Sunday, May 2, 2010

(No.90) Banks, stability & insurance: the silly & the wise

Previously on RickardsRead.com I have made this point: the big Canadian banks received -- and continue to receive -- bouquets from around the world for their solidity and probity during the 2007-2008 financial crisis that caused so many financial institutions to stumble or fall. While our big banks' senior managers deserve some credit, they deserve far less than do the tough, revised federal rules for Canadian banks (passed by the Liberals in 1996) and, just as important, OSFI's strict and aggressive federal regulation of the banks.

The CEO of the Canadian Bankers Association, Nancy Hughes Anthony, recently bragged in a letter to the Globe and Mail (May 1) that Canada's big banks "did not need taxpayer-funded government bailouts". Well, yes and no.

She omitted mention of Ottawa having provided our banks with a crisis-prompted $200 billion low interest line of credit. And then there was that little glitch involving certain bank-involved paper (especially the National Bank). Still, thanks largely to federal rules and federal regulation Canada did come through the financial crisis looking so good that federal Finance Minister Flaherty had the credibility at the recent G20 finance ministers meeting to manage alone to oppose and delay meaningful progress on the imposition of an internationally desired "bank tax", opposition emphatically desired by both Canadian banks and their regulators.

Former federal Superintendent of Financial Institutions (1994-2001) John Palmer, in contrasting the superiority of Canada's regulatory results manifested during the international financial crisis with those of the EU and the US, credits the "judgmental supervision" exercised by Canada's federal regulators. I agree, but point additionally to the importance of it having been married to an aggressive regulatory attitude by OSFI to banks.

What bankers like Ms Anthony conveniently omit from their public declarations these days is any reference to all the pre-crisis pissing and moaning done by Canadian bankers about the too restrictive/onerous/aggressive regulation by Ottawa, the negative effect it had on Canadian bank entrepreneurial activity and profits in comparison with all of the wonderful, freedom-based success being enjoyed by banks outside Canada, e.g., with sub-prime mortgages. Even now there's been big bank bleating about how OSFI is blocking banks from boosting their dividends because of regulatory caution in keeping up the Canadian banks' capital levels. Same old, same old.

[ An excellent overview of bank regulation in Canada in the view of John Palmer was written by John Geddes for MACLEAN'S, May 10 edition, 2010.]

Meanwhile the Globe and Mail's Report On Business is back (q.v., April 26,2010) to making insurance mountains out of bank molehills with its breathless coverage of Finance Minister's Flaherty's public reaffirmation of his commitment to halt the banks' use of bank websites (not bank insurance company subsidiaries' websites) to promote/facilitate their sale of non-authorized types of insurance. Note to the Globe ROB: there had actually arisen no informed doubt that the Minister and his Finance Dept. would get their way on their already announced policy on banks and insurance.

[For background on the reality of banks and insurance in Canada, see for example on RickardsRead.com: column nos. 33,34,47,48,69.]

This ROB story was immediately followed by the truly earth-moving news (Globe ROB, April 27) that the banks had managed to get some sort of quid pro quo from Ottawa that would restrict how insurance companies promote/facilitate the sale of bank products online. In fact the only Canadian non-bank-owned insurer with any real dog in this online fight is Manulife because of its own Manulife Bank. And even so most of Manu's product sales in Canada originate by and through licensed sales people, not online.

I expect that the Canadian insurance industry will regard such a restriction (if implemented) on their online activities involving bank products as commercially insignificant, especially in comparison with what the banks are trying (with very limited success) to accomplish with insurance sales online -- absent significant use, for most of the banks, of very much if any in the way of genuine active, prospecting, selling-based agency systems.

If such a restriction on insurance company online promotion and sale of bank manufactured GICs and the like is the price to be paid by insurance companies in order to restrict current and future bank online insurance activity via their websites, the price is inconsequential.

Mark down another regulatory victory for the Canadian insurance industry over the big banks.

Alastair Rickard

RickardsRead.com

email: Alastair.Rickard@sympatico.ca