Monday, April 27, 2009
The Truth About Canada's Banks & Their Success
A lot has been made about the relative strengths of the Canadian banking system. The newspapers are filled with stories about how the focus on "retail" has lead to lower risk profile for the Canadian banks. You have also been reading recently about the superior risk management focus of the Canadian banks and the superior compliance regime of both the banks and the Canadian regulators.
That's pretty neat stuff for us Canadians; hey we're number one! It was all pretty reasonable to the average bloke who has not worked inside the machinery of a big Canadian financial institution.....but I have and I can assure you it is all CRAP!
The reason Canadian Banks are so successful is quite simple. They have an oligopoly structure that lends itself to high margins through low competition strategies. In short, they make tons of profit by over-charging for virtually all domestic services! Need convincing? The evidence has been sitting staring at us for years so lets point out a couple of obvious situations to get us started!
High Interest Savings Accounts: For years the Canadian Banks have made a fortune by offering little or no interest on your savings account. In fact the situation got so ridiculous that a foreign bank figured out that they could pay for their whole expansion into Canada by exploiting the fat margins that existed on savings accounts. Thus that annoying ING guy made his appearance and told Canadians the ugly truth! Your banks are not paying you interest you dummies! Of course the banks were not about to fight back over one measely foreign bank offering fair interest rates.
Think about it.....if Royal has ten billion in savings accounts earning 0.25%, they are not about to start paying 2.25% and give up $200 million in profits. They( and all the other banks) just sacrificed a few hundred million in deposits each, that would drift to ING, counting on Canadian apathy to keep most of the money in their accounts! The Canadian banks did not react at all until the credit unions followed ING's lead; at which time they created a high interest saving option that was not as high as ING and the credit unions, but was enough to stem the flow of apathetic money from the big banks!
Credit Cards: Foreign credit card companies also noticed that Canadian rates were very high, even though losses were quite low. In the hyper competitive card market south of the border, aggressive credit granting and extreme marketing competition pushed card companies into high risk credit granting, expensive rewards programs, and aggressive direct marketing campaigns. No wonder the card interest rates were 19% to cover the losses and expenses. In Canada that was not quite the case. Rates were 19%, but marketing was through the branches to existing customers. Credit standards were still very reasonable and losses were consistently below the U.S. experience. Even better, the banks owned the card processing firms and could screw both the customers (think 19% rates) and the merchants who had to pay outragious fees for the privelege of accepting the cards! Again, the Canadian banks took it to the extreme and again foreign banks eventually stepped in. Check your mail box and see how often a U.S. monoline (sells only one product) firm has sent you a pre-approved card at a low teaser rate. Again, the banks are not about to match low rates and sacrifice the profits from tens of billions in outstanding card balances at 19%, or 24%, or 27%. Let Capital One or some other company steal the crumbs from the table, but never give in to the temptation to be competitive!
Need further proof? Canadian banks are paying huge class action fines for illegal foreign exchange fees on the credit cards! Canadian banks are the leading broker and mutual fund firms in Canada.....and Canadians pay the highest mutual fund fees in the world! Ask the small business guy about the cost of banking services in Canada!
So how does that make our banks the best in the world? How do you explain the lower risk profiles and the lack of idiotic leveraging? Simple actually; Canadian banks just were not willing to pull their capital out of Canada and forego the huge domestic profits to chase U.S. sub prime assets, or expand aggressively into the U.S. capital markets. While foreign banks greedily schemed and took risks to gain any slight advantage in terms of profit, it was a totally foriegn concept to the Big Five! Compete for profits? Surely you jest! Stay home; stay fat and happy!
So now you know! The success of the Canadian Banking System rests with us! If we were not suckers who overpay for all our banking services, then the big banks could not have been nearly so clever! Lets give ourselves a hand! Of course don't forget to thank the government, who through the weakest banking regulations in the free world, continue to let the oligopolies thrive!
Keeping with this fine Canadian tradition; you can apply the same logic to some of the worlds wealthiest civil servants, dairy farmers, and financial planners! Low competition, poor regulations and consumer apathy! I am Canadian!