COVID-19 has forced everyone to adapt to the new normal. People are stuck at home, the businesses they used to frequent are having to embrace e-commerce and Canada’s big banks — which are more of the strong, silent, oligopoly-type — are being forced into a starring role in the federal government’s response to the coronavirus recession.
It is a change of pace for the big banks, which are used to conducting business with Ottawa offstage. Pre-crisis, the government and regulators tended to be respectful towards the biggest financial institutions, taking care not to move too quickly for fear of upsetting the renowned stability of Canada’s financial system. The banks rewarded this show of respect with handsome returns for shareholders, decent service and, perhaps most importantly, didn’t take wild risks that put the economy at stake.
Now, though, the political spotlight is on the Big Six. People and businesses need immediate help and politicians have made it clear that they expect financial institutions to deliver, even as they try to grind out earnings amid shrinking margins and the possibility of rising loan-loss reserves. Taken together, it is a fertile environment for populist backlash against Canada’s big banks, which is something they have spent decades avoiding.
At the House of Commons’ finance committee on April 16, Peter Julian, a New Democratic member of Parliament, presented Finance Minister Bill Morneau with a list of complaints about how banks were treating their clients during the crisis.
Morneau initially offered a defence, pointing out the banks have been responsive to many of the government’s requests, including a nudge to lower interest rates on credit cards. But the finance minister ended his reply with a remark that must have caused some uneasiness on Bay Street. “I’m not saying that we shouldn’t continue to put their feet to the fire, we will.”
His words could be bluster, of course, or just an attitude that only lasts as long as the current crisis does. After all, Morneau, a former corporate executive and a millionaire many times over, is unlikely to be mistaken for a fire-breathing, bank-bashing, one-per-cent-slamming kind of politician anytime soon.
Canadian Imperial Bank of Commerce chief executive Victor Dodig is also confident Canada isn’t on the verge of populist revolt.
“Banks are publicly owned, banks are highly regulated entities, banks play a role in the economy,” he said in a recent interview. “And I don’t anticipate nor do I think it would be a good thing for populism to enter into the equation.”
Still, taken at face value, the political discourse suggests the big banks have been put in a position where a lot of people could get mad at them, including some of the folks who write the laws.
Wall Street was punished for its role in starting the Great Recession with a barrage of new regulations that constrained its room to manoeuvre. But, unlike their American cousins, Canada’s biggest banks avoided a political backlash after the global financial crisis, which they weathered better than many of their international peers.
But there is still a lot riding on Canada’s banks getting their response to the coronavirus crisis right; too many missteps and “political risk” could move up their lists of threats to future profits.
The current crisis will have “lasting implications” for the economy, taxation, consumer behaviour and the way people work, said Patricia Meredith, a former banking executive and co-author of Stumbling Giants: Transforming Canada’s Banks for the Information Age, a Donner Prize-winning public policy book.
“All of which is going to end up flowing through into the banks,” she added. “And the banks’ response has to be very long-sighted, as opposed to shortsighted, otherwise they’re not going to be well-positioned coming out of this.”
There has always been some level of hostility towards banks because part of the business is saying no to consumers or companies who want things, such as a loan or bigger line of credit, said James Darroch, a professor at York University’s Schulich School of Business in Toronto and Meredith’s co-author on Stumbling Giants.
In the current crisis, some customers have expressed frustration about getting banks to defer loan payments and dealing with long waits, or they’re irked that such deferrals could ultimately cost them more in interest.
But banks can’t give their retail clients everything they might want, Darroch said, because they are a “two-sided business.”
Lenders have an obligation to both their depositors and shareholders, and bank dividends are sacred to Canadian investors, particularly seniors who rely on them for income. In other words, there are limits to the banks’ flexibility.
A move by lenders to cut dividends would set off alarm bells since the payments have continued in previous crises. It’s part of the brand: Bank of Montreal, for example, boasts “the longest running dividend payout record of any company in Canada,” a 191-year streak.
“I think it’s inevitable there will be some ill will,” Darroch said. “The question is how much and how much traction it gets.”
The ill will generated in previous crises was relatively mild in Canada compared to other countries. This could be a side-effect of what a 2011 paper by the National Bureau of Economic Research (NBER), a Massachusetts-based think-tank, called a “grand bargain,” a trade-off of competition for regulation and stability.
It’s a bargain that has been very profitable for the Big Six banks, whose combined net income increased to approximately $46 billion last year from about $29.6 billion in 2012.
It’s also been pretty fortuitous for the government. Canada’s big banks have been allowed to expand their operations into mortgage lending and investment dealing, but there are only a handful of them and they are under federal oversight. This level of control and stability stands out in comparison to that of the more fragmented and political banking system of the U.S., which has gone through far more financial crises than Canada.
“Financial populism never had the traction in Canada that prevailed in the U.S.,” wrote the authors of the NBER report, Michael Bordo, Angela Redish and Hugh Rockoff.
The coronavirus crisis, though, has shown the Canadian federal government can call out the banks publicly if it so chooses, and that banks will respond to its requests.
On March 13, before the data really began to show the economic devastation the virus is causing, the federal government said lenders had “made a commitment” to Ottawa to support businesses and consumers during tough times.
Since then, lenders have lowered credit-card interest costs and allowed customers to defer mortgage payments, albeit at the borrower’s risk of having to pay more interest later. Banks are also key to the federal government’s $25-billion Canada Emergency Business Account program, which provides interest-free loans of up to $40,000 to small businesses.
There has been pressure on the banks to do more, and Prime Minister Justin Trudeau on April 7 suggested they could do better. The next day, Royal Bank of Canada’s chief executive, Dave McKay, said there are other support programs being worked on that haven’t been announced yet.
Typically, though, the relationship between Ottawa and the banks is much more agreeable, such as the government’s response to reports of aggressive retail sales practices that prompted regulators to take a closer look a few years ago.
The ultimate findings from the Financial Consumer Agency of Canada in March 2018 were that banks had “insufficient” controls in place to reduce the risk of making misleading or unneeded sales, but that there were no “widespread” issues.
In the wake of the report, the government moved to adjust consumer protections at a gradual pace. Legislation to hike fines on banks that break consumer-protection rules to $10 million from $500,000 passed in December 2018, but still isn’t in force yet.
But the political conditions created by the coronavirus crisis could create opportunities for some of Bay Street’s more traditional critics.
For example, the New Democratic Party, which has some influence over the minority Liberal government, has argued that banks should be pushed to waive all credit-card interest fees and charges, not just reduce them.
Democracy Watch, a non-profit citizen group, wants lasting changes, including a requirement to break down and disclose account and loan approval rates by neighbourhood and type of borrower. The group has also launched an online petition to “make Canada’s Big Banks help during (the) coronavirus crisis, and after,” which has garnered more than 40,000 signatures in two weeks.
“The government has done the bare minimum and is congratulating itself in promoting and boasting that the banks have done a lot when they’ve done very little,” said Duff Conacher, co-founder of Democracy Watch.
But there is a big difference between an online petition and the sort of anti-bank sentiment that exists in the U.S., where well-known critics such as Elizabeth Warren and Bernie Sanders were viewed as viable presidential candidates until recently.
Still, now that Trudeau and Co. have opened the door for the government to jawbone the banks, what’s to stop it, or someone else, from doing it again? Would people complain if the government of the day decided all mortgages and credit-card borrowing should be cheaper, and publicly demanded the banks make it so?
The size and scale and unprecedented nature of the coronavirus crisis wasn’t caused by the banks or any other company, but it has led to more intervention from the government and more pressure on the banks to deliver relief to consumers.
Even so, governments have also been “very careful not to overstep their bounds as democratic institutions” when it comes to dealing with the private sector, said Brigitte Goulard, co-head of the consumer-protection practice at law firm Torys LLP and former deputy commissioner of the Financial Consumer Agency of Canada.
The banks have not given the government a reason so far to violate those boundaries either, and Ottawa is making sure private lenders have access to lots of cash.
As one example, the federal government is buying up to $150 billion in insured mortgages through the Canada Mortgage and Housing Corp., providing funding to lenders that they can use to keep on lending.
“Governments and society need banks to keep operating,” Bharat Masrani, chief executive of Toronto-Dominion Bank, said at the lender’s shareholder meeting on April 2.
Yet the government’s intervention, partnership and support all put the onus on the banks to deliver. It also gives the politicians someone to share the blame with (or to scapegoat) if things go sideways.
The banks have expressed confidence that they can rise to the challenges posed by the coronavirus crisis, but there is uncertainty around how long the crisis and those challenges will continue.
More than 670,000 Canadians have already deferred or skipped a mortgage payment, which are debts that will still need to be paid back at some point, and there is no guarantee life as usual will resume when the deferral period ends.
“A lot has come at the banking industry in a very short period of time, and in addition to trying to get some of these programs out and launched, which needed to happen, there is an eye to a medium-term and longer-term view as well,” Neil Parmenter, chief executive of the Canadian Bankers Association, said during an April 9 meeting of the finance committee.
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CIBC’s Dodig also said he expects the government will respect the banks’ independence once the crisis passes.
The relationship with regulators, the Bank of Canada and the federal government has been “well-defined” for more than a century, he said. “I think one of the hallmarks of the Canadian financial system is that regulation has never been populist in orientation.”
When other systems around the world have run into trouble, Dodig added, “lots of times it’s been due to populism.”
That doesn’t mean the banks won’t catch more flak from the government at some point.
It was not out of the ordinary 20 years ago for big bank executives to hash out the issues of the day with the finance minister and the Bank of Canada governor behind closed doors, author Meredith said.
“Nothing had to be said publicly, because everything was said privately,” she said. “What’s changed in the last 20 years is that the government almost is forced to use the public media to signal … what they want the banks to do.”
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