The Agenda with Steve Paikin (Audio) - Would Bank Competition Boost the Economy?

Episode Date: October 16, 2024

Canadian banks have a global reputation as safe, secure institutions with reliable dividends for investors. But federal policies have given the Big 6 a dominant position that has resulted in a lack of real competition among them, leading to excessive fees for customers and a risk aversion that weighs on the Canadian economy at large. A look at why Canada's protected financial services market needs to change in service to all Canadians, and whether credit unions or online banks offer a better alternative. See omnystudio.com/listener for privacy information.

Canadian banks have a global reputation as safe, secure institutions with reliable dividends for investors. But our next guest argues federal policies have given the Big Six a dominant position. The result? A lack of real competition amongst them, leading to excessive fees on customers and a risk aversion on loans that adversely affects the Canadian economy at large. Andrew Spence chronicles all this in his new book. It's called Fleeced Canadians versus Their Banks, and he joins us now for more. Andrew, it's good to meet you. Nice to have you here.

Thank you, Steve. Okay, don't take this first question as a chippy question. It's not meant to be a chippy question. What qualifies you to write this book? First of all, I'm a trained economist. I started my career at a majesty's treasury, as it then was in London. I moved to Canada. I worked for a couple of the Canadian banks, as a matter of fact, as an economist, as well as a couple of the global banks. So I've had a good insider's look across both big

global universal banks and the Canadian banks, and then I transitioned to asset management, where I became an owner of the banks. And so I've also had a good look inside from an investor's perspective. Why does the Bank of Canada describe Canadian banks as, quote, a collusive oligopoly? Why? Because by definition, there are only five to six members of the market. And what we know about oligopolies is that they produce at a much higher price and much lower quantities.

So that can be quantities of loans, but it can also mean quantity and quality of service, both of which conform to the stylized facts of an oligopoly. The bankers would tell you there are tons of players in this field. Yes, there are six dominant ones, but there are lots of smaller players who play their part. Is that not true?

And who are they? They're not top of mind names. In fact, the only way in some ways, the only way that you can bring competition to an extremely important industry like banks, and they have to be stable, because if they go down, they're going to have catastrophic effects. And so that we have to accept.

But there are ways to introduce competition that do not threaten stability. And one of them is the fintech revolution. And so we have been talking about the competition, the potential competition coming from fintechs. We've talked about open banking in Canada, but we have not executed on it, where other jurisdictions have. Okay, these are groups like Well Simple

or Simply Financial, new players, new entrants in the field. You don't think that they are kind of taking grasp of the marketplace in the way that they ought to? So the way you access customers is through the payment system. So this is a very important piece of public infrastructure, and I emphasize it's a piece of public infrastructure, but it's been outsourced to the banks to run. And this has been a serial challenge for the federal government over more than 40 years, because it can act as a castle wall and a moat

to keep competition at bay. And so if you want to travel to these fintech providers, you have to go through the banks. And so that makes it difficult for them to break through. Can you give us some examples of, my suspicion is people don't mind banks making big profits as long as it is not at the expense of their customers. Can you tell us about how they make,

I guess in your view, excessive profits at the expense of their customers? Yeah, I mean, I think the work by research from North Economics is a great contribution to our understanding of just how pervasive fees are and how they can quickly accumulate. If you bounce a check, for instance, you're going to get charged $45, where that charge might be what, five bucks?

Eight dollars? Five bucks. No, no. No. In other jurisdictions. Oh, I see. OK. That take transparency and consumer protection more seriously than we do here in Canada,

that charge will be one seventh of what we are charged here. Why is it so high here? Why, you tell me. I think if you can charge a high fee and nobody complains and nobody calls you out on it, then you're going to do it. Now, banks have a license to print money, literally. So as part of that license though, they were told they could only print fives, five dollar bills.

So one day, let's slip in a few twenties. Nobody noticed. How about some fifties? Before you know it, they're printing hundreds. 365 days a year, seven days a week, 24 hours a day. Isn't the idea though to deter writing bad checks, and it's a pretty good deterrent if you put the NSF fee up there to 45 bucks. Who's going to be, who's most likely to bounce a check?

The well-off? No. The affluent? Those that pay close attention to their daily fares? Or those who are cash constrained? Because they are either economically marginal or not yet financially literate. So it's a tax on the less well-off? Yeah. In some respects. Okay. Let's do, Sheldon, can we do this quote board in the middle of page one here? This is a quote from your book here. Let's bring that up. Sure. When banks are stingy with credit, the rest of the economy feels it.

