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The Classic Canadian Compromise

February 2, 2015

A recent Globe and Mail article regarding the cut in the Bank of Canada’s overnight lending rate and the Canadian banks’ subsequent refusal to fully match the rate cut has shown sympathy for the banks.

Fear of spurring further debt in Canada and thin profit margins are blamed for the banks’ inability to pass interest savings to consumers.

Although what the article fails to mention is how quick the banks were to decrease by 0.25% the interest they pay to savers and retirees in their investment products.

The article also makes reference to the banks’ profit margins being squeezed by a potential 0.25% interest rate decrease. From the article:

“Because interest rates were already so low, their lending
margins – or the amount they make per loan – were weak,
and some bank executives had already warned about tougher
times ahead for the industry. Cutting into these margins would
only hurt their bottom lines even more.”

For reference, here are 2014 Q4 Results (the most recent data available) for a few of Canada’s largest financial institutions:

– CIBC Q4 2014 Profit: $811 million

– RBC Q4 2014 Profit: $2.33 billion

– BMO Q4 2014 Profit: $1.07 billion

Clearly, the refusal to pass along the 0.25% rate cut to Canadians is well justified.

For the full article, please see the link below: