News

Close ties between big banks and government get even closer during coronavirus crisis

Close ties between big banks and government get even closer during coronavirus crisis
Business
On any given day over the past few weeks, the chief executives of Canada’s biggest banks may have heard their phones begin to buzz. Ah, they might have thought, it’s the government again.

After all, Finance Minister Bill Morneau threw down the gauntlet on March 13, saying he had been speaking with the CEOs of the big banks, and that the lenders understood the threat the new coronavirus posed to their customers.

“They’ve made a commitment to me, and we had a discussion as recently as a couple of hours ago, that they will support businesses and individuals through these difficult times in a responsible, fair and compassionate way,” Morneau said. “We’ll be holding regular calls, twice weekly calls, in the coming weeks to ensure that this happens.”

Canada’s government has since received commitments from the banks to try to accommodate customers during an extremely trying time, such as by allowing for the deferral of mortgage payments of up to six months. Prime Minister Justin Trudeau’s press conference Friday brought news of a new “emergency business account,” in which financial institutions will get up to $25 billion, so they can grant interest-free loans to small businesses of up to $40,000.

Such close collaboration would be a curious sight at any other time. Yet during the current crisis, the federal government and the banking industry have been working together, by hook or by crook, to try to support consumers and businesses. And as the crisis has continued, it has served as a reminder that Canada’s banking industry is political — and always has been.

The very first session of Canada’s parliament saw an “Act Respecting Banks” passed, noted Charles Calomiris and Stephen Haber in their 2014 book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. The new Canadian government then tried to strike a deal with the Bank of Montreal, offering “to create a privileged position for the bank in exchange for its providing finance” for the fledgling regime.

Over the protests of other banks and merchants, it didn’t happen, but one of the main themes of Fragile By Design is “that chartered banks represent a partnership between the parties in control of the government and the founders and shareholders of the banks,” Calomiris and Haber write.

“Bank chartering in the Dominion of Canada was no exception,” they added.

The partnership has held up in more modern times, such as during the global financial crisis a decade ago, which Canada’s banks weathered better than most. Lines of communication remain open as well, as evidenced when the prime minister tweeted thanks to the CEOs of the Big Five for their advice during recent North American free-trade talks.

Deferring mortgage payments came out of a “two-way conversation” between the regulators and the banks, which can provide cash to the real economy in ways that may be difficult for regulators to do directly, according to Andrew Moor, the president and chief executive officer of Toronto-based Equitable Bank.

“The good news is we have quite a small banking community,” Moor said. “And we’re all really interested in making sure the Canadian economy gets through this.”

The Canadian Bankers Association has noted banks are offering “flexibility on credit cards and lines of credit, including deferrals and low minimum payments,” albeit with no mention of outright rate cuts, which is something Trudeau raised on Thursday, and that the government then walked back.

“As we have done before, Canada’s banks are working closely with all stakeholders to help Canadians weather this unprecedented event,” the CBA said.

Granted, it could be to the banks’ mutual advantage to go along with governments. Debt ratings agency DBRS Morningstar said Friday that there are “two crucial elements” that will determine how COVID-19 affects banks’ creditworthiness around the world: the economic fallout and the level of government and central bank support.

“The details and implementation of many of these packages are still being finalized, but they will mitigate some of the impact of the economic shutdown, reducing pressure on banks,” DBRS Morningstar analysts wrote. “Many of the measures directly involve the banking sector and confirm the importance of the role banks are being asked to play in ensuring individuals and corporates can eventually recover from this shutdown and that credit continues to flow through to the economy.”

Laurence Booth, a professor of finance at the University of Toronto’s Rotman School of Management, noted banks in Canada had supported tighter mortgage-lending rules a few years ago when the housing markets were overheating. Such a move in the United States “would be an abomination,” Booth said.

“It’s not at all unusual for the banks to cooperate on sort of broad macroeconomic issues, that individually they might benefit but in aggregate they’d lose,” he added. “And it’s symptomatic of the very close relationships between the banks and the central bank. They’re constantly talking to each other.”

Canada’s central bank, the Bank of Canada, has been in close contact with the country’s biggest commercial banks. Governor Stephen Poloz said Friday, after the Bank of Canada announced its third rate-cut this month, lowering its policy benchmark to 0.25 per cent, that both he and Senior Deputy Governor Carolyn Wilkins were meeting twice a week with the chief executives of the Big Six.

“We have a high level of collaboration, even in peacetime,” Poloz said. “We can’t do all this by ourselves, that’s for sure.”
Read more on National Post
News Topics :
RELATED STORIES :
Business
Murdoch Alexander MacPherson had come to Toronto bearing feel good stories about debt. “I want to read another letter that has to do with a case, ” the Saskatchewan lawyer and politician...
Business
Canada’s six biggest banks survived a severe stress test by the Bank of Canada, which is a relief since they might be the only thing standing between a relatively short...
Business
After the Bank of Canada on March 4, I wrote that the timing of its next move would be determined by oil prices. If I had thought to check...
Business
Canada has been hit by a credit crunch that is threatening pension funds, individual savers, homeowners and small businesses, with broad implications for a national economy already partially paralyzed by...
Business
The longer the income shock lasts, the greater the risk of a rise in consumer and business defaults and insolvencies, the bank said in its latest Financial System Review. While...