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The Canadian chartered banks and the federal government : an analysis of the 1954 and 1967 Bank act revisions MacDonald, Brian J.H. 1978

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THE CANADIAN CHARTERED BANKS AND THE FEDERAL GOVERNMENT: AN ANALYSIS OF THE 1954 AND 1967 BANK ACT REVISIONS by BRIAN J . H. MACDONALD B.A. Honours, University of Alberta, 1974 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF ' MASTER OF ARTS in THE FACULTY OF GRADUATE STUDIES (Department of Po l i t i c a l Science) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA November, 1978 cj Brian 3ohn Howard MacDonald, 1978 In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I a g r ee t h a t the L ibrary shal l make it f ree ly ava i lab le for r e f e r e n c e and s t u d y . I fur ther agree that permission for extensive copying of t h i s t h e s i s for scho lar ly purposes may be granted by the Head of my Department o r by his representat ives. It is understood that copying o r p u b l i c a t i o n o f th is thes is for f inanc ia l gain sha l l not be allowed without my written permission. _ - P o l i t i c a l Science Department of The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 Date November, 1978 a O Supervisor: Dr. Richard G.C. Johnston ABSTRACT Hugh A i t k e n i n h i s essay on Canadian economic development p o s i t e d a concept wherein economic development was viewed as aided by an amalgamation of government i n t e r e s t s w i t h c e r t a i n p r i v a t e c o r p o r a t i o n s . These p r i v a t e c o r p o r a t i o n s , p o t e n t i a l l y powerful i n t h e i r p a r t i c u l a r s e c t o r s , could be viewed as the 'chosen instruments' of government p o l i c y . Omitted from Aitken's essay was any reference to the Canadian chartered banks. The Chartered banks though can be seen as a r e l a t i v e l y concentrated f o r c e w i t h i n the n a t i o n a l economy and i n t u i t i v e l y prime examples of a 'chosen instrument'. This t h e s i s attempts to explore the r e l a t i o n s h i p between the Chartered banks and the f e d e r a l government. In so doing we have attempted to e s t a b l i s h that the concept of the chosen instrument may be a p p l i e d to the chartered bank-government r e l a t i o n s h i p . Recent h i s t o r y provides us w i t h two o p p o r t u n i t i e s f o r case examination of the concept i n a c t i o n . The 1954 and 1967 Bank Act r e v i -sions took place at a time of d e c l i n i n g government c o n t r o l over monetary p o l i c y , d e c l i n i n g market share held by banks and s t e a d i l y i n c r e a s i n g competition i n f i n a n c i a l markets from non-bank f i n a n c i a l i n s t i t u t i o n s beyond f e d e r a l j u r i s d i c t i o n . The process of i n t e r a c t i o n between the banks and the government i n r e l a t i o n to these problems provides the backdrop f o r our a n a l y s i s . i i To p r o p e r l y l a y the groundwork f o r a d i s c u s s i o n of these trends, background in f o r m a t i o n i s provided on many of the s t r u c t u r a l and f u n c t i o n a l l i n k a g e s between banks and government. Examination of the trends and r e a c t i o n by both p a r t i e s i n the process l e a d i n g to the 1954 and 1967 Bank Act r e v i s i o n s i s then undertaken. While e x p l o r a t i o n of the v a r i o u s stands by actors i n v o l v e d i n the 1954 and 1967 Bank Act r e v i s i o n s lends a c e r t a i n degree of credence to the use of the chosen instrument concept s e v e r a l questions a r i s e as to i t s a p p l i c a b i l i t y under a l l circumstances. These questions u n d e r l i e the d i f f i c u l t y i n d e s c r i b i n g any p o l i t i c a l s i t u a t i o n . i i i CHAPTER I I I I I I IV V APPENDIX I TABLE OF CONTENTS PAGE INTRODUCTION 1 H i s t o r i c a l R e l a t i o n s h i p 2 Notes to Chapter I 6 STRUCTURAL AND FUNCTIONAL RELATIONSHIPS 7 Notes to Chapter I I 21 THE 1954 BANK ACT 25 Conclusions 41 Notes to Chapter I I I 47 THE 1967 BANK ACT 54 Notes to Chapter IV 78 CONCLUSION 85 Consequences of the 1954 and 87 1967 Reviews Impact of the 1954 and 1967 Bank Acts 91 N.H.A. CONVENTIONAL MORTGAGES APPROVED BY 94 LENDING INSTITUTIONS: NEW RESIDENTIAL CONSTRUCTION i v APPENDIX I I OUTSTANDING CONSUMER CREDIT IN CANADA I I I CHARTERED BANKS, PERSONAL LOANS OUTSTANDING IV COMPARISON OF PERSONAL DEMAND, PERSONAL SAVINGS, AND TERM DEPOSIT LIABILITIES -SELECTED FINANCIAL INSTITUTIONS AND INSTRUMENTS SELECTED BIBLIOGRAPHY LIST OF TABLES TABLE PAGE I SELECTED LIQUID FINANCIAL ASSETS 59 HELD MAINLY BY INDIVIDUALS I I GROSS RESIDENTIAL MORTGAGE LOANS 62 APPROVED BY LENDING INSTITUTIONS vi Acknowledgements I t i s not o f t e n that one i s able to b r i n g together p e r s o n a l , research and career i n t e r e s t s i n one p r o j e c t . I would l i k e to express a p p r e c i a t i o n to the Department of P o l i t i c a l Science f o r p r o v i d i n g an avenue f o r such a p r o j e c t . I would p a r t i c u l a r l y l i k e to thank Professors K e i t h Banting, Richard Johnston, Kenneth Carty, and Donald Blake f o r t h e i r i n s i g h t s and suggestions on the t o p i c . As w e l l I would l i k e to acknowledge the a s s i s t a n c e given by the Toronto-Dominion Bank's Department of Economic Research i n p r o v i d i n g numerous source m a t e r i a l s . This t h e s i s , however, would never have been completed without the understanding, tolerance and support of Marion MacDonald. In s p i t e of the generous a s s i s t a n c e I rece i v e d s o l e r e s p o n s i -b i l i t y f o r any omissions and e r r o r s of f a c t or i n t e r p r e t a t i o n belong s o l e l y to myself. v i i CHAPTER I INTRODUCTION In Canada the chartered banks and the f e d e r a l government have long been the two dominant forces i n the n a t i o n a l f i n a n c i a l system. That the banks remain i n t h i s p o s i t i o n despite increased competition and erosion of t h e i r markets by smaller, but more r a p i d l y growing non-bank f i n a n c i a l i n s t i t u t i o n s i s , i n p a r t , the r e s u l t of the p a r t i c u l a r r e l a t i o n s h i p banks have had with the f e d e r a l government. This r e l a t i o n s h i p has not only benef i t e d and supported the p o s i t i o n of the chartered banks but that of the c e n t r a l government as w e l l . The r e l a t i o n s h i p between the chartered banks and the c e n t r a l government has i t s o r i g i n s i n the p a r t i c u l a r l e g i s l a t i v e environment w i t h i n which the s t r u c t u r a l and f u n c t i o n a l t i e s between the two p a r t i e s are formulated. The l e g i s l a t i v e environment d i c t a t e s , i n large measure, the conditions under which the banks conduct t h e i r business. But more importantly, t h i s l e g i s l a t i v e environment aids the smooth and e f f i c i e n t d i r e c t i o n of what has become a developed mixed economy to p o l i t i c a l , s o c i a l , and economic ends. The d i r e c t i o n of the economy to these ends i s a f u n c t i o n of the f e d e r a l government. The chartered banks by t h e i r p o s i t i o n i n the f i n a n c i a l system provide several avenues through which changes i n n a t i o n a l monetary p o l i c i e s are implemented. As w e l l , the banking system provides important s e r v i c e s to government, and the p u b l i c at l a r g e , by v i r t u e of i t s extensive branch system, maintenance of the f o r e i g n exchange market, c l e a r i n g system, and i t s importance as a source of commercial and personal c r e d i t f a c i l i t i e s . 2 Since f e d e r a l l e g i s l a t i o n determines i n l a r g e measure the scope and d i r e c t i o n of banking business, the r e l a t i o n s h i p between government and banks has developed i n t o one which can, i n many senses, be termed 'symbiotic'. That i s , both the c e n t r a l government and the banks d e r i v e b e n e f i t s from the r e l a t i o n s h i p . The c r i t i c a l l i n k i n maintaining and enhancing the b e n e f i t s each r e c e i v e s i s the Bank Act, the l e g i s l a t i v e framework under which the banks operate. In t h i s paper we propose to examine f a c t o r s which cause the f e d e r a l government and the chartered banks to maintain a c l o s e and sym-b i o t i c r e l a t i o n s h i p . As an a i d to our examination we w i l l review a number of s t r u c t u r a l and f u n c t i o n a l l i n k a g e s between the two p a r t i e s and t h e i r i n t e r a c t i o n during the l e g i s l a t i v e process l e a d i n g to the l a s t two Bank Act r e v i s i o n s . Throughout we w i l l be concerned w i t h the r o l e both government and the banks play i n the f i n a n c i a l system and more p a r t i c u l a r l y the way i n which t h e i r r o l e s shape t h e i r i n t e r a c t i o n . In t h i s way we w i l l seek to determine some of the impulses behind the maintenance of t h e i r r e l a t i o n s h i p . HISTORICAL RELATIONSHIP H i s t o r i c a l l y Canadian governments have taken an a c t i v e , i f not dominant, r o l e i n the f i n a n c i a l and other key sec t o r s of the n a t i o n a l economy. This r o l e has been assumed i n order to promote greater development of the Canadian economy. Several commentators have d e t a i l e d how the Canadian p o l i t i c a l 3 c u l t u r e has been imbued w i t h the acceptance of government i n t e r v e n t i o n i n what i s nominally a p r i v a t e c a p i t a l based economy. Despite an h i s t o r i c a l acceptance of c a p i t a l i s t v a l u e s , government has come to p l a y a c r i t i c a l r o l e i n both p r o v i n c i a l and n a t i o n a l economies . . . . /Most7 English-Canadians have always e n t e r t a i n e d a pragmatic . a p p r e c i a t i o n of government, perhaps symbolized by the common view that Confederation was e s s e n t i a l l y an economic plan . . . Any r a d i c a l s p i r i t of l a i s s e z - f a i r e or f e a r of government which might have assumed to c h a r a c t e r i z e Canadian entrepreneurs, and indeed most of those engaged i n commerce and i n d u s t r y , r a r e l y seems to have taken hold i n E n g l i s h Canada. Hugh A i t k e n i n h i s essay, "Government and Business i n Canada" has shown that s i n c e Confederation: The f e d e r a l government has i n t e r p r e t e d i t s f u n c t i o n as that of b u i l d i n g and maintaining an i n t e g r a t e d n a t i o n a l economy. In performing t h i s f u n c t i o n i t has found i t necessary to support c e r t a i n business o b j e c t i v e s and oppose others. I t has opposed corporate s t r a t e g i e s that appeared l i k e l y to j e o par-d i z e the maintenance of n a t i o n a l economic unity, and i t has supported s t r a t e g i e s that appeared l i k e l y to r e i n f o r c e i t . 2 C e n t r a l to A i t k e n ' s t h e s i s i s the n o t i o n that i t has been defensive a c t i o n on the p a r t of various Canadian governments i n attempting to p r o t e c t Canada from domination, p o l i t i c a l l y and economically, by the United States that has spurred government p o l i c y to s t i m u l a t e Canadian economic development. I t i s important to appreciate the c o n t i n u i t y of t h i s concern throughout Canadian h i s t o r y , f o r otherwise, the p e r s i s t e n t involvement of Canadian governments i n the p r i v a t e sector of the economy becomes incomprehensible.3 E q u a l l y important from our p o i n t of view i s that i t has t r a d i t i o n a l l y 4 been the c e n t r a l government, and not the p r o v i n c i a l governments, which has conceived of i t s r o l e i n t h i s manner. Canadian governments have succeeded i n defensive a c t i o n through the use of what A i t k e n terms 'chosen instruments': . . .Canadian governments have c o n s i s t e n t l y and continuously e x e r c i s e d p o l i t i c a l power to s t i m u l a t e and d i r e c t the course of economic development i n Canada. They have done so, i n the main, not by d i r e c t i n t e r v e n t i o n but by lending the a u t h o r i t y and f i n a n c i a l resources of the s t a t e to c e r t a i n p r i v a t e business corporations which have i n t h i s way become the 'chosen instruments', as i t were, f o r the furtherance of n a t i o n a l economic policy.4 A i t k e n has a l s o pointed out that the process of governments f o r c i n g development on an immature economy has had s i d e e f f e c t s which have l e f t permanent marks on the r e l a t i o n s h i p between p o l i t i c a l and economic l e a d e r s h i p . /jThis forced development? gave a p a r t i c u l a r cast to the power s t r u c t u r e of the Canadian economy. R e l a t i v e backwardness, as i n other cases, encouraged c e n t r a l i z a t i o n of power and an i n t i m a t e a l l i a n c e of p o l i t i c a l and economic leadership.5 The c e n t r a l i z a t i o n of power w i t h i n the economic le a d e r s h i p of which A i t k e n speaks, has long been vested i n the chartered banks. Moreover, the intimacy of the t i e s between p o l i t i c a l and economic lea d e r s h i p has caused the banks, f o r one reason or another, to a i d the c e n t r a l government i n the maintenance of a n a t i o n a l f i n a n c i a l system through the s e r v i c e s performed by them and t h e i r branches. That i s to say, the r e l a t i o n s h i p between government and the banks tends to be governed by the concept of the chosen instrument which i n turn has 5 f a c i l i t a t e d the maintenance of cen t r a l government influences over p a r t i c u l a r areas of the economy. But j u s t as t h i s chosen instrument r e l a t i o n s h i p has aided the government and the bui l d i n g of a nation so too i s i t an explanation for the p o s i t i o n of the chartered banks i n the Canadian f i n a n c i a l system even today. 6 FOOTNOTES Robert Presthus, E l i t e Accommodation i n Canadian P o l i t i c s (Toronto: MacMillan of Canada, 1973), p. 21. 2 Hugh G. J . A i t k e n , "Government and Business i n Canada: An I n t e r p r e t a t i o n , " i n The Canadian Economy: Selected Readings, rev. ed., e d i t e d by John J . Deutsch, Burton S. K e i r s t e a d , K a r i L e v i t t , and Robert M. W i l l (Toronto: The MacMillan Company of Canada L t d . , 1965), pp. 511-12. 3 I b i d . , p. 497. 4 I b i d . , p. 494. 5 I b i d . , p. 497. CHAPTER I I The chosen instrument concept i s important as a means of d e s c r i b i n g implementation of government p o l i c y . While A i t k e n has used the concept to e x p l a i n e f f o r t s by government to b u i l d and p r o t e c t a f l e d g l i n g economic system from outside i n f l u e n c e , i t may be s a i d to be eq u a l l y a p p l i c a b l e i n other circumstances, f o r example, i n i n f l u e n c i n g the a c t i o n s of the economy i n t e r n a l l y . A fundamental b a s i s f o r use of chosen instruments i s that the t i e s between government and chosen instruments are s u f f i c i e n t to a l l o w the accomplishment of government p o l i c y without government t a k i n g respon-s i b i l i t y f o r a l l f u n c t i o n s performed by the e n t i t y t a k i n g on chosen instrument s t a t u s . I f the concept of chosen instrument., i s to be put i n p r a c t i c e s u c c e s s f u l l y , t h o u g h , i t i s necessary that s u f f i c i e n t s t r u c t u r a l and f u n c t i o n a l t i e s be developed between government and the e n t i t i e s considered chosen instruments. This development has occurred between the chartered banks and the f e d e r a l government. STRUCTURAL AND FUNCTIONAL RELATIONSHIPS: The f e d e r a l government under the B.N.A. Act of 1867 was granted power over banking, the i n c o r p o r a t i o n of banks, and the i s s u e of paper money."'" Thus while a number of f e d e r a l l y and p r o v i n c i a l l y incorporated f i n a n c i a l i n s t i t u t i o n s t r a n s a c t business i n deposits and c r e d i t , only the s e l e c t few under f e d e r a l l e g i s l a t i o n may use the name 'bank' 7 8 l e g a l l y . Those corporations c a l l e d banks d e r i v e t h e i r d i s t i n c t i o n by being named i n Schedule A of the Bank Act, which i s the c h a r t e r f o r 2 the banks l i s t e d t h e r e i n . Schedule A of the 1967 Bank Act l i s t e d ten chartered banks. The Canadian chartered banks are among the l a r g e s t banks i n the world. As of May 31, 1977 t h e i r t o t a l assets exceeded $136 b i l l i o n of which some $30 b i l l i o n was outstanding i n business loans and $18 b i l l i o n i n personal loans. In terms of access to banking f a c i l i t i e s , there i s one chartered bank branch f o r every 3205 persons. The banks employ over 150,000 employees i n Canada and bank shareholders number i n excess of 3 190,000. Chartered banks are the main sources of business c r e d i t and c o n t r o l i n one way or another a s i g n i f i c a n t share of every n a t i o n a l c r e d i t market. Their fundamental importance to the economy over and above t h e i r s i z e though flows from the f a c t that deposits i n chartered banks represent a m a j o r i t y of the money supply and these bank deposits are taken as a means of making payments. In p o i n t of f a c t , most monetary t r a n s a c t i o n s of any s i z e take place by the medium of a cheque drawn on a chartered bank. A l l cheques issued i n Canada pass through the c l e a r i n g system maintained by the chartered banks and a l l the non-bank f i n a n c i a l i n s t i t u t i o n s which have deposits w i t h chequing p r i v i l e g e s make use of deposit and chequing f a c i l i t i e s a t one or more chartered banks. The f e d e r a l government e x e r c i s e s most of i t s i n f l u e n c e over the chartered banks through the r e g u l a t i o n of banks' cash reserves by the 9 4 Bank of Canada. By r e g u l a t i n g banks.' cash p o s i t i o n s the Bank of Canada may increase or decrease the volume of bank c r e d i t a v a i l a b l e to the f i n a n c i a l system as a whole. The l e v e l of q u a n t i t y of c r e d i t a v a i l a b l e produces e f f e c t s , i n the q u a l i t y , of money, the l e v e l s of aggregate expenditure, and consequently the l e v e l of economic a c t i v i t y . P r i o r to 1954 the Bank of Canada had recourse to only three b a s i c techniques of money and c r e d i t management; open market operations, changes i n the c e n t r a l bank discount r a t e , and moral suasion. As w e l l , as a s u b s i d i a r y l e v e r , the Bank of Canada i n conjunction w i t h other government agencies, could vary.the d i s t r i b u t i o n of government deposits between the c e n t r a l bank and the chartered banks.^ Open market operations have h i s t o r i c a l l y been the favoured t o o l of the Bank of Canada i n c o n t r o l l i n g money supply and c r e d i t c o n d i t i o n s . Open market operations g e n e r a l l y have a more s u b t l e e f f e c t on the f i n a n c i a l system than other Bank of Canada l e v e r s . That i s , there need not be wholesale changes throughout the f i n a n c i a l system but rather c a r e f u l l y measured adjustments to cash reserves may be obtained. However s i d e e f f e c t s may on occasion occur which are unwanted and counterproductive.^ Another means of e f f e c t i n g monetary p o l i c y i s through the c e n t r a l bank's use of discount p o l i c y or the bank r a t e . The bank r a t e i s the r a t e at which the banks may. temporarily and i n f r e q u e n t l y borrow from the c e n t r a l banks. Most o f t e n a chartered bank borrows only to b r i n g i t s reserve p o s i t i o n to a r e q u i r e d l e v e l or to adjust f o r some l a r g e 10 cash expenditure. The bank r a t e a c t s p r i m a r i l y as a s i g n a l to the f i n a n c i a l system: an increase i n the bank r a t e i s a s i g n a l to r e s t r a i n and reduce the volume of c r e d i t , a decrease, a s i g n a l to expand c r e d i t . A change i n the bank r a t e a l s o demonstrates the Bank of Canada's i n t e n t i o n to intervene w i t h open market t r a n s a c t i o n s to f o r c e r a t e s i n g the same d i r e c t i o n as the change i n the bank r a t e . The l a s t type of c o n t r o l , moral suasion, was used q u i t e e f f e c t i v e l y i n the e a r l y 1950's. On s e v e r a l occasions i n f o r m a l agreements were worked out between the c e n t r a l bank and the chartered banks, e s p e c i a l l y as regards c r e d i t c o n d i t i o n s and the volume of c r e d i t . The e f f e c t i v e n e s s of moral suasion as an instrument of c r e d i t c o n t r o l depends to a considerable extent on the s t r u c t u r e of the f i n a n c i a l system, e s p e c i a l l y the banking system, and on the p r e s t i g e and good judgement of the a u t h o r i t i e s o f f e r i n g the advice. Thus, the compactness of the Canadian f i n a n c i a l comm-u n i t y i n general, and the chartered banking system i n p a r t i c u l a r , as w e l l as the gradual development of confidence and respect i n the monetary o f f i c i a l s , has permitted the Bank of Canada to i n i t i a t e recommen-dations and to ob t a i n agreement concerning appropriate lending and investment p o l i c i e s to a degree not p o s s i b l e i n many other f i n a n c i a l systems.9 The technique of moral suasion depends upon good rapport between c e n t r a l bank and the commercial bankers; f a i l i n g such cooperation, suasion i s of l i t t l e use. While the business of banking per se i s a f e d e r a l r e s p o n s i b i l i t y the l a c k of a broad l e g a l d e f i n i t i o n has paved the way f o r many non-f e d e r a l l y incorporated non-bank companies to enter the d e p o s i t - t a k i n g business. These near-banks do not hol d reserves w i t h the Bank of Canada 11 and hence are one step removed from f e d e r a l i n f l u e n c e . Lack of f e d e r a l i n c o r p o r a t i o n a l s o p r o h i b i t s f e d e r a l r e g u l a t i o n of company s t r u c t u r e and behaviour; although f e d e r a l l y incorporated near-banks may be operated i n accordance w i t h other l e g i s l a t i o n . The thorny question of f e d e r a l - p r o v i n c i a l r e l a t i o n s over the past few decades has impeded the development of a d e f i n i t i v e judgement on the scope of banking business and as imp o r t a n t l y , has allowed much of the current p r o l i f e r a t i o n of non-bank f i n a n c i a l i n s t i t u t i o n s . Not si n c e the l a t e 1930's has the question of f e d e r a l j u r i s d i c -t i o n i n the f i e l d of banking been t e s t e d . At that time attempts by the A l b e r t a government to regul a t e chartered bank c r e d i t p o l i c y w i t h i n the 10 province were d i s a l l o w e d by the Federal cabinet. In January, 1938, the essence of the S o c i a l C r e d i t programme was t e s t e d by the Supreme Court of Canada f o r i t s c o n s t i t u t i o n a l v a l i d i t y . From the beginning the argument was extended beyond the mere s i g n i f i -cance of the b i l l s themselves through the attempts by the Dominion and the chartered banks to r e l a t e them to the whole programme of the A l b e r t a government which was, i n t h e i r view, an a t t a c k on the main s t r u c t u r e of the c o n s t i t u t i o n . i l (emphasis mine) The Supreme Court upheld disallowance by the Cabinet and w i t h the demise of a s t r o n g l y i d e o l o g i c a l S o c i a l C r e d i t P a r t y , attempts at extending p r o v i n c i a l powers to the banking f i e l d through d i r e c t l e g i s l a t i v e a c t i o n s on the part of the provinces subsided. The e a r l y 1950's and 1960's saw a resurgence of p r o v i n c i a l i n t e r e s t i n banking powers p a r t i c u l a r l y i n s e v e r a l Western provinces. Various provinces have from time to time proposed d i r e c t p r o v i n c i a l involvement i n 12 12 banking through a c t u a l chartered bank share ownership or the formation of t h e i r own banks. These moves by p r o v i n c i a l governments have had t h e i r b a s i s i n ideology or r e g i o n a l d i s s a t i s f a c t i o n s or both. Attempts by provinces to exert some i n f l u e n c e over the banks have u s u a l l y d e r i v e d from perceptions that the n a t i o n a l banks have d i s c r i m i n a t e d i n some ways against p a r t i c u l a r provinces. In general the n o t i o n of 'deposit d r a i n ' o c c u r r i n g has been the g r e a t e s t f e a r . In the West t h i s has taken on the appearance of deposits by r e s i d e n t s of the Western provinces 13 supporting greater expansion of i n d u s t r y i n the East. The chartered banks have been keen opponents of any increase i n p r o v i n c i a l i n t e r v e n t i o n i n f i n a n c i a l i n s t i t u t i o n s . As r e c e n t l y as 1974 the chartered banks issued a b r i e f arguing . . . v o c i f e r o u s l y that vigorous commpetition already e x i s t s i n the Canadian banking and f i n a n c i a l system among government as w e l l as p r i v a t e lending i n s t i t u t i o n s and r a i s e s the p o s s i b i l i t y that p r o v i n -c i a l government ownership would reduce the e f f e c t i v e -ness of f e d e r a l monetary p o l i c y . 