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DISSENTING OPINION OF
THE NEW DEMOCRATIC PARTY
The Future Starts Now
"I've seen the future, and brother, it is murder"
"When the capital development of a country becomes a by product
of
the activities of a casino, the job is likely to be ill done"
Preamble: Statement of concern over the process followed within
the Standing Committee on Finance
The New Democrat members of the Standing Committee on Finance feel it
is necessary to go on record and state that the process followed by this
Committee must be changed in the future, and that never again a 250 page
majority report be imposed to the members of the Committee without adequate
time for review, debate and input from its members. In this instance the
Opposition members of this Committee had effectively less than 24 hours
to react to the report of the majority, on which they had no direct input.
If we are to ensure that committees remain at the core of parliamentary
democracy, and the public interest is upheld, then these concerns must
be heeded and acted upon.
The majority report of the Standing Committee on Finance generally endorses
the vision and the recommendations of the MacKay task force. One of the
major exceptions is the report's opposition in allowing banks to retail
insurance and automobile leasing products. New Democrats strongly support
the position of the Standing Committee on Finance, regarding the restrictions
on banks and life insurance companies selling insurance and automobile
leasing.
The New Democrat members of the Standing Committee on Finance are pleased
that the MacKay task force adopted some of the recommendations that we
have been advocating for years such as: appointing an independent financial
ombudsman (albeit with limited powers), enhancing the credit union system,
ensuring a broader access to the Canadian Payment system and better access
to basic banking services. For the Finance Committee, we are pleased to
see that the majority report is urging the government to put in place a
consumer protection bureau and supports the establishment of a Financial
Consumers' Organisation as advocated by the Canadian Community Reinvestment
Coalition. However, we believe (as was the original position in MacKay)
that it may not be in the public interest for government to deny public
funding to such an advocacy group.
For a decade, New Democrats have been advocating policies to protect
otherwise viable small businesses against credit crunches and consumers
against unjustified interest rate spreads and service charge abuse. There
is no reason for businesses to fail for artificial financial reasons.
We are pleased to see the National Liberal Task Force on the Future
of The Financial Services Sector recommended policies long promoted by
the NDP, such as a) upholding the "big shall not buy big" policy
(and rejecting the proposed mega-bank mergers between the Royal Bank of
Canada and The Bank of Montreal as well as the Toronto Dominion and The
Canadian Imperial Bank of Commerce); b) introducing a Canadian Community
Reinvestment Act; c) creating an Independent financial ombudsman with binding
powers; d) compelling credit card issuers to calculate interest charges
in a manner which fully credits any partial payment by the credit card
holder and e) capping credit card interest rates. In a telling contrast,
the Majority Report of the Standing Committee excluded these recommendations.
The MacKay report fails in its fundamental objective to chart a policy
for the financial sector that would achieve an acceptable balance between
the private interest of financial institutions and the public interest
of Canadians. The following explains why the failure of both the MacKay
report and the majority report is not acceptable by the NDP, and why this
NDP minority report must become a document for the public record:
1) The MacKay report and the majority report are based on a narrow
and short-term definition of the public good that amounts to nothing more
than the sum of private interest which would prevail at the expense of
the public interest. It is dangerously simplistic to assume that a deregulated
open financial system will somehow magically support the public interest.
The global financial crisis and the inability of financial authorities
to contain it demonstrate that there is simply no evidence that a deregulated
financial system is efficient, especially in the long run, or that globalised
finance will be stable. A number of international banks have either collapsed
or are being rescued at great cost by taxpayers. Aggressive speculators
extort exorbitant profits at the expense of the poor by pitting country
against country, company against company and community against community
in a merciless race to the bottom.
Close regulation of financial institutions and the dismantling of the
global casino are required as well as the need to redefine how we measure
and create wealth. Our ability for unprecedented wealth creation stands
in sharp contrast with the reality of fewer people benefiting from this
capacity, as well as the collapse of global demand because of shrinking
purchasing power. In Canada, the effects are already felt through the collapse
of commodity prices and the worst farm crisis since the Great Depression.
The current chaos is largely created by the deregulation of global finance,
the quest for fiscal surpluses and speculative greed. We need a new economic
vision for the 21st Century, one based on increasing real wealth and reducing
inequality.
A New Democrat vision for Canada's financial system emphasizes a much
broader definition of the public good, one that includes, as core elements,
full employment and cooperation between: trade unions, small and
large businesses, community organisations, government, the financial sector,
and, most importantly, a proactive role for the Bank of Canada. A social
democratic perspective must go beyond the traditional image of the financial
corporation and requires financial institutions have broader responsibilities
than just to their shareholders. These responsibilities are commensurate
with the vast powers and privileges granted to financial institutions by
the public through Parliament. Financial regulation must therefore foster
a commitment by chartered financial institutions to the public good, to
the communities they serve and the country which supports them.
2) Regrettably, the MacKay report and the majority report recommend
more deregulation; this will only amplify the strategy of financial institutions
which have sought to take advantage of deregulation to maximize their earnings
by financing massive speculative investments.