There is a negative network effect. Businesses can't grow, can't improve their productivity, can't hire more people, can't pay them more, and our living standards decline. Bank financing at current magnitudes is simply insufficient to finance the economic vitality necessary for Canada to have the robust and competitive economy we all covet. Okay, this is a direct criticism of how, in your view, banks are not prepared to take somewhat more adventurous risks and the economy as a whole suffers. Why aren't they? So, investors will reward a bank

if its earnings are stable. It will reward a bank through a higher stock price if its risk of loss is low. And the way you've got to think about it is that banks have become increasingly bold in where they apply a fee and how often they apply it. They've driven deposit rates very, very low. But you can't push prices too high. It's OK to make your clients squirm, but don't make them scream because

that just might get their attention and it might get the attention of regulators. So how are we going to reward the investors for what they want? Well, let's not necessarily push the revenue pedal to the metal, but let's slam the risk break into the floor. And so where are you most likely to lose money and assess whether or not you're going to get paid back on a loan? Because banks do need to get paid back and it's small and medium sized businesses. If they're not beyond proof of concept,

their risk of loss is high. And so the banking system has systematically and serially over a number of years, reduced the amount of credit that's provided to this sector. So if you're an entrepreneur, you're not going to get much of a loan from a bank, if anything. They'll tell you, use your credit card, and that's a rate of interest of 20%. In a world where the overnight rate of interest of the Bank of Canada is four and a half,

that's a huge spread, right? And so what happens is the entrepreneur takes all the risk, and in the early days of a business success, who gets all the profit? The bank does. Is it not fair to say though that banks are reflective of the corporate culture in which they operate? And that I think the fact is most Canadian businesses are much more risk averse than say their American counterparts. There is no question.

So they're typical of the economy. There is no question that Canada is a very conservative country. But that does not mean to say that we have a shortage of entrepreneurs. There is no shortage of ideas. There is no shortage of people that want to build equity in their lives and have some control. But they find it very difficult to get financing to get going. If banks were looser with their rules on financing, presumably they would lose more loans, right?

Not all the loans would be repaid, and they wouldn't do as well financially. I mean, isn't that just common self-preservation? Right, but in other jurisdictions, there are markers that show that that's perhaps the wrong question. So if we look at if we look at the price of credit provided to small businesses it'll be something like the OECD calculated it was at 240 basis points on the loan spread over a risk free rate and elsewhere in the world it's 45 basis points so they are pricing people out of the market as well as constraining the credit. Banks in Canada are much more conservative in their credit granting processes and elsewhere.

And this is an institutional and cultural issue. But if we look at the banks are in every single nook and cranny of our economy. Where does innovation and invention take place? If we look at the banks are in every single nook and cranny of our economy, where does innovation and invention take place? It's not taking place in all the big oligopolies in Canada. Data show that their investment in capital equipment that empowers their employees to become more efficient has been falling dramatically since about 2012. They don't invest in efficiency because they don't have to, just as the banks don't invest in the dynamic dimension

of our economy because they don't have to. So if the banks were a little more generous, not overly risky, but a little more generous in the criteria by which they gave out loans, what impact would that have on the Canadian economy? Many Canadian entrepreneurs simply give up because they can't get financing, or they can't get sufficient financing.

I just want to give you one statistic. The Canadian Federation of Independent Business does a survey, regular survey of their members. And the median amount, the halfway point between the lowest amount of credit given and the highest amount is $156,000 per year. This is for half of Canada's economy and 2 thirds of its jobs.

It's a pretty small number. Right. But the issue is 10 years ago, it was over $200,000. So if you adjust for the inflation we've had in the growth in the economy, that median should be about $360,000 a year. And now we're down to less than $100,000. So they are even more risk averse today

than they were ten years I think so and look, you know incentives matter, right? And if you have no incentive to do better, why would you? How would you introduce more competition into banking in this country? As I said before this is not a simple challenge and it has bedeviled Canadian policymakers for the past 60 years all the way back to the Portrait Commission in 1964 that attempted to introduce more competition into the system. And as Jack Mintz, a renowned Canadian economist, observed at the time, in fact, profitability of the banks went up and competition went down, which did earn him some imprimalite criticism from a bank chairman at the time.

So what would you do? We have to think seriously about the fintech group so that people can look at their app. Look at an app on their phone, say I want to do a transaction XYZ, and they tell the app go find me the cheapest, most efficient place to do this please, and that will get the bank's attention. And so then they've got to think about,

okay, I now have to meet that challenge. And Canadian banks are more than able to make that challenge. They hire and they employ some very talented people. If they're given the right incentive, they will do so. What's preventing that from happening? So it's partly the banks dragging their feet, and that's natural. Getting an annuity going in business is really hard so you don't want to lose it.

