Canadian Banks and the need for change

There are very few things that Mr. Layton (NDP - Moustache Ride) and I agree on- his most recent assault on Canada's banks are one.

First things first- Interac fees are ridiculous. I think we should amend section 8 of the Currency Act to ensure that individuals who elect to not use hard currency are not discouraged from using a secure procedure for the transfer of capital. The banks (not Interac) nail the stores with a fee, who in turn pass that cost along to customer with a mark-up. They shouldn't be allowed to. They call it "infrastructure" when it really just cuts down on the number of people they need to count money. Stores can elect to not offer the service if they so choose.

I have believed for a long time that the institutions granted their charter under the Bank Act have had far too much coddling from the Federal Government. They have a legislated oligopoly and have made hundreds of billions of dollars since their initial charters were granted. They were granted those charters under a series of conditions, including "acting in the public interest." I believe that they have been failing in this area for as long as I have had my own bank account.

On the one hand, they whine that they need to be bigger to compete internationally. On the other hand, they complain that the cost of setting up their infrastructure for electronic banking is prohibitively expensive. On yet a third hand, they want to be able to sell insurance out of their branches, thus ensuring that they need to add another level of very costly infrastructure.

Why don't we let them print money- it would be easier and faster? Except, we already do. As very few people in Canada know, chartered financial institutions are allowed to lend out more than their holdings. Yes, you heard me correctly. Mel Hurtig has been lamenting this for years and he is right.

I concede that the financial services sector is one of, if not the most, regulated sectors of the economy. I will also concede that the costs associated with physical branches are going up. I will also concede that the banks make a billion dollars a year in profits. That is AFTER their re-investment of capital into their own infrastructure - the cost of which is what they use to justify the service fees they charge you. The cost of which is an ASSET for them.

The banking business model is supposed to be predicated on providing a secure and reliable third party mechanism for holding capital and secured lending that is trusted by the public. They are allowed to lend beyond their holdings because your average mortgage is going to collect 2.5 times its average value over its life.

Banks are supposed to make money on the capital that they lend - on favourable terms for secured property (mortgages) and on risk based terms for less secure investments (start up capital, seed money). The thing is - the greater their holdings, the more money they can lend out. So, they should want you to keep your money in their institutions, right?

And yet, they try to nickel and dime you at every chance they get. A service fee here, a monthly fee there - if I was to make a physical deposit at my branch, it would cost me $1.50. I am too smart for that, so I make sure that I don't get dinged with service fees. Unfortunately, the people who get nailed the most are the poor (not maintaining a minimum balance) and the elderly (who like to go into the branch and talk to a real person).

So, what would I do? Well, if I was Finance Minister, I would write a letter to the Presidents of the major banks and say "You have two years to stop gouging customers. If you don't, I will act to make sure that you do." There are three perfectly plausible threats that I could lord over the heads of the banks:

1) I would grant more charters, and let people who want in on the greatest racket in the world to become banks and benefit from the massive federal government protection that the current banks have; or

2) I would allow foreign competition; or (and I love this one)

3) I would threaten the creation of the "Bank of Canada." A bank that would ensure every citizen in Canada could have an no cost account. An account against which no other financial institution could levy a service fee under threat of sanction. This bank would have no service fees, monthly fees, or interac fees and it would be allowed to lend out its holdings under the same terms as any other bank to a) Canadian citizens and b) any corporation defined by the Income Tax Act as a "Canadian-controlled private corporation." The key difference between this bank and the others is a) there is no limit on its holdings and b) it wouldn't be designed to make money - it would be designed to break even.

Otherwise, all the same rules for secured lending would apply. Except consumers would have a new option to consider. PetroCanada made shitloads of money.

Very. Tough. To. Compete. With.

Ultimately, my conclusion is this - You are already a heavily regulated industry and yet the public confidence in you in very low. You make record profits for the people who can actually afford your shares but you don't provide a public service in the true sense of the word "public." You have had the chance to provide this service, with the protection of the government, for 100 years and over time your business model has changed. It is now geared at cost recovery for services rather than understanding that your expenses are not to be passed onto the ordinary consumer. They are to be passed onto the lendees - the people who want to borrow your money and can accept the terms you have for lending it.

Those services represent the COST for being allowed to lend money securely under the protections afforded under the Bank Act. That is not a COST you can pass on to ordinary Canadians. It is the "public" part of the service your charters contemplate.

Will this drive up interest rates? Maybe, but that will be a short term problem because:

a) The banks are still supposed to be competing with each other and they are still pegged to the national rate;

b) The banks want to lend out as much as possible to maintain profitability;

c) The ordinary consumer will have access to an institution that can lend them the money. As a result, only large corporations and risky investments would have to turn to the banks unless the banks could compete with the new federal bank; and

d) The people who need the money the most can use other government programs to absorb and account for the additional interest payments. For example, the ability to write off interest that is incurred to run a business.

If you think I am a socialist, don't worry- I am not. Next week I will discuss how Corporations shouldn't pay any taxes at all. None.