A security guard at Silicon Valley Bank monitors a line of people outside the office on March 13, 2023 in Santa Clara, California. It was days after Silicon Valley Bank collapsed.Justin Sullivan
John Turley-Ewart is a Canadian banking historian and principal at Regulatory Risk Management Inc. His clients include Royal Bank of Canada.
The contrast between the Canadian and U.S. banking systems was again brought into sharp relief recently. The sudden closure of the Oklahoma-based First National Bank of Lindsay on Oct. 18 and the announcement of the U.S.’s Open Banking rules last week showcase how history sets countries on different paths, even in banking.
For those who wonder “what’s the holdup” for open banking in Canada, in which customers can more easily switch financial institutions, therein is the answer.
This month, the U.S. Office of the Comptroller of the Currency (OCC) identified “deceptive bank records and other information suggesting fraud,” that First National was in an “unsafe and unsound condition” with its debt to creditors and others exceeding its reported total assets of US$108-million. This was the second bank failure this year in the U.S. and some financial observers anticipate more to follow.
Amidst the growing questions about this bank failure came the Consumer Financial Protection Bureau’s (CFPB) long-awaited Open Banking rules that affect how bank customers access their financial information, a change that will ripple through the entire U.S. banking system.
These new rules will compel banks and other financial institutions to share personal financial data of individuals at their request and to transfer that data to another provider without charge.
Rohit Chopra, the CFPB’s director, said the change “will give people more power to get better rates and service on bank accounts, credit cards, and more.”
In Canada the advocates for open banking have been calling for similar rules, encouraged by the Liberal government who promised to implement it as of January, 2023 – a promise that has not been kept.
Many reasons have been given as to why Canada is an open banking laggard, trailing countries such as Australia, Britain and now the United States. Change is slow in Canada’s financial sector. The pandemic, the rapid decrease in interest rates that came with it to keep the economy on life-support, and the equally expedited rate increases to tackle inflation are among the reasons that have been cited.
Yet the overriding explanation can be found in the fact that a century has passed since Canada had a bank failure such as First National Bank of Lindsay, where some depositors are out-of-pocket. Indeed, the last time Canada witnessed the failure of two small banks in 1985 (the Northland Bank and Canadian Commercial Bank) it led to a federal commission and an overhaul of Canadian bank inspection, leading to the creation of the Office of the Superintendent of Financial Institutions.
There will be no federal inquiry on bank supervision in the United States because of the Lindsay insolvency.
One of the very first and most divisive debates Canada had after Confederation in 1867 was on the nature of the banking system. It was one that pitted encouraging competition and what it was envisioned to entail (faster economic growth, better access to more and cheaper loans and banking services) against stability, prudence and sustainable growth.
Prime Minister Sir John A. Macdonald gave speeches and debated the subject in Parliament, he lost a finance minister in a disagreement over which way the country should go, but in the end, a compromise was reached. The compromise was to concede the debate to competition and faster economic growth, hidden by the veneer of a Bank Act in 1871 that promised safety and prudence yet offered nothing of the kind.
The outcome was a bank failure rate of roughly 40 per cent over the next half-century that culminated in the storied collapse of the Home Bank of Canada in 1923. It brought street protests in Toronto and small towns across parts of the country. At least one suicide was attributed to the bank’s downfall. Public calls were made for transparency: What did the Canadian government know about the Home Bank’s condition and when?
In truth it knew almost a decade before that the Home Bank was insolvent, but Canada was at war and closing it might have shaken confidence in the country’s banks more generally, so nothing was done. With the Home Bank failure came the end of an era in Canadian banking where competition trumped stability.
Change would come slowly to banking as the 20th century progressed, and at any sign of trouble, larger, better-managed banks were encouraged by Ottawa to take over smaller rivals. This history explains why Canada doesn’t have bank failures such as those in the U.S. It also explains why Canadians are still waiting for open banking, and why they are likely to wait a long time before they see rules such as those introduced last week in the U.S.