Canadian banks stand tall, but not alone

The Occupy Toronto movement was always doomed to fizzle. A successful protest is fuelled by the anger of the masses. But the percentage of Canadians who are truly mad-as-hell at the Bay Street elite—mad enough to take to the streets—is rather small. Even those on the political left must find it hard to get too angry at the Bad Old Banks these days, when stateside liberal icons like the economist Paul Krugman praise Canadian bankers as prudent, responsible and worthy of emulation.

Three years after the financial crisis exposed huge cracks in American and European financial institutions, the international love-in with our bankers carries on. Canada's banks—which are the "envy of the world" ( The Guardian)—are a "main reason for the country's economic resilience" ( The Economist). Their performance is perhaps because of the nature of Canadian bankers themselves: "[It's]partly a cultural thing—they are more conservative," cooed Paul Volcker, the former Federal Reserve chairman, in the Financial Times last year.

All of this acclaim is paying off in the real world. Mark Carney has been named chairman of the Financial Stability Board, the leading global body for financial regulators, not only because of his own reputation but because of Canada's. Naturally, the praise is also causing a few swelled heads in high finance. Terry Campbell is the new chief executive of the Canadian Bankers Association; here's a line from his first public speech in the job: "As one of our member bank CEOs has said, banks in Canada are in the business of lending money to people who will pay it back. Sounds simple, but it's a lesson that a number of banks around the world seemed to have forgotten."

Gosh. When you put it that way, it really does sound simple! Those dumb Americans gave mortgages to people with almost nothing saved for a down payment. No Canadian banker would be so foolish. Except our banks do the same thing, all the time. The difference is that if the borrower defaults and the loan loses money, it's the federal government that usually swallows the loss, via the Canada Mortgage and Housing Corp.

Mandatory CMHC insurance is the best deal going for the banks: It turns the vast business of residential mortgages into a source of nearly risk-free profits. But this is hardly the only way in which our sober, prudent bankers benefit from a playing field that's tilted in their direction. I'm not saying that Canadian bankers' reputation for good behaviour is totally undeserved. There probably is something in our culture that makes us good at the lending business (hockey, maple syrup, banking: Just add it to the list of clichés).

But it's a whole lot easier to be good at "managing risk" when the government is your friend, and allows you to make abundant profits from low-risk activities.

This manifests itself in big and small ways. Ever try to pay off a mortgage early in Canada? Get ready to be whacked with penalties. In the U.S., many states ban such fees, at least for conventional mortgages. The most popular type of U.S. mortgage allows homeowners to lock in an interest rate for 30 years and prepay any amount at any time. Nothing like that will ever be available here. No banker in his right mind would ever offer it—too risky—and no politician would ever demand it.

Our political leaders and regulators do try to limit banks' power, of course. But these efforts are often half-hearted. They've long banned the sale of insurance in bank branches, out of fear that banks would use their enormous real-estate edge—thousands of storefronts—to colonize the insurance sector. No problem, say the banks. Now they just put an insurance office right beside the bank. The letter of the law is met. The spirit of the law is violated. Ottawa looks the other way.

The big banks will eventually use their size advantage to grab a bigger piece of the insurance business, just as they have done in investments. Go on, try it: Walk into a Royal Bank branch and tell them you want to buy a mutual fund. Do you think they'll offer you something from Fidelity? They'll just sell you an RBC fund instead. As far as the feds are concerned, that is perfectly kosher.

The dominance of the Big Six is self-perpetuating. Because they are so big, they can acquire or shove aside smaller competitors easily, making them larger still. They use their giant balance sheets to offer big loans to big companies—and in the process capture other, more lucrative lines of business, such as providing merger advice. Or they use their muscle to prey on the weak. In 2007, the bank founded by Bay Street entrepreneur Ned Goodman ran into financial trouble, and Bank of Nova Scotia came to the rescue. But the price was steep: Scotiabank also coveted a large minority stake in Goodman's mutual funds business. Today it owns the whole thing.

Now our bankers seem on the verge of gaining control of yet another business—the Toronto Stock Exchange. Aren't they good? Aren't they smart? Aren't they lucky to be in a country where monopolists are tolerated?