As a onetime inmate of the Canadian banking system, I can tell you from firsthand experience that bankers are prone to excesses and lapses in judgement. The bank I worked for — one of the Big Five — has long had an eerie proficiency at messing up, finding itself covered in goo after the bursting of every financial bubble in recent decades. Banks are also the institutions we love to hate. We may need them, but there’s always that sense that, like the unreconstructed Scrooge, they are gouging us.
But are they turning us away in our hour of economic crisis? If you believe Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney, the banks are shutting off the lending taps just when we need credit most. The banks are charged with sopping up the liquidity that Ottawa and the Bank of Canada has provided to stimulate lending and using it to strengthen their own balance sheets. A war of words has been waged between the two sides since early December, and this week Flaherty and Carney called top bankers in for a meeting to apply direct pressure.
On the evidence, Flaherty and Carney don’t have much of a case. Using the Bank of Canada’s own statistics, Toronto Dominion Bank argued recently that loans have kept flowing through the crisis. From September to November, household credit was up more than 12 per cent year to year while business credit rose 13.4 per cent hardly suggesting a credit squeeze.
It’s also been noted that Canadian banks made up some of the difference as foreign banks and auto financing arms fled the market. Even the Bank of Canada admitted in its December financial system review that “credit growth … has generally been sustained throughout the crisis.”
Banks could be forgiven if they were a whole lot tighter. Ironically, Ottawa’s bank regulator, the Office of Superintendent of Financial Institutions, has been signalling that it may raise regulatory capital requirements this year, a good reason to hoard cash. Besides, in a weak economy, banks normally become more scrupulous lenders and boost reserves because there’s a greater likelihood of loan defaults. That’s only prudent, given that the banks’ first responsibility is to assure viable operations in order to protect depositors’ funds. Staying healthy also helps preserve shareholder value which affects a majority of Canadians who, directly or indirectly, own bank stock. What’s good for them is at least partly what’s good for most of us.