1 4 While the chartered banks and the f e d e r a l government through the Bank of Canada are l i n k e d by the cash reserve system they i n t e r a c t w i t h government i n ways other than simply p a s s i v e l y responding to changes i n f e d e r a l monetary p o l i c y . In a d d i t i o n to the t i e s that are n e c e s s a r i l y present through the economic r e l a t i o n s h i p , the banks have developed numerous s t r u c t u r a l l i n k s w i t h the f e d e r a l government. In t h i s sense the banks have a number of a t t r i b u t e s common to,many i n t e r e s t or pressure groups. The r e l a t i o n s h i p between banks and government i s , i n p a r t , l i k e that of many i n t e r e s t group's r e l a t i o n s h i p s w i t h policy-makers. A. Paul Pross, i n h i s examination of the s t a t e of the a r t of i n t e r e s t group"'""' research, defined i n t e r e s t groups as ". . . o r g a n i -z a t i o n s whose members act together to i n f l u e n c e p u b l i c p o l i c y i n order 16 to promote t h e i r common i n t e r e s t . " Their c h i e f aim i s to convince v a r i o u s l e v e l s of government to adopt the p o l i c i e s advocated by the 17 group. Since they a r t i c u l a t e i n t e r e s t s and the p o i n t s of view of concerned i n d i v i d u a l s they i n e f f e c t supply government, and the 18 p o l i t i c a l system i n general, w i t h i n f o r m a t i o n . In a d d i t i o n to the information-communications r e l a t i o n s h i p s that occur between pressure groups and government, s e v e r a l other aspects of pressure groups are of relevance to the p o l i t i c a l , and by extension to the bank-government system. F i r s t , i n t e r e s t group involvement i n p o l i c y d i s c u s s i o n s may be used to ". . . n e u t r a l i z e group o b j e c t i o n s to proposed l e g i s l a t i o n and to engage support f o r i t . " Secondly, i n t e r e s t groups " . . . f r e q u e n t l y act as the agents of 20 government." Moreover, i n t e r e s t groups vary t h e i r s t r u c t u r e and behaviour ". . . according to the environment i n which they are found." Groups which take p a r t i n the p o l i c y d i s c u s s i o n s surrounding a p o l i c y d e c i s i o n are more l i k e l y to r e a c t p o s i t i v e l y towards the outcome i f they have had a v o i c e i n a r r i v i n g at the d e c i s i o n . As w e l l , a group which i n part r e g u l a t e s i t s own membership's a c t i v i t i e s w i l l have a vested i n t e r e s t i n p o l i c y d e c i s i o n s reached as a r e s u l t of j o i n t 14 22 group/government d i s c u s s i o n s and agreements. These l a t t e r groups are o f t e n formed and l e g i t i m i s e d to the e x c l u s i o n of any competing groups by s p e c i f i c government l e g i s l a t i o n . Many of these groups o f f e r s p e c i f i c b e n e f i t s to members which accrue from operating as part of the o r g a n i z a t i o n . In the case of the chartered banks the payments system and the interbank f o r e i g n exchange system are two of the most worthwhile. Quite c l e a r l y the chartered banks operate as what may be termed 23 24 a h i g h l y i n s t i t u t i o n a l i z e d group. According to one typology i n s t i t u t i o n a l i z e d groups demonstrate the f o l l o w i n g c h a r a c t e r i s t i c s 1. They possess o r g a n i z a t i o n a l c o n t i n u i t y and cohesion; . . . 2. They have extensive knowledge of those se c t o r s of government that a f f e c t them and t h e i r c l i e n t s ; . . . 3. There i s a s t a b l e membership; . . . 4. Operational o b j e c t i v e s are concrete and immediate: . . . 5. O r g a n i z a t i o n a l imperatives are g e n e r a l l y more important than any p a r t i c u l a r objective.25 The i n s t i t u t i o n a l i z e d form of pressure group has an advantage i n the Canadian p o l i t i c a l system: the a b i l i t y to gain access to the key p o l i c y making groups of the c i v i l s e r v i c e and the party system. Because the p o l i c y system i s r e l a t i v e l y c l o s e d , ". . . i t places a 26 premium on access, and access need not be a f u n c t i o n of p u b l i c i t y . " The Canadian p o l i c y system . . . tends to favour e l i t e groups, making f u n c t i o n a l accommodative, consensus-seeking techniques of p o l i t i c a l communication, r a t h e r 15 than c o n f l i c t - o r i e n t e d techniques that are d i r e c t e d towards the achievement of o b j e c t i v e s through arousing p u b l i c opinion.27 The c h a r a c t e r i s t i c s of i n s t i t u t i o n a l i z e d i n t e r e s t group behaviour i n the Canadian context has meant that: . . . those groups that have maintained a f a i r l y c o n s i s t e n t l e v e l of success i n a c h i e v i n g t h e i r p o l i t i c a l o b j e c t i v e s , have done so because they have maintained c l o s e connections w i t h one or other of the p r i n c i p l e p o l i c y s t r u c t u r e s and because they have avoided j e o p a r d i z i n g the intimacy of those connec-t i o n s through appealing e i t h e r to Parliament or to the p u b l i c at l a r g e . E f f e c t i v e i n t e r a c t i o n w i t h the Canadian p o l i c y system then, depends on the c u l t i v a t i o n of access to those p u b l i c d e c i s i o n makers having i n f l u e n c e i n the p o l i c y area of greatest concern to the pressure group, and a w i l l i n g n e s s to accept short-term defeats of s p e c i f i c proposals i n the i n t e r e s t s of c o n t i n u i n g favourable r e l a t i o n s over the long run. C o n s u l t a t i o n and the search f o r accommodation and consensus become the outstanding c h a r a c t e r i s t i c s of government pressure-group r e l a t i o n s . . . .28 This tendency to seek access to Cabinet and a d m i n i s t r a t i v e policy-making bodies i s f u r t h e r enhanced by the s t r u c t u r e of the parliamentary system. ' (jj t i s i n e v i t a b l e that Canadian o r g a n i z a t i o n s f i n d i t e s s e n t i a l to i n f l u e n c e p o l i c y and l e g i s l a t i o n before the parliamentary stage i s reached.' Because b i l l s can be s u b s t a n t i a l l y amended only w i t h c o n s i d e r -able embarrassment to the government, concessions to pressure groups have to be won before the parliamentary stage i s reached.29 The chartered banks use the Canadian Bankers' A s s o c i a t i o n as t h e i r v e h i c l e f o r p u b l i c i n t e r a c t i o n w i t h government. P r i o r to 1900, the C.B.A. was a voluntary a s s o c i a t i o n of bank 30 r e p r e s e n t a t i v e s . In 1900 the Canadian Banker's A s s o c i a t i o n Act was passed, forming a c o r p o r a t i o n under that name. Membership i n the 16 corporation was limited to those institutions listed in the Bank Act. The Act specified that "/jtjhe objects and powers of the Association shall be to promote generally the interests and efficiency of banks and 31 bank officers . . . " The Act also provided for the establishment 3 and control of the clearing mechanism as a function of the Association. The clearing house function has since evolved into the central payments 33 mechanism of the Canadian economy. The C.B.A. interacts at a number of levels and with a number of different government agencies and ministries. For example the C.B.A. determines the percentage allocation of money credited to the 34 Receiver General among the chartered banks. As well the C.B.A. supplies much day-to-day data to the Bank of Canada, Minister of Finance and the Inspector General of Banks for the compilation of economic and other s t a t i s t i c s . Most importantly however, the C.B.A. prepares and carries out the lobbying for the chartered banks during the decennial revision of the Bank Act. Both in i t s lobbying of the federal government over the decennial revision of the Bank Act and in i t s daily relations with governmental agencies and authorities, the C.B.A. plays a role which is substantially greater than that played by any other institutionalized pressure groups. No other groups such as the Canadian Labour Congress or the Canadian Manufacturers Association are as integrated and linked to government as is the C.B.A. Nor is any other trade association in the same position. The level of integration that is the norm between the chartered banks 17 and the government i s c h a r a c t e r i s t i c of what we term a chosen i n s t r u -ment. What i s more, to a l a r g e extent the banks see guarantees of f u t u r e corporate success i n terms of the r e t e n t i o n of t h i s s t a t u s . Even though the banks enjoy t h i s s t a t u s the banks have undergone some l o s s of p o s i t i o n i n r e l a t i o n to the f i n a n c i a l system as a whole. The powers that the banks were granted under successive Bank Acts and other r e l a t e d pieces of l e g i s l a t i o n , and hence the p o s i t i o n they a t t a i n e d during the formative years of the Canadian economy, have never been diminished due to l e g i s l a t i v e change. Rather, any l o s s of p o s i t i o n and consequent d i l u t i o n of bank i n f l u e n c e , has been the r e s u l t of competition from growth i n the number and s i z e of non-bank f i n a n c i a l i n s t i t u t i o n s , and the changing patte r n s of f i n a n c i a l flows which t h i s growth has f a c i l i t a t e d . When the chartered banks l o s e i n f l u e n c e i n the f i n a n c i a l system though, so too does the f e d e r a l government. The concurrent l o s s of i n f l u e n c e p o i n t s out that a c r i t i c a l element i n the chartered b a n k — f e d e r a l government r e l a t i o n s h i p i s the r o l e of the banks i n the c o n t r o l of the economy. The very f a c t that p r o v i n c i a l l y and o c c a s i o n a l l y f e d e r a l l y incorporated and supervised non-bank f i n a n c i a l i n s t i t u t i o n s have increased i n s i z e has meant a diminution of the f e d e r a l govern-ment's a b i l i t y to c a r r y out f e d e r a l monetary p o l i c i e s . Thus both the chartered banks and the f e d e r a l government have a vested i n t e r e s t i n supporting the p o s i t i o n and i n f l u e n c e of the chartered banks i n 18 r e l a t i o n to non-bank f i n a n c i a l i n s t i t u t i o n s . This s i t u a t i o n i n v i t e s and, to some extent, acts as a c a t a l y s t f o r the formation of a t r u l y symbiotic r e l a t i o n s h i p between chartered banking i n t e r e s t s and the f e d e r a l government, i n short the maintenance of a chosen instrument r e l a t i o n s h i p . The e s s e n t i a l element i n the maintenance of the chosen instrument r e l a t i o n s h i p i s the process of bank-government i n t e r a c t i o n during decennial review of f e d e r a l banking l e g i s l a t i o n . The process l e a d i n g to the r e v i s i o n of the Bank Act i s e s s e n t i a l l y one of consensus seeking between the chartered banks and the f e d e r a l government p r i o r to i n t r o d u c t i o n of the proposed l e g i s l a t i o n to p u b l i c view. As mentioned p r e v i o u s l y , i n s t i t u t i o n a l i z e d groups and government work to make accommodations i n p r i v a t e r a t h e r than demonstrate disagreement i n p u b l i c . In the two years or so preceding the r e v i s i o n deadline, extensive study i s given to those areas which the banks and the government f e e l , r e q u i r e amendment. I n i t i a l r e p r e s e n t a t i o n s from the banking community are sent to the Department of Finance f o l l o w i n g which the Finance department sends i t s proposals to the chartered banks. O f f i c i a l s from the Department of Finance and the banks then meet together to reach some degree of consensus and a t t a i n a r e l a t i v e l y acceptable statement of proposals p r i o r to the submission of the Bank Act to Parliament. I t i s i n t e r e s t i n g to note however, that i n the exchanges between the banking community and the 19 government proposals put f o r t h are i n the nature of p r i n c i p l e s only and not concrete d r a f t clauses. Bank r e p r e s e n t a t i v e s do not see how the p r i n c i p l e s are to be enacted u n t i l the b i l l i s presented to the 35 House. During second reading the House of Commons Banking and Finance Committee hears rep r e s e n t a t i o n s from a number of groups i n the 36 f i n a n c i a l sector as w e l l as other i n t e r e s t e d p a r t i e s . Changes are then made to the extent that the m a j o r i t y party i s w i l l i n g to accede. I t i s from the inf o r m a t i o n presented at these committee hearings and subsequent commentary that much of the f o l l o w i n g a n a l y s i s i s drawn. This i s p a r t i c u l a r l y the case i n the 1954 Bank Act r e v i s i o n s i n c e sources of inf o r m a t i o n are d i s t i n c t l y more l i m i t e d than i n the 1967 case. The 1954 r e v i s i o n was c h a r a c t e r i z e d by the s t y l e of the St. Laurent a d m i n i s t r a t i o n which was dominated by m i n i s t e r s such as C. D. Howe strong i n t h e i r b e l i e f i n the p r i v a c y of government decision-making. In 1967 the Royal Commission on Banking and Finance brought a degree of openess to the r e v i s i o n process, as d i d the p o l i t i c a l s t y l e of the L i b e r a l a d m i n i s t r a t i o n s of that decade. The f o l l o w i n g two chapters discuss the 1954 and 1967 r e v i s i o n s of the Bank Act. While the Bank Act i t s e l f i s a s i n g l e piece of l e g i s l a t i o n , the government o f t e n takes the opportunity presented by the Bank Act r e v i s i o n to amend other pieces of l e g i s l a t i o n which are d i r e c t l y r e l a t e d to the f i n a n c i a l system. Such l e g i s l a t i o n i n c l u d e s the Bank of Canada Act, the N a t i o n a l Housing Act, v a r i o u s s u b s i d i a r y Acts such as the Home Improvement Loans Act, and a host of other 20 s p e c i a l i z e d s t a t u t e s . Since banking l e g i s l a t i o n i s of t e n i n t e r r e l a t e d w i t h these others, i n d i s c u s s i n g the Bank Act we w i l l from time to time i n c l u d e other amendments to other l e g i s l a t i o n which was d i r e c t l y a f f e c t e d by, or a l t e r n a t i v e l y d i r e c t l y a f f e c t e d , the p a r t i c u l a r Bank Act under study. 21 FOOTNOTES The B r i t i s h North America A c t , Secti o n 91(15), 30 & 31 V i c t o r i a c. 3. 2 For example, An Act Respecting Banks and Banking, 14-15-16 E l i z a b e t h I I , Section 4, Schedule A. "This Act a p p l i e s to each bank named i n Schedule A and does not apply to any other bank." Secti o n 2 (c) defines 'bank' as ". . . a bank to which t h i s Act a p p l i e s . " In Se c t i o n 5, "Each bank named i n Schedule A i s a body p o l i t i c and corporate and t h i s Act i s i t s c h a r t e r . " The word bank i s protected by the Act i n S e c t i o n 157(10). "Every person who, i n any language, uses the word 'bank,' 'banker,' or 'banking,' e i t h e r alone or i n combination w i t h other words, or any word or words of important e q u i -v a l e n t t h e r e t o , to i n d i c a t e or describe h i s business i n Canada or any part of h i s business i n Canada without being a u t h o r i z e d so to do by t h i s or any other Act, i s g u i l t y of an offence against t h i s A c t . " 3 Canadian Banker's A s s o c i a t i o n , Factbook 1977-78 (Toronto: Canadian Banker's A s s o c i a t i o n , 1977), pp. 2-4. 4 For example the Bank of Canada, a f t e r c o n s u l t a t i o n w i t h the M i n i s t e r of Finance and h i s s t a f f , may decide to s t i m u l a t e or dampen growth i n the economy i n response to measurements taken on economic performance and other key i n d i c a t o r s . Steps may be taken by the Bank of Canada to induce the economy toward some end. The Bank of Canada achieves these goals by e i t h e r r e s t r i c t i n g or easing c r e d i t c o n d i t i o n s i n the banking system and a c c o r d i n g l y i n the f i n a n c i a l system as a whole. C r e d i t c o n d i t i o n s are d i r e c t l y r e l a t e d to the reserve system wherein each of the chartered banks lodges a c e r t a i n p r o p o r t i o n of i t s d e p o s i t s , f o r l i t t l e or no i n t e r e s t depending upon the type of reserve, w i t h the Bank of Canada. I f the Bank of Canada wishes to t i g h t e n c r e d i t c o n d i t i o n s i t w i l l move to e f f e c t changes i n the amount of money on reserve i n p r o p o r t i o n to the volume of deposits i n the chartered banks. In e f f e c t i f the Bank of Canada wishes to increase l i q u i d i t y and t h e r e f o r e loans, i t could, by open market operations f o r example, purchase government s e c u r i t i e s on the open market, thereby i n c r e a s i n g the amount of cash banks have on reserve over and above the r e q u i r e d minimum. The banks could t h e r e f o r e increase t h e i r outstanding loans volume. Banks w i l l always act c e t e r i s paribus to u t i l i z e i d l e cash s i n c e f a i l u r e to e i t h e r purchase s e c u r i t i e s or w r i t e loans w i l l mean income l o s s or l o s s of competitive p o s i t i o n . 22 Gordon F. Boreham, "Changes i n the F i n a n c i a l S t r u c t u r e of Canada, 1953-1958" (Ph.D. d i s s e r t a t i o n , Columbia U n i v e r s i t y (1962), p. 199. "The most important e f f e c t of open-market operations i s on chartered bank reserves. Purchases of s e c u r i t i e s by the c e n t r a l bank increases bank reserves; s a l e s of s e c u r i t i e s have the reverse e f f e c t . In a d d i t i o n open-market t r a n s a c t i o n s may have a number of other e f f e c t s . Purchases from non-bank i n v e s t o r s increase the money supply by c r e a t i n g bank d e p o s i t s , w h i l e s a l e s to such i n v e s t o r s take deposits out of exi s t e n c e . Open-market operations can d i r e c t l y o f f s e t i n t e r e s t r a t e s . Purchases tend to b i d up s e c u r i t y p r i c e s , thereby lowering t h e i r y i e l d s ; s a l e s tend to lower p r i c e s and increase market y i e l d s . " I b i d . , p. 200. I b i d . , p. 206. 8 I b i d . , p. 207. 9 I b i d . , p. 209. J . R. M a l l o r y , S o c i a l C r e d i t and the Federal Power i n Canada, (Toronto: U n i v e r s i t y of Toronto Press, 1954), pp. 71-90. "'""'"Ibid., pp. 85-86. The S o c i a l C r e d i t government d i d e s t a b l i s h a banking type i n s t i t u t i o n , the A l b e r t a Treasury Branch, which operates s o l e l y w i t h i n A l b e r t a and c a r r i e s on r e t a i l banking s e r v i c e s . 12 John N. Benson, P r o v i n c i a l Government Banks: A Case Study of  Regional Response to N a t i o n a l I n s t i t u t i o n s , (Vancouver: The Fraser I n s t i t u t e , 1978). In the e a r l y 1960's B.C.'s government attempted to support the Bank of B.C. through p a r t i a l ownership of bank stock. L e g i s l a t i v e changes introduced i n 1964 and incorporated i n the 1967 Bank Act barred ownership of v o t i n g shares of bank stock by p r o v i n c i a l governments. 13 I b i d . , pp. 13-18. 14 I b i d . , p. 19. A. Paul Pross, "Pressure Groups: Adaptive Instruments of P o l i t i c a l Communication," i n Pressure Group Behaviour i n Canadian P o l i t i c s , ed. A. Paul Pross (Toronto: McGraw-Hill Ryerson L t d . , 1975), pp.. 1^26. . As i n P r o s s 1 work, the terms i n t e r e s t group and pressure group w i l l be used interchangeably throughout the paper. 