Do we really believe in the socioeconomic commitment of banks?
In 2019, December 4 was declared to be the International Day of Banks by the United Nations in order to encourage financial institutions to become responsible leaders within their communities. Almost three years after the adoption of this resolution, have Canadian banks become part of a wider social movement?
This is a great example of the archetypal love-hate relationship. As citizens, it’s a sentiment we share with others regarding banks and financial institutions in general.
On the one hand, banks make money—lots of money. The Royal Bank, the largest in Canada, has alone reaped profits totalling $4 billion in the second quarter of 2021, which is the most recent quarter reported. And just to remind you, that was in the middle of the pandemic!
At the same time, they are also regularly involved in, rightly or wrongly, financial evasion strategies, which doesn’t exactly make them sympathetic figures. Not to mention those irritating bank fees that always seem to magically appear on our account statements. Although they must have been explained when you selected your banking plan, who actually reads the fine print?
It should also be noted, and this is a definite advantage, that Canadian consumers enjoy the most solid banking institutions in the world, and that includes Mouvement Desjardins.
This is not something to take lightly.
The financial crisis exposed the vulnerabilities of American banks
During the worst part of the financial crisis of 2008–2009, at least one American bank failed every week. Overly permissive regulation allowed them to lend money almost without restraint. But when their customers found themselves incapable of repaying their loans, many banks wound up running out of funds.
How would you react if one morning you tried entering the front door of your bank and found the entrance was barricaded with a chain? Such was the experience of millions of Americans.
For context, in the U.S., there are around 5,000 banks and savings and loan institutions, which are often locally or regionally based. For the surrounding community, their existence is a point of pride, but all it takes is an economic crisis to expose their vulnerability; these independent entities cannot rely on the support of a network.
And this is in addition to an underlying fault in the American financial system, in which property owners can deduct the interest paid on their mortgages on their tax returns. This is an explicit incentive to borrow.
When the crisis hit, on average, 100,000 American households had their homes taken into possession by bailiffs every day. Property values fell, leaving them unable to sell, especially if the owners had fallen into the trap of remortgaging on a regular basis. In other words, they owed more money to their bankers than they could possibly obtain by selling their property. Repossessions multiplied.
In Canada, this option does not exist. There is no advantage to borrowing. Around 20 years ago the idea was tossed around, but after witnessing what happened down south, the subject was dropped.
Our banks are solid, but are they socially responsible?
Comparatively speaking, as consumers, we have more security, particularly given that the Canada Deposit Insurance Corporation guarantees up to $100,000 in deposits in accounts at recognized financial institutions. It would be shocking if they had to intervene, but you never know.
So, our banks are solid. But can they contribute to the public good?
The newly re-elected Trudeau government believes they can. By all indications he seems intent on delivering on his electoral promise of increasing the tax rate on banks and insurance companies from 15 percent to 18 percent. The new revenue will be used to help new home buyers save through a tax-free savings account, a kind of TFSA for real estate.
At the same time, banks are finding themselves increasingly in the sights of activist shareholders who are intervening on their decision making to the fullest extent possible. Their targets are often pension funds that have amassed huge blocks of shares, through which they are able to execute on demands to invest in humanitarian or other causes. For example, banks are increasingly being asked to stay away from fossil fuel companies, whether by liquidating their investments or not financing their operations.
At any rate, financial institutions have become more open to environmental issues, though not necessarily for noble reasons. They are especially keen to avoid getting into trouble by approving loans to companies whose operations end up being on the wrong side of the law by dint of some future legislation.
And don’t forget that these banks are led by people who are sensitive to the cultural issues of the day. For example, the National Bank is currently running a big advertising campaign to draw attention to its intention to implement more diverse hiring, increasing the proportion of such employees to 25 percent by the end of 2023.
Is this just for optics? To improve their image? Basically, it doesn’t matter. The idea remains the same, which is to make it so that everyone benefits, not just shareholders.