July 10, 2019
Business insiders were shocked when David Macdonald, an economist with the Canadian Center for Policy Alternatives, revealed that the Big Banks got nearly $114 billion in secret bailout support after the 2008-2009 financial crisis.
The story, which was quite technical, got major attention from specialists. However, since the process provided poor sound bites, mainstream media quickly moved on.
The issue died long before the 2015 election.
Today, it’s thus hardly a surprise that global experts such as the International Monetary Fund now laud the resilience of Canada’s banks.
Yet few of those experts saw the previous crisis coming. With another election scheduled this fall, it makes sense to ask whether Canadians should bail out the big banks again should another crisis come.
“One of the biggest challenges is that we still can’t confirm which banks got what money from which sources,” says Macdonald, who estimates that RBC, Scotiabank, TD, CIBC, and BMO got an average of $22 billion each. "It’s also not at all clear whether some of the banks actually needed the cash.”
Further complicating the question is the fact that Canada’s banking system already benefits from a vast range of subsidies.
The fractional reserve system: should banks be allowed to “print” money?
The most blatant subsidy that Canadian banks benefit from is their collective ability to leverage a complicated zero reserve system to “create money” via interbank borrowing and to thus benefit from interest free loans.
John Kenneth Galbraith once said that the process through which banks operate “repels the mind".
It’s stunningly complex, and even many sector professionals themselves don’t understand it. Ask a bank teller or public relations official and all you will get is a blank look.
But the guys pulling the strings know. That’s how they get away with it.
Banning competition facilitates price gouging
The second implicit subsidy that Canada’s banks get is protection from competition. This enables them to gouge consumers by charging higher prices on almost all their services.
Private citizens, for example, are banned from starting their own banks, as is foreign competition.
Bitcoin, other cryptocurrencies and payments systems are locked out, or they are loaded with so many regulations that they cannot operate effectively.
This enables the big banks to run a quasi oligopoly. The result is that bank credit card interest rates often exceed 20%. Transferring $300 from London, New Delhi, or New York to Canada costs more than $20.
Interest rate subsidies caused by tacit bailout promise
Although most Canadians remain unaware of the fact that the Big Banks were bailed out during that last financial crisis, insiders and bank executives themselves know.
For example, Macdonald quotes then-TD Bank CEO Edmund Clark as telling investors: “What are the chances that TD Bank is not going to be bailed out if we do something stupid?”
This implicit guarantee that bank CEOs will keep their jobs and their bonuses, no matter how they act, enables them to borrow and lend at maximum capacity to just about anyone who has a pulse.
This creates vast short-term profits for the banks, with bailout subsidies that will be required later, financed by taxpayers.
Do banks deserve another bailout?
One good way to reassert controls would be to re-establish a gold standard, to deregulate financial markets, and allow the losers to fail.
That said, the question about whether Canadian banks should be bailed out is far more complicated than it appears.
While gold investors are justifiably leery, Canadians love their big banks.
The RBC, CIBC, BMO, Scotiabank, and TD are swimming in cash, much of it from loyal customers who have racked up $6.4 trillion in system debts.
Canadian governments, businesses, and consumers are not just addicted to debt, they are addicted to increases in debt.
If credit ever stopped growing for any length of time, the economy would simply implode.
Allowing Canadian banks to fail would be like putting a drug addict’s dealer in prison.
We know it’s the right thing to do. We know it needs to be done. We also know that the sooner it’s done the better. But it wouldn’t be easy.
“Unfortunately the veil of secrecy is obscuring an obvious reality,” says Macdonald. “Canada’s banks are too big to fail.”
Peter Diekmeyer is a business writer/editor with Sprott Money News, the National Post and Canadian Defence Review. He has studied in MBA, CA and Law programs and filed reports from more than two dozen countries.
The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.You may copy, link to or quote from the above for your use only, provided that proper attribution to the source and author is given and you do not modify the content. Click Here to read our Article Syndication Policy.
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