23 " ^ I b i d . , p. 2. I b i d . I b i d . , p. 6. 1 9 I b i d . I b i d . , p. 7. 21 I b i d . , p. 5. 22 I b i d . , pp. 6-7. 2 3 I b i d . , pp. 9-18. I b i d . 25 I b i d . , p. 10. Pross p o i n t s out that i n s t i t u t i o n a l i z e d groups have an o v e r a l l general philosophy which i s not one-issue o r i e n t e d . This framework allows these groups to bargain 'pragmatically.' " I t i s b e t t e r . . . to r e t u r n to bargain another day than to r i s k the ' c r e d i b i l i t y , ' of the o r g a n i z a t i o n i n the eyes of those whose d e c i s i o n s may i n the f u t u r e make or break the group and i t s c l i e n t s . Hence the r e l u c t a n c e of most i n s t i t u t i o n a l i z e d groups to a v a i l themselves of the wide range of pressure t e c h n i q u e s — p a r t i c u l a r l y the manipulation of p u b l i c o p i n i o n — t h a t e x i s t s i n most western systems." I b i d . 2 6 I b i d . , p. 19. See f o r example the d i s c u s s i o n i n J . E. Anderson, "Pressure Groups and the Canadian Bureaucracy" i n W. D. K. Kernaghan, ed., Bureaucracy i n Canadian Government, 2nd ed. (Toronto: Methuen, 1973), pp. 97-106. 27 Pross, "Pressure Groups," p. 19. I b i d . 29 I b i d . , p. 21. 24 30 An Act to Incorporate the Canadian Banker's A s s o c i a t i o n , 63-64 V i c t o r i a , Chapter 93. 31 I b i d . , S e c t i o n 5. 32 "The A s s o c i a t i o n may from time to time e s t a b l i s h i n any place i n Canada a c l e a r i n g house f o r banks, and make r u l e s and r e g u l a t i o n s f o r the operations of such c l e a r i n g house." L i m i t s to the r u l e s the A s s o c i a t i o n could make were imposed under t h i s same s e c t i o n : " . . . no such r u l e or r e g u l a t i o n s h a l l have any fo r c e or e f f e c t u n t i l approved of by the Treasury Board." I b i d . , S e c t i o n 7 (1) (2). 33 In a d d i t i o n to the c l e a r i n g f u n c t i o n the Canadian Banker's A s s o c i a t i o n takes an a c t i v e part i n expressing the viewpoint of the chartered banks when l e g i s l a t i o n i s prepared. Moreover, i t acts on behalf of the chartered banks i n the areas of education, p u b l i c a t i o n s , p u b l i c r e l a t i o n s , i n f o r m a t i o n , research and bank s e c u r i t y . The C.B.A. al s o operates the interbank f o r e i g n exchange market i n Canada. 34 H. R. B a l l s , " F i n a n c i a l A d m i n i s t r a t i o n i n Canada" i n W. D. K. Kernaghan, ed., Bureaucracy i n Canadian Government, 2nd. ed. (Toronto: Methuen, 1973), p. 44. 35 The 1954 r e v i s i o n i n f o l l o w i n g t h i s procedure maintained the t r a d i t i o n of a l l r e v i s i o n s s i n c e 1871. The 1967 r e v i s i o n which i s discussed l a t e r was i n good part a r e s u l t of the legacy of the Royal Commission on Banking re p o r t which, because of i t s broad scope, made the p a r t i e s to the 1967 Bank Act r e v i s i o n depart from the normal p a t t e r n . "^oreham, " F i n a n c i a l S t r u c t u r e , " p. 35, CHAPTER III THE 1954 BANK ACT: The 1954 Bank Act revision gave impetus to much change in the Canadian Financial system. The discussions, decisions and reallocations of influence which the amendments wrought had an indelible effect upon the economy in general and the financial sector in particular. The development of a more diverse financial system during the post-depression, post-war years stretched control procedures; a legislative move was required to reestablish the lines of influence. For the financial authorities of the federal government, the Bank Act reaffirmed control mechanisms and brought a.changing financial system under greater control. But the legislative move involved more than the government deciding that i t had to implement changes. It demonstrated the duality of the bank-government relationship. The banks pursued a line of limited accommodation in seeking a continuance of their stable system and one bank sought a change which was aimed at greater expansion of i t s interests. In so doing the Bank Act revision process showed the functional links inherent in the maintenance of the chosen instrument relationship. The points set out for discussion at the beginning of the 1954 Bank Act revision were not great in number; the general consensus was that few structural changes were necessary.''" The banks had no clearly discernible goals to be met during the revision process. They had done 25 26 reasonably w e l l i n the post-war p e r i o d and few, i f any, changes were 2 sought by the banks as an u n i t e d f r o n t through t h e i r a s s o c i a t i o n . Despite t h i s , the 1954 changes had greater impact on the Canadian banking system than any which had been made s i n c e Confederation. There were b a s i c a l l y three important changes: the f i r s t concerned the use of banks as approved mortgage lenders under the N a t i o n a l Housing Act; the second changed the cash reserve r a t i o which chartered banks maintain w i t h the Bank of Canada; and the t h i r d removed the p r o h i b i t i o n s against the t a k i n g of c h a t t e l mortgages on r e a l or moveable property. The i n t r o d u c t i o n of mortgage le n d i n g to the banking f i e l d had the greatest impact upon the t r a d i t i o n a l approach to banking. That the advent of mortgage lending should have such an impact i s not s u r p r i s i n g . The f i n a n c i a l system as a whole was not prepared f o r the type of s o c i e t y that evolved i n Canada f o l l o w i n g the Second World War. Immediately a f t e r the war there occurred a tremendous surge i n demand f o r r e s i d e n t i a l housing mortgage funds. This was brought about by a severe shortage of housing u n i t s to accommodate a pop u l a t i o n anxious to s e t t l e i n t o c i v i l i a n ways f o l l o w i n g wartime s e r v i c e . B u i l d e r s were prepared to commence c o n s t r u c t i o n and buyers were prepared to purchase; however, s e r i o u s c a p i t a l shortages developed. These c a p i t a l shortages were due i n l a r g e part to t r a d i t i o n a l and l e g a l p r o h i b i t i o n s i n the f i n a n c i a l s e c t o r : 27 The huge increase in the demand for residential mortgage funds which was the leading financial development of the postwar period did not mesh readily into the banking structure. In the United States, this great demand gave rise to extraordinary growth in savings and loan associations. In Canada, i t stimulated the growth of the trust and mortgage loan companies and to a lesser extent the caisses populaires. Most of a l l , i t led to government financing of housing and to the consequent sustained government interest in getting a share of the public's liquid savings through Canada Savings Bonds.3 The government first became involved in the mortgage field as a result of the 1944 National Housing Act. As a result of this Act a government agency was formed which, with other lenders, contributed funds for builders and individual purchases on a formula basis. Initially the banks were not designated lenders under the Act. On October 1st, 1953 however, the chartered banks were notified that under proposed amendments to the National Housing Act they would be named 4 as authorized lenders of N.H.A. mortgages. Until 1954 the major supplies of mortgage funds were derived from li f e insurance companies. As l i f e insurance companies gradually raised the proportion of their assets which consisted of mortgages, they soon reached a plateau above which further investment in mortgages would not have been in keeping with the type of liability which they held. At the end of 1945 only 11.9 percent of l i f e insurance company assets were invested in mortgages. By the end of 1953, 29.5 percent of l i f e insurance companies asset structures consisted of mortgages.^ The flow of funds for this increase came largely as a result of the 28 l i q u i d a t i o n of s e c u r i t i e s held during the war years. As the l i q u i d a t i o n of s e c u r i t i e s diminished so did the flow of mortgage funds. Furthermore, the government l e g i s l a t e d an increase i n the amortization period f o r N.H.A. mortgages. Coupled with a decrease i n s e c u r i t i e s l i q u i d a t i o n i n future years, t h i s meant that the funds recovered from repayments on e x i s t i n g mortgages would have been i n s u f f i c i e n t to meet the demand for new mortgages. This predicament was communicated to the f e d e r a l government by the l i f e insurance companies and others who r e a l i z e d that unless a new source of mortgage funds was made a v a i l a b l e , housing s t a r t s and the construction industry would be adversely a f f e c t e d . ^ Immediately the government was faced with the prospect of i t s e l f providing the bulk of mortgage funds i n Canada. Thus the foremost purpose of the pr o v i s i o n allowing chartered banks to p a r t i c i p a t e i n N.H.A. mortgages was to augment the supply of mortgage money made g a v a i l a b l e at National Housing Act rates. The i n c l u s i o n of the chartered banks as approved lenders had at le a s t three advantages to the fed e r a l government. The f i r s t , as mentioned previously, was to s u b s t a n t i a l l y increase the amount of mortgage money a v a i l a b l e . The second advantage was to improve s i g n i f i -cantly the service provided by mortgage lenders, p a r t i c u l a r l y to smaller centres not usually served by trust or insurance companies but served by banks. The t h i r d advantage, and i n many ways the most important and appealing to government, was that bringing the banks into 29 the f i e l d allowed the government to reduce i t s r o l e i n the mortgage 9 lending f i e l d without unduly d i s l o c a t i n g the market. T. H. Atkinson, president of the C.B.A. r e l a t e d to the House of Commons, Committee on Banking and Finance that the banks were n o t i f i e d by telegram on October f i r s t , 1953 that they would be named as a u t h o r i z e d l e n d e r s . "^ The chartered banks were caught unaware by the move which caused s u r p r i s e and c e r t a i n l y some concern among more conservative bankers. Loans on r e a l e s t a t e were considered by many bankers to be considerably more r i s k y than short-term loans to i n d u s t r y . The question of t y i n g up funds on a long-term b a s i s when deposit l i a b i l i t i e s tend to be r e l a t i v e l y more short-term was and remains a concern of bank f i n a n c i a l a n a l y s t s . Through the i n t r o d u c t i o n of various government guaranteed loans programmes p r i o r to 1953-54, the banks had moved away s l i g h t l y from the n o t i o n that a l l bank assets ought to be s e l f - l i q u i d a t i n g over the short-term. Thus, w i t h the i n t r o d u c t i o n of the banks as approved lender s , the banks d i d not have to adopt a complete new set of banking p r i n c i p l e s . Even so, the government was forced on s e v e r a l occasions during passage of the amended N a t i o n a l Housing Act and s e v e r a l months l a t e r , during passage of the Bank Act, to support the idea that longer-term lending u t i l i z i n g r e a l property as s e c u r i t y was an appropriate area f o r banks."'"''' In defense of i t s proposed l e g i s l a t i o n , the government emphasized that although loans would be made against 30 r e a l e s t a t e , u l t i m a t e s a f e t y was guaranteed through the insurance by the co r p o r a t i o n [C.M.H.CJ which, as s t a t e d i n the Act, would be an o b l i g a t i o n of the government. The government a l s o pointed out that the new l e g i s l a t i o n ( B i l l 102) had considered the e s s e n t i a l aspect of l i q u i d i t y by: ( i ) p r o v i d i n g i n the act that the banks could borrow from the co r p o r a t i o n on the c o l l a t e r a l of insured mortgages and that the Corporation could purchase such mortgages from the banks; ( i i ) a proposed amendment to the Bank of Canada Act, making insured mortgages e l i g i b l e s e c u r i t y f o r c e n t r a l bank advances to the chartered banks.12 The b a s i c p o i n t the government sought to make was that w h i l e N.H.A. mortgages i n v o l v e d a longer term commitment of funds against which banks had to r e l y on short-term demand and savings d e p o s i t s , seventy to eighty percent of those deposits were d<2 f a c t o long term deposits s i n c e they were never c a l l e d upon. Moreover, the volume of deposits was r e l a t i v e l y constant d e s p i t e the f a c t that depositors could withdraw at w i l l . During Committee study of the N.H.A. r e v i s i o n s (which took place immediately p r i o r to hearings on the Bank Act r e v i s i o n ) Graham Towers, then Governor of the Bank of Canada, stat e d the c e n t r a l bank's view of bank p a r t i c i p a t i o n i n . t h e N.H.A. mortgage f i e l d . In response to Committee qu e s t i o n i n g , he st a t e d that the a b i l i t y to give mortgages would not hamper other types of c r e d i t granted by the banks: . . . I would expect that the o v e r a l l c r e d i t s t r u c t u r e would be s u f f i c i e n t l y l a r g e to permit the banks to make mortgage loans without l e a v i n g them short i n f u l f i l l i n g the requirements of t h e i r other 31 customers. . . . I t may w e l l be that over the years the asset s t r u c t u r e of the banks w i l l be d i f f e r e n t from what i t would have been i f t h i s b i l l d i d not pass . . . but I cannot see any prospect of e x i s t i n g customers of the banks f i n d i n g l i f e more d i f f i c u l t by reason of the banks le n d i n g on mortgages.13 Presenting the views of the Canadian Banker's A s s o c i a t i o n to the Committee, T. H. Atkinson s t r e s s e d the inexperience of the banks i n the mortgage market. L i t t l e concern was generated by the long term nature of mortgage debt. Stress however was l a i d on the n e c e s s i t y of a secondary mortgage market f o r r e s a l e of mortgages i f the banks were 14 going to be able to maintain a presence i n the market. On balance the C.B.A. r e p r e s e n t a t i v e d i d s t a t e that he f e l t that banks were not being forced i n t o the mortgage f i e l d against t h e i r b e t t e r judgement ."^ He pointed out that the only p r o v i s i o n that the banks r e a l l y objected to was the act of "vacant possession," i . e., f o r e c l o s u r e on a homeowner f o r non-payment. I t was f e l t that t h i s might do harm to banks' p u b l i c r e l a t i o n s . On a p o i n t r e l a t e d to the a b i l i t y of the banks to engage i n mortgage l e n d i n g , e s p e c i a l l y i n 1954, the C.B.A. r e p r e s e n t a t i v e s t r e s s e d that the banks were at that p o i n t i n time, f u l l y loaned. Atkinson pointed out that "/Ju7nder today's c o n d i t i o n s , i f loans are to 16 expand, f u r t h e r reserves are e s s e n t i a l . " The second major change introduced by the 1954 r e v i s i o n a l t e r e d the reserve s t r u c t u r e of the chartered banks and introduced s e v e r a l 32 changes enhancing c e n t r a l bank c o n t r o l over monetary p o l i c y . These changes r e s u l t e d i n the f r e e i n g of some funds f o r immediate use i n the mortgage market and promised a more e f f i c i e n t use of funds over the long 17 term. During the 1950's concern began to increase at the Bank of Canada over the adequacy of e x i s t i n g instruments of monetary p o l i c y . This concern d o v e t a i l e d w i t h the Bank of Canada's o v e r r i d i n g i n t e r e s t i n the d i r e c t i o n i n which the f i n a n c i a l system was moving. I t was not u n t i l the 1950's that the.problems inherent i n having a monetary p o l i c y e f f e c t e d 18 through a c t i o n s on the banking system became observable. With the growth of near-banks as c r e d i t grantors and reasonably important f a c t o r s i n the economic system, the l i m i t a t i o n s of a p o l i c y based on banks became 19 only too evident. The 1950's saw a g r e a t l y expanded use of near-bank deposits and the money market wherein corporate borrowing needs could be met. Thus the e f f i c a c y of measures designed to t i g h t e n bank l i n e s of c r e d i t were reduced s i g n i f i c a n t l y . I t i s an i n t e r e s t i n g f a c t that during t h i s decade /the 1950's7 of r e l a t i v e l y t i g h t money, the emphasis s h i f t e d toward the concept of i n f l u e n c i n g c r e d i t c o n d i t i o n s and away from the simpler idea of c o n t r o l l i n g the money supply.20 E f f e c t s of the new reserve r a t i o .were foreseen during Committee study of the r e v i s e d Bank A c t . Graham Towers pointed out i n Commitee hearings that i t was i n the i n t e r e s t s of f u l f i l l i n g the assigned d u t i e s of the Bank of Canada, which made necessary another l e v e r i n c o n t r o l l i n g monetary p o l i c y and c r e d i t c o n d i t i o n s . Towers pointed out: 33 . . . that the only way i n which a c e n t r a l bank can discharge i t s duty i s to t r y to i n f l u e n c e the s i z e of the c r e d i t s t r u c t u r e as a whole . . .21 In response to questions regarding the i n f l u e n c i n g of bank reserves by the Bank of Canada, Towers confirmed that the options introduced by the reserve p r o v i s i o n would r e l i e v e s e c u r i t y markets from bearing the f u l l weight, through open market operations, of a n t i - i n f l a t i o n a r y moves. I t would f u r t h e r act to draw out sharp f l u c t u a t i o n s i n i n t e r e s t r a t e s , p a r t i c u l a r l y i n the case of moves on the p a r t of the c e n t r a l bank which caused sudden downward s l i d e s i n bond r a t e s . P r i o r to 1954 each bank was expected to hold a minimum of f i v e percent of deposit l i a b i l i t i e s , computed on the d a i l y average of deposit volumes, as a cash reserve. H i s t o r i c a l l y the banks maintained approximately a ten percent reserve on hand to meet c l e a r i n g house d i f f e r e n c e s . The 1954 amendment to the cash reserves requirement c a l l e d f o r a v a r i a b l e r a t e determined by the Bank of Canada and an immediate r i s e i n the minimum re q u i r e d reserve to e i g h t percent of deposit l i a b i l i t i e s . While the minimum reserve was increased, the procedure f o r c a l c u l a t i o n was changed to a l l o w f o r monthly averages determined by successive Wednesday balances of deposit l i a b i l i t i e s ; chartered bank cash holdings at the Bank of Canada were determined d a i l y every business day at the c l o s e of business. I t i s i n t e r e s t i n g to note that the Wednesday averages were determined by and l a r g e by the preceding month and the chartered bank cash holdings at the Bank of Canada by / 34 22 the current month. This allowed banks to adjust t h e i r funds at the Bank of Canada i n order to maintain t h e i r reserves as c l o s e as p o s s i b l e to the re q u i r e d minimum. The e f f e c t of the change i n the c a l c u l a t i o n method of the cash r a t i o was f i r s t l y , to e l i m i n a t e much work w i t h i n the branches of the banks, e s p e c i a l l y on a d a i l y b a s i s ; secondly, to a l l o w the banks to monitor and c o n t r o l to a f a r greater extent t h e i r cash reserve p o s i t i o n s ; and t h i r d l y , to f r e e f o r more p r o f i t a b l e uses the p o r t i o n of funds between what they u s u a l l y kept at the Bank of Canada, and what was now 23 r e q u i r e d . At the same time the cash reserve c a l c u l a t i o n was changed, the Bank of Canada was given the power to vary between eight and twelve percent the percentage of cash reserves r e q u i r e d of the chartered banks. In e f f e c t t h i s allowed the Bank of Canada another method of c o n t r o l l i n g monetary expansion. Even though under these amendments the Bank of Canada was p r o h i b i t e d from i n c r e a s i n g the reserve l e v e l more than one percent per month and was f u r t h e r r equired to give the banks one month's n o t i c e of i n t e n t i o n to r a i s e the l e v e l , /V7he p r o v i s i o n of a v a r i a b l e cash reserve requirement was the major change i n the Bank of Canada Act and . . . /^ddej7 a new instrument to those a v a i l a b l e to the c e n t r a l bank to enable i t to perform i t s fundamental task of r e g u l a t i n g the supply of cash a v a i l a b l e to the banking s y s t e m . ^ A decrease i n reserve requirements has a powerful e f f e c t on c r e d i t 35 c o n d i t i o n s . Because of the s e v e r i t y of i t s consequences, changes i n 25 reserve requirements are not o f t e n used. P r a c t i c a l l y , a change i n the reserve percentage has an immediate e f f e c t on the l i q u i d asset or secondary reserve p o s i t i o n of the v a r i o u s banks. I f the percentage of cash reserves i s increased, banks which are operating at the minimum must l o c a t e a d d i t i o n a l reserve funds. U s u a l l y t h i s i s accomplished by s e l l i n g h i g h l y l i q u i d assets i n the money market or by borrowing the ' funds from the Bank of Canada. A decrease i n the reserve percentage a f f e c t s the banks by f r e e i n g excess reserves f o r investment purposes. Again, t h i s may take the form of the purchase of s e c u r i t i e s or the issuance of bank c r e d i t . The Bank of Canada was c l e a r l y the i n s t i g a t o r of the reserve c a l c u l a t i o n amendment which was most l i k e l y proposed to make the change i n the reserve percentages more p a l a t a b l e to the banks. A s i d e e f f e c t of the change was to f r e e up the reserves so that the chartered banks could enter the mortgage market i n 1954. Whether the change i n the reserve c a l c u l a t i o n s was i n s t i t u t e d i n order to b r i n g the banks i n t o the mortgage market i s not known. In any event, the banks d i d not oppose the change i n c a l c u l a t i o n method or the granting of the power to change reserve percentages to the c e n t r a l bank. The t h i r d change i n the Bank Act and one which must rank w i t h banks entering the mortgage f i e l d i n terms of impact upon the Canadian f i n a n c i a l system, was the wholesale entry of the banks i n t o 36 the consumer lending f i e l d through the c h a t t e l mortgage p r o v i s i o n . Through amendment to s e c t i o n 75 of the Bank Act, banks were given the power to take c h a t t e l mortgage s e c u r i t y on household goods or motor v e h i c l e s . Formerly t h i s type of s e c u r i t y , and hence the consumer type of loan, was v i r t u a l l y l i m i t e d to small loan companies which were l e s s r e s t r i c t e d by law as to t h e i r loan terms and c o n d i t i o n s . This u s u a l l y meant that the loan r a t e to the consumer was w e l l i n excess of bank r a t e s . In the o r i g i n a l d r a f t of the proposed Bank Act sent to Committee no p r o v i s i o n f o r banks t a k i n g c h a t t e l mortgages was i n c l u d e d . Rather the p r o v i s i o n sprang from the dynamics of the committee hearings i n 26 response to submissions by one bank, the Canadian Bank of Commerce. In response to c o n s i d e r a t i o n of the extension of c h a t t e l mortgage p r o v i s i o n s as s e c u r i t y f o r consumer loans granted by the banks, s e v e r a l submissions were made by ou t s i d e p a r t i e s . For example, the Board of Con t r o l of the C i t y of Toronto sent an endorsement s t a t i n g i n part t h a t , ". . . t h i s would be h e l p f u l to i n d i v i d u a l s r e q u i r i n g such a s s i s t a n c e /loans7 a t a l e s s e r r a t e of i n t e r e s t than i s charged by 27 loan companies." However, the question of c h a t t e l mortgages was not one on which the government had any strong o p i n i o n . The f o l l o w i n g exchange between the Finance M i n i s t e r and a committee member c l e a r l y p ortrays the government's p o s i t i o n both on the c h a t t e l mortgage p r o v i s i o n and the 'proper' means by which banks ought to suggest changes 37 to the Bank Act: . . . i t was suggested that the banks be allowed to loan on c h a t t e l . Have you any comment to make on that? Hon. Mr. Abbott: No. I have not any strong o p i n i o n on t h a t . I f the banks came forward as a u n i t and asked f o r such power, I t h i n k i t should be looked a t , but I have not given i t any c o n s i d e r a t i o n myself. Mr. Fraser(Peterborough): They have not come forward and asked f o r i t ? 