01 February 2009 Issue 2 John Siembida

Preparing for challenges ahead - on Canadian banking issues

After avoiding the worst consequences of the global credit crisis, Canadian banks are in much better shape than other world banking groups. However, they are concerned about risks created by competition from foreign banks, many of which have received financial assistance from trillion dollar rescue packages.

While the federal Finance Minister’s recent move was designed to help restore international inter-bank wholesale lending, it has also helped level the playing field for our banks. Canada’s major players had been impacted by the immense scale of bad mortgage loan and asset-backed commercial paper guarantees given by other governments to stem the fallout elsewhere.

That situation was compounded by an extensive freeze in credit markets, already disrupted by gyrating overnight interest rates, and lack of confidence in lending to other banks, all of which combined to create a ‘perfect financial storm’.


However, as markets return to normal, our banking experts are starting to eye tactics to further improve efficiency and cost-effectiveness. Having weathered the worst liquidity crisis since 1929, our banking system has been energised by top financial grades from the International Monetary Fund (IMF) and World Economic Forum.

Canadian banks have hired better-qualified staff and have leveraged use of technologies to improve output from their 257,000 employees. Increased use of technology combined with effective outsourcing could help create more permanent cost advantages for them.

Although the former creates higher base costs, these are offset by the latter through more effective analysis and skilful implementations. Just as the massive multi-bank chequing centre in Mississauga reduced administrative costs when it began operations in the 90’s, the major banks must examine all angles of their business budgets, in order to cope with the increased costs of doing business and creating innovative services.

The Canadian Bankers Association (CBA) is instrumental in implementing both the Basel II agreement, which uses three mutually-reinforcing pillars of banking responsibilities, and other ongoing regulatory procedures, to ensure our banks meet, and often exceed, international protocols and account-processing standards.

Yet, even as the CBA is achieving progress on these and other issues, world bankers are meeting to devise greater transparency, increase capital requirements and improve supervision in order to raise standards of international compliance and liquidity, in light of the near-meltdown of operations caused by the US sub-prime mortgage and bank crises.

Recent G8 discussions led by the UK have centred on reviving the fixed gold standard from the 1944 Bretton Woods Conference agreement, which sought to underpin and stabilise financial trading between nations through the IMF. By establishing permanent ratios for money transfers and by using the US dollar and sterling as reserve currencies, greater control and stability were achieved over global financial trading, when Bretton came into operation in 1958.

While such reinforcement today would buffer currencies against crises, the heightened attention towards more legislation and increased credit and currency control with higher minimum capital requirements will raise costs across the board.

One objective, full public disclosure of a bank’s debt obligations and liabilities, has been planned for this year-end, according to the CBA, and the Office of the Superintendent of Financial Institutions also expects our banks to offer Advance Internal Ratings-based Approaches soon. Yet, increased supervisory controls and more time-sensitive deadlines will also boost administration charges unless increased technology and outsourcing can yield greater efficiencies.

New ideas

All of these factors, along with ever-increasing building and overhead costs, bring further challenges to the ‘lean-and-mean’ philosophy, which has started to attract more banking management and executive staff. At the same time, the attractiveness of being ‘green’ has also created considerable interest. Outside suppliers cost Canadian banks CAD12.5 billion in 2007.

We aimed to give more impetus to stimulating new ideas and concepts for Canadian Financial Institutions at the Access Group Round Table, held in Toronto on 9 December. Leaders from many Canadian Financial Services companies attended, debating and discussing industry issues and solutions.

With the horrific credit crisis in international banking resulting from ABCP, sub-prime mortgage loans and uncontrolled laissez-faire operations hopefully at an end, we need to focus on bringing greater attention to many of these challenges.

Questions and answers

While many questions still need answers as well as solutions, it is reassuring to note that Canada has about 5 per cent of sub-prime loans and our ABCP issues are likely to be settled shortly. It should also be remembered that European banks have been allowed leverage ratios of 40 times deposits versus 20 times North American banks, and some UK banks have gone even higher.

Implementation of Generally Accepted Accounting Principles across North America would be a major step forward in making business more transparent and responsible.

Of course, these loan catastrophes emphasise the vital need for maintaining contact and trust with your leading customers or clients in difficult times, as well as serving them to the best possible standards and with appropriate products, as Steve Matheson, the VP and manager of Mississauga City Centre branch of HSBC Canada articulates strongly.

He says that his role as commercial banker is to ‘reinforce the importance of strong management team’, twinned with the responsibility for staying close to customers. Juri Kudrasovs, the Senior Manager for Commercial Banking at nearby Scotiabank agrees and says his sector has held up as well.

Although conditions are slower, with more companies being cautious about expansion, demand has still been healthy from small business and other commercial users, adds Kudrasovs.

In addition to focusing on more productive business in specialised areas, another way of improving bank margins is to cut costs by targeting provision of services. We know that some management have thought of a differentiation process from other ‘Big Six’ by touting dedicated branches for certain services, instead of continuing to be ‘all things to all people’ in certain areas.

Thus, in the future, we may see the establishment of branches dedicated to small business, or branches that only offer investments services or more other focused services. Joint bank partnership call centres might be another innovation, for instance, just as the joint cheque processing centre has been a major cost cutter.