As financial institutions continue to fail, to cite the American experience,
more and more U.S. politicians and bankers recognize existing mechanisms
of control cannot cope. Meanwhile, it is disturbing to see that the total
exposure of the big five Canadian chartered banks to risk in the ailing
Asian markets exceeds $40 billion - or more than 100% of their combined
capital. The Canadian government must recognize the pressing need for re-regulation.
Regulators must deal with recent destabilizing financial innovations (see
parts 4&12). The task force has not researched this crucial issue.
3) Neither MacKay nor the majority report deal properly with
the crucial role of banks. The NDP rejects the notion that banks are just
a special class of financial intermediaries. Banks are at the core of our
economic system. If we cannot regulate banks properly, we lose financial
and ultimately our political sovereignty. Banks decide which firms survive
and which ones fail; which jobs are created and which jobs are destroyed;
who gets a home and who does not. Simply put, banks are not ordinary corporations.
The banking sector does much more than just lend deposits. Banking institutions
create money by granting loans to firms, consumers or governments. Banks
also create money through indirect means such as securitization and off-balance
sheet activities. Banks are therefore not merely intermediaries. In the
US, for instance, this reality is reflected by the Community Reinvestment
Act (CRA), which creates a framework of accountability between banks and
their communities. The Majority report is opposed to the principle of a
CRA. In fact, the majority report moves further away from the notion of
accountability by recommending that Community Accountability Statements,
as proposed by MacKay, not be required from financial institutions. New
Democrats believe it is essential that Parliament should empower an all
party committee to conduct a full inquiry into the US community reinvestment
system, and into its impact on job creation, affordable housing, and community
development.
4) Both reports also ignore the central role of the Bank of Canada
and its relation to the chartered banks. In Canada, the creation of money
has been mostly privatized since the end of WWII. An effective monetary
policy must not only address central banking policy, it must also regulate
the role of private banks in the creation of money. By requiring banks
to hold up to 100 % of the value of a category of loans in reserve, the
Bank of Canada could influence lending selectively. Selective requirements
on loans must be part of the monetary policy tool box in the 1990s, such
as imposing 100% reserve requirement on loans which are not targeting the
direct creation of wealth, productive investments and payment of salaries
and wages (for instance, a 0% reserve could be required for lending that
supports job creation, community reinvestment, or the redevelopment of
polluted lands). As former Prime Minister Mackenzie King warned "Once
a nation parts with the control of its currency and credit it matters not
who makes the nation's laws... Until the control of the issue of currency
and credit is restored to government and recognized as its most conspicuous
and sacred responsibility, all talk of the sovereignty of parliament and
of democracy is idle and futile."
5) Both reports embrace a purely micro-economic vision of the
financial sector, which is the perspective of the CEO/manager. The reports
substitute this narrow vision for a public interest perspective. This is
particularly dangerous in a world where bankers who once prided themselves
for prudence and due diligence now talk about their desire to "kick
global ass."
6) In correlating the increase in earnings by Canadian chartered
banks to the globalization of their services, MacKay ignores the fact that
the bulk of the growth in bank profits originates from their domestic market
power. This power allows banks to slap service charges across a vast and
complex continuum of financial services, while engaging in highly profitable
speculative activities through their securities affiliates. Because Canadian
banks will strive to reach the same rates of return that large foreign
banks achieve in speculative markets, Canadian bankers will in the end
expect much higher rates of return on productive domestic operations. The
globalization of banking leads to Canadian banks substituting speculative
loans for productive lending to the domestic economy.
7) Both reports recommend relaxing the 10% ownership rule, which
has worked successfully to uphold the public interest by preventing Canadian
chartered banks from being controlled by foreign interests or dominated
by owners who would use the bank to further their own interests (the 10%
rule was put into place in the 1960s when the Chase Manhattan of New-York
wanted to buy the Toronto Dominion Bank). This recommendation means the
abandonment of the provision of domestic credit to financial institutions
which will no longer have a preferred relationship with the Canadian domestic
economy. Foreign financial institutions such as Wells Fargo and ING are
only interested in skimming off the best customers and make it more difficult
for Canadian financial institutions to serve all Canadians. In the long
run, foreign financial multinationals operating in Canada will impose their
profit margins on the Canadian consumer, and banks operating in Canada
will lend to the Canadian public only if they can attain the same earnings
that they achieve in their highly profitable and mainly international operations.
And worse, they will impose compensation on the Canadian public for their
losses as they have in the past.
8) Both reports abandon the "big shall not buy big policy"
and therefore implicitly encourage mega-bank mergers. The reports state
that mergers should be accepted as long as the Minister of Finance believes
them to be in the public interest. Making this distinction is quite impossible
because according to these reports, one of the main factors defining the
public interest is the future enhancement of competitiveness in the global
economy. And what exactly does that mean? Banks can always demonstrate
merging will reinforce their competitiveness relative to their global competitors.
By concentrating more powers in the hands of the Minister of Finance, MacKay
further limits opportunities for parliamentary and democratic input on
these issues which strongly affects the public interest.
9) The reports implicitly advocates a complete integration of
the Canadian financial system to the global U.S. financial system. Again,
this recommendation ignores the evidence of the distinctiveness of the
financial industry. A complete integration would lead to the loss of control
over our monetary policy and to the loss of Canada's sovereignty.
10) The reports do not address the consequences of systemic failures
which may be triggered by the collapse of merged banks. In an unstable
financial economy large banks can be much more exposed to risk than smaller
ones and the larger they are, the higher the fall and the lower the capacity
of government to let banks fail. For instance, clause 39 of the recommendations
authorizes the Minister of Finance to sell off a Canadian chartered bank
to foreign interests in "exceptional cases", and as long the
sale conforms to the public interest. Mr. MacKay himself stated before
the Finance Committee that the purpose of recommendation 39 was to give
the Minister of finance a lower-cost solution for dealing with a mega-bank
failure. Assuming the failure of a mega-bank in Canada because of losses
in speculative markets (as happened in Japan recently), means there will
be no domestic financial institutions large enough left to buy out the
mega-bank. To have the costs underwritten by the Canadian taxpayer will
be far too much of a burden. According to MacKay, then, the solution would
be to sell the mega-bank to foreign buyers. In the long run, these mega-mergers
could quite possibly accelerate the sell-out of our banking system to foreign
interests.
11) The MacKay report only briefly talks about regulations and
corporate governance. Canadians should be particularly concerned by the
explosive growth in derivative products and off-balance sheet liabilities.
Derivative products are very risky and the leading cause of the current
banking failures. Like all pyramid-like schemes, these financial products
are not supported by real economic activity and have resulted in the failure
of trillions and trillions of dollars of highly leveraged contracts. Derivative
products, which can bring down a large bank (i.e.Barings), are used primarily
for speculative purposes instead of for hedging risk, which is their theoretical
rationale. These huge losses then bounce back to all parties involved and
ultimately impact on the real economy. Economic theory and regulations
have not caught up with this huge and fast growing market and no one, not
even the U.S. Federal Reserve, truly understands the potential of the disaster.
It is interesting to note that Robert Merton and Myron Scholes who both
won the Nobel Prize for their theoretical work on derivatives had to take
responsibility for the collapse of the Long Term Capital Management, a
hedge fund that lost its equity and had to be bailed out. It is frightening
that the majority report has not taken into account the new dangers involved
in derivatives and the inadequacy of self regulation in preventing huge
losses which would have to be directly or indirectly underwritten by the
public.
12) To control derivatives or to mitigate the effects of a spillover,
the powers of the Office of the Superintendent for Financial Institutions
(OSFI) should be extended. The reports should have recommended the creation
of financial structures and rules that would make the work of the Superintendent
effective in an age of ever-increasing complexity. The Auditor-General
has written about "the capacity of the Office of the Superintendent
of Financial Institutions to evaluate credit risks facing the banks from
derivatives and securities activities." (Globe and Mail May 12, 1995,
p. B1). These financial liabilities and the risk they carry must be brought
back to formal accounting rules with adequate regulation and supervision.
Today's accounting rules for derivatives and other similar financial operations
leave regulators and investors largely in the dark. We should look into
new ways of accounting which would integrate off balance sheet risk into
the balance sheet. This is an issue which the two reports do not explore.
The preferred option for the NDP would be to directly or indirectly prohibit
the financing of derivative operations through bank credits.
Instead, the reports recommend that financial institutions be given
maximum organizational flexibility, including the ability to set up sophisticated
Financial Holding Companies (FHCs) with relaxed ownership rules, and "as
non-intrusive as possible" regulatory requirements.
In a de-regulated global environment, these financial groups would make
the job of the regulator impossible. Global FHCs will be extremely difficult
to supervise and will be prone to tax avoidance. However, with adequate
regulation, and provisions guaranteeing that the headquarters of both parents
and subsidiaries remain in Canada, the FHC may open an avenue to segregate
and contain higher risk activities such as derivatives from normal risk
core banking activities. At a national level, the FHC structure could be
used to combine innovative regulations which target speculation (such as
selective reserve requirements), with functional regulation. Functional
regulation would isolate speculative activities from core banking activities.
This may help prevent speculative firestorms and somehow contain contagion
while protecting depositors (and taxpayers). For instance, should a chartered
bank be involved in a massive derivative meltdown, the damage would be
confined to its securities affiliate. At best, the FHC system should be
considered as a vehicle for more transparency and re-regulation and not
for de-regulation as the report advocates.
In sum, the MacKay report favours the integration of the Canadian
financial system to a costly and chaotic model of financial globalisation
at a time where many are searching for a more equitable alternative model.
Regrettably, the MacKay report and the $3.5 million spent on it provide
little guidance for a banking system that must promote stability and serve
all Canadians fairly in the new millennium.
HON. LORNE NYSTROM, M.P. - REGINA - QU'APPELLE
NDP CRITIC FOR FINANCIAL INSTITUTIONS