That I understand. We have concerns in this country about our conservative culture. Do I want my information out there for other people to see? There could be security issues with that. And our own plodding ponderous government policy making. So let me give you an example in the UK where open banking emerged the first. In 2016 the UK authorities brought the nine biggest banks into a room somewhere in Whitehall

and said we are going to introduce open banking in this country, you have two years to get yourself ready So you guys go away and you talk about all the issues and you hammer out some way to get this done But make no mistake. This is gonna happen The authorities were not under any illusion that this was going to be easy So what did they do instead of having everybody join hands and sing kumbaya? So everyone's special interest is satisfied so that we can all move ahead,

they assigned an implementation trustee. And the implementation trustee listened to everybody and said, right, we're done. This is what we are going to do. Now no more whining, no more whinging, no more griping. Let the rubber hit the road. Whinging is a great British word, isn't it? Isn't it, Josh?

Yeah, it's wonderful. I think I remember reading in the book that you had a conversation with Anita Annett, the president of the Treasury Board. And when the discussion came to, how do we get a little more competition into banking, her response was something along the lines of, hey, our banks performed extremely well

during the subprime crisis, you know, the recession of 2008. Our banks are strong, Canadians like them strong, and we don't need to do what you are suggesting. I wouldn't say that she didn't say, we don't need to do what you're suggesting. Okay, I overstepped there, did I? Yeah, I think I talked to her about it, and her first response was, well, yeah, we looked at the banks, but the crisis, we didn't have to deal with that.

And I can understand what motivates hesitancy about grasping that issue. We avoided the political mayhem of having to quote bailout banks. Our banks did not fail, unlike in the United States. No, they didn't. But most people don't realize they did receive substantial support from the federal authorities.

So it wasn't that we didn't have to support them, but they were not on the verge of collapse. But remember that the banking system in the US got itself into trouble not because it was subject to liberalization and competition, it went under because it was inadequately regulated. Canadian banks were very well regulated at the time.

They had high capital requirements relative to Basel. They had limits on leverage. The only place we fell short was the amount of liquidity they had to hold, by which I mean if you get a bill you need to have cash to pay it, otherwise you could be insolvent because you can't get your hands on the cash. So you can have liberalisation in your banking system, you can continue to ask for demanding and stringent regulatory requirements that will preserve that stability. Xavier Vives is a Spanish economist that has done exhaustive research on banking systems across the world, and he observes that concentrated markets and concentrated banking systems are

not a necessary condition for stability because the UK banks, the Dutch banks and the Belgian banks all were all concentrated and all had significant problems. Big banks can be more diversified, but if you don't regulate them, they can take a lot more risk. And so there's a trade-off. We've got some aspects of the trade-off right but just because the bank survived the crisis in 08-09 should not give them carte blanche to run wild through the charges that they levy on

their customers. Okay do you see any appetite at the federal level to either force the banks or deeply encourage the banks to be more competitive It's it's not even ostensibly evident. I Don't think I think we we have in general in in and this is not just in the Canadian economy But in most industrialized countries that are sort of falling into the Anglo model is we think we are pro market, right? But we're not we're pro business. What do I mean by that? If you're pro market, you want to we're not, we're pro business. What do I mean by that? If you're pro market, you want to have a fair degree of competition,

you want to have people fighting for their customers so that we get the best prices, so that they become efficient. If you end up being pro business, then you are pro feather bedding, special interests. I mean, Canadians should be absolutely ashamed of the farm subsidies in this country so the point is Steve wherever you go there is a pro-business sentiment towards the economy in general and we

are now paying the price for it. Canadians I'm gonna put to you and you tell me if I'm wrong Canadians may not necessarily mind that because they hold all of you know they hold stock in all of these institutions in their pension funds and so on and they want them to be very profitable and strong because that's the money we depend on after we retire. How do we deal with that imbalance? Well who owns equities in the general scheme of things? You're gonna say better off people versus lower income people. Of course.

So if everybody had access to capital to buy bank stock, to compensate them for the fees they were paying, that would be a reasonable argument. But when economists try to estimate, OK, if the stock market goes up, what impact is that going to have on the economy, let's say? The answer is next to nothing, because only about 3% of people own nearly all the equities. The one thing that will make a difference to consumption is if you

own a home and the value of the house goes up. That will have a big impact because more people own a house relative to owning equities. I got to say, I learned a lot reading your book. it's you know it's one of these... you see that everybody? It's a nice brisk read. Exactly I was gonna say it's a brisk read. Yeah. It was written under duress from my publisher and editor Ken White. He's a terrible man isn't he? He's dreadful. Yeah. But he... I can confirm that because I've written a book for him as well. He's extraordinarily skilled. He helped a lot to get the arguments out there.

I hope if you do read this book, I hope you have the ideas, the words, the knowledge and the concepts to understand the predicament we're in. And now you will have the questions to go and ask your elected representatives. It's called Fleeced Canadians versus their banks and it has brought Andrew Spence to our studio today. Thanks a lot, Andrew. Thanks, Steve.