The Bureaucrats vs. Bankers’ Tag Team Match

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Just like on the good old WWE grunt ’n groan Battles Royale of good vs. evil on TV Wrestling, we’ve got a knock down drag out tussle over our Canadian banks’ lending practices, at this time of financial stress and market illiquidity. It seems that the Canadian banks are not following the government’s script of cranking out bank loans to whatever customers come along, creditworthy or otherwise.

In the one corner is the tough guy team of Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney (do I hear a chorus of boos?). And in the other corner is the masked duo of the Rating Agencies (read S&P, Moody’s, DBRS), and the Regulators (read OSFI), both of whom believe in sound lending practices, and the banks’ fiduciary responsibility to its depositors. At stake in this morality play are nothing less than the banks’ independence in assessing risk, and the shareholders’ confidence in the responsible operation of the banks’ day to day lending activities.

The guys in the dark trunks want the banks to step up their lending activities to jump start the economy. Lend, lend, lend they say. Get that money out the door as fast as you can. That way people and companies will have lots of borrowed money to spend, and borrow and spend, and get this house of cards going again.

The other team says hey wait a minute there you villains! Isn’t that what got us in all this trouble in the first place? Namely granting loans at a breakneck pace to every Tom, Dick, & Bernie(Madoff) who could fog a mirror? We think you banks should exercise a little old fashioned judgement, prudence, and due diligence. Where’s the ref? These nasties want us to break the rules, compromise our good guy status at serious risk to shareholders and depositors alike. No way Messrs. Flaherty and Carney. We’re not knuckling under to your submission hold.

And so it goes. The fact is that the rate of growth in bank lending has far exceeded the rate of economic growth in Canada for years. Additionally banks are beginning to feel the sting of loan losses that accompany any recession. Loan delinquencies and defaults have begun to show a remarkable upsurge, and the banks have rightfully re-examined their credit assessment and lending practices in an effort to restore a stronger risk profile to their books of assets. Depositors and shareholders expect banks to lend, but only to those from whom they expect a reasonable prospect of being repaid in a timely fashion.

The pressures the banks are now experiencing from politicians and bureaucrats in this country are simply a knee-jerk spillover from the bailout program for U.S. and European banks, many of which have now to a large extent been nationalized. Canadian banks must stand their ground against the forces who do not understand the old horse to water parable. The Canadian Bankers’ Association has recently come out in support of the chartered banks and agreed that lending standards should not be relaxed simply to artificially jumpstart another round of reckless lending and another asset bubble of the future.

The Canadian banks have not been the cause of the lending freeze. They are more than willing to make good sound loans to Canadians and their businesses. Politicians and bureaucrats should stay out of the business arena especially in this tag team match where their nefarious motives are so transparent to the paying customers.

Richard G. Scott. January 6, 2009.

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