- March 19, 2013 - 13:39
This is further to your comment on banks. The worldwide financial collapse of 2008 was driven largely by a banking and brokerage industry out of control. The bailout costs were astronomical. Canada's banks fared the best among G7 nations and yet the federal government was forced to turn over $75 Billion in taxpayer funds to keep them afloat. And while the good times have returned for Canadian banks, the international banking community is hardly out of the woods yet as evidenced by the continuing euro-crisis. Governments have done almost nothing to reform them. As you point out, senior bank executives continue to be rewarded handsomely for taking excessive risks. (It should be noted that, since banks are still to big to fail, any risks they take are not their own but rather those of the taxpayer.) What the Harper government has done is to make it more difficult for banks to issue mortgages. It reduced the amortization period, increased the downpayment requirement, and lowered the share of household income that can be allocated to debt retirement. Ironically, one of the banks that publicly endorsed these restrictions was the Bank of Montreal which has since become one of the most aggressive in competing for business with discount mortgage rates (below 3%). It is because of this 'race to the basement' as you put it that Flaherty has warned the banks against an all-out rate war. This, in my view, creates a problem for both government and the consumer. It is perfectly acceptable for Flaherty to choke off mortgage lending with the range of levers he has already used and others he has not. But in advocating that the banks back away from competition based on rates is tantamount to an invitation to price-fixing. Canadian banks have racked up unprecedented profits in recent years - $7.3 billion this past quarter alone. Do we really need to inflate those profits even more by suggesting they set the spread between their borrowing costs and lending rates artificially high? Other than to further restrict mortgage rules, Flaherty could consider other alternatives. These include a special tax on mortgage profits and/or a requirement that the size of their household mortgage portfolios be tied to their volume of small business lending activity. Anyone knowledgeable of banking trends in this country is aware that banks have, defacto, stopped lending to small business altogether. Their minimum security is now several multiples of the face value of the loan and their profits are routinely built into their upfront fees. In essence, banks see no point in taking any risks whatsoever in dealing with small business when they can invest in mortgages which (by virtue of written and unwritten government guarantees) carry no risk at all. Among other things, this explains why we no longer have even mid level bank executives in this province. You don't need high level management to send mortgage applications up the pipe.