Posted by: Nick Ametrano
With that said, the front page of the January 29, 2015 Globe and Mail’s Report on Business contains one of the most bizarre articles I have read in 20 years.
It actually tries to justify why Canadian banks did not match the Bank of Canada’s (BoC) prime decrease of 0.25%. As you know, the Bank of Canada sets its rates and historically, banks follow suit and pass along any increases or decreases to its customers. These rates are not set haphazardly. After significant government intervention and arm-pulling, the banks finally agreed to a modest 0.15% decrease in their prime lending rate. The “Classic Canadian Compromise”, as the article is called, tries to make you feel sorry for and sympathetic towards Canadian banks and their shareholders. The article is fraught with misinformation, I have dissected the article below to help you understand the facts that the banks are not giving you:
“To many Canadians, it looked like the lenders were being greedy. By not passing on the rate cut, products such as variable-rate mortgages and lines of credit did not become any cheaper. However, the banks were in a pickle.”
…in a pickle, really? In a cookie jar is more like it. Canadians were right, it is greed. These same banks made $32 billion dollars in profit alone last year. Canadians contributed 70% of that profit. Put another way, on average every working Canadian contributed $1,255 to the bank’s bottom line in 2014, that’s $2,510 for a family with two people working. That can buy a lot of pickles with that money.
“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 line even more.”
…can you believe this nonsense? Tough times for this industry? “They were also stuck in a no-win situation”. Where does $32 billion in profits not classify as a “win”? What most Canadians don’t realize is that the bond yield (rate) for a five year fixed mortgage has decreased .68 basis points over the past few weeks but the five year rate the banks offer has only dropped.15 basis points. Banks push clients into the five year fixed terms where interest margins and profit are the highest and contribute most significantly to the banks bottom line. For those clients who have been reading our newsletters and mortgage updates, you know that MonsterMortgage.ca has been advising borrowers to stay away from the banks’ high-margin five year mortgage by simply taking a variable rate mortgage and paying it off as if it was a fixed rate mortgage. This helps you terminate your mortgage quicker and puts more money where it belongs – in your pocket!
I love this next line…
“…if they did cut the prime rate, they (Banks) could ultimately be blamed for inflaming a massive debt bubble.”
Let’s just wait a minute here. It is the central bank and CMHC that make and change the rates, not your local CIBC branch. If there is a housing correction, the banks will blame the government…period! I have never heard a banker stand up and cry, “mea culpa”. After all, the government guarantees over 60% of all bank loans…who do you think pays for this? That’s right we do.
“Any additional cuts would only compress margins further, and hurt the banks’ bottom line.”
Who cares about the bank’s bottom line when they charge me $2.00 a month for “electronic record keeping”? Remember, every working Canadian contributed on average $1,255 directly to the banks’ profit in 2014. Why would anyone be so concerned about these organizations when they earn so much revenue from you already? Canadians have given these banks a license to do business in Canada. This comes with a responsibility and an obligation to balance their profits against their privilege to continue to do business and lend money and to follow the lead of the BoC when it makes decisions that are in Canadians’ best interests. Again, Canadians account for 70% of the banks’ profits – yes, they chip away at us with monthly fees and interest on interest. To illustrate my point further, I was at the bank the other day and anyone within 20 feet of the teller would have overheard a lady complaining that she never ordered a Visa or even understood that this Visa had a yearly fee of $99.00 attached to it. To make matters worse, she exclaimed, she had to pay the fee and the bank hit her with a late payment interest penalty of $2.25. She owed them $101.25 and hadn’t spent a dime.
Why did the Bank of Canada lower rates?
At the end of the day, the BoC lowered rates to entice Canadians to spend the money that they are saving. It was not done to lower the dollar as it was under 80 cents already. They provide the money supply to the banks and have given them an oligopoly to make a lot of money each and every year. The least these banks could do (as they have done every other time) was to follow suit and pass on the rate cut to Canadians as was meant to be.
“By cutting rates, the banks also sent a message to skittish investors that they are healthy enough to sacrifice some of their profits.”
Not so fast! We have the benefit of a healthy banking system where the government has consistently protected the industry and set rates that have ensured the success of the industry and the economy. It is a delicate balance that has served us well and positioned us to survive the economic storm that ravaged banking systems and economies around the world. Now, in the face of a proposed cut by the Bank of Canada to stimulate spending, the banks initially lowered interest on savings accounts by .25% thereby taking that money as even more profit for themselves by decreasing the interest they pay you before passing along any borrowing rate cuts.
Enough is Enough
I think that it’s time for Canadians to understand that we actually have a role to play in the banking industry in Canada and that we can make decisions to keep more money in our own pockets. We need to understand that the banks make decisions to enhance their bottom-lines and that we can make banking decisions that enhance our own bottom lines to protect our families and the futures we want to build. We don’t owe anything to the banks – we need to be LOYAL to ourselves first. Demand some respect from your bank and understand that like any other product or service that you purchase you have options, and if your bank doesn’t want to provide you with the respect that you deserve, then you are free to bring your business elsewhere. Alternatively, you can just invest what money they did not take from you and your family and invest in their stocks and start reap the reward of a 4% dividend. You can use that money to pay down your mortgage…slowly.
Like any other business the banks have a right to earn a profit but with $32 billion already going into their pockets I am pretty sure the BoC meant this money to make its way to the pockets of Canadians.
The Globe & Mail article referenced in the above post is available here: http://www.theglobeandmail.com/report-on-business/banks-prime-rate-cut-a-compromise-on-public-image-consumer-duty/article22693172/