Re-regulate Banks.

Tom Locke
December 11, 2022

Should the government re-regulate the banks?  Many Canadians are struggling to hang onto their homes as a direct result of policies enacted by the Federal Government in collusion with the Bank of Canada.  Make no mistake, our current economic disaster was always avoidable.  It takes bold and clear-thinking legislative measures to reverse the impact of Bank of Canada policy actions that harm consumers. Unfortunately, the interests of bankers bank shareholders do not align with the interests of customers.

Credit Cards:

Quebec, much to its credit took very clever steps towards freeing consumers from the ravages of profiteering credit card company and bank policies.  Legislators recognized that setting minimum monthly payment terms that extend beyond many lifetimes was unconscionable.  A client, in his 80’s, produced a bank issued credit card statement, requiring minimum monthly payment terms that extended over 420, yes, four hundred and twenty, years.  

A few years ago, Quebec enacted new credit card rules that required all new credit cards to charge minimum monthly payments of at least 5% of the outstanding balance.  With the repayment terms on existing cards being gradually implemented to avoid mass defaults.  And as the Federal Government has recently  allowed merchants to openly recover fees paid to credit card companies, Quebec has blocked the practice.  

Hitherto, merchants have paid an average of 3% of the purchase price of goods to credit card issuers, in addition to other fees for the use of point-of-sale equipment.  But those fees have been buried in the price of goods, and passed along to everyone else, including customers paying cash.  In other words, you have been paying a 3% premium on everything you buy because credit cards are being used to make purchases, whether you use that payment option or not

The Federal Government’s new rules require merchants to disclose the fees and to allow merchants to recover the cost of the fee directly from their customers.  But don’t look for a 3% discount if you use cash or a cheque to pay for goods.  Merchants will simply tack on another 3% on top of the already inflated price sticker when you use a credit card if they, at their option, ask for you to pay their fees.  

The Government of Quebec has had the courage to take on consumer exploitation in a way the Federal Government has not, it is long pased time to reregulate banks as you will discover reading this blog

Interest Rates:

Increasing interest rates for most forms of credit are exploitative with the average bank issued credit card rate being close to 20% – even though the lender brrowed the money for a mere 0.25% from the central bank.  Why did the Bank of Canada wait so long to return interest rates to the level of historic norms?  Interest rates have been suppressed for over a decade, as “quantitative easing” measures, following the banks’ questionable practices that led to the great Canadian taxpayers’ Bail Out of 2008/9. At some point, banks, like all other businesses, need to suffer the consequences of their own actions.

Interest rates were strategically reduced to encourage spending, to “create money” in the system by encouraging people to take on more debt, that would then be recorded as assets on bank balance sheets allowing banks to lend even more money.  To understand the creation of money, watch this short explainer video.

Unfortunately, politicians, of all stripes, are dependent on financial support (political donations) from banking institutions and are unlikely to get in their way.  Following the near banking collapse of 2007/8 governments could have boken the banks up into smaller, competitive, entities that were not “too big to fail”. 

Housing Crisis:

Canada has a regulatory housing crisis, it has been bought about by government regulatory medling, as well as excessive and myopic immigration policies.  The government has made it difficult for builders to build, with cumbersome regulatory requirements. Immigration has been poorly planned including allowing illegal imgrants to simply walk across the border between Canada and the USA in contravention of existing legislation. The result has beena dramatic increase in eubanized population growth, without any viable plans to house the homeless.

Another cause of the crisis is the manner in which mortgages work in Canada – driving up hosing costs. In the USA when you take out a thirty year mortgage, the rate of interest, at the time you took out the mortgage, is the rate that prevails until the mortgage is paid out (thirty years later).  And, in the US the interest paid on your mortgage is tax deductible.

By contrast in Canada, although you borrowed from the bank at a time when the rate at which the bank borrowed the money, from the Bank of Canada, at 0.25%, and your repayment terms were 1.4% (a profit of nearly 600%), the bank gets to gazunder you every few years, increasing the rate of payback.  So, if you took out the mortgage described and then renewed five years later at 7% the banks profit on the money, they originally loaned you, increased to a value of 2,800%. Not only that, but the Federal Government now taxes the profit from the sale of your home if you operated a business in it, and plans to tax the profit as a capital gain even if you don’t operate a business.

The Federal Government in collusion with the Bank of Canada has the ability to correct the sins of the past, but they won’t (you can take that to the bank). They could freeze the rates of all mortgages issued in the last five years and fix those rates (at the lowest agrred rate) for the full repayment of the amortization.  Increased rates would then apply only to new mortgages in a like manner – for the full amortization – until paid in full.  If the government fails to act, and it likely will, as history bears witness, the result will be many people finding their homes are worth far less, on the market, than the cost of their mortgages.  

If Canada were to adopt the same type of mortgage regime as the USA model, homeowners would not be subject to constantly fluctuating interest rates, and they would get tax relief for the interest payments paid to mortgage lenders.  Unfortunately, taxation itself is one of the leading causes of poverty and inflation in this country.  Simply eliminating the G/HST, which was supposed to be a temporary tax in the first place, would put 13% of earnings back in the pockets of consumers and businesses.  But that is a whole other blog article

The Way Out:

It seems the clearest way of debt problems is to reregulate banks, to force banks to change their lending policies, at all levels, ending the exploitation of consumers as a commodity.  It is also worthy of note that the Government is changing investment rules to push low-middle class investors into buying bank bonds, apparently as a part of the bank bail-in regime passed by the Federal Government in 2018.  Again that is a whole other blog article, stay tuned.