28 Hon. Mr. Abbott: No. Most banks seem to have considered the whole idea of consumer loans to be only m a r g i n a l l y p r o f i t a b l e . Not only was the c l i e n t e l e served by consumer loans considered l e s s creditworthy than the usual loan customer, the existence of a s i x percent i n t e r e s t c e i l i n g on a l l bank loans e f f e c t i v e l y made t h i s type of loan appear too c o s t l y to grant. When questioned during the committee hearings, the M i n i s t e r of Finance was q u i t e adamant that the s i x percent c e i l i n g should stay i n pl a c e ; . . .1 t h i n k that the r a t e which i s now e s t a b l i s h e d as the maximum l e g a l r a t e i s an appropriate r a t e and I would hope that the normal f o r c e of competition would enable the r a t e s below that to be determined on an economic b a s i s i n accordance w i t h the c r e d i t -worthiness of the borrower, the cost of doing business, and a l l the r e s t of i t . 2 9 P r i o r to 1954 only the Bank of Commerce engaged i n widespread consumer lending without b e n e f i t of the c h a t t e l mortgage p r o v i s i o n s . Influenced by development of t h i s type of lending i n the United S t a t e s , 38 the Bank of Commerce entered the market i n 1936. These loans were ". . . on a d i r e c t l ending b a s i s , £patterne<£7 on the Mor r i s Plan that 30 had been developed i n the United States". This p l a n i n v o l v e d the bank earning a higher e f f e c t i v e i n t e r e s t r a t e through a convoluted method of having the borrower pay i n t o a savings account according to a repayment schedule, then once the savings account equalled the note p r i n c i p a l , paying i t out. The lending experience was s a t i s f a c t o r y ; however, expansion i n volume terms was l i m i t e d due to the bank's i n a b i l i t y to take c h a t t e l mortgage s e c u r i t y . That i s to say, the r i s k f a c t o r s inherent i n o f f e r i n g unsecured consumer loans precluded volume in c r e a s e s . In a separate submission, the Bank of Commerce t h e r e f o r e requested a c h a t t e l mortgage p r o v i s i o n and an increase i n the consumer loan r a t e . Response to the Bank of Commerce's submission i n d i c a t e d that many of the committee members were more concerned w i t h the r a t e of i n t e r e s t being charged by the Bank of Commerce. Indeed, the questions asked of the Canadian Bank of Commerce V i c e - P r e s i d e n t , N e i l McKinnon, only b a r e l y d i s g u i s e d the i l l f e e l i n g s on the part of some committee members that the s i x percent c e i l i n g was r o u t i n e l y circum-31 vented. At l e a s t some of the committee members f e l t that the Canadian Bank of Commerce was not making i t s proposal out of i n t e r e s t i n l ending to consumers at h a l f the finance company r a t e , but r a t h e r i n order to l e g i t i m i z e the r a t e of 10.46 percent they were n e t t i n g on t h e i r consumer loans under the st r a t e g y they had developed f o r making 39 32 loans. McKinnon r e p l i e d that the crux of the proposal to make use 33 of c h a t t e l mortgages and increase the c e i l i n g above s i x percent was to a l l o w wage earners the a b i l i t y to make use of c r e d i t without 34 having to o b t a i n a guarantor. He i n s i s t e d that the Bank of Commerce was ". . . q u i t e s a t i s f i e d w i t h the l e g a l o p i n i o n under which we operat£ i d 7 . But we f f e l t J , however, that i t would be d e s i r a b l e not only f o r ourselves but f o r the other banks to extend t h e i r operations 35 i n t h i s f i e l d . " McKinnon continued: " I b e l i e v e we are s a t i s f i e d that we are i n the f i e l d i n the same sense that the small loan companies are. We b e l i e v e that we are doing a s i m i l a r type of business f o r which we are endeavouring to o f f e r f a c i l i t i e s at one h a l f t h e i r ,,36 r a t e s . I f c h a t t e l mortgages are adopted by the Committee on Banking and Commerce, there w i l l be an opportunity then f o r us to perhaps i n many cases take a c h a t t e l mortgage i n s t e a d of asking f o r a guarantor. In other words, we would move i n t o an e v o l u t i o n a r y plan of development to endeavour to b u i l d up a volume of personal loan business, which would be an advantage to the people using that service.37 The former po i n t coincided w i t h the committee viewpoint which emphasized the a b i l i t y of banks to cut the i n t e r e s t r a t e that small loan comapnies were charging. The Chairman, David C r o l l , pointed out at the time that: This committee i s v i t a l l y i n t e r e s t e d i n having the ra t e s reduced. I f you can cut them i n h a l f , f i n e . I f there i s the p o s s i b i l i t y of doing i t , that i s what the committee should consider . . . . I t i s a question of i n t e r e s t rates.38 40 In any event McKinnon pointed out that whether or not the rate would be allowed to increase, i f the committee allowed c h a t t e l mortgages, there would be some cost saving and hence a continuance of the personal loan plan. However, there was a clear i n d i c a t i o n that i f the c h a t t e l mortgage pr o v i s i o n and the rate increase did not go through, personal lending under the Bank of Commerce plan could be halted because an 39 earnings-cost squeeze would render the plan uneconomical. V i r t u a l l y t h i s same argument was repeated i n the House of Commons when clause by clause study was given the b i l l : Mr. Thatcher: . . . I c e r t a i n l y think the 6 percent c e i l i n g should be maintained on standard loans, but I should l i k e the minister to make a statement as to whether or not we might not have more Canadians benefit i f the banks were able to make these personal loans now at a s l i g h t l y higher rate. Mr. Abbott: I gave that very c a r e f u l consideration, Mr. Chairman, but on balance I came to the conclusion I was not prepared to recommend an increase i n the maximum permitted i n t e r e s t rate at t h i s time . . . . Mr. Thatcher: . . . My reason f o r making t h i s suggestion i s that i t might be a progressive step. I believe the banks would go a f t e r t h i s type of business i f i t were made more l u c r a t i v e . Mr. Abbott: I think that i s r i g h t . . . . Mr. Fraser (Peterborough): I j u s t wish to say that I think t h i s i s a very s a t i s f a c t o r y clause. Under i t I b e l i e v e chattels are allowed to be accepted as c o l l a t e r a l f o r bank loans. In my view t h i s w i l l help a great deal, and I have heard much favourable comment from d i f f e r e n t people. .They f e e l that this i s a very good move, and that the banking and commerce committee was wise i n making t h i s p r o v i s i o n . 41 Mr. Abbott: I congratulate the committee, because I t h i n k i t i s a good move, too. I t removes one of the p r o h i b i t i o n s , but i t l i m i t s the f i e l d of a c t i o n , so f a r as the type of s e c u r i t y i s concerned, to a narrow f i e l d , and q u i t e p r o p e r l y so. I t a l s o makes i t q u i t e c l e a r that the s e c u r i t y to be taken must be taken i n accordance w i t h the law of the province i n which the loan i s made and the s e c u r i t y taken. We are not c r e a t i n g a new type of banking s e c u r i t y ; we are simply removing a p r o h i b i t i o n which existed.^0 The r e v i s i o n to Section 75 brought about two changes almost immediately; f i r s t , the banks q u i c k l y became a l a r g e f a c t o r i n the 41 consumer c r e d i t market, and secondly, bank's consumer loan volumes, as a f u n c t i o n of a l l c r e d i t outstanding, rose d r a m a t i c a l l y . Conclusions The 1954 r e v i s i o n to the Bank Act brought about three major changes: the des i g n a t i o n of the chartered banks as approved lenders of N.H.A. mortgages; amendment of the cash reserve s t r u c t u r e to a l l o w the Bank of Canada to vary the percentage of reserves maintained by the chartered banks; and removal of the p r o h i b i t i o n against banks ta k i n g c h a t t e l mortgages on r e a l or moveable property. Each of these changes was c h i e f l y supported by one of the p a r t i e s to the government-bank r e l a t i o n s h i p . The N.H.A. mortgage p r o v i s i o n allowed the f e d e r a l government to v i r t u a l l y r e l i n q u i s h i t s place i n 4 the mortgage funds market w i t h l i t t l e or no d i s r u p t i o n of the economy. This p r o v i s i o n was c l e a r l y a f e d e r a l government i n i t i a t i v e which had 42 the support of the Bank of Canada f o r i t s e f f e c t s on the implementation of monetary measures. We may conclude from the testimony during the committee hearings that the government was not prepared to maintain i t s presence i n the mortgage market and the banks were seen as the l o g i c a l agents to replace that presence. The changes i n reserve r a t i o c a l c u l a t i o n s and i n the reserve r a t i o i t s e l f were c e r t a i n l y inducements to the banks to accept the approved lender s t a t u s granted by the government. The Bank of Canada was the f o r c e behind the move to a l l o w the c e n t r a l bank to vary the reserve percentages. Not only d i d the move add another instrument of monetary c o n t r o l to the c e n t r a l bank's a r s e n a l , but.the= change i n reserve c a l c u l a t i o n method that accompanied the i n t r o d u c t i o n of the v a r i a b l e percentages m a t e r i a l l y aided the f e d e r a l government i n o b t a i n i n g bank p a r t i c i p a t i o n i n the N.H.A. mortgage f i e l d . Removal of the p r o h i b i t i o n a gainst chartered banks t a k i n g c h a t t e l mortgages i n support of loans grew out of the submission by the Canadian Bank of Commerce to the Committee on Banking and Finance. The submission managed to s t r i k e a chord w i t h members of the Committee which then included i t as a proposed amendment to the r e v i s e Bank A c t . The l a c k of a f e d e r a l government o p i n i o n or p o l i c y on the matter c l e a r l y d i d not hinder passage of the r e v i s i o n . In r e t r o s p e c t i t appears that the c h a t t e l mortgage p r o v i s i o n was a recommendation which d e f i e d the odds of a committee amendment succeeding and managed to be implemented. 43 While the advantages f o r c e r t a i n s e c t o r s may be q u i t e evident, f u l l assessment of the p o l i t i c a l dynamics behind the changes i s not p o s s i b l e . The t r a d i t i o n a l p r i v a c y which accompanies n e g o t i a t i o n a t the cabinet l e v e l p r o h i b i t s us from determining a l l the motives f o r any p a r t i c u l a r move. The consequences of the r e v i s i o n s however, are much c l e a r e r . They were b a s i c a l l y two important consequences of the 1954 Bank Act. The f i r s t was a broadening of chartered bank business through the removal of obstacles which stood i n the way of chartered bank p a r t i c i p a t i o n i n s e v e r a l areas of the f i n a n c i a l system, i . e . , the N.H.A. mortgage and consumer loan markets. The second important consequence was the improvement i n the Bank of Canada's a b i l i t y to implement monetary p o l i c y . In the case of t h i s l a t t e r consequence i t i s p o s s i b l e to d i s t i n g u i s h between the i n i t i a t i v e to i n s t i t u t e a v a r i a b l e reserve, which was c l e a r l y intended to a i d the c e n t r a l bank, and s e v e r a l s p i n o f f s which occurred u n i n t e n t i o n a l l y but i n response to the other changes to the Bank Act. The b e n e f i c i a l consequences f o r the p a r t i e s to the r e v i s i o n p o i n t s to the commonality of i n t e r e s t s which u n d e r l i e s the bank-government r e l a t i o n s h i p . For example, the changes i n the reserve requirement c a l c u l a t i o n s which accompanied the i n t r o d u c t i o n of the v a r i a b l e reserve r a t i o i n i t i a l l y provided f o r a l a r g e investment i n the mortgage market by the chartered banks. However, the c a l c u l a t i o n s a l s o aided the implementation of Bank of Canada monetary p o l i c y . 44 By a l l o w i n g the banks to c a l c u l a t e p r e c i s e l y the amount of reserve funds r e q u i r e d f o r the current month, the streamlined procedures e f f e c t i v e l y took up the s l a c k i n the system. The f i r s t e f f e c t of the new c a l c u l a t i o n method f o r the reserve r a t i o s was to b r i n g the banks' reserves down to the minimum re q u i r e d l e v e l . Where p r i o r to 1954, there was a cushion on t h e i r reserves to absorb the impact of p o l i c y changes, a f t e r 1954 there was none. P o l i c y i n i t i a t i v e s by the Bank of Canada were f e l t immediately by the banks and hence by the f i n a n c i a l system. Lik e w i s e , the c h a t t e l mortgage p r o v i s i o n encouraged greater i n f l u e n c e over monetary p o l i c y by the c e n t r a l bank. The growth i n the market share by the chartered banks of consumer debt outstanding, while unforeseen by the p a r t i e s to the d i s c u s s i o n i n committee hearings, e f f e c t i v e l y aided the c e n t r a l bank. One commentator has pointed out that because finance companies and other f i n a n c i a l i n t e r m e d i a r i e s , which were w r i t i n g i n c r e a s i n g volumes of c r e d i t , were outside the c e n t r a l bank's c o n t r o l v i s - a - v i s impact on cash reserves, the a b i l i t y of the Bank of Canada to a f f e c t the supply of c r e d i t was becoming i n c r e a s i n g l y tenuous. By a l l o w i n g the banks to gain an edge i n the consumer loans market, c o n t r o l was 43 r e e s t a b l i s h e d . Banks' share of the volume of consumer c r e d i t went from 18 percent at the end of 1952 to 26.8 percent by the end of 44 1960. Later the Bank of Canada annual r e p o r t of 1956 admitted that 45 the growth of near-banks had been a c o n s i d e r a t i o n which entered i n t o i t s thoughts on the a p p l i c a b i l i t y of monetary p o l i c y . ". . . /jrjhe existence of what amounts to a r i v a l banking system . . . without s u p e r v i s i o n or r e g u l a t i o n /_by f e d e r a l a u t h o r i t i e s / , and out of step w i t h the trend of c r e d i t p o l i c y i n the r e g u l a r banking system, can be.. 45 a d e f i n i t e handicap to monetary p o l i c y . . ." The entrance of the chartered banks i n t o the N.H.A. mortgage f i e l d a l s o aided the Bank of Canada, and the government as a whole, i n i n f l u e n c i n g monetary p o l i c y . A f t e r 1954, changes to the Bank r a t e a f f e c t e d the N.H.A. mortgage r a t e . C e n t r a l bank pressure on cash reserves f o l l o w i n g 1954 a f f e c t e d the volume of mortgage funds i n a d d i t i o n to usual bank c r e d i t l i n e s . S u p e r f i c i a l l y the a c t i o n on reserve r a t i o s was the only e x p l i c i t move on the pa r t of the monetary a u t h o r i t i e s to seek greater i n f l u e n c e over the economy. I m p l i c i t l y however, both the N.H.A. and c h a t t e l mortgage p r o v i s i o n s aided a resurgence of monetary p o l i c y i n f l u e n c e by the Bank of Canada. Whether or not a l l the r a m i f i c a t i o n s of the 1954 r e v i s i o n could have been foreseen i s not known; however, what i s known i s that there were many more underlying currents to the d i s c u s s i o n s i n the House of Commons and during committee study of the b i l l . The problems of an i n t e r e s t c e i l i n g , term l e n d i n g , i n t e r l o c k i n g d i r e c t o r s h i p s , f o r e i g n ownership and competition were a l l matters of some debate at 46 some p o i n t during c o n s i d e r a t i o n of the r e v i s e Bank Act. They were however not matters of serious c o n s i d e r a t i o n to any more than the i s o l a t e d Member of Parliament or outside group. These very p o i n t s however, were to become i n short order the c r i t i c a l i s s u e s of the pe r i o d between the 1954 and 1967 Bank Act reviews. 47 FOOTNOTES While there i s no documentary evidence which p o i n t s to t h i s l a c k of proposals, C.B.A. r e p r e s e n t a t i v e s at the Banking and Finance committee made no v e r b a l proposals f o r l a r g e s c a l e change i n the Bank Act. The C.B.A. d i d seek a change to the Act a l l o w i n g them to take as s e c u r i t y hydrocarbons ". . . i n , under or upon the ground, i n place or i n storage; . . .". S e c t i o n 82, Bank Act. During the 1950's, w i t h the o i l i n d u s t r y i n an i n f a n t s t a t e , a means was needed whereby banks could lend to companies whose only assets o f t e n c o n s i s t e d of d r i l l i n g r i g h t s or undeveloped o i l and gas d i s c o v e r i e s . The p r i n c i p l e behind t h i s type of s e c u r i t y has been a p a r t of the Bank Act since i t s i n c e p t i o n , most notably i n the t a k i n g of s e c u r i t y i n r e l a t i o n to f i s h i n g , farming or f o r e s t r y . 2 The request f o r changes a l l o w i n g banks to take s e c u r i t y on o i l and gas deposits was the only instance of the banks operating i n concert to propose an amendment to the Bank Ac t . 3 Douglas J . Gibson, "Banking Since the War: A Story of R e s t r i c t e d Adjustment," The Canadian Banker, 74 No. 4 (Winter, 1967): pp. 36-51. See Table 1 f o r f i g u r e s on increases i n C.S.B. t o t a l s . 4 The a d d i t i o n of the chartered banks to the l i s t of a u t h o r i z e d lenders was made as an amendment to the N a t i o n a l Housing Act i n l a t e 1953. Corresponding amendments were made to the Bank Act i n 1954. ^Boreham, " F i n a n c i a l S t r u c t u r e , " p. 75. 6 I b i d . , pp. 76-77 f f . 7 I b i d . I b i d . , p. 75. 48 The ,. crux of the government's p o l i c y as red e f i n e d i n l a t e 1953 during r e v i s i o n s to the N a t i o n a l Housing Act. was the replacement of the Pool Guarantee Fund System by a type of r e s i d e n t i a l mortgage insurance secured by the government w i t h the i n c l u s i o n of the banks as a u t h o r i z e d lenders. This scheme e l i m i n a t e d the j o i n t loans p r o v i s i o n s by which N.H.A. mortgages had been granted p r i o r to 1954, although C.M.H.C. r e t a i n e d the a u t h o r i t y to make loans i n c e r t a i n circumstances. P r e v i o u s l y j o i n t loans were made by approved lenders p r o v i d i n g 75 percent of the mortgage and C.M.H.C. p r o v i d i n g 25 percent. I n t e r e s t rates were a weighted average between the approved lender's usual r a t e and the N.H.A. r a t e . Approved lenders were protected by the Pool Guarantee Fund system whereby f o r each mortgage lenders obtained a c r e d i t based on s i z e , term, and l o c a t i o n of the proposed house. I b i d . , pp. 76-80. "^House of Commons Banking and Finance Committee, Hearings on Na t i o n a l Housing Act and Revisions to the Bank Act. October 1953-A p r i l 1954, p. 291. "'""'"Some o p p o s i t i o n members on the Banking and Finance Committee voiced o b j e c t i o n to the move on the grounds that loans secured by r e a l property were dependent on the market value of the property which, during the term of the mortgage, could f l u c t u a t e downward. The c r i t i c i s m was based on the premise that some homeowners seeing t h e i r property d e c l i n e i n value would be l e s s than w i l l i n g to pay on a mortgage greater than the current market value of t h e i r property. The banks were not o v e r l y concerned w i t h t h i s problem s i n c e the r i s k inherent i n .the market value of s e c u r i t y f a l l i n g below the outstanding p r i n c i p a l , on a loan i s always present. See House of Commons Banking and Finance Committee Hearings on N a t i o n a l Housing Act and Revis i o n s to the Bank Ac t . October, 1 9 5 3 - A p r i l , 1954, esp. pp. 240ff. 12 Boreham, " F i n a n c i a l S t r u c t u r e , " p. 95. The N a t i o n a l Housing Act, as r e v i s e d , a l s o changed the r o l e of C.M.H.C. C.M.H.C.'s a b i l i t y to make d i r e c t loans was r e i n f o r c e d but i t s borrowing power was reduced to $250 m i l l i o n . The mortgage reserve fund, out of which d e f a u l t e d mortgages were p a i d , was implemented and administered by C.M.H.C. C.M.H.C. became r e s p o n s i b l e f o r p r o v i d i n g a p p r a i s a l s and i n s p e c t i o n s . The housing act a l s o provided the basis f o r a secondary market i n insured mortgage loans which i n d i v i d u a l s and other i n v e s t o r s not empowered to i n i t i a t e such loans might p a r t i c i p a t e . Under the new act the insurance p o l i c y on a mortgage loan could be assigned to the purchaser should the loan be s o l d so long as the loan continued to 49 be s e r v i c e d by an approved lender. I b i d . , p. 91. The a b i l i t y to t r a n s f e r insurance coverage provided f o r the secondary mortgage market and i n part allowed i n s t i t u t i o n s to continue to meet the requirements of the primary mortgage market. 13 Canada, House of Commons. Standing Committee on Banking and Commerce. Minutes of the Proceedings and Evidence, Decennial R e v i s i o n of the Bank Ac t . (Ottawa: Queen's P r i n t e r , 1954), p. 245. 14 I b i d . , p. 291ff. Atkinson pointed out that deposits would not r i s e as q u i c k l y as mortgage a p p l i c a t i o n s and unless funds derived from the s a l e of mortgages re p l e n i s h e d the share which banks devoted to mortgages, mortgage lending by banks would be short d u r a t i o n . 15 Atkinson r e i t e r a t e d that the chartered banks had f i r s t been advised on Oct. 1, 1953, j u s t p r i o r to the amendments being made to the N a t i o n a l Housing A c t . I b i d . , p. 297. 1 6 I b i d . , p. 307. 17 I t w i l l be r e c a l l e d that the f r e e i n g of reserves immediately allows the banks funds f o r the g r a n t i n g of c r e d i t or s e c u r i t i e s investment. On the b a s i s of the f r a c t i o n a l reserve system a f r e e i n g of $10 m i l l i o n i n reserves would t h e o r e t i c a l l y y i e l d $125 m i l l i o n i n new c r e d i t . 18 D e f i n i t i o n of the money supply as c o n s i s t i n g of only Bank of Canada notes and chartered bank d e p o s i t s , misrepresents the q u a n t i t y of money by d i s r e g a r d i n g deposits i n non-bank f i n a n c i a l i n t e r m e d i a r i e s and the l i a b i l i t i e s of other f i n a n c i a l i n s t i t u t i o n s . C e n t r a l bank pressure was only brought to bear on the chartered bank component of the money supply. 19 The chartered banks became aware that the near-banks were growing i n deposit and loan volumes without the dampening e f f e c t s of reserves and other c o n t r o l measures. Logic d i c t a t e d that the more near-banks grew the more severe the c o n t r o l f e a t u r e s of c e n t r a l bank p o l i c y on banks would have to become to net the same aggregate r e s u l t s i n the n a t i o n a l economy. 20 Gibson, Banking Since the War, p. 43. 21 Canada, Bank Act Proceedings, p. 704. 50 22 The l e g a l reserve r a t i o was c a l c u l a t e d based upon the numerator as deposits w i t h the Bank of Canada on hand during the current month, and the balance of Bank of Canada notes (money), computed on the average of four consecutive Wednesdays ending on the second l a s t Wednesday of the month immediately preceding the current month. The denominator c o n s i s t e d of the t o t a l s of Canadian d o l l a r deposits computed on the four consecutive Wednesdays of the previous month. Boreham, " F i n a n c i a l S t r u c t u r e , " pp. 37-38. 2 3 I b i d . , pp. 37-38ff. I b i d . , p. 38. See Se c t i o n 18 1(0) of the Bank of Canada Act and S e c t i o n 72 of the Bank Act. 25 I b i d . , pp. 203-4. 26 The Bank of Commerce acted alone and without overt support of any of the other member banks of the C.B.A. This a c t i o n on the p a r t of the Commerce wh i l e unusual was not unheard o f . In a l e t t e r to the w r i t e r , Michael A. H a r r i s o n , Executive D i r e c t o r of the C.B.A. s t a t e s i n part that: "The A s s o c i a t i o n t r i e s to achieve unanimity i n deciding on the matters coming w i t h i n i t s purview. This means that one d i s s e n t i n g vote could defeat a proposal because there i s no power w i t h i n the A s s o c i a t i o n to f o r c e m a j o r i t y views on the m i n o r i t y , even i f the m i n o r i t y numbers only one. The A s s o c i a t i o n does not have the a b i l i t y to commit or f o r c e a bank to any d e c i s i o n or l i n e of a c t i o n , or conversely to cause a bank to cease and d e s i s t from a l i n e of a c t i o n . Thus i n d u s t r y p o s i t i o n s are a r r i v e d at as a unanimous or strong consensus among the members. Sometimes a strong d i s s e n t w i l l prevent a p o s i t i o n being put forward. On other occasions a member may d i s s e n t but not wish to block the expression of the m a j o r i t y view. In the case of the Bank Act, major proposals put f o r t h p u b l i c l y or to the M i n i s t e r of Finance by the A s s o c i a t i o n were supported by a l l of our member banks. Even here, however, there was exception taken by one bank on one i n d u s t r y p o s i t i o n and i t submitted i t s own views." L e t t e r from Michael A. Ha r r i s o n , Executive D i r e c t o r , C.B.A., J u l y 27, 1978. 27 Canada. Bank Act Proceedings, p. 1111. 2 ^ I b i d . , p. 1343. 29 I b i d . , p. 1337. 51 30 S. Sarpkaya, The Banker and Soc i e t y (Don M i l l s , Ont.: I n s t i t u t e of Canadian Bankers, 1968), pp. 244-45. The Canadian Bank of Commerce l e n t consumers a p r i n c i p a l amount whereupon i t had the borrower pay back monthly i n s t a l l m e n t s i n t o a savings account. Thus the p r i n c i p a l amount of the note accrued i n t e r e s t at the r a t e of 6 percent; the bank had r e l a t i v e l y f r e e balances i n the savings accounts u n t i l the note was p a i d o f f as w e l l as an ever i n c r e a s i n g s e c u r i t y value as the balance of the savings account grew. The Commerce Bank estimated an average y i e l d of 10.46 percent on personal loans. Boreham. " F i n a n c i a l S t r u c t u r e , " p. 49. Some other banks simply l e n t twice the r e q u i r e d amount and maintained the excess i n a savings account u n t i l h a l f the p r i n c i p a l was r e p a i d . See previous note. 3 2 I b i d . , pp. 1448-53. 33 The Canadian Bank of Commerce submission contained a proposal to set the r a t e on consumer loans at one h a l f the going r a t e on loans from the small loan companies. The government s t a t e d i t s view that i t d i d not wish to move from the s i x percent c e i l i n g and the Commerce Bank concentrated on the c h a t t e l mortgage p o r t i o n of the submission. 52 34 Sarpkaya, The Banker and S o c i e t y , pp. 244-45. The p r e s e n t a t i o n from the Canadian Bank of Commerce to the Committee hearings on the 1954 r e v i s i o n demonstrated the use of c h a t t e l mortgages by the small loans companies. Comparative A n a l y s i s of Loans Classed by S e c u r i t y Small Loans Co.'s C B . of C. Pers. as of Dec. 31, 1952 Loan Plan as of J u l . 31, $ Amount % 1953 C h a t t e l Mortgages $101,990,303.00 69.06% 0 0 Other S e c u r i t y 675.00 n i l 0 0 Notes Cosigned $ 2,742,713.00 1.86% 17,301,846.00 60.35% T o t a l Secured $104,733,691.00 70.92% 17,301,846.00 60.35% Unsecured 42,941,094.00 29.08% 11.367,163.00 39.65% T o t a l $147,674,785.00 100.00% 28,669,009.00 100.00% Source: Canada, Bank Act Proceedings, p. 1100. Figures were s u p p l i e d by the Canadian Bank of Commerce i n t h e i r submission to the Banking and Commerce Committee. Due to the higher p r o p o r t i o n of unsecured loans the Bank of Commerce u t i l i z e d a higher l o s s reserve f i g u r e on i t s consumer loans than d i d small loans companies. R e s p e c t i v e l y the Commerce experienced a 4.0% l o s s reserve p o s i t i o n whereas the Small Loans companies reserves were 2.75%. I b i d . , p. 1101. Net p r o f i t a f t e r taxes was 4.4% f o r the small loans companies f o r the year ended Dec. 31, 1952 and 1.24% f o r the Bank of Commerce year ended October 31, 1952. I b i d . , p. 1104. 35 Canada, Bank Act Proceedings, p. 1456. The Inspector General of Banks gave i m p l i c i t approval to the c i r c u i t o u s route used by banks to circumvent the s i x percent c e i l i n g . I t was i n part t h i s o p i n i o n , which apparently had never before been s t a t e d i n p u b l i c forum, which aided the expansion of consumer loans by a l l banks. 3 6 I b i d . , p. 1455. I b i d . , p. 1451. 53 3 8 I b i d . , p. 1455. 39 I b i d . , pp. 1467-68. Evidence of earnings and d e f a u l t r a t e s from small loans companies were produced by the Inspector General of Banks. Representatives of the small loans companies were not present f o r these d i s c u s s i o n s . 40 House of Commons Debates, May 26, 1954. pp. 5124-25. 41 In the p e r i o d between 1953 and 1960 the volume of personal loans outstanding on bank books rose from $308 m i l l i o n to $857 m i l l i o n . The percentage of these loans used f o r the purchase of household property went from n i l i n 1953 to 19.83 percent i n 1960. Boreham, " F i n a n c i a l S t r u c t u r e , " p. 52. See a l s o Appendix I I and I I I . 42 In 1953 C.M.H.C. approved 18.5% of the N.H.A. mortgages i n Canada; i n 1954, 5.3%; i n 1955, 2.5% and i n 1956, 4.8%. Thus a re d u c t i o n , i f not an e l i m i n a t i o n , of the f e d e r a l supply of mortgage funds was obtained. Boreham, " F i n a n c i a l S t r u c t u r e , " p. 115. In 1957, C.M.H.C. approved 47.2 percent of N.H.A. mortgages i n 1958, 42.8%. These increases were a r e s u l t of two f a c t o r s : f e d e r a l i n i t i a t i v e s i n the housing market to s t i m u l a t e the economy and the ne c e s s i t y to take up the s l a c k from the banks when the N.H.A. mortgage r a t e climbed near and then exceeded the l e g a l s i x percent c e i l i n g on bank loans. The e f f e c t of the s i x percent c e i l i n g i s discussed below. *4 3 Boreham, " F i n a n c i a l S t r u c t u r e , " pp. 56-57ff. 44 I b i d . , p. 57. 45 Canada. Bank of Canada Annual Report - 1956, p. 27. The growth of a l t e r n a t e f i n a n c i a l i n s t i t u t i o n s or near-banks such as t r u s t companies,, c r e d i t unions, finance companies and so on, which f u n c t i o n outside f e d e r a l j u r i s d i c t i o n , hamper the ac t i o n s of monetary p o l i c y by the mere f a c t . t h a t they are not acted upon by the t r a d i t i o n a l l e v e r s of monetary p o l i c y which have e f f e c t through chartered banks and s e c u r i t y markets. Thus i n the 1950's, suasion and agreements between the banks and the Bank of Canada had to be invoked i n order to c u r t a i l l e nding to fin a n c e companies f o r r e - l e n d i n g to consumers. These agreements l a s t e d only a r e l a t i v e l y short time s i n c e the finance companies moved to the money market to o b t a i n more c o s t l y but obtainable c r e d i t . See Boreham, " F i n a n c i a l S t r u c t u r e , " p. 5 6 f f . CHAPTER IV THE 1967 BANK ACT The intimacy between economic leadership and government which had existed throughout Canadian history since 1867 was dealt a severe blow several years a f t e r the 1954 Bank Act re v i s i o n . With the electi o n of John Diefenbaker and the economic d i f f i c u l t i e s which emerged i n the following years, strains developed between these two groups which hampered the smooth functioning of economic policy making. In part, these d i f f i c u l t i e s were due to s t r u c t u r a l problems inherent i n the Canadian economy which were also exacerbated by po l i c y choices made by the party i n power. While the Diefenbaker administration could not be held responsible for many of the economic misfortunes which b e f e l l Canada from 1957 to 1963, a' number of p o l i t i c a l miscalculations disrupted the 'businesslike' relationship that had heretofore been the norm between the f i n a n c i a l sector and the federal government."*" The stable and mutually r e i n f o r c i n g relationship which had existed between the banks and government was tested on a number of occasions during the Diefenbaker period. The conversion loan of 1958, indecision and the lack of a clear d i r e c t i o n i n monetary and f i s c a l p o l i c y , the foreign currency c r i s i s , a n t i - f o r e i g n investment actions, the dismissal of James Coyne, and Diefenbaker's attack on the chartered banks a l l added to the estrangement between the government and the 54 55 business sector g e n e r a l l y . In l a t e 1959 on A Nation's Business t e l e c a s t Diefenbaker charged that the chartered banks were responsible f o r the tight-money s i t u a t i o n then p r e v a i l i n g and suggested that the banks r e s t r u c t u r e t h e i r lending p o l i c i e s . According to Peter Newman, "/Jf7roin the date of t h i s t e l e v i s i o n broadcast, Canada's business community r e a l i z e d i t did not have a sympathizer i n the Prime M i n i s t e r ' s o f f i c e . " 3 The period from 1957 to 1963 was a watershed not only f o r the Canadian economy but also f o r other western nations w i t h mixed economies. In 1957 i n an e f f o r t to reach consensus on economic p o l i c y , B r i t a i n established a Committee on the Working of the Monetary System, the R a d c l i f f e Commission. L a t e r , the United States e s t a b l i s h e d i t s 4 Commission on Money and Credit and on October 18, 1961 the Royal Commission on Banking and Finance was es t a b l i s h e d i n Canada at the i n s t i g a t i o n of the M i n i s t e r of Finance. The Commission was brought i n t o being to provide an a n a l y s i s of the f u n c t i o n i n g of the na t i o n a l f i n a n c i a l system. The Order-in-Council e s t a b l i s h i n g the Commission stated that: " . . . or d e r l y economic growth i s dependant i n no small measure on the adequacy and adaptation of the f i n a n c i a l i n s t i t u t i o n s through which funds are made a v a i l a b l e f o r expansion and development . . ."^ With that i n mind the Commission was to review the Bank Act, the Quebec Savings Bank Act 56 and furthermore: . . . to enquire i n t o and report upon the s t r u c t u r e and methods of operation of the Canadian f i n a n c i a l system, i n c l u d i n g the banking and monetary system and the i n s t i t u t i o n s and processes i n v o l v e d i n the flo w of funds through the c a p i t a l market.6 In a d d i t i o n the Commission was to make recommendations on the improve-ment of the f i n a n c i a l system and the adequacy of the r e l e v a n t f e d e r a l l e g i s l a t i o n . ^ I t was a l s o to serve as the springboard f o r the decennial Bank Act r e v i s i o n . The establishment of the Commission was i n essence a r e s u l t of the tremendous growth i n d i v e r s i t y of the Canadian f i n a n c i a l system f o l l o w i n g the Second World War. A number of i n s t i t u t i o n s grew to support the requirements of an expanded economy; however- most t r u s t companies, loan companies and c r e d i t unions which were e s t a b l i s h e d during t h i s time were subject to p r o v i n c i a l j u r i s d i c t i o n and hence somewhat removed from d i r e c t f e d e r a l i n f l u e n c e . Thus the p e r i o d a f t e r 1945 was marked by an increase i n impediments to the a c t i o n s of f e d e r a l monetary p o l i c y simply due to the d i v e r s i t y encouraged by economic growth. What i s more the measures adopted to increase f e d e r a l monetary i n f l u e n c e i n the 1954 Bank Act proved i n s u f f i c i e n t by the end of the 1950's. This s t a t e of a f f a i r s was brought home by the Commission i t s e l f : Growing experience has l e d to the development of a whole new range of p o l i c y instruments and techniques and to greater p u b l i c acceptance of t h e i r 57 use. There has been some increase i n p u b l i c awareness of the i m p l i c a t i o n s of f i n a n c i a l p o l i c y , although i t has not kept pace w i t h the demand f o r  ever-higher standards of performance i n a t t a i n i n g  p o l i c y goals.°(emphasis mine) The c e n t r a l question f o r the Commission was t h e r e f o r e what changes could be made i n the f i n a n c i a l system to a i d the e f f e c t i v e implementation 9 of n a t i o n a l monetary and economic p o l i c y ? To these ends the Commission set i t s e l f four tasks: 1. Assess the c o n t r i b u t i o n of f i n a n c i a l p o l i c i e s to the nation's main economic goals; 2. Assess the extent to which the e f f e c t i v e n e s s of f i n a n c i a l p o l i c y might be strengthened by changes i n e x i s t i n g techniques of monetary p o l i c y instruments; 3. Assess p u b l i c safeguards i n i t s dealings w i t h the f i n a n c i a l s e c t o r ; 4. Assess the adequacy of the f i n a n c i a l system to meet the l e g i t i m a t e needs of lenders and borrowers i n an ". . . e f f i c i e n t , f l e x i b l e , n o n-discriminatory and c r e a t i v e way."10 In response to these tasks a number of important areas of controversy were brought before the Commission and subsequently were in v o l v e d i n the 1967 Bank Act r e v i s i o n . From the p o i n t of view of the bank-government r e l a t i o n s h i p the only c r i t i c a l area was however the quest by the banks f o r removal of the i n t e r e s t r a t e c e i l i n g on loans. Not only was t h i s c r i t i c a l to the bank-government r e l a t i o n s h i p but r e s o l u t i o n of the c o n f l i c t had f a r - r e a c h i n g i m p l i c a t i o n s f o r the whole of the economy. Linked to the i n t e r e s t r a t e c e i l i n g removal was the 58 growth of near-banks and the consequent loss of competitive position by the banks. This dynamic caused attendant monetary policy problems for the federal authorities. More important from our point of view the factors inter-acting within the interest rate ceiling removal controversy brought out the depth of the relationship between the banks and the government. Since the issues involved were of such importance the banks expended a great deal of energy in bringing their side of the question to the Commissioners. In a brief which in effect argued for'a number of structural changes for the financial system, the C.B.A. in an uncharac-t e r i s t i c manner exposed i t s preferences to public scrutiny The central motivating force for changes in legislation as far as the banks were concerned was the steadily declining position of the banks in relation to other types of institutions in the financial market. -Table 1 below clearly outlines the problem as the banks saw i t : declining market share. The banks launched an attack on what the C.B.A. deemed the c r i t i c a l variable in their decline — the six percent interest rate ceiling. They urged that the limit be.removed because i t precluded banks from attractive lending business, distorted financial markets by concentrating excessive demands on banks when market rates exceeded six percent, and reduced their a b i l i t y to compete for deposits with other financial institutions to which the ceiling did not apply.^ To the banks the six percent ceiling T a b l e 1 5 9 SELECTED LIQUID FINANCIAL ASSETS HELD MAINLY BY INDIVIDUALS (December 31) 1935(c) 1945 1950 1955 1958 1962 $m. % $m. % $m. % $m. % $m. % $m. % Chartered Bank Personal Savings Deposits 1,300 74.5 2,635 73.3 4,176 63.8 5,633 55. 5 6,844 54.5 7,932 45.8 Quebec Savings Bank Deposits 70 4.0 130 3.6 190 2.9 247 2. 4 274 2.2 324 1.9 Caisses P o p u l a i r e s and Cre d i t Union Shares and Deposits 9 0.5 135 3.8 288 4.4 598 5. 9 919 7.3 1,516 8.7 Trust Company Deposits and C e r t i f i c a t e s 160 9.2 181 5.0 343 5.2 597 5. 9 825 6.6 1,682 9.7 Mortgage Loan Company Deposits and Debentures 150 8.6 156 4.3 278 4.3 469 4. 6 602 4.8 1,055 6.1 Deposits i n Government Savings I n s t i t u t i o n s ( a ) 56 3.2 110 3.1 162 2.5 180 1. 8 195 1.6 206 1.2 SUB TOTAL: 1,745 100.0 3,347 93.1 5,437 83.1 7,724 76. 0 9,659 76.9 12,715 73.3 Canada Savings Bonds (b) n i l n i l 248 6.9 1,104 16.9 2,433 24. 0 2,895 23.1 4,260 26.7 TOTAL: 1,745 100.0 3,595 100.0 6,541 100.0 10,157 100. 0 12,554 100.0 17,335 100.0 (a) As at March 31 of the year shown. The Newfoundland Savings Bank was purchased by the Bank of Montreal on A p r i l 1, 1962 and the remaining 3 government i n s t i t u t i o n s had deposits of $183 m i l l i o n on March 31, 1963. (b) Includes War Savings C e r t i f i c a t e s i n 1945 and 1950. (c) Estimated Source: The Royal Commission on Banking and Finance, p. 120. 60 was the prime reason f o r the growth of t r u s t companies which the banks , - , • , -, • 12 saw as t h e i r b i g g e s t , but not only, competitors. The banks' main p o i n t s f o r removal df the c e i l i n g centred around the n o t i o n that banks were u n f a i r l y competed against by other f i n a n c i a l i n s t i t u t i o n s . The banks charged that the c e i l i n g prevented them from making loans on which higher r a t e s of i n t e r e s t ought to be charged to 13 cover costs and r i s k s . This argument was used p r e v i o u s l y during the 1954 Bank Act r e v i s i o n i n support of a higher r a t e f o r personal i n s t a l l m e n t loans. I t a l s o served as an explanation f o r the r e l a t i v e d i f f e r e n c e s i n term l e n d i n g volumes between the United States and Canada. In the United S t a t e s , term loans accounted f o r 57 percent of 14 outstanding loans i n 1957 versus 13 percent i n Canada i n 1962. Term loans t r a d i t i o n a l l y c a r r y a higher r a t e s i n c e r i s k i s d i r e c t l y r e l a t e d to term. This i n a b i l i t y to e s t a b l i s h a presence i n the term l e n d i n g market due to the i n t e r e s t r a t e c e i l i n g was a contentious p o i n t f o r the banks. The banks a l s o maintained that the c e i l i n g caused d i s c r i m i n a t i o n against small businesses s i n c e marginal prospects were forced to go outside the chartered banks f o r c r e d i t at rat e s w e l l above those o f f e r e d by banks. Moreover, during t i g h t money c o n d i t i o n s banks could not r a i s e t h e i r r a t e s above s i x percent and hence were forced to r a t i o n c r e d i t . Simultaneously demand f o r bank c r e d i t rose when general i n t e r e s t r a t e s were greater than s i x percent causing 61 further stress on the financial system. The rate structure problem invariably led, in the banks' view, to credit flows outside the control of the monetary authorities. Opponents (other financial institutions and some p o l i t i c a l figures) to removal voiced the same reasons for maintaining the ceiling. The ceiling was f e l t to enhance control of the monetary and credit system by monetary authorities; theoretically, i f credit restrictions could be firmly placed on the system by tightening credit and increasing rates, expansion of the economy would be limited by banks' credit rationing and impact upon chartered bank reserves. The interest rate ceiling was also said to protect small and inexperienced borrowers from being charged excessive rates by the banks. The most c r i t i c a l element in the ceiling controversy was however the shelter from chartered bank competition provided for near-bank financial institutions."^ Not only could other financial institutions carry on basic banking services, they could also lend to certain classes of .borrowers at rates attractive enough to cover their risks and costs. The effect of the interest rate ceiling on banks was brought out dramatically when bank participation in N.H.A. mortgages was considered. Table II amply demonstrates how the large participation by the banks in the Canadian mortgage market from 1954-1959 dropped to almost 62 Table 2 GROSS RESIDENTIAL MORTGAGE LOANS APPROVED BY LENDING INSTITUTIONS 1951--1953 1954- -1959 1960-1962 $m. % $m. % $m. % L i f e Insurance Companies 943.3 74.7 2,638.1 50.2 1,706.6 55.5 Trust Companies 88.5 7.1 546.7 10.4 726.8 23.6 Loan Companies 208.5 16.5 661.6 12.6 530.2 17.2 Chartered Banks - - 1,292.2 24.6 1.3 -Other (a) 22.8 1.8 114.9 2.2 111.7 3.6 TOTAL: 1,263.2 100.0 5,235.5 100.0 3,076.6 100.0 Includes Quebec Savings Banks and mutual b e n e f i t s o c i e t i e s . Caisses p o p u l a i r e s and c r e d i t unions are not i n c l u d e d ; i n 1961 the former approved a l l mortgages of some $80 m i l l i o n and the l a t t e r not more than $15 or $20 m i l l i o n . Source: Royal Commission on Banking and Finance, p. 274. 63 n i l by the years 1960-1962. The wholesale abandonment of the mortgage market by the banks was caused by N.H.A. mortgage ra t e s c l i m b i n g above the s i x percent c e i l i n g . The r e s u l t a n t d e s t a b i l i z a t i o n caused the government to enter the market and re p l a c e the p a r t i c i p a t i o n l e f t vacant by the banks. Since mid-1959 . . .banks have a l l but withdrawn from N.H.A. len d i n g — p a r t l y because of the demands upon them and p a r t l y because of doubts about the p r o p r i e t y of making d i r e c t mortgage loans above 6%. In a d d i t i o n , there have been occasions when the N.H.A. r a t e was f i x e d at l e v e l s which were u n a t t r a c t i v e to lenders , given a l t e r n a t i v e r a t e s on conventional loans and on s e c u r i t i e s . Thus the government's p o l i c i e s have r e s u l t e d i n a gap i n the a v a i l a b i l i t y of funds which i t f e l t o b l i g e d to f i l l w i t h d i r e c t C.M.H.C. l e n d i n g . 1 S i m i l a r effects,though not as dramatic, were seen by banks to occur each time general i n t e r e s t r a t e s exceeded s i x percent. This brought home the fundamental i s s u e of the i n e q u a l i t y represented by the i m p o s i t i o n of the s i x percent c e i l i n g . Moreover the banks extended t h i s p e r c e p t i o n of d i s c r i m i n a t i o n to c e r t a i n mortgage p r o h i b i t i o n s on t h e i r method of operation versus the entry of the t r u s t companies and others i n t o l i n e s of business g e n e r a l l y construed to be banking. The t r u s t companies and other non-bank f i n a n c i a l i n s t i t u t i o n s were not subject to the same r e g u l a t i o n s as were the banks and g e n e r a l l y were f r e e to enter many areas of endeavour. The banks were concerned w i t h more than simply the len d i n g r a t e i s s u e as i t a p p l i e d to loans; t i e d to the r a t e c e i l i n g f o r loans was 64 the i m p l i c i t r a t e c e i l i n g on savings d e p o s i t s . As t a b l e I demons-t r a t e s the p r o p o r t i o n of savings deposits held by the banks s l i p p e d s u b s t a n t i a l l y i n the period from 1945 to 1962. The a b i l i t y of a lending i n s t i t u t i o n to lend i s t i e d d i r e c t l y to i t s a b i l i t y to borrow money i n the form of d e p o s i t s ; a declining p r o p o r t i o n of deposits due to ' u n f a i r ' r a t e competition i n v a r i a b l y c u r t a i l e d l e n d i n g . In absolute terms, the chartered banks' share of the savings deposit business i s s t i l l l a r g e , but the s i g n i f i c a n t p o i n t i s that the r a t e of growth of other i n s t i t u t i o n s i n the f i e l d i s s u b s t a n t i a l l y greater than that of the chartered banks, and the share of the community's t o t a l money deposits going i n t o the chartered banks i s d e c l i n i n g s t e a d i l y on a long-term b a s i s . A fundamental reason f o r t h i s trend i s the a b i l i t y of the competing i n s t i t u t i o n s to pay more a t t r a c t i v e r a t e s on savings d e p o s i t s . ^ The question of competition amongst the v a r i o u s f i n a n c i a l i n s t i -t u t i o n s was a r e c u r r e n t theme throughout the hearings of the Royal Commission. Many submissions took up d i f f e r i n g tacks on the t o p i c , c l a i m i n g v a r i o u s l y that some laws then i n e f f e c t hampered competition, made i t unequal or promoted,the i n t e r e s t s of some i n s t i t u t i o n s over others. As a motive f o r many of the recommendations generated by the Commission, competition was the most prominently sought a f t e r goal and b a s i c r a t i o n a l e f o r proposed changes. The Commission made i t s recommendations based on two assumptions about the f i n a n c i a l system: f i r s t , even though t h e i r r e l a t i v e p o s i t i o n had d e c l i n e d i n r e l a t i o n to other f i n a n c i a l i n s t i t u t i o n s , the chartered 20 banks would continue to be a major f o r c e i n the system; and secondly, 65 the n a t i o n a l t r u s t companies would remain the chartered banks major 21 competitors. In order to implement t h i s new competitive regime the Commission proposed p r o h i b i t i o n s on a number of a c t i v i t i e s i n which the chartered banks had engaged. S p e c i f i c a l l y p r o h i b i t i o n s against interbank p r i c e and r a t e agreements, i n t e r l o c k i n g t r u s t and bank d i r e c t o r s h i p s and of r e s t r i c t i o n s on the q u a n t i t y of share ownership by banks/non-federally 22 incorporated f i n a n c i a l corporations were recommended. The Commission recommended as w e l l that f o r e i g n ownership of bank stock be c u r t a i l e d but that the entrance of f o r e i g n banks i n t o the Canadian r e t a i l 23 banking market be allowed. These recommendations however could guarantee l i t t l e by way of a more competitive f i n a n c i a l system. More fundamental r e l a t i o n s h i p s v i s - a - v i s the flow of c a p i t a l were deemed necessary by the Commission. This c o n c l u s i o n derived d i r e c t l y from the Commission's viewpoint on banking l e g i s l a t i o n : . . . an appropriate r e g u l a t o r y environment i s one which permits quick and e f f i c i e n t adaptation of our banking machinery to the changing needs of borrowers and le n d e r s , w h i l e o f f e r i n g reasonable p r o t e c t i o n against l o s s or e x p l o i t a t i o n to those who deal w i t h the banking i n s t i t u t i o n s . At the same time, good banking l e g i s l a t i o n should a l s o ensure that measures of monetary p o l i c y have an e q u i t a b l e and broadly p r e d i c t a b l e e f f e c t on the operations of the i n s t i t u -t i o n s concerned, and should encourage the development of e f f e c t i v e contacts and c o n s u l t a t i o n between them and the c e n t r a l banks.. F i n a l l y , the framework of banking law should provide f o r a f a i r and acceptable p a t t e r n of r e g u l a t i o n which does not d i s c r i m i n a t e ^ among those doing an e s s e n t i a l l y s i m i l a r business. 66 The most dramatic change required by t h i s viewpoint was the removal of the s i x percent c e i l i n g on loans. The Commission concurred w i t h the chartered banks that the s i x percent c e i l i n g hampered or otherwise d i s t o r t e d the flow of funds w i t h i n the f i n a n c i a l system. The Commission pointed out t h e r e f o r e t h a t , ". . . greater freedom to move rat e s w i t h the t i d e would undobtedly c o n t r i b u t e to smoother and more e q u i t a b l e changes i n c r e d i t c o n d i t i o n s and remove 25 the a r t i f i c i a l i n c e n t i v e f o r borrowers to c a l l on bank c r e d i t . The Commission c a l l e d f o r a homogenization of a c t i v i t i e s : chartered banks d e a l i n g i n conventional mortgages; t r u s t companies de a l i n g i n commercial c r e d i t ; a l l i n s t i t u t i o n s r e c e i v i n g equal access , • •, , 26 to the f i n a n c i a l markets. For the Commission, the only way through which t h i s homogenization could take place was i f a l l f i n a n c i a l i n s t i t u t i o n s were brought under f e d e r a l a u t h o r i t y . We have concluded that f e d e r a l r e g u l a t i o n and super-v i s i o n should apply to a l l i n s t i t u t i o n s deemed to be banking i n s t i t u t i o n s , and that a l l i n s t i t u t i o n s not chartered or l i c e n s e d by the a u t h o r i t i e s should not be permitted to engage i n banking a c t i v i t i e s . ' The r a t i o n a l i z a t i o n of the f i n a n c i a l system that these recommendations e n t a i l e d however, came square against questions of f e d e r a l - p r o v i n c i a l j u r i s d i c t i o n . Moreover they added to the p o l i t i c a l problems faced by s e v e r a l f i n a n c e m i n i s t e r s i n the 1960's. Be that as i t may, the problems and approaches r a i s e d by the 67 Commission have dominated t h i n k i n g on the f i n a n c i a l system even to the present day. The problem had been one of p o l i t i c a l not f i n a n c i a l p o s s i b i l i t i e s . The Royal Commission completed and presented i t s r e p o r t to a 28 L i b e r a l m i n o r i t y government i n e a r l y 1964. While the government had changed hands during the time the Royal Commission was i n progress, the o v e r a l l r e l a t i o n s h i p between government and the f i n a n c i a l community changed r e l a t i v e l y l i t t l e . The new M i n i s t e r of Finance i n the L i b e r a l government was Walter Gordon. While possessing c r e d e n t i a l s and a background which should have made him h i g h l y regarded as a business r e p r e s e n t a t i v e i n the Cabinet, he brought to government a number of proposals which ran counter to general business philosophy. These proposals c o n s i s t e d of measures designed to l e s s e n the impact and i n f l u e n c e of d i r e c t f o r e i g n investment i n the Canadian economy. Coupled w i t h what was perceived as a more s o c i a l l y conscious government than had heretofore been the norm, the a n t i - f o r e i g n investment proposals tended to f u r t h e r exacerbate disagreements between the government and the business community at l a r g e . What i s more the m i n o r i t y p o s i t i o n of the government meant that i t was l e s s able to withstand pressure from any groups which might be able to lend c r i t i c a l support to l e g i s l a t i o n or to the P a r t y . During the l a t t e r part of 1964 and e a r l y 1965 p r i v a t e c o n s u l t a t i o n along the l i n e s of the 1954 Bank Act review took place between the banks 68 and the government. These c o n s u l t a t i o n s ended i n the p r e s e n t a t i o n of 29 the r e v i s e d Bank Act to the House i n May 1965. Unl i k e 1954 however, there was no consensus between the p a r t i e s on s e v e r a l key iss u e s contained i n the r e v i s e d a c t . The major stumbling blocks concerned Gordon's r e f u s a l to remove the i n t e r e s t r a t e c e i l i n g and extend Bank Act r e g u l a t i o n s to the near-banks. The banks were a l s o opposed to 30 Gordon's i n t e n t i o n to l i m i t f o r e i g n ownership of banks. Because of t h i s l a c k of consensus, "Gordon . . . found himself engaged once again 31 i n p u b l i c c o n f l i c t w i t h the f i n a n c i a l community." The l a c k of consensus was due to Gordon's b e l i e f that the very s i z e of the banks l e t alone t h e i r p o s s i b i l i t i e s f o r expansion under l e s s r e s t r i c t i v e r e g u l a t i o n s would not permit a f r e e competitive system to develop. The M i n i s t e r d i d not accept the argument of the Royal Commission and the banks that removal of the i n t e r e s t r a t e c e i l i n g would s t i m u l a t e competition and f o r c e down i n t e r e s t r a t e s i n some pa r t s of the market; he feared i n s t e a d that the o l i g o p o l y p o s i t i o n of the banks would a l l o w them to r a i s e t h e i r l e n d i n g r a t e s i f the c e i l i n g were l i f t e d . (In t h i s he was supported by a l l p a r t i e s i n the House of Commons.) He there f o r e favoured a cont i n u i n g measure of government c o n t r o l over banking operations, i n c l u d i n g i n t e r e s t r a t e s , and the encourage-ment of increased competition.32 Gordon, l i k e the Commission, saw the t r u s t companies as the banks' strongest competitors. Gordon's p o s i t i o n was however that the banks could counteract t h i s competition by t h e i r sheer s i z e i f the i n t e r e s t r a t e c e i l i n g was l i f t e d . As f o r the question of i n c l u d i n g near-banks under f e d e r a l 69 l e g i s l a t i o n , Gordon's non-support was due p r i m a r i l y to the c o n s t i t u -t i o n a l r a m i f i c a t i o n s of the move. Nothing was s a i d i n the commission's r e p o r t , . . . as to how such a c t i o n could be j u s t i f i e d under the C o n s t i t u t i o n . Under the B r i t i s h North America Act, 'banking' i s designated as coming w i t h i n the f e d e r a l a u t h o r i t y . There i s no d e f i n i t i o n of the word 'banking', however, and I could f i n d no support e i t h e r from the law o f f i c e r s of the Crown — that i s , the Department of J u s t i c e — or from outside counsel whom I consulted p r i v a t e l y , which could have j u s t i f i e d the f e d e r a l government assuming the proposed powers of s u p e r v i s i o n over the s o - c a l l e d 'near-banks'. Moreover, the government concluded that any attempt to a r b i t r a r i l y .usurp such powers would a u t o m a t i c a l l y provoke a major controversy w i t h the provinces which was the l a s t t h i n g we wished f o r at that time. Ac c o r d i n g l y , t h i s recommendation of the Royal Commission was not accepted.33 According to Gordon's biographer, Denis Smith, t h i s l a c k of a c t i o n on the near-banks is s u e f u r t h e r annoyed the banks. " C o n s t i t u t i o n a l n i c e t i e s and p o l i t i c a l c a l c u l a t i o n were of l e s s importance /_to the banks_7 . . . and the government's choice was another source of d i s p l e a s u r e to 34 add to t h e i r growing l i s t of grievances. The 1965 v e r s i o n of the Bank Act l e g i s l a t i o n however died on the order paper as the country moved to an e l e c t i o n i n the F a l l of 1965. The L i b e r a l s again found themselves i n a m i n o r i t y p o s i t i o n f o l l o w i n g the 1965 e l e c t i o n . Walter Gordon who had pushed f o r the e l e c t i o n tendered h i s r e s i g n a t i o n upon the L i b e r a l ' s f a i l u r e to o b t a i n a m a j o r i t y p o s i t i o n . I f Gordon had not resigned f o r t h i s reason however, other moves w i t h i n the L i b e r a l e l e c t i o n campaign l e a d e r s h i p would have q u i c k l y produced the same r e s u l t . 70 According to s e v e r a l commentators Pearson and s e v e r a l others were hard at work immediately p r i o r and during the e l e c t i o n campaign i n an attempt to swing business support to the pa r t y . The day Pearson c a l l e d the e l e c t i o n , the N a t i o n a l L i b e r a l Federation i n Ottawa was $250,000 i n debt. The 1965 campaign was budgeted at about $4 m i l l i o n s . When Senator John A i r d , the party's c h i e f fund r a i s e r , made h i s i n i t i a l contacts to t r y and r a i s e that sum he was met by unprecedented resentment and r e s i s t a n c e . During the week of September 6 some sen i o r represen-t a t i v e s of Canada's chartered banks urged Pearson through t h e i r i n t e r m e d i a r i e s to r e c r u i t Robert Winters and drop Walter Gordon from the Finance p o r t f o l i o . . . . Whether or not Pearson acceded to the bankers' demands was never c l e a r . But the bankers were l e f t w i t h the f i r m impression that the L i b e r a l Leader had accepted t h e i r p o i n t of view, p a r t i c u l a r l y s i n c e he had mentioned Robert^Winters f o r the Trade and Commerce p o r t f o l i o . Because M i t c h e l l Sharp was then occupying t h i s j o b , the bankers assumed that Pearson intended to move Sharp to Finance as Gordon's replacement. Fo l l o w i n g the Winters recruitment many L i b e r a l fund r a i s e r s across the country, . . . were openly promising t h e i r p o t e n t i a l s u b s c r i b e r s that Pearson had pledged to remove Gordon from the Finance p o r t f o l i o a f t e r November 8.35 Gordon's r e s i g n a t i o n r e s u l t e d i n M i t c h e l l Sharp's move to the Finance p o r t f o l i o . While t h i s change i n personnel accommodated those business leaders contacted during the campaign i t d i d not remove the Bank Act r e v i s i o n s from controversy. The months between Gordon's r e s i g n a t i o n and the r e - i n t r o d u c t i o n of the Bank Act l e g i s l a t i o n were f i l l e d w i t h c o n f l i c t w i t h i n the L i b e r a l p a r t y over the s i g n i f i c a n t 36 p r i n c i p l e s i n v o l v e s i n the Bank Act proposals. This c o n f l i c t was f u e l e d by the very nature of the L i b e r a l Cabinet 71 and caucus during the Pearson years. From the very beginning of the Pearson government L i b e r a l M.P.'s broke down i n t o f a i r l y r i g i d r i g h t and l e f t camps. These camps showed i n various stands taken on the many s o c i a l welfare and n a t i o n a l i s m questions dealt w i t h during t h i s time. F o l l o w i n g the 1965 e l e c t i o n though the r e f o r m i s t group began a f a i r l y r a p i d d e c l i n e i n both numbers and power. This d e c l i n e meant that the l e f t wing could not muster a m a j o r i t y of the caucus though i t s s t r e n g t h was s u f f i c i e n t to cause t u r m o i l which o f t e n s p i l l e d 37 over i n t o p u b l i c view. Sh o r t l y a f t e r the e l e c t i o n Pearson s h u f f l e d h i s cabinet and reassigned a number of the reform wing i n the L i b e r a l caucus. The readjustment i n v o l v e d the usual muddled compromise of p o l i t i c a l views and i n c l i n a t i o n s . But the departure of Gordon, Lamontagne, Kent and Davey from the Prime M i n i s t e r ' s inner c o u n c i l s r e f l e c t e d Mike Pearson's preference f o r a l e s s venturesome and c o n t r o v e r s i a l second term of o f f i c e : the reforming l e a d e r s h i p was gone.-^ Although the balance of power i n caucus c l e a r l y swung to the more conservative elements f o l l o w i n g the e l e c t i o n the r e s i s t a n c e of the reformers to " b a c k - t r a c k i n g " on previous d e c i s i o n s was strong. The Bank Act r e v i s i o n s and most notably the removal of the s i x percent c e i l i n g numbered among the most important is s u e s f o r the reform group. I t f e l l to Sharp to p i l o t the Bank Act and the l i f t i n g of 72 s i x percent c e i l i n g through caucus and through the House. I n i t i a l entry of i n i t i a t i v e s f o r removal of the s i x percent c e i l i n g arose out of a compromise proposal f i r s t broached by Walter Gordon during c o n s i d e r a t i o n of the r e v i s i o n s f i r s t tendered i n May, 1965. At that time Gordon t o l d the House that he would reconsider l i f t i n g the c e i l i n g only i f general world i n t e r e s t r a t e s began to climb 39 e x c e s s i v e l y . Sharp r e s u r r e c t e d t h i s comment i n 1966 although Gordon s t i l l d i d not agree that the c e i l i n g ought to be l i f t e d . Sharp intended to give i n to the chartered banks on the i n t e r e s t r a t e question and gave the ". . . impression . . . /to7 the party caucus — 40 that Gordon himself approved the changes!" In a memo to Sharp, Gordon attempted to dissuade Sharp from a l l o w i n g the banks to succeed on the r a t e question: You mentioned i n caucus that I had planned to propose some new amendments to the Bank Ac t . This i s a b s o l u t e l y c o r r e c t , but w h i l e the amendments are a b i t lengthy they do not amount to much i n substance. While Lou Rasminsky /Governor of the Bank of Canadq7 and E l d e r k i n /inspector-General of Banks7 would have l i k e d me to propose l i f t i n g the c e i l i n g on i n t e r e s t r a t e s , I t o l d them I could not recommend t h i s i n view of the l i n e taken by the government when the Act was introduced and the very favourable r e a c t i o n from a l l sides of the House to t h i s p a r t i c u l a r point.41 Gordon's proposed changes at that time concerned l i n k i n g the i n t e r e s t r a t e to changes i n the bank r a t e . D i s c u s s i o n s occurred w i t h Finance department o f f i c i a l s on the f e a s i b i l i t y of t h i s proposal but, i n 73 42 the f i n a l a n a l y s i s , Gordon was unable to supp.ort removal of the c e i l i n g . In caucus Gordon cautioned that the government's stand on the Bank Act r e v i s i o n s and e s p e c i a l l y the i n t e r e s t question could decide 43 the f u t u r e of the L i b e r a l p a r t y as a p r o g r e s s i v e f o r c e . The k i t e s that have been f l y i n g suggest the government i s planning to l i f t the i n t e r e s t c e i l i n g . C e r t a i n l y the f i n a n c i a l community t h i n k s so. Bank stocks have been going up . . . . My idea of the L i b e r a l party i s that we should represent and f i g h t f o r the great mass of small and i n a r t i c u l a t e people. We should be t h i n k i n g about what i s best f o r them. I t i s not our job to worry about the bankers. Their p r o f i t s are going up enough alr e a d y . . . . The long term f u t u r e of the L i b e r a l p a r t y . . . i s f a r more ^ important to Canada than the g o o d w i l l of the bankers. Although Gordon pushed f o r the establishment of a caucus committee on the i n t e r e s t r a t e question, none was e s t a b l i s h e d . To counter t h i s Sharp proposed a r e t e n t i o n of the c e i l i n g f o r loans under $25,000. Oppostion from the other s i d e of the House, as w e l l as i n caucus, to t h i s proposal was intense: . . . o p p o s i t i o n was l e d by Maurice Lamontagne and Walter Gordon, and the suggestion was withdrawn i n response to t h e i r warning that L i b e r a l abstentions ^ might lead to the government's defeat i n the House. In the House Sharp withdrew h i s proposal s t a t i n g that i t opened the way f o r banks to c u r t a i l l e n d i n g under $25,000.00 i n order to 46 b e n e f i t from higher r e t u r n s . Sharp proposed i n s t e a d t y i n g the r a t e charged by banks, f o r an i n t e r i m p e r i o d f o l l o w i n g which the c e i l i n g 47 would be l i f t e d , to the average y i e l d on short-term government bonds. 74 This proposal engendered a d d i t i o n a l o p p o s i t i o n i n the L i b e r a l caucus. In cabinet Alan MacEachern and Jean Marchand were p a r t i c u l a r l y opposed to the proposal. Gordon and Lamontagne l e d o p p o s i t i o n i n caucus. Gordon, Lamontagne and t h e i r group were however unable to exert s u f f i c i e n t i n f l u e n c e upon Sharp to dissuade him from h i s choice. MacEachern and Marchand i n cabinet changed t h e i r votes f o r the s i x percent c e i l i n g proposal f o r Sharp's support of increased a i d to o l d age.pensioners. In the House Diefenbaker g r i l l e d Sharp on the trade o f f s which e v e n t u a l l y produced the c e i l i n g removal proposal but d i d 49 not espouse Conservative party o p p o s i t i o n to the removal. On J u l y 7, 1966 the Bank Act r e v i s i o n s went to committee and on March 21, 1967 the r e v i s e d Bank Act was passed. Support came from both the Conservatives and the L i b e r a l s ; o p p o s i t i o n came from s e v e r a l Western Conservative M.P.'s, the N.D.P. and S o c i a l C r e d i t . Conclusions: The a c t o r s i n v o l v e d i n the chartered bank-government r e l a t i o n -ship during the 1967 r e v i s i o n process broke down i n t o two camps on the major i s s u e s . On the one hand the chartered banks and the Bank of Canada promoted the greater expansion of bank powers, i n c l u d i n g removal of the i n t e r e s t r a t e c e i l i n g and the proposed extension of bank r e g u l a t i o n s to near-banks. On the other hand, p a r t i c u l a r l y when Walter Gordon was Finance M i n i s t e r , p o l i t i c a l a u t h o r i t i e s i n government 75 were against removal of the c e i l i n g and were u n w i l l i n g to r i s k a c t i o n on near-bank r e g u l a t i o n . Commentators on the 1967 Bank Act are unanimous i n the c o n c l u s i o n that the " . . . main message of the new banking l e g i s l a t i o n . . . /was7 the a s t o n i s h i n g degree to which competition w i t h i n the banking community and between banks and other f i n a n c i a l i n s t i t u t i o n s /_was7 embraced as the o f f i c i a l p o l i c y , f o l l o w i n g the d i r e c t i o n set by the • • -.50 P o r t e r Commission. The government c l e a r l y saw such p r o v i s i o n s as conventional mortgages f o r banks, the ten percent share ownership and i n t e r l o c k i n g d i r e c t o r s h i p r u l e s as a p p l i e d to t r u s t company-bank i n t e r r e l a t i o n s h i p s , the banning of interbank i n t e r e s t r a t e agreements, and loan r a t e d i s c l o s u r e r u l e s as a c h i e v i n g a more competitive f i n a n c i a l system. These features of the l e g i s l a t i o n came d i r e c t l y from the Commission r e p o r t . They were not c o n t r o v e r s i a l and were g e n e r a l l y perceived as the l e a s t government could do upon r e c e i p t of the Commission's r e p o r t . In essence these p r o v i s i o n s had the c a p a b i l i t y of seeming to improve the competitive mechanisms w i t h i n the f i n a n c i a l system with l i t t l e e f f o r t on the pa r t of the government. To these p r o v i s i o n s the banks d i d not v o i c e o b j e c t i o n . Rather the banks used t h e i r energy i n a concerted attempt to achieve removal of the s i x percent c e i l i n g . In so f a r as we might i s o l a t e groups which made gains on s p e c i f i c issues we may say that the banks c l e a r l y won on t h i s most important 76 of i s s u e s . What i s most important i s that the reason that the banks were able to 'win' on t h i s i s s u e was the same which prevented the government from a c t i n g on the more c o n t r o v e r s i a l points r a i s e d by the Royal Commission. S p e c i f i c a l l y the government, because i t was i n a m i n o r i t y p o s i t i o n , could not a f f o r d the p o l i t i c a l repercussions of maintaining i t s p o s i t i o n on the points at hand. The f i n a n c i a l c o n s t r a i n t s placed on the party by f i g h t i n g successive campaigns and the imminent th r e a t of defeat made the p o l i t i c a l l e a d e r s h i p p a r t i c u -l a r l y s e n s i t i v e to i n f l u e n c e from the f i n a n c i a l s e c t o r . The government's weak mandate l e d i n t u r n to l o s s e s by both the banks and the government on the question of the r e g u l a t i o n of near-banks. Because of the p o l i t i c a l environment of the time, no concerted a c t i o n was p o s s i b l e on t h i s i s s u e . While the removal of the s i x percent c e i l i n g aided the banks and the Bank of Canada v i s - a - v i s chartered bank impact on the f i n a n c i a l system, the f a c t that the c e n t r a l bank was unable to gain d i r e c t i n f l u e n c e over near-banks must be t r e a t e d as the major disappointment of the 1967 r e v i s i o n to monetary a u t h o r i t i e s and the chartered banks. The 1967 Bank Act had s e v e r a l immediate consequences f o r the chartered banks.. In a sense the r e v i s i o n l e d to a r e v i t a l i z a t i o n of the banking system. The l i f t i n g of the c e i l i n g on i n t e r e s t rates e f f e c t i v e l y allowed the banks to enter many areas of the f i n a n c i a l system from xvhich they had heretofore been barred by c o n s i d e r a t i o n s 77 of cost and volume. Banks reentered the mortgate market, strengthened t h e i r p o s i t i o n i n the consumer loans market and began to increase t h e i r term lending operations. Moreover, the removal of the c e i l i n g permitted f u l l s c a l e competition to begin i n the deposit business; rates improved immediately and new types of savings v e h i c l e s were developed. In the p e r i o d f o l l o w i n g the 1967 Bank Act the banks began to r egain a p o r t i o n of the market share which they had l o s t w h i l e the c e i l i n g was i n e f f e c t and, i n a sense, again became i n s t i t u t i o n s which have the power to dominate the f i n a n c i a l system. 78 FOOTNOTES Peter C. Newman, Renegade i n Power: The Diefenbaker Years (Toronto: McClelland and Stewart, 1973), p. 201ff. 2 I b i d . , pp. 206-215. 3 I b i d . , p. 208. Newman p o i n t s out that the banks were able to prove the next day that Diefenbaker's charges were unfounded. ^John H. Young, " C r e d i t Conditions and the Bank of Canada," The Canadian Banker, V o l . 74, No. 1 (Spring, 1967), pp. 198-99. ^Royal Commission on Banking and Finance, Appendix I . Order i n C o u n c i l #1484, Terms of Reference. 6 I b i d . 7 I b i d . The Commission was chai r e d by the Honourable Dana P o r t e r , Chief J u s t i c e of Ontario, and spent 2% years i n q u i r i n g i n t o the s t a t e of the f i n a n c i a l system i n Canada. In i t s d e l i b e r a t i o n s many f o r e i g n c e n t r a l bankers provided non-Canadian input which provided an opportunity f o r an outside a n a l y s i s of the domestic f i n a n c i a l scene. But the main body of submissions came from p r i v a t e f i n a n c i a l i n s t i t u -t i o n s and government departments. These submissions were augmented by research undertaken under the auspices of the Commission i t s e l f . ^ I b i d . , p. 4. The Commission pointed out that: " F i n a n c i a l i n s t i t u t i o n s and markets are . . . the v e h i c l e f o r t r a n s m i t t i n g the main impact of f i n a n c i a l p o l i c y , and i f they do not adequately r e f l e c t the changed a t t r a c t i v e n e s s of spending on r e a l goods and s e r v i c e s r e l a t i v e to the a c q u i s i t i o n s of f i n a n c i a l a s s e t s , the f i n a n c i a l system w i l l f r u s t r a t e the a u t h o r i t i e s p r i n c i p a l aim of a l t e r i n g the l e v e l of p h y s i c a l a c t i v i t y i n the economy." I b i d . , p. 8. I b i d . , pp. 7-8. 79 I b i d . , p. 116. In t h e i r b r i e f to the Commission the C.B.A. argued that w i t h the r i s e i n general i n t e r e s t rates to near or greater than s i x percent ". . . the banks are no longer able to use an increase i n l e n d i n g r a t e s to moderate pressures on l e n d i n g resources. I t a l s o means that the d i f f e r e n t i a l between y i e l d on accounts i n v o l v i n g v a r y i n g r i s k s or v a r y i n g s e r v i c e requirements i s almost e l i m i n a t e d . The c e i l i n g forces bank le n d i n g r a t e s i n t o a r i g i d p a t t e r n i n which almost a l l borrowers pay much the same r a t e . " Canadian Bankers A s s o c i a t i o n , Submission to the Royal Commission on  Banking and Finance (Toronto: Canadian Banker's A s s o c i a t i o n , 1963), p. 21. 12 In t h e i r b r i e f to the Commission, the C.B.A. argued that the banks were at a disadvantage against other i n s t i t u t i o n s i n the f i n a n -c i a l system because banks were under l e g a l c o n s t r a i n t s which prevented them from competing to the f u l l e s t extent. The c r e d i t unions and caisses p o p u l a i r e s were s i n g l e d out as having the greatest advantages. ". . . [XJo a very considerable extent these competing i n s t i t u t i o n s have made r a p i d headway i n areas they have taken over under circumstances i n which the chartered banks were prevented by l e g a l or other r i g i d i t i e s from competing e f f e c t i v e l y . I t might be pointed out that some of these competing i n s t i t u t i o n s enjoy freedom from income t a x a t i o n . . . . I t should be p a r t i c u l a r l y noted that co-operatives, c r e d i t unions, and ca i s s e s p o p u l a i r e s have s u b s t a n t i a l tax advantages." C.B.A., Submission to Royal Commission, pp. 88-89. The C.B.A. c a r r i e d i t s case of u n f a i r competition to the C a r t e r Commission on Taxation hearings i n 1964: " . . . not only does the exemption of c r e d i t unions from income t a x a t i o n r e s u l t i n l o s s e s to the f e d e r a l , p r o v i n c i a l , and municipal t r e a s u r i e s , i t a l s o operates at an u n f a i r competitive advantage against the banks and other f i n a n c i a l i n s t i t u t i o n s . I t i s recommended that the present tax advantages conferred on c r e d i t unions should be c l o s e l y reviewed e s p e c i a l l y as they r e l a t e to those which have a t t a i n e d a l a r g e s i z e and whose a c t i v i t i e s have become i n c r e a s i n g l y i n d i s t i n g u i s h a b l e from other f i n a n c i a l e n t e r p r i s e s . " Canadian Banker's A s s o c i a t i o n , "The Canadian Banker's A s s o c i a t i o n Submission to the Royal Commission on Taxation," The Canadian Banker, V o l . 74, No. 1 (Spring, 1964), p. 85. Table I demonstrates that as w e l l as encountering competition from other f i n a n c i a l i n s t i t u t i o n s the growth i n the market share of Canada Savings Bonds a l s o c o n t r i b u t e d to a d e c l i n e i n bank d e p o s i t s . The chartered banks d i d not oppose CSB s a l e s f o r s e v e r a l reasons: Banks gained s u b s t a n t i a l revenue from a s s i s t i n g i n the s a l e of CSB's to t h e i r customers; CSB s a l e s augmented the issuance of other 80 government debt issues which would normally have been s o l d i n the narrower confines of s e c u r i t i e s markets (banks would have been expected to purchase s u b s t a n t i a l q u a n t i t i e s of a l t e r n a t i v e i s s u e s ) ; and the s a l e of CSB's allowed government p a r t i c i p a t i o n i n C.M.H.C. and other government housing programmes upon which the banks depended i n p a r t f o r other business. The Royal Commission recommended that the government reduce i t s commitment to the CSB programme i n p a r t to a l l o w other deposit i n s t i t u t i o n s to grow. Canada. Royal Commission  on Banking and Finance, pp. 458-60. "*"Ibid., p. 364. 14 I b i d . , p. 125. 1 5 I b i d . , p. 365ff. "*"^Ibid., p. 275 . Because of t h i s freedom from r e g u l a t i o n a number of banks bought equity i n t r u s t companies and over time placed bank o f f i c i a l s and other bank d i r e c t o r s on t r u s t company boards of d i r e c t o r s . The opposite c o n d i t i o n a l s o occurred but w i t h l e s s r e g u l a r i t y . The p r i n c i p a l reason banks acquired t r u s t company r e l a t i o n s h i p s was to provide a more v a r i e d f i n a n c i a l s e r v i c e than p o s s i b l e under the e x i s t i n g Bank A c t . Another f a c t o r was the d e s i r e of the banks to have a s s o c i a t e s who were not r e s t r i c t e d i n t h e i r a b i l i t y to o f f e r competitive deposit r a t e s . This was e s p e c i a l l y the case i f a bank was i n danger of l o s i n g a valued customer. I b i d . , p. 195. In t h e i r b r i e f to the Commission, the C.B.A. s t r e s s e d the l o s s of p o s i t i o n by the banks i n t h e i r a b i l i t y to a t t r a c t savings d e p o s i t s . The banks cautioned that t h e i r d e c l i n e from 87 percent of the deposits i n 1947 to 74 percent i n 1960 would " . . . have s e r i o u s repercussions on the economy." C.B.A., Submission to the Royal Commission on  Banking and Finance, p. 95 . The Banks' concern was based on the very r e a l e f f e c t s on them of the workings of monetary p o l i c y . As the banks saw i t , "Under present c o n d i t i o n s , as competing forms of f i n a n c i a l claims grow r e l a t i v e to chartered bank d e p o s i t s , monetary p o l i c y has e i t h e r to become more broadly d i r e c t e d against the t o t a l supply of l i q u i d i t y or p r o g r e s s i v e l y more vigorous on chartered bank deposits i n order to b r i n g about a given expansion or c o n t r a c t i o n of t o t a l money expenditures. When monetary p o l i c y i s r e s t r i c t i v e heavy 81 pressure i s placed upon the banks which i s not shared by other f i n a n c i a l i n s t i t u t i o n s . " I b i d . , p. 95. The banks suggested that: I f t h i s trend had been the r e s u l t of f r e e and u n r e s t r i c t e d competition among the f i n a n c i a l i n s t i t u t i o n s i n v o l v e d , the p u b l i c i n t e r e s t would have been served. This has not been the case, however, as the banks do not enjoy the same freedom as t h e i r competitors. The t o t a l of chartered bank deposits i s regulated d i r e c t l y by the c e n t r a l bank i n the i n t e r e s t of c o n t r a - c y c l i c a l monetary p o l i c y . No such d i r e c t i n f l u e n c e i s ex e r c i s e d over deposits i n competing i n s t i t u t i o n s . " I b i d . 19 Submission of N e i l J . McKinnon, president of C.I.B.C. i n Submissions to the Royal Commission on Banking and Finance, Canadian Banker's A s s o c i a t i o n , 1963, p. 133. 20 Canada, Royal Commission on Banking and Finance, p. 146. 2 1 I b i d . , p. 196. 22 I b i d . , pp. 369-76. The t r u s t companies, through t h e i r holdings of bank stock i n the E s t a t e , Trust and Agency (E.T.A.) Accounts, could conceivably have i n f l u e n c e d banks' p o l i c i e s . The Commission decided though :that: "Given the t r u s t companies' present share-voting p o l i c i e s and the independence of many E.T.A. accounts, these holdings of bank shares do not appear to be used as an a c t i v e instrument i n c o n t r o l l i n g bank p o l i c i e s . " I b i d . While the Commission d i d not see anything i n t r i n s i c a l l y wrong with the c l o s e i n t e r r e l a t i o n s h i p of banking and t r u s t a c t i v i t i e s , i t d i d consider that o v e r a l l competition would s u f f e r as a r e s u l t . " I f there i s a danger [In a f f i l i a t i o n ? i t i s that c o n t i n u a t i o n of the present trend /[toward greater i n t e g r a t i o n / might l e a d to undue conc e n t r a t i o n and thus to reduced competition i n the f i n a n c i a l system. The banks are already l a r g e and the t r u s t companies c o l l e c t i v e l y are the banks' most important s i n g l e group of competitors." I b i d . 23 I b i d . 2 4 I b i d . , p. 357. 25 I b i d . , p. 136. See a l s o p. 365ff. 2 ^ I b i d . , pp. 363-4. 82 27 I b i d . , p. 363; The Commission f u l l y r e a l i z e d that p r o v i n -c i a l l y incorporated, companies, r e l a t i v e l y f r e e from r e g u l a t i o n , might not wish to come under f e d e r a l r e g u l a t i o n . The Commission suggested e i t h e r a f e d e r a l i n i t i a t i v e i n the area to f o r c e f u l l y b r i n g a l l f i n a n c i a l i n s t i t u t i o n s under f e d e r a l r e g u l a t i o n or the o f f e r i n g of inducements to a r r i v e at the same end. In order to make the r e q u i r e -ments of f e d e r a l r e g u l a t i o n l e s s burdensome the Commission recommended a l e s s e n i n g of l i q u i d asset requirements. I t i s noteworthy that the proposed reserve requirements f o r c r e d i t unions and t r u s t companies were twice what they normally h e l d . I b i d . , p. 392. In exchange f o r the reserve requirements, the near-banks would enter i n t o an independent c l e a r i n g a s s o c i a t i o n formed a t the Bank of Canada. Such a c l e a r i n g a s s o c i a t i o n would form f o l l o w i n g r e p e a l of the Canadian Banker's A s s o c i a t i o n Act clauses a l l o w i n g i t to form the c l e a r i n g system. I b i d . , p. 393. The 1967 Bank Act changed bank reserves to a l l o w chartered banks greater competitive a b i l i t i e s and to r e f l e c t the mix and m a t u r i t i e s of d e p o s i t s . Demand deposits r e q u i r e d 12% reserves, time d e p o s i t s , 4%. 28 According to the decennial t r a d i t i o n the r e v i s e d Bank Act was due i n 1964. The L i b e r a l cabinet introduced l e g i s l a t i o n to extend the 1954 Act. pending r e c e i p t of the Commission's f i n d i n g s and re p o r t . S p e c i f i c l e g i s l a t i o n must be introduced to extend the ch a r t e r s of the banks since the Bank Act expires a f t e r ten years. 29 Denis Smith, Gentle P a t r i o t : A P o l i t i c a l Biography of  Walter Gordon (Edmonton: H u r t i g P u b l i s h e r s , 1973), p. 235. 30 I b i d . The C.B.A. objected on grounds that i t would be d i f f i c u l t to c o n t r o l the n a t i o n a l i t y of share ownership and hence un-workable. They were al s o opposed to the p r o h i b i t i o n against agencies of f o r e i g n banks on Canadian s o i l . I b i d . 32 I b i d . , pp. 235-6. 33 Walter L. Gordon, A P o l i t i c a l Memoir (Toronto: M c C l e l l a n d and Stewart, 1977), pp. 210-211. 34 Smith, Gordon, p. 237. 83 Peter C. Newman, The Distemper of Our Times (Toronto: McClelland and Stewart L i m i t e d , 1968), pp. 34-341. 36 Added to the i n t e r n a l d i s s e n s i o n was the impact of o f f i c i a l U.S. involvement i n the f o r e i g n ownership p r o v i s i o n s of the proposed Bank Act. "In the f i r s t months of 1966 the goverhment was subjected to pressure from the American government, some of the Canadian chartered banks, and the F i r s t N a t i o n a l C i t y Bank of New York (the owners of the M e r c a n t i l e Bank of Canada) to amend Gordon's d r a f t B i l l i n order to permit foreign-owned banks and bank agencies to operate without d i s c r i m i n a t i o n i n Canada. The most s i g n i f i c a n t p r o t e s t came i n a d i p l o m a t i c note from the United States government on A p r i l 7, 1966. . . . Smith, Gordon, p. 311. The government r e s i s t e d t h i s d i p l o m a t i c pressure and on J u l y 7, 1966, Sharp again introduced the Bank Act r e v i s i o n i n t o the House. The r e v i s e d Act r e t a i n e d Gordon's proposals l i m i t i n g f o r e i g n ownership. In the F a l l of 1966, the B i l l r e c e i v e d second reading and was forwarded to the Standing Committee on Finance, Trade and Economic A f f a i r s . During the F a l l , f u r t h e r repre-sen t a t i o n s were made by the U.S. government and others r e s p e c t i n g the treatment of the M e r c a n t i l e Bank and the entrance of f o r e i g n banks to the Canadian f i n a n c i a l s e c t o r . Over the course of l a t e 1966 and e a r l y 1967 the f o r e i g n ownership p r o v i s i o n s , by then l a r g e l y concerned w i t h j u s t the M e r c a n t i l e Bank, caused more Cabinet d i s s e n s i o n . However, a compromise was worked out between the M i n i s t e r of Finance and the F i r s t N a t i o n a l C i t y Bank of New York which allowed M e r c a n t i l e to expand i n the short-term and reduce i t s ownership to the twenty-five percent non-resident l i m i t w i t h i n f i v e years. I b i d . 37 A measure of the complete d e c l i n e i n the Gordon for c e s may be taken from the r e s u l t s of proposals i d e n t i f i e d w i t h Walter Gordon at a western L i b e r a l Party p o l i c y conference i n August 1966, and at the N a t i o n a l Party conference i n October 1966. "The L i b e r a l p o l i c y conference ( i n October) b u r i e d the myth that Walter Gordon s t i l l c o n t r o l l e d the o r g a n i z a t i o n a l heart of h i s party. The Gordon supporters thought they could r a l l y . a conference m a j o r i t y on behalf of t h e i r p o l i c i e s , but t h e i r s t r a t e g y caucuses never a t t r a c t e d more than two hundred of the conference's two thousand delegates. I t was only because of the strenuous e f f o r t s of K e i t h Davey, lobbying f o r h i s o l d f r i e n d Walter Gordon, that even t h i s many supporters turned up." Newman;, Distemper, pp. 376-377. 38 Smith, Gordon, p. 268. I b i d . , p. 236. 84 I b i d . , p. 270. 270. 271. "'"Ibid. , p. 272. 45.,., Ibxd. 46 Canada. Queen's P r i n t e r . House of Commons Debates, 1st Session, 27th Parliament 15, E l i z a b e t h I I . p. 7236. Ibxd. I b i d . , p. I b i d . , p. I b i d . I b i d . , pp. 7238-7243. "^David W. S l a t e r , "The 1967 R e v i s i o n of the Canadian Banking A c t s , Part I: An Economist's View," Canadian Journa l of Economics, V o l . 1, No. 1, p. 79. CHAPTER V CONCLUSION Throughout the course of t h i s paper we have sought to demonstrate that a very high degree of cooperation and mutual reinforcement e x i s t s between the banking community and the f e d e r a l government. We have proposed the Aitken's concept of that chosen instrument i s p a r t i c u l a r l y a p p l i c a b l e to :the r o l e and p o s i t i o n of the chartered banks i n the Canadian economy. The f u n c t i o n a l p o s i t i o n occupied by the banks i s important both to the n a t i o n a l economy and to the maintenance of a f e d e r a l presence i n the country's f i n a n c i a l a f f a i r s . Another proposal has been that i t i s the f u n c t i o n a l b a s i s f o r the chartered banks that has given them i n f l u e n c e i n the l e g i s l a t i v e process. Because of the type of p o l i t i c a l and f i n a n c i a l systems that have developed w i t h i n the n a t i o n , the f e d e r a l government r e l i e s on s u c c e s s f u l chartered banks. The chartered banks provide the only n a t i o n -wide system of f i n a n c i a l i n t e r m e d i a r i e s w i t h r e l a t i v e l y common p o l i c i e s and r e l a t i v e l y common i n t e r e s t s that have • t h e i r b a s i s s o l e l y i n f e d e r a l law.That is,there i s no other n a t i o n a l system f o r the r a p i d and uniform enactment, of monetary p o l i c i e s on the asset s t r u c t u r e s of f i n a n c i a l i n t e r m e d i a r i e s . Moreover, there i s no a l t e r n a t i v e system that could ensure uniform a p p l i c a t i o n of changes i n p u b l i c access to f i n a n c i a l markets. 85 86 The banks accept t h e i r s t a tus as 'chosen instruments' of government because so long as they perform the r o l e of agent the banking community w i l l not l o s e i t s i n f l u e n c e w i t h i n the f i n a n c i a l system. Simply put, the chartered banks would not be as s u c c e s s f u l or as powerful i f they were p r o v i n c i a l e n t i t i e s . In essence Aitken's concept of the chosen instrument may be seen as a model f o r bank-government i n t e r a c t i o n . I d e a l l y the government ought to decide on p a r t i c u l a r p o l i c i e s f o r implementation i n the f i n a n c i a l system and economy i n general and carry those p o l i c i e s out through i t s p o i n t s of leverage, i . e . the banks. In a sense t h i s has overtones of economic " f i n e - t u n i n g " . " F i n e - t u n i n g " i s , to say the l e a s t , overrated. C l e a r l y what has come out i n the two Bank Act Revisions that were examined here i s an a p p r e c i a t i o n that the very c o m p l e x i t i e s of the p o l i t i c a l and economic systems m i t i g a t e against such a d i r e c t r e l a t i o n s h i p between banks and government p o l i c y . In 1954 the a c t i o n s of government i n promoting i t s i n t e r e s t s i n banking l e g i s l a t i o n show through q u i t e w e l l . The n e c e s s i t y of government a c t i o n i n s t i m u l a t i n g and i n e f f e c t supplying p r i v a t e c a p i t a l resources to the mortgage market was met. In the 1967 r e v i s i o n however the balance of power i n the r e l a t i o n s h i p was. turned. A government weakened by i t s m i n o r i t y base, i t s f i n a n c i a l p o s i t i o n , and i t s i n t e r n a l d i s s e n s i o n was not a match 87 f o r concerted e f f o r t s on the part of a group which could supply much needed resources at opportune times. The 1967 r e v i s i o n experience points out that government i s subject to many pressures, i n t e r n a l as w e l l as e x t e r n a l , and i s only o c c a s i o n a l l y " m o n o l i t h i c " i n i t s viewpoint. Nevertheless the chosen instrument does have some explanatory and h e u r i s t i c v a l u e . This may be seen i n the consequences of the two reviews examined. CONSEQUENCES OF THE 1954 AND 1967 REVIEWS: The s u c c e s s f u l operation of the r e l a t i o n s h i p between banks and government may be observed as the long-term consequences of va r i o u s amendments to the Bank Act work t h e i r way through the f i n a n c i a l system over time. The 1954 and 1967 Bank Acts introduced four changes which had the a b i l i t y to change the share of f i n a n c i a l markets which were open to banks. S p e c i f i c a l l y these changes included the c h a t t e l mortgage, reserve change and N.H.A. mortgage p r o v i s i o n s of the 1954 Bank Act and the l i f t i n g of the s i x percent i n t e r e s t r a t e c e i l i n g i n the 1967 Act. In Appendix I the market share percentages make c l e a r what the impacts were of the o r i g i n a l N.H.A. mortgage p r o v i s i o n and the s i x percent i n t e r e s t c e i l i n g on the mortgage market. P r i o r to 1953 the chartered banks were barred.from making N.H.A. or any other k i n d 88 of r e s i d e n t i a l mortgage: l i f e insurance companies s u p p l i e d the greatest p r o p o r t i o n of funds. In the years of 1952 and 1953, C.M.H.C. began to place s i g n i f i c a n t sums i n the mortgage market. The advent of the 1954 Bank Act brought about an immediate impact v i s - a - v i s bank p a r t i c i p a t i o n i n the s e c t o r . The banks' share of the market went to a high of 36.5% i n 1955 and was near 20% f o r the p e r i o d u n t i l 1958. L i f e insurance company funds d e c l i n e d i n p r o p o r t i o n to 29.3% over the same pe r i o d . C.M.H.C. p a r t i c i p a t i o n was r e s t r a i n e d u n t i l 1957 when the cor p o r a t i o n again became a major f a c t o r . The per i o d from 1958 onward was marked by higher i n t e r e s t rates which constrained the banks from making many mortgage loans. Banks were forced out of the market f o r four years i n the post 1958 period w h i l e C.M.H.C. t r u s t and loan companies took up the share vacated by the banks. C.M.H.C. p a r t i c i p a -t i o n went to a»high of 42.9% i n 1966 while the t r u s t and other companies continued to improve t h e i r share of the market. - . Appendices I I and I I I demonstrate the impact of the removal of the s i x percent c e i l i n g as w e l l as the gradual move of the chartered banks i n t o a dominant p o s i t i o n i n the consumer loans market. This dominance i s p r i m a r i l y due to removal of the s i x percent i n t e r e s t r a t e c e i l i n g . As can be seen from Appendix I I the percentage of the consumer loans market which banks held climbed from 16.5% i n 1954 to 53.3% i n 1974. The greatest increase occurred f o l l o w i n g the 1967 removal of the i n t e r e s t c e i l i n g . Appendix I I demonstrates the impact of the 89 1954 p r o v i s i o n a l l o w i n g banks to take c h a t t e l mortgages on household property i n support of personal loans. From a n i l p o s i t i o n of the t o t a l volume/of loans issued i n 1953 those loans secured by household property represented almost 32% of a l l personal loans granted by banks by the year 1974. As i n Appendix I , Appendix I I shows d e c l i n e s by other companies i n response to banks e n t e r i n g the market. Sales finance, consumer l o a n , l i f e insurance p o l i c y loans and r e t a i l dealers a l l d e c l i n e d i n t h e i r share of the market. The greatest d e c l i n e has been i n those companies, s a l e s f i n a n c e , consumer loan and r e t a i l dealers, whose loan rates were and remain c o n s i s t e n t l y higher than those o f f e r e d by the banks. The general increase i n banks' share of these two markets po i n t s to the o v e r a l l success of those a c t o r s who pushed f o r major changes i n the 1954 and 1967 Bank A c t s . C e r t a i n l y the f e d e r a l govern-ment met w i t h success, at l e a s t t e m p o r a r i l y , i n reducing the r o l e played by C.M.H.C. i n the mortgage market a f t e r the 1954 review. The years 1954 through 1956 saw g r e a t l y reduced expenditures by C.M.H.C. As w e l l the l i f e insurance companies were able to reduce t h e i r p a r t i -c i p a t i o n over the long-term, without undue e f f e c t s upon the market. The.banks succeeded and were rewarded i n t h e i r e f f o r t s to dispense w i t h the s i x percent i n t e r e s t r a t e c e i l i n g i n 1967. As Appendix I I i n d i c a t e s , i n both the mortgate and personal loans areas banks were able to s i g n i f i c a n t l y increase t h e i r market share f o l l o w i n g removal of the c e i l i n g . This though has had s i d e - e f f e c t s . 90 The competitiveness of the banks between themselves and with other institutions has led to increasing pressures upon consumers to purchase items on installment. The a b i l i t y of consumers to obtain credit at the banks at inexpensive rates rather than applying at finance companies at higher rates had led to a respectability in carrying certain types of debt. This development in turn led the banks to become to a much greater extent financial 'department stores' servicing the needs of a whole range of customers. The general success of the chartered banks as evidenced by the significant growth in just the areas of consumer loans and mortgage lending alone reinforces the concept of the chosen instrument as applied to the bank-government relationship. In part this relationship functions because the Canadian Banker's Association as a body, represents much more than a group of similarly-minded corporations which seek to influence government on a range of legislative i n i t i a t i v e s . Perhaps the small membership of the C.B.A. has bearing. More probably the reason the chartered banks are so able to perform in unison and in conjunction with government policy is because so many of the variables in each bank's internal economy are prescribed by government regulation: central bank reserve ratios, bank rates, lending rate ceiling (prior to 1968), make-up of boards of directors, c r i t e r i a for lending against particular security, and a number of other factors a l l impinge upon a bank's internal functioning. Furthermore the a b i l i t y of the chartered 91 banks to influence the processes of government which have bearing on t h e i r operations and at the same time accept the decisions which are reached add credence to t h e i r s p e c i a l status. In the end we must consider that the obvious success which the banks have enjoyed has not simply been the r e s u l t of t h e i r a b i l i t y to serve the public with s a t i s f a c t o r y banking ser v i c e s . IMPACT OF THE 1954 AND 1967 BANK ACTS: The 1954 and 1967 Bank Acts i n i t i a t e d and permitted the develop-ment of two major trends i n the government-chartered bank r e l a t i o n s h i p . In the case of the government, the amendments resulted i n the chartered banks taking on and having enhanced a status as the main instrument of central bank influence over monetary p o l i c y and the f i n a n c i a l system. That t h i s was necessary was due f i r s t l y to the dominance of f e d e r a l -p r o v i n c i a l j u r i s d i c t i o n a l concerns during the postwar years. Secondly, to the loss of p o s i t i o n experienced by the banks i n the same time period. The f a c t that the numerous non-bank f i n a n c i a l i n s t i t u t i o n s tend to be under p r o v i n c i a l j u r i s d i c t i o n and have a tendency to want . to remain so, m i l i t a t e s against the federal a u t h o r i t i e s b u i l d i n g an a l l i n c l u s i v e f e d e r a l l y c o n t r o l l e d means to implement monetary p o l i c y . The trend that the two revisions established indicates that u n t i l a f e d e r a l - p r o v i n c i a l agreement or mechanism i s established whereby the f e d e r a l a u t h o r i t i e s may use l o c a l f i n a n c i a l i n s t i t u t i o n s i n the control 92 of monetary policy, the federal government will have a vested interest in maintaining a strong and growing federally chartered banking system. In this regard the amendments to the Bank Acts which broadened the scope of bank powers and released the banks from certain legal restrictions bear particular significance. By encouraging and allowing the chartered banks to engage in areas of business from which they were previously barred, the federal government initiated a trend which will allow the banks to become the paramount financial institutions in Canada. That this is so benefits the federal government, or more precisely, the Bank of Canada. In the absence of reserves maintained by non-bank financial institutions, the greater the market share of any sector of the financial system captured by the chartered banks the greater the monetary policy influence by the Bank of Canada. As well, the more sectors of the financial system banks are permitted to enter, the greater the impact of monetary policy carried out through actions on the central reserves of the chartered banks. Further evidence that the Bank Act revisions have at least slowed down or stemmed the tide of the banks' declining position vis-a-vis other institutions in the a l l important deposit base area is demonstrated in Appendix IV. Chartered bank aggregate deposit figures show a fairly steady performance by the banks in attracting deposits and managing their liability portfolios. A steady growth in the 93 p r o p o r t i o n of higher cost term deposits has augmented the supply of l e s s expensive savings deposits which has d e c l i n e d f o r the banks. This trend i s seen throughout a l l i n s t i t u t i o n s however as growth i n terms of p r o p o r t i o n of the t o t a l deposit base i s seen to occur w i t h term deposit l i a b i l i t i e s or i n s t i t u t i o n s o f f e r i n g higher rates on savings accounts. These categories i n c l u d e bank and t r u s t company term deposits and c r e d i t unions. That i t i s p o s s i b l e f o r the banks to h o l d t h e i r t o t a l deposit p o s i t i o n by o f f e r i n g higher i n t e r e s t term deposits i s due s o l e l y to r e v i s i o n s i n the Bank Act. Were i t not f o r the 1967 r e v i s i o n banks' deposit base would be d e c l i n i n g more r a p i d l y than even t h e i r holdings of savings deposits would i n d i c a t e . Thus i n the absence of i n i t i a t i v e s by f e d e r a l and p r o v i n c i a l a u t h o r i t i e s to reach agreement on the c o n t r o l of monetary p o l i c i e s and t h e i r implementation i t appears that the trend to i n v o l v e the chartered banks i n a l l areas of the f i n a n c i a l system w i l l continue. At the moment i t seems c e r t a i n that t h i s trend w i l l encourage the l a r g e s t chartered banks to expand and become major f a c t o r s i n most areas of the f i n a n c i a l system. 94 APPENDIX I N.H.A. AND CONVENTIONAL MORTGAGES APPROVED BY LENDING INSTITUTIONS: NEW RESIDENTIAL CONSTRUCTION I CHARTERED % OF LIFE INSURANCE % OF TRUST, LOAN % OF % OF TOTAL ALL TOTAL % ALL YEAR BANKS TOTAL COMPANIES TOTAL & OTHERS TOTAL C.M.H.C. TOTAL INSTITUTIONS INSTITUTIONS 1951 0 0 207.8 83.6 29.4 11.8 11.3 4.5 248.5 99.9 1952 0 0 262.0 74.8 40.7 11.6 47.7 13.6 350.4 100.0 1953 0 0 319.7 73.9 54.8 12.7 58.1 13.4 432.7 100.0 1954 158.5 23.6 394.9 58.9 91.2 13.6 26.0 3.9 670.6 100.0 1955 326.2 36.5 428.3 47.9 119.9 13.4 18.0 2.0 892.4 99.8 1956 158.4 22.6 416.7 59.5 105.2 15.0 19.9 2.8 700.2 99.9 1957 173.5 23.1 251.1 33.3 92.8 12.3 235.2 31.2 752.5 99.9 1958 300.0 25.0 352.0 29.3 157.0 13.1 389.0 32.7 1199.0 100.1 1959 175.0 17.2 352.0 34.6 123.0 12.1 367.0 36.0 1018.0 99.9 1960 1.0 .1 378.0 52.7 170.0 23.7 168.0 23.4 717.0 99.9 1961 0 0 495.0 46.8 290.0 27.4 271.0 25.6 1057.0 99.8 1962 0 0 532.0 51.4 ; 329.0 31.8 172.0 16.6 1034.0 99.8 1963 0 0 616.0 46.0 421.0 31.4 302.0 22.5 1339.0 99.9 1964 9.0 0.5 647.0 40.9 508.0 32.1 417.0 26.4 1581.0 99.9 1965 6.0 0.3 691.0 40.3 525.0 30.6 491.0 28.7 1713.0 99.9 1966 0 0 459.0 34.3 306.0 22.8 574.0 42.9 1339.0 100.0 1967 128.0 7.2 493.0 27.6 480.0 26.9 685.0 38.3 1786.0 100.0 1968 333.0 14.8 613.0 27.2 848.0 37.7 456.0 20.3 2250.0 100.0 1969 284.0 12.7 379.0 16.9 1028.0 45.9 549.0 24.5 2240.0 100.0 1970 379.0 16.5 176.0 7.7 840.0 36.6 900.0 39.2 2295.0 100.0 1971 851.0 26.8 352.0 11.1 1266.0 39.9 701.0 22.1 3170.0 99.9 1972 1026.0 29.4 414.0 11.9 1542.0 44.2 503.0 14.4 3485.0 99.9 1973 1217.0 30.0 581.0 14.3 1877.0 46.3 381.0 9.4 4056.0 100.0 1974 995.0 28.9 399.0 11.6 1458.0 42.4 589.0 17.1 3441.0 100.0 Source: Bank of Canada, S t a t i s t i c a l Summary. 95 APPENDIX I I OUTSTANDING CONSUMER CREDIT IN CANADA ( m i l l i o n s of d o l l a r s ) SALES FINANCE, LIFE INS. CHART.BANKS CONSUMER LOAN % OF TOTAL POLICY % OF TOTAL RETAIL % OF TOTAL CREDIT UNIONS, % OF TOTAL QUE. SAV. % OF TOTAL TOTAL YEAR COMPANIES MARKET LOANS MARKET DEALERS MARKET CAISSES POP. MARKET BANKS MARKET MARKET % 1950 295 24.1 178 14.6 454 37.1 72 5.9 224 18.3 1223 100.0 1951 300 25.3 199 16.8 407 . 34.3 76 6.4 204 17.2 1186 100.0 1952 521 32.1 213 13.1 551 33.9 94 5.8 244 15.0 1623 99.9 1953 692 34.9 225 11.4 623 31.5 129 6.5 311 15.7 1980 100.0 1954 707 33.1 240 11.2 685 32.1 151 7.1 353 16.5 2136 100.0 1955 878 34.9 250 9.9 772 30.7 174 6.9 443 17.6 2517 100.0 1956 1112 38.7 270 9.4 824 28.7 226 7.9 438 15.3 2870 100.0 1957 1142 38.4 295 9.9 856 28.8 258 8.7 425 14.3 2976 100.0 1958 1169 36.0 305 9.4 895 27.6 320 9.9 559 17.2 3248 100.1 1959 1290 34.9 323 8.8 956 25.9 397 10.8 725 19.6 3691 100.0 1960 1377 34.3 344 8.6 1003 25.0 433 10.8 863 21.5 4020 100.2 1961 1350 31.3 358 8.3 1052 24.4 516 12.0 1039 24.1 4315 100.1 1962 1515 31.9 372 7.8 1088 22.9 579 12.2 1196 25.2 4750 100.0 1963 1684 31.5 385 7.2 1142 21.4 691 12.9 1446 27.0 5348 100.0 1964 1939 31.0 398 6.4 1406 22.5 705 11.3 1808 28.9 6356 100.1 1965 2174 30.4 411 5.7 1501 21.0 813 11.4 2257 31.5 7156 100.0 1966 2347 30.2 450 5.8 1571 20.2 937 12.0 2474 31.8 7779 100.0 1967 2408 27.9 486 5.6 1631 18.9 1094 12.7 2997 34.8 8616 99.9 1968 2638 26.8 553 5.6 1724 17.5 1247 12.7 3694 37.5 9856 100.1 1969 3046 27.4 660 5.9 1846 16.6 1401 12.6 4181 37.6 11134 100.1 1970 2851 24.4 759 6.5 1918 16.4 1493 12.8 4685 40.0 11706 100.1 1971 2367 18.7 784 6.2 2030 16.0 1690 13.3 5802 45.8 12673 100.0 1972 2646 17.8 813 5.5 2211 14.9 2000 13.5 7174 48.3 14844* 100.0 1973 2913 16.5 884 5.0 2476 14.1 2420 13.7 8914 50.6 17607* 99.9 1974 3003 14.7 1060 5.2 2707 13.3 2762 13.5 10861 53.3 20393* 100.0 * Figures f o r these three years do not i n c l u d e t r u s t companies. In each of these years loans granted by t r u s t companies f o r consumer purchases c o n s t i t u t e d l e s s than 1% of the outstanding amount. Source: Bank of Canada Review. 1975. APPENDIX I I I CHARTERED BANKS: PERSONAL LOANS OUTSTANDING ( m i l l i o n s of d o l l a r s ) Personal loans excluding those f u l l y secured by marketable stocks and bonds and Home Improvement Loans YEAR (As at AGGREGATE PERSONAL '% OF ALL LOANS SECURED % OF PERSONAL TOTAL ALL Dec. 31) LOANS OUTSTANDING OUTSTANDING BY HOUSEHOLD LOANS OUTSTANDING PROPERTY LOANS 1951 204.3 6.4 . 0 0 3,172.1 1952 242.1 6.9 0 0 3,520.5 1953 308.0 7.5 0 0 4,107.0 1954 352.0 8.5 0.5 .01 4,164.1 1955 a 441.0 9.0 4.0 .09 4,890.6 1956 435.0 10.9 7.3 1.7 3,997.7 1957 421.0 10.4 10.2 2.4 4,062.7 1958 553.0 13.4 . 29.4 5.3 4,137.8 1959 719.0 15.3 108.4 15.1 4,701.4 1960 857.0 17.0 170.0 19.8 5,032.1 1961 1,030.0 18.2 224.4 21.8 5,647.2 1962 1,183.0 18.4 274.3 23.2 6,445.3 1963 1,432.0 20.1 369.6 25.8 7,118.9 1964 1,793.0 21.8 502.8 28.0 8,222.3 1965 2,241.0 23.5 665.0 29.7 9,516.7 1966 2,458.0 23.5 767.5 31.2 10,454.8 1967 2,977.0 25.2 969.8 32.6 11,831.6 1968 3,665.0 27.7 1,180.7 32.2 13,218.2 1969 4,157.0 29.5 1,295.0 31.1 14,083.0 1970 4,663.0 30.5 1,426.0 30.6 15,287.0 1971 5,777.0 28.3 1,803.0 31.2 20,384.0 1972 7,144.0 29.1 2,240.0 31.4 24,545.0 1973 8,878.0 30.5 2,821.0 31.8 29,150.0 1974 10,817.0 32.8 3,439.0 31.8 32,998.0 Source: Bank of Canada - S t a t i s t i c a l Summary Supplements: 1957, 1959, 1960. Bank of Canada Review 1975. P r i o r to 1955 t o t a l f i g u r e s i n c l u d e f o r e i g n currency loans. APPENDIX IV 97 Comparison of Personal Demand, Personal Savings, and Term Deposit L i a b i l i t i e s - Selected F i n a n c i a l I n s t i t u t i o n s and Instruments: ( m i l l i o n s of d o l l a r s ) Year C. Bank-Demand % of Total C. Bank-Savings % of Total C. Bank-Term Deposit % of Total Que. Sav. Bank All % of Total Mtge. Ln. Excl. Term % of Total Mtge. Ln. Term Dep. % of Total Trust Co. Excl. Term % of Total Trust Co. Term Dep. [ % of Total Credit Union All Types O 4-1 o C.S.B.'s % of Total TOTAL 6-5 1964 173 88 8935 45.8 1505 7.7 376.0 1.9 321 1.6 n.a. n.a. 1048 5.4 1551 7.7 n.a. n.a. 5613 28.8 19522.0 99.9 1965 207 • 95 9725 44.7 2044 9.4 401.8 1.8 365 1.7 n.a. n.a. 1115 5.1 2006 9.4 n.a. n.a. 5866 27.0 21729.8 99.8 1966 235 95 10248 41.4 2346 9.5 421.2 1. 7 384 1.5 1486 6.0 1096 4.4 2426 9.5 n.a. n.a. 6089 24.6 24731.2 99.8 1967 366 1. 2 11760 39.3 3255 10.9 455.7 1.5 398 1.3 1651 5.5 1163 3.9 2740 10.9 1787 6.0 6319 21.1 29894.7 99.9 1968 568 .1. 7 13622 40.3 4050 12.0 518.5 1.5 450 1.3 1778 5.3 1225 3.6 3215 12.0 2031 6.0 6359 18.8 33816.5 100.0 1969 721 2. 0 15030 41.5 3392 9.4 494.4 1.4 441 1.2 1956 5.4 1339 3.7 3833 9.4 2364 6.5 668 3 18.4 36253.4 100.1 1970 878 2. 1 16615 40.2 4450 10.8 532.1 1.3 483 1.2 2307 5.6 1472 3.6 4442 10.8 2795 6.8 7397 17.9 41371.1 100.2 1971 1112 2. 2 17783 36.1 6215 12.6 592.0 1.2 546 1.1 2604 5.3 1684 3.4 5127 12.6 3682 7.5 9916 20.1 49261.0 99.9 1972 1420 2. 5 19949 35.1 7644 13.5 658.9 1.2 606 1.1 2713 4.8 1980 3.5 5849 13.5 4841 8.5 11111 19.6 56771.9 100.1 1973 1819 2. 7 24604 36.7 9283 13.8 758.2 1.1 646 1.0 3452 5.1 2048 3.1 7576 13.8 6210 9.3 10726 16.0 67122.2 100.1 1974 2015 2. 5 29789 37.0 11210 13.9 818.7 1.0 660 .8 4010 5.0 2204 2.7 9179 13.9 7507 9.3 13171 16.3 80563.7 99.9 Source: Bank of Canada Review, Dec. 1975. 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