A NATION OF BANKERS © David Watts 06/02/2010

In the recovery from the recent recession, a new Canadian strength became evident. We’ve long been known for our arts, diplomacy, pluralism, resources, peace keeping and military.

But banking, the solidarity of our currency, and the energy of the economy on which our country was built, and on which all these activities rest, was something we took for granted.

Yet it did not just happen. A legacy of policies, decisions, practices, mistakes made and learned from, all contributed to our surviving the recession less scathed than most economies.

In this latest crisis, as in the Great Depression of the 1930’s, there were no major Canadian bank failures. International economists have given our system top marks.

We have reason, then, to look at our banking sector to see what has worked and why, and to be more conscious of what part this system has played in the Canadian story.

Most of us have less awareness of the banking sector than of specific banks with which we deal. These have shaped and been shaped by the system, and it is here that we shall begin.

Many of our banks now use initials like CIBC or BMO, or coined words like Scotiabank. But a study of the names, or what these initials stand for, tells us where they come from.

Oldest is the Bank of Montreal, founded in 1817. Now Canada’s fifth largest, it dominated the national scene from before Confederation till the establishment of a central bank in 1934.

Next is the 1832 Bank of Nova Scotia or Scotiabank, with the most international presence.

The Bank of Toronto founded in 1855 joined a century later with the Dominion Bank formed in the year of Confederation. With the addition of Canada’s first trust company, they now make up TD Canada Trust that prides itself as North America’s most customer friendly bank.

The Royal Bank of Canada was founded in Nova Scotia in 1864 and took its present name in 1901. It has since acquired five other banks, to become Canada’s largest.

Youngest of the Big Five is CIBC. The Canadian Bank of Commerce was founded in 1867, the year of Confederation, and the Imperial Bank of Canada eight years later.

Three of Canada’s Big Six, the Bank of Nova Scotia, the Bank of Montreal and la Banque Nationale still have the names they had at their beginnings before Confederation.

The other three have changed identities due to mergers. Yet with their individual and specific skill sets, all six share a number of general strengths.

The first is their durability. Like Canada, they’re survivors. The youngest has been around 125 years, the oldest 200. None is a newcomer. All have adapted to changing circumstances.

A second characteristic of our banks is their size: large enough to rank internationally, not enough for any one to dominate the national scene. Four rank in North America’s Top Ten.

These four are considered the best managed on the continent. In global terms our top banks are middle sized. Of the world’s top one hundred, our top four rank 45th, 46th, 49th, 54th and 78th. In the middle means they must be able to deal with others, and be competitive.

A third characteristic of our banks is their historic connections to industry. Each was created and evolved to help a certain sector of the Canadian economy.

The Bank of Montreal grew out of the fur trade. Many of its first leaders rose through the ranks of the Hudson’s Bay and North West companies. One was also involved in early financing of railways; he went on to become first President of Canadian Pacific, our first transcontinental.

The Bank of Nova Scotia grew up with the Atlantic shipping trade to Europe, the east coast of the US, and the West Indies. The Royal Bank of Canada was first linked to timber and fishing.

The Bank of Toronto was set up by millers to move the grain of Upper Canada to market. Its partner, the Dominion Bank, worked with the mining industry—specialties the two blended.

The fourth strength of Canadian banking is the quality of the men who laid its foundations. These include Bank of Montreal’s E. H. King, seen as both a tyrant and a demigod. They include his successor George Stephen who put his personal assets on the line to save the CPR.

And they include the Dominion Bank’s Edmund Osler who extended the reach of his bank and Canada across the Atlantic, while remaining a generous and genuine human being who “respected money but gave his love to animate things like flowers and children.”

They include finance ministers Galt, Hincks and others, and governors of the Bank of Canada. Since 1971, they include women in various banks, among them our present Banking Regulator.

The fifth strength of our banking sector is its accountability—not only to shareholders and investors but to the public through a federal government that regulates financial institutions.

This operates at many levels. It begins with the federal power to grant or withhold a charter, a high reserves-to-loans ratio, regular inspections and other stringent requirement on lending.

A control we now take for granted is the Bank of Canada. The national bank does not give loans and other consumer services but sets the prime interest rate and stands behind our dollar.

Originally the Bank of Montreal functioned as central banker and individual banks issued their own banknotes. These were called in and replaced with Bank of Canada bills in 1934.

After Confederation it was debated whether to have a single Canada-wide banking system or a two level one, with regulated national banks and less regulated regional ones as in the US.

The Bank of Montreal, then dominant, sought a two-level system to give it freedom to pick more promising clients. Others, led by the Bank of Toronto, held for a single banking system.

The single level won out, leading to the system of branch banking we have today. The case for this was strengthened by a series of bank failures in the US which had a two-level system.

The branch banking system was part of the first federal Bank Act of 1871. Now the Financial Institutions Act, revised every decade, is one of the strongest controls of the banking sector.

But the ultimate safeguard is an alert public. In the 1990’s Canada’s banks were seeking to merge into larger units and follow the less regulated route of their American counterparts.

Public reaction to bank profits led the government to deny the merger requests. This preserved the integrity of the Canadian system, and helped it weather the recent recession.

The federal government, the Bank Act, a branch banking system and the political independence of the Bank of Canada, have all helped keep the financial sector accountable.

But these controls must be balanced with flexibility to allow the banking system to adapt to changing conditions. This flexibility plays out in the ten-yearly debate to revise the Act.

Not all possible situations can be foreseen by government or a head office. In the early 1900’s the Bank of Toronto expanded onto the prairies by taking over local private banks.

In Cartwright Manitoba, the local manager had difficulty with the new requirement of regular reporting overdue loans to Head Office. When winter weather kept farmers from coming in to sign the papers, he proposed to renew their loans and sign their names to the papers himself.

His unorthodox suggestion echoed a precedent of 200 years earlier under the French régime.

When the Saint Lawrence froze up before the supply boat arrived with bullion to pay the troops, Intendent Jacques Meules decreed that specially marked playing cards, of which the colony had a surplus, were to be used as currency until the ship arrived in the spring.

He too was rebuked by superiors, but his interim measure kept the colony afloat in the winter. It may even have prevented a mutiny by a garrison that otherwise would have gone unpaid.

And there was a longer term effect. When French soldiers completed their Québec turn of duty and returned to France, they took with them the practice of “playing card money.” This spread in Europe and became the first example of standard denominations of paper money.

The necessity of Canadian winter called for a flexible solution that in this case became long term. That is what is meant by the writing on our currency: “will pay to the bearer on demand.”

The use of paper money in lieu of metal was a stroke of genius. But so is any currency—paper, metal, wampum, beads. It shows that value is a creation of the mind and this can be transferred.

A monetary system illustrates Relativity: that Energy, represented by Money, transcends Space. A banking system that loans money before an event also transcends Time.

Mackenzie King said Canada has too much geography and not enough history. It’s not surprising that a meeting place of timelessness and spaciousness has been an incubus for monetary innovation.

Men of character and skill, who mastered the banking trade of the Old World and how to apply it in the differing conditions of the New, dealt with workers in the trades of fur and agriculture, forest and fishing: trades governed by rhythms of climate and seasons, not clock and calendar.

To transmit this wealth required a broad view. A land of limitless resources, sparse in population, called for an approach as demanding and diverse as the mix of people who gathered here.

Meeting that challenge, putting themselves on the line, explains why many of Canada’s early bank executives died in office or retired for health reasons.

Making the grade for investors and public, these men built a Canada that gained a reputation as a Nation of Bankers. We who reap the rewards of their work owe them a debt of gratitude.