa correspondent and feature editor for The Toronto Star; Washington correspondent and managing editor, Maclean's magazine; and Ottawa correspondent for FP News Services.
As a journalist, Mr. Stewart has contributed articles to magazines in Canada and abroad including Saturday Night, Quest, Toronto Life, Atlantic Insight, Reader's Digest, Penthouse magazine, The New York Times, The Baltimore Sun, and The Washington Post.
He is the author of a number of best sellers, including Shrug: Trudeau in Power, Hard to Swallow, and Paper Juggernaut. His most recent book, as mentioned a moment ago, is Towers of Gold, Feet of Clay: The Canadian Banks.
As is evident from all of this, we have speaking to us today a writer of very broad experience who has undertaken to address a subject of widespread interest. I am pleased to welcome Walter Stewart to address us on the subject, "Canadian Banks--Myth and Reality."
Mr. Chairman, ladies and gentlemen: For the first time in decades, serious Canadians are seriously asking themselves, "Are our banks safe?"
The answer appears to be that, yes, they are. As safe as anything else, anyway. Safer than the trust companies, safer than most manufacturing concerns, and, compared to farm implement manufacturers, they are Fort Knox itself.
But they are no longer fail-safe. A year ago, no question of their stability could even have been raised. It was something we could take for granted, like Niagara Falls, wheat rust, and a Liberal government in Ottawa, things which, for good and ill, are always with us.
That is no longer the case. It holds true for the Falls, the wheat rust, and, alas, the Liberals, but not for the banks. It could happen--it is not likely, but it could happen--that a run will start on the American banks because of their exposure in so many foreign lands whose credit is down among the wines and spirits. Someone is bound to notice, in the event of such a run, that our banks have been sharing the shower with the Americans. Indeed, our banks are up to their Plimsoll lines in foreign syndicates held up by not much more than hope and hot air.
Poland is bankrupt, has been for years. The Poles can't pay their debts, can't even pay the interest on them, and our banks, which have a substantial stake in Poland, propose to meet the problem by wishing and waiting. It's called "rescheduling." I spoke to my own bank manager, and asked for a loan on the same basis as the Poles, namely that I wouldn't pay anything for four years, and then I would get $500 million to tide me over 1983. All I got was a wintry smile.
But someday soon, the banks of the world, including our own, are going to have to face up to the fact that at least $400 billion that shows up on their books as assets has gone west. They are going to have to begin telling us how much is involved--$400 billion is just a conservative guess--and where it went. Someday, a creditor who is unable to collect from a bank caught short overseas is going to sue it into insolvency, and when that happens, all hell may break loose. In 1974, when a small West German bank went bust, it brought down an American bank, and very nearly started a major run. If such a run were to start today, no one knows if the international system could survive. They are all tied together, and our banks, whose foreign exposure now amounts to more than $150 billion, could be blown away with the rest.
Unlikely though such an event may seem today, it is the ghost that has put a shiver into the International Monetary Fund, causing all the shoals of economists and consultants to foregather in expensive hotels to ask each other the crucial question: What The Hell Do We Do Now? And to provide the stock banking answer: Fake it. Pass a resolution. Maybe the economy will right itself.
The possibility of a banking collapse should make us examine our own banks in a more critical way than we have in the past. By and large, the Canadian banking system has been a successful one. But it has never been nearly the perfect thing the Canadian Bankers' Association would have us believe. We--with the help of the CBA--have managed to surround our banks with a friendly mythology, which should now be compared with reality.
The first myth is: Honesty, Thy Name Is Banker.
Because banking history in this country has been written mainly by bankers, we have been led to believe that they are as dull as dishwater and as honest as the day is long. The two go together in the Canadian mind.
In fact, Canadian banking history has been marked by a fair degree of skulduggery.
Our first banker was Enos Collins, who started out as a privateer during the War of 1812. When he got too old to buckle a swash, he turned instead to bankrolling other privateers. There are some who contend that not much has changed in banking from that day to this.
Collins became the founder of the Halifax Banking Company, and appears in our history books as a man of probity and character.
