Ed Clark keeps a simple formula for banking. "Just stop doing the stupid things," the Toronto-Dominion Bank chief said the other day, "and these are money machines like God has never created before."
He's right. In sporting terms, banking is like amateur tennis. It matters less how hard you hit the ball than how many unforced errors you make - that is, how many stupid things you do. Bankers win by not losing.
But just because a task is simple to describe - don't hit the ball into the net, don't lend money to people who can't repay it - doesn't mean it's easy to do. A recession makes the banker's dilemma even more difficult. Should he lend more, because he can charge higher rates and impose strict terms on borrowers? Or less, because so much of the data - the unemployment rate, the bankruptcy rate, and so on - is so bleak, and the odds of default are higher than before? Back in the day, Canadian Tire promised customers they could give like Santa and save like Scrooge, but a bank can't do both at the same time.
If you pose the question to Finance Minister Jim Flaherty, the answer is easy: Give, give, give! Mr. Flaherty was burned by the accusation that he wasn't taking the economic downturn seriously enough and won't make that mistake again. He's latched on to the notion that the banks are being too miserly and he won't let go. That's a political winner, and the Bank of Canada helpfully provided him two more bits of ammunition yesterday. The central bank released a survey in which 63 per cent of businesses said credit is getting tighter, and a survey of bank loan officers confirmed the same. No doubt that will fuel the minister's sense of mission.
But what if Mr. Flaherty is wrong by 180 degrees? (Liberals and income trust unitholders, insert your own snide remarks here.) In other words: What if the real problem with Canada's banks isn't that they're making money too hard to get, but too easy?
Business owners may complain about the banks and the now-higher cost of borrowing money. But that's only one part of the story. For individuals, there's little evidence the banks have turned off the spigot (even if they have made it more expensive to obtain it). The creditworthy can still get bank-issued plastic with no trouble. In November, the country's banks increased consumer credit by 9.9 per cent from the same month in 2007 - excluding mortgages, which are swelling at a similar rate.
Think about that for a moment. During the boom, the domestic banks made a ton of money by pumping out consumer loans; that business has been growing at double-digit rates. It was all good. But now the economy is contracting. The ranks of the unemployed are growing. Yet credit card balances and personal credit lines are bulging and the banks show little sign of hitting the brakes.
Could it possibly be, to borrow Mr. Clark's line, that someone on Bay Street is doing something stupid? Ian de Verteuil, bank analyst nonpareil at BMO Nesbitt Burns, thinks so: "Contrary to popular belief, we believe the Canadian banks need to be more frugal with their issuance of credit in 2009," he wrote. "It was lack of control that hurt the banking system globally. Call us crazy, but we don't see how you can put out a fire with gasoline."
One wonders whether Mr. Flaherty has thought through the implications. First of all, there are political risks. If the minister continues to badger the big banks to grant loans, and one or two of them gets carried away and winds up in trouble as the recession grinds on in 2010 - well, voters will pin some of the blame on him, justified or not.
But the more important risks are financial. Canada, as the minister himself has said, is one of the few developed countries to have avoided a costly bank bailout. The British government controls Royal Bank of Scotland. It will have a 43-per-cent stake in the new Lloyds Banking Group, created from the shotgun marriage of Lloyds and HBOS. The U.S. government, meanwhile, has pumped more money into Citigroup than the bank is worth (market capitalization: just $30-billion U.S.), as part of the Treasury's $250-billion bank recapitalization scheme. Just last week, the French government announced a second round of capital injections into its banks, at a cost of €10.5-billion ($14-billion).
None of these measures was necessary in Canada. True, the government has offered to buy mortgages from the banks. But Ottawa hasn't had to provide one dollar in equity. So what makes Canada's banks different from British or American or French banks? They did fewer stupid things. Left to their own lending decisions, they've remained solvent and liquid (so far). The Canadian system, whatever its flaws, works. Mr. Flaherty: Why mess with that?