Integrity, stability of banking system

Canada’s constitution assigns responsibility for banking exclusively to the federal government. And, given our modest population on a gigantic land mass, it made sense that banks were permitted unlimited branching across the country.

By the end of the second decade in the last century the industry was consolidated into about a dozen firms with the six largest controlling more than 90 per cent of the banking sector’s assets.

This oligopoly practiced conservative policies especially as compared to their banking colleagues in the United States. While some of the largest banks in the world call the U.S. home, there are almost 10,000 relatively small institutions (many chartered by state governments) with limited or non-existent branch networks. As in the U.S., provincial governments in Canada license and regulate financial institutions such as trust companies, insurance companies and stock brokerages.

It is fair to say, therefore, that the financial sector in both countries is far from homogeneous and not subject to one dominant authority.

In second half of the 20th century, the chartered banks in Canada made several concessions to the non-bank financial enterprises including, most importantly, access to the clearing system which, up to the mid 1980s, had been owned and operated by the banks.

At the same time, foreign banks were allowed to establish operations including branches in Canada.

But, forces external to the financial services industry were beginning to put enormous pressure on the big six banks. The largest force was the revolution in communications and information storage and retrieval. Suddenly, large retail consumer business such as grocery stores sought to charter their own banks, believing offering financial services that would give them access to funds, cement customer relationships, and perhaps open up new markets. Further, other firms sought to provide mobile access to ways and means of transferring funds, making investments and paying bills. This mobile market is dominated by those under 30 years of age.

For the big six, in particular, their key competitive strength and dominant characteristic was an extensive branch network. Canada has the highest number of bank branches per capita of any developed nation — a substantial investment in real estate and in personnel. I disagree with those who say that the big banks’ reluctance to engage in rapid, wholesale change in structure, services and methodology is motivated by stubbornness. Rather, I believe they are motivated by concern for their financial stability and that of the financial system as whole.

While it is true that companies such as Apple, Amazon, PayPal and Google are using technology to provide new and improved financial services to their customers without either bank charters or branches, we need to consider some fundamental issues regarding their participation in the sector. Central questions include:

1. What, if any government agency, should be regulating these non-bank financial institutions? Should regulation be exclusively federal or shared with provincial authorities?

2. Who owns the data stored in these institutions and under what conditions is access to these data bases allowed?

3. What are the risks associated with these activities and how are they related to both their assets and liabilities?

4. If new products are introduced, (e. g. securitized loans to small business), what type of disclosures will be mandated to enable investors to make rational investments?

Several interested parties are calling for significant acceleration in the revision of legislation governing the financial sector. I can well understand their desire to move quickly.

But, I also am reminded of the stellar history of Canadian banking legislation and the stability of our system amid the global crash of 2008 when Canada stood head and shoulders above most of the banking systems in the developed world.

Yes, the industry needs to change and government will respond to pressures from various groups seeking to implement change. But, government’s chief concerns have to be both the integrity and stability of the banking system as a whole.

David Bond is a retired bank economist who resides in Kelowna. This column appears Tuesdays.