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Trudeau's folly was oil, Mulroney's is banking

Globe and Mail Update

The origins of the federal Government's recent paper on the regulation of Canadian financial institutions are obscured in the mists that perennially enshroud that ineffable and Byzantine personality, Henry Newton Rowell Jackman, the chairman of National Victoria and Grey Trustco. The first serious perturbation of those waters was Robert Campeau's unintended kamikaze attack on almost the entire Canadian financial establishment with his attempted takeover of the Royal Trust Co. in 1980. Ken White, the feisty chairman of Royal Trust, assembled large blocks of stock in a few hands that were prepared to work together to sandbag Campeau. That original and creative entrepreneur was archly judged unsuitable for a fiduciary role by the institutional leadership of the financial community, including all of the five big banks except the Nova Scotia.

The high-handed exclusion of Campeau led to a lengthy inquiry by the Ontario Securities Commission, which did not reflect flatteringly on the practices of Ken White and his allies. One of the Royal Trust management's most overworked arguments at the time was that all major financial institutions--or at least trust companies-should, like chartered banks, restrict ownership to a maximum of 10% by any single or contiguous group of shareholders. In the corporate world he who loses often seems to win, and Ken White, with a controlling interest in his company assembled in a few sizeable shareholdings, was in a position where, after half a dozen telephone calls, he could be employed by the Bronfmans and the Reichmanns. Trevor Eyton made the calls and Ken White was so employed, and then, unemployed. Apart from the relentless OSC investigation, the principal consequence of the quarantine against Bob Campeau was the reverberation of Ken White's advocacy of a 10% ceiling on shareholdings in trust companies.

The banks generally favored such a rule, a convenient one for incumbent managements, and the head of the Canadian Bankers Association, the learned but impolitic Bob MacIntosh, decried the control of more than $60 billion of assets in the hands of a few wealthy individuals and families such as the Bronfmans, Reichmanns, Belzbergs, McCutcheons, Jackman, Paul Desmarais and Steve Roman. (If Canadian business is interesting at all, it is because of the personalities much more than the techniques.) MacIntosh's initiative was one of the worst tactical miscalculations since General Custer determined that reconnaissance was a redundant activity at the Little Bighorn, and it brought Jackman snorting into the fray like the legendary warrior ofJob. He set about focusing public antagonism on the one target less accessible to public sympathy than wealthy proprietors such as himself: the banks. It was a brilliant gambit, and within a couple of years extension of the 10% ceiling had been forgotten and the banks were generally on the defensive for restricted competition, reckless credit policies, alleged disparities in treatment of small and large borrowers, and insufficiently forthright reporting of unproductive loans, which if they were written off would reveal sharp reductions of shareholders' equity. The banks' popularity was not necessarily inflated by outbursts of quixotry from unexpected quarters such as the TorontoDominion Bank's attack on Campeau's new Scotia Place on spurious grounds of zoning densities, inauspiciously rekindling that old feud.

Another such foray was the same bank's invasion of the brokerage business--not, as far as can be judged, to make money from it, but to spite the securities industry which, it was claimed, had entered the banking business by paying interest on clients' cash balances and contracting loans with customers' securities as collateral, without proper capital requirements. The biases in the federal Government paper presented by Barbara McDougall, the Minister of State for Finance, are not hard to find. The purported aims are to promote competition, variety and stability in financial institutions (none of which is lacking now), while discouraging conflicts of interest and abusive self-dealing (presumably a concern perceived more keenly after the Crown Trust shambles). In furtherance of those unexceptionable objectives, the paper proposes to enable nonbank financial institutions to group themselves together in financial holding companies and to establish Schedule C banks, whose proliferation would be encouraged.

The federal Government's jurisdiction over financial institutions is ambiguous, except in respect of banks (insurance and trust companies can be federal or provincial, securities companies are provincial); and for some years Ottawa has confined itself to the generation of inconsequential position papers, while the principal provinces have steadily upgraded their applicable legislation. In the circumstances, it is hard to banish altogether the suspicion that the new holding companies are designed in part to bring most aspects of the financial industry more directly under federal authority. A sharp intensification of regulation (apart from a desirable strengthening of selfdealing rules and capital requirements) is also promised. Unfortunately, there is no recent precedent that justifies optimism about the efficiency or even fairness of that sort of dirigent initiative. The last thing that Canada's financial industry needs now is a profusion of fly-bynight undercapitalized banks accompanied by a herniating miscellany of new regulations. Very few of the Schedule B banks (the newly licenced and mainly foreign-controlled institutions) make money now, and most are sustained by infusions of capital from their parent banks. So far, they have not, despite a commendable effort, added a great deal of competitiveness to the domestic banking system.

When rules for the formation of trust companies in Ontario were overly liberalized a few years ago, a horde of new companies entered the field, many of which have since vanished--taking into oblivion with them, in several cases, their investors' equity. An induced spawning of Schedule C banks probably would replicate that process, wipe out a lot of equity, threaten deposits, bring the financial system into disrepute, and, if present rules are maintained, dump the burden of bailing out unsuspecting depositors on the existing (and unoffending) banks. Since the Ottawa paper also proposes the conversion of all but the largest chartered banks to C banks, the result clearly would be a fettering of the major banks to the benefit of a very untested alternative.

Our banking system is one of Canada's greatest institutional strengths. As the United States moves slowly toward fewer but larger banks, we seem to be moving in the opposite direction. It is, in any case, unjust to facilitate an invasion of the banking field by virtually anyone who can rummage together a down payment and a licence fee, while unctuously denying the existing Canadian banks, among the greatest financial institutions in the world, any right to diversify their domestic financial activities.

To ensure increased banking competition, it would have been quite sufficient to grant the request by the larger trust companies for greater lending flexibility. The big trusts asked for an increased lending power of only a few billion dollars, totalling about one-third of the lending facility originally accorded the Schedule B banks. The distinction between deposit-taking institutions was blurred many decades ago by the removal of the right of Canadian chartered banks to print their own money. Certainly it is not unreasonable to give them some increased commercial lending capability. Tougher rules on conflict of interest and more rigorous capitalization requirements should have been adopted years ago, without having to be announced by a series of aerated position papers or the unseemly demise of the venerable Crown Trust Co.

What has emerged in Barbara McDougall's paper is beyond the dreams, or even the preferences, of Jackman himself. Spooked by Jackman's masterful propaganda campaign, buoyed by public antagonism toward the giant moneylenders, abetted by the maladroit public relations of the banks themselves, the Government has brought forth a document which, while espousing acceptable objectives, is couched in arbitrary and jurisdictionally aggressive terms redolent of the former Liberal regime. ("The details are negotiable, the principles are not.") In promising more and weaker lending institutions and a more stifling hairnet of superfluous regulation, the federal paper, if transformed into law by the Progressive Conservative Government, risks becoming the financial industry version of the Liberals' catastrophic National Energy Program of 1980. It should not, and probably will not, be enacted.

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