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Banks spin as interest rates fall
Banks nearly slip and fall as they show a moment of collusion?

By Don Elzer - February 1, 2008

In the wake of a rogue bank trader losing $7 billion for France’s second largest bank, we’re seeing just how fragile our big financial institutions are.

This week, Mark Carney has taken over as the new Governor of the Bank of Canada amidst growing public scrutiny of how our big financial institutions govern themselves.

While he’s facing the challenge of fighting off a looming recession and possibly redesigning our central bank, there is a greater question.
Will Carney place the interests of his country first, or the interests of Canada’s big six banks?

We may discover a bit more about Mark Carney soon enough as he ponders another drop in interest rates in the wake of our nervous chartered banks.

Financial markets were buzzing this past January over suggestions that Canada's big banks may not cut their prime lending rates, despite an expected rate cut from the Bank of Canada.

Chartered banks normally raise or lower their prime rates in lockstep with changes the Bank of Canada makes to its key overnight lending rate. A report in the Globe and Mail said some banks were contemplating keeping their prime rates right where they are, as a way of restoring their profits at a time when the credit crunch has forced interbank lending rates above the Bank of Canada's target rate.

Should the banks ever refuse to follow the central bank's lead, it wouldn't make  borrowing any cheaper which would make the Bank of Canada's rate cut largely ineffectual.
Ted Carmichael, chief economist at JP Morgan Securities Canada, said it would not be unprecedented for this to happen. While the spread between the prime rate and the Bank of Canada's policy rate has remained stable since 2000, he pointed out that the spread had widened in the past, just before or during recessions in 1974-75, 1980, 1981-82, and 1990.

"As growth prospects deteriorated during these periods, credit risk rose and the spread between the prime rate and the [Bank of Canada] rate increased," he wrote in a note to clients on the Wednesday before the Bank of Canada lowered its rate in January.

"It simply means that if the [Bank of Canada] desires to reduce borrowing rates for consumers, home buyers and businesses it has to make larger reductions in its policy rate," he said.

On that same day, Royal Bank chief executive Gordon Nixon hinted at a banking conference that prime rates were being watched "very carefully" as the central bank continued to lower rates.

He didn't elaborate on the comment but reports cited insider sources saying that Canada's largest banks were considering a joint effort to ignore an expected key rate cut of a quarter of a percentage point expected on January 22nd.

At that point most of the big banks chose to dodge questions of whether they've been talking behind closed doors. According to the Global and Mail, they either didn't return calls or refused to comment.

These reports have now placed Canada’s big banks under the microscope as the word “collusion” once again surfaces in some financial and political circles.

The entire issue surfaced just before Christmas when one media report cited a TD report issued in mid-December, in which that bank's economics department speculated some banks could choose not to reduce the prime rate after a Bank of Canada rate cut.

Back then a TD spokesman said the report from the economics department was "no reflection of corporate policy" and he pointed out that TD has no history of defying the Bank of Canada.

Then the whole issue heated up by mid-January when Royal Bank spokeswoman Beja Rodeck had issued a statement via e-mail which was one of many statements from the banking industry that confused this issue, since every time a bank suggests they know what other banks are thinking, more questions about the integrity of the free market surfaces.

Rodeck said, "financial market disruptions have affected RBC's credit spreads as well as those of all financial institutions."

Duncan Mavin, from the Financial Post reported on January 16th that the executives at Canada's big banks were outraged at suggestions they have held discussions to set interest rates independently of rate-setting decisions from the Bank of Canada.

It is "absolutely not" the case that the banks get together to set rates, said a spokesperson for Bank of Montreal.

"Pricing decisions are proprietary decisions and we don't discuss them in advance," he said.

The Royal Bank of Canada denied strongly that any collusion had taken place. "Canadian banks make competitively driven, independent decisions with respect to the setting of interest rates," said their spokeswoman. "Pricing decisions reflect both economic realities and the Bank of Canada's monetary policy."

A spokesman for Toronto-Dominion Bank said the bank sets rates following its own policies, and "factors in a bunch of things including market conditions and what the Bank of Canada is doing."

"From our point of view, it's a TD decision and not a group decision," he said.

It’s interesting, to see how the banks have responded in unison to these allegations of possible collusion. But it is disturbing that they don’t seem to recognized what the citizens of the country see, that in fact interest rates have been set by all of them at the same rate at the same time for the past 60 years.

And as history proves, they may not follow the Bank of Canada rate.

The banks appear to be oblivious to the common knowledge and frustrations that the public has with them. It should be noted that Canada's six biggest banks reported 2007 profits totaling a record $19.5 billion on revenues of slightly more than $74 billion. A banner year as three of the six banks reported their best-ever annual earnings. And that's despite most of them having to take big write downs related to the subprime mortgage chaos in the United States.

While they will continue to feel the subprime ripple effect in 2008, this past year looked pretty good. The banks are crediting the numbers to more mortgage and commercial loan business, fatter spreads, more credit-card borrowing, more mutual fund sales, more stock market trading, and better cost controls.

And if you’re unhappy with bank fees, especially monthly bank account fees and ATM fees, consider this. While the banks don't break those out separately in their financial reports, the Canadian Bankers Association has said that service fees account for about five per cent of total bank revenues. For 2007, that would mean service fee income of about $3.7 billion.

It seems that any suggestion that banks should not retain the level of profit they are accustomed too is believed by both government and the financial sector to translate into an unhealthy banking environment.

It will be interesting to see how Mark Carney navigates the Bank of Canada through these challenges.

If he can.


Don Elzer writes and comments about travel, current affairs and the natural world. He is the Director of the Wildcraft Forest Ecomuseum and is the editor of The Monster Guide which can be found at
He can also be reached by email at:

Will he reform our central bank - or will our banks reform him?