It is time for banks to do their part

Credit has never been cheaper but banks must pass it on to consumers

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The Gazette, Wednesday, March 4, 2009

It's official - money has never been cheaper. Of course, actually getting it at the bank is quite another matter.

As expected, Bank of Canada Governor Mark Carney lowered the central bank's overnight lending rate by half a percentage point yesterday, to an all time low of 0.5 per cent. In just a year, since taking over as Canada's top central banker, Carney has lowered his key policy rate from 4 per cent.

How low can he go? Well, he could cut another 25 basis points, if he thinks the economy needs another injection of liquidity to get consumption and investment moving again. Below that, there's only 0.0, and that's still possible. In the United States, the fed is pretty much there. But at some point, Carney also needs to protect the dollar, now a petro currency, which has plunged with the price of oil. Any time it gets below 80 cents U.S., while that's good for exports, it has an inflationary impact on consumer goods (think Florida oranges, California strawberries).

Within an hour of Carney's announcement, the Bank of Montreal and the Royal Bank followed suit, cutting their prime rate by 50 basis points to 2.5 per cent from 3 per cent. The prime is the rate banks give their best customers. Of course, nobody ever gets money at prime - it's their version of the overnight bank rate; it's a benchmark.

You probably consider yourself one of your bank's best customers. That being the case, the bank will lend you money at prime plus two. That would 4.5 per cent today, and that's amazing. For an open mortgage, you should be getting 3.5 or 4 per cent today, depending on your bank.

So, buy that house, borrow for that car, put that flatscreen on your line of credit at the bank. Do it now, please. Help our economy grow again out of this terrible recession.

There's another message from Carney, and Finance Minister Jim Flaherty. It's directed at the banks, and it's not very subtle. They are telling the Canadian banks to start lending again.

Carney's job is to pump liquidity into the system, as he has with his series of aggressive rate cuts. Flaherty's job is to pump stimulus into the system, as he has with $40 billion of stimulative spending in his budget, which incurs Canada's first deficit in 12 years.

Beyond that, it's the job of the political leadership, starting with the prime minister, to pump confidence into the system. Confidence isn't measured in rate cuts and stimulus, it's an intangible, but it's everything. It's what Barack Obama was trying to inspire in his address to the U.S. Congress last week.

But beyond liquidity, stimulus and leadership, it's up to the banks to start lending again. This is implicit in the $200-billion extraordinary financing framework in the budget. In essence, it's a standby bailout package for the banks. The commercial banks haven't asked for a penny of it, and it's unlikely that they ever will.

In times like this, there's a lot to be a said for a stodgy, conservative banking system such as ours. The Canadian banks don't have toxic assets to wash through their system, as is the case in the U.S. They didn't get caught up in the housing bubble. They keep a close watch on their loan loss provisions, as does the Office of the Supervisor of Financial Institutions. There are only six big chartered banks in Canada, meaning they all have a critical mass of deposits and assets under administration.

It is no accident that Canada's banks are ranked the soundest in the world by the World Economic Forum. Switzerland's banks are ranked 14th, and U.S. banks are ranked 41st in the world, and that was the before the bailouts of Citibank and Bank America, to say nothing of AIG (it's quite an achievement, losing $60 billion in a quarter). Obama, a famous fan of Canada's BlackBerry, pointed out the strengths of Canada's banks in his CBC interview last month.

All that being said, it's time for the banks to step up. In an interview with Policy Options ( this month, I asked Flaherty if he thought our banks had a moral obligation to participate in the economic recovery.

"That's right," he said.

Banks are in the business of lending money for mortgages, but they'll also have to fill some gaps in the lending system. On autos, for example. General Motors Acceptance Corporation, which was created for the purpose of car loans, is out of that business. That's on the consumer side. On the investment side, the banks have a role in encouraging the entrepreneurial spirit.

Carney and Flaherty have given them every incentive to do so.

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