George Stephen was another worthy Canadian banker, an early president of the Bank of Montreal. He took $8 million out of the bank, without the knowledge or consent of the board, to invest in the St. Paul and Minneapolis Railway, which he managed to get at a knockdown price by having a fraudulent report prepared for the shareholders. It showed the railway line to be in grave difficulty. The man who produced this ersatz report then sued--he wanted a bigger share of the loot. The first court to hear the case threw it out, because, the judge said, it was not the court's job to decide "how plunder should be divided among different members of a gang."
Stephen became Lord Mount Stephen, and died a rich and honourable man.
But my favourite Canadian banker was William Zimmerman, owner and floater of the Zimmerman Bank, which produced some of the classiest worthless bank notes this nation ever saw. Zimmerman used his bank in his other line of work, which was railway contracting, and systematically sheared his shareholders, the general public, the towns through which his railways ran, and the gullible, wherever he found them. His last railway line, built with money raised through his bank, ran across the Desjardin Canal near Hamilton. Zimmerman contracted to build the trestle of oak, but built it of pine instead,
and pocketed the savings. The first time a train went over the trestle, it collapsed, taking sixty passengers to their deaths, among them, William Zimmerman. There was an investigation, and the board of directors, after a lot of humming and hawing, said they could not explain why the trestle fell down; they said it was probably an act of God. Probably was, too. Zimmerman, needless to say, comes across in our history books as a man of sterling worth.
Gustavus Myers, the radical American economist, once explained the difference between American bankers and our own. In the United States, wrote Myers, the bankers bribed the legislatures to give them licences to print money. But in Canada, the legislators and the bankers were usually one and the same, "thus rendering bribery superfluous." Many of our early banks were looted into insolvency; the bankers disappeared over the horizon, with their back pockets bulging, and those of the depositors, flat.
I do not intend to imply that Canadian bankers are greater scoundrels than, say, Canadian journalists. But they are not lily-white, never have been. In our own day, the Unity Bank of Canada flowered and withered in the early 1970s under the direction of one Richard Higgins, a man who was a) very charming, b) very smart, and c) very crooked. He eventually wound up in jail, and almost nothing about what really happened ever appeared in Canadian newspapers.
We cling to our myths, come what may.
The second myth is: Canadian Banks Are As Safe As, Well, Banks.
The Canadian Bankers' Association likes to boast that the last bank to go belly up in this country was the Home Bank, in 1923. True. However, until 1923, Canadian banks were a good deal more unstable than those of the United States, which have a deserved reputation for shakiness. Economic historian Tom Naylor has calculated that between 1867 and 1914, losses to shareholders in Canadian banks ran at three-and-one-half times the American rate, and concludes, "The record of stability of the Canadian banking system is alarming, and the myth of stability sheer propaganda."
Canadian banks were shaky right until the time the system came to be dominated by a handful of firms, which brings us to the third myth: Canadian Banks Are Competitive.
Well, they are, in a way. They compete in the entertainment stars they hire to push their products, in branch locations, and there are even a few banks where the pens work. But for the most part, in the words of economist John Chant, "Competition is something that has never been tried in Canadian banking."
The banks do not compete where it counts most--in pricing. To an overwhelming extent, they buy money at the same rate, and sell it at the same rate. Always have and, if they can help it, always will. The prime rate, of which the banks are so proud, is merely the outward and visible sign of their sameness. They mount a "common front" that should make Quebec unions green with envy.
Banking in this country is dominated by the "big five"--the Royal, the Commerce, the Bank of Montreal, The Bank of Nova Scotia, and the Toronto Dominion. Among them, these five hold more than 90 per cent of all the assets in banking. The Toronto Dominion, the smallest of the "big five," holds oneand-a-half times more assets than the sixty other banks in the system rolled into one. This is a classic oligopoly, and it behaves the way you would expect an oligopoly to behave, which is to say that, while shouting the praises of competition from the rooftops, it avoids the unpleasantness of competing on every possible occasion.
The fourth myth is: Canadian Banks Are Over-Regulated.
If you swallow this one, you should have no trouble with the one abut the guy with flying reindeer and a toy shop up north. The Inspector General of Banks, our watchdog, is paid, indirectly, by the banks. The costs of his office are toted up each year, and the bill divided among the banks, according to size. This arrangement reflects the strength of banking mythology. Would we allow restaurant inspectors to be paid by the restaurants? No way. But for the banks, it's okay.
Canadian banks examine themselves. In the United Kingdom, the dear old B of E looks after this chore. In the United States, bank examiners descend on the banks, lock the doors, check the drawers, and verify the paper behind every loan. Not in Canada. Here, the staff of Inspector General William Kennett consists of twenty-one people--not enough to count the doorknobs on the banks, much less inspect them. So the banks inspect themselves, and send along a note that says, "Looks okay to us, Bill," and he has someone go over the paperwork. Then, when $10 million disappears out of the old cash drawer--as happened in Toronto not too long ago--there isn't much the Inspector General can say but, "Isn't that the darnedest thing?" It is, too.
Canadians who want to complain about their treatment at the hands of a bank are invited to take their case to the Inspector General, who will deal with the problem in one of two ways. If it is a minor matter--mere insolence of office, or the loss of a few hundred dollars--he turns it over to the bank complained of. This is, he says, "to ensure a fair hearing by the bank."
But if the matter is really serious, he does nothing at all. He thinks it should be dealt with by the courts. That's a comfort. Myth number five is: The Bank Is On Your Side.
One of the "big five" banks has a motto that says, "When you succeed, we succeed," but the real truth is found in the quote of a vice-president of the Royal Bank who said, "When we bleed, you bleed."
One case I came across involved a blind, elderly widow in Ottawa, who had many thousands of dollars on deposit in a local bank, drawing no interest whatsoever. When a neighbour found out about this, he berated the bank manager for not switching her money over to an interest-bearing account. The bank manager replied that it wasn't his job to tell customers how to place their money. I mentioned this case on an Ottawa open-line show, and promptly got a phone call from an Ottawa banker. I thought I was going to get a hot denial. Nope. He wanted to know what was wrong. If you can't fleece elderly, blind widows, he seemed to be saying, whom can you fleece?
Well, I don't expect banks to operate as social institutions. But, that being the case, I don't think they should get away with the notion that they are somehow different, loftier, worthier than other businesses. They are not.
Myth number six is: Canadian Banks Are Prudent.
They are prudent enough when you want to borrow $5,000 to consolidate your debts. Your friendly banker will raise his eyebrows, draw in his breath, and tap his fingers on the desktop until you crawl out of his office. But Massey-Ferguson got into the ribs of the banks with a set of figures which--if an ordinary businessman had brought them forward--would have put the loans officer into hospital with hysterics.
We have already seen how, in recent years, Canadian banks have taken to playing inflation roulette overseas, counting on an ever-expanding economy to support loans to nations whose collective credit isn't worth a bucket of warm spit. They have abandoned their own rules of prudent banking practice in the scramble for new business, and we don't even know to what extent we are involved--for, make no mistake, if these debts go sour in the can, we are all involved.
So we are back where we began, wondering about the safety of Canadian banks. It is a subject worthy of our wonder.
The Canadian banking system has a number of built-in advantages for all of us. One is the relative size of our banks--the very factor that produced the oligopoly of which I complain. Our banks are world-striders. Any list of the top sixty-five banks in the world will include the Canadian "big five," and we do not have many industries in such high esteem abroad.
Again, the other side of their rapid expansion in world markets has been to provide a strong arm for Canadian businesses abroad, and to earn foreign exchange for this nation.
Finally, the branch-banking system we enjoy brings some advantages we may not appreciate, because we are so used to them. In the United States, which has a much more competitive system, banks are confined within state boundaries; in many states, each branch is a separate company. As a result, service is often erratic; most businesses find it much easier to work under a system where the same rules apply from one end of the country to the other. Once again, the drawback--a lack of competition--has a partially compensating advantage, which is uniformity of service and ease of access to our banks.
My complaint about the Canadian banking system is not that it is a bad one, but that it is not nearly as good as it thinks it is. We need more action and less arrogance. Our bankers have become so dazzled by their own myths that they cannot see their own shortcomings. It is only now beginning to dawn on them--and on us--that they may be on the brink of a calamity that could bring the entire international monetary system crashing down around our ears.
The fact that this could happen should remind us that we are better served by our major institutions if we see them as they are, and not as they would like us to believe they are.
The appreciation of the audience was expressed by Ronald Goodall, C.A., Treasurer of The Empire Club of Canada