BUSINESS

A strategy to save a bank

MICHAEL SALTER November 11 1985
BUSINESS

A strategy to save a bank

MICHAEL SALTER November 11 1985

A strategy to save a bank

BUSINESS

ECONOMY

For a tradition-bound profession that usually cloaks its operations in secrecy, the admission was a calculated gamble. Last week David Lewis, president of the Toronto-based Continental Bank of Canada, confirmed that the bank was suffering from a serious erosion of deposits that, if not stopped, could cause the bank to seek a merger. Since the demise of Edmonton’s Canadian Commercial Bank (CCB) and Calgary’s Northland Bank in September, the Continental’s large depositors have withdrawn $1.2 billion —about 20 per cent of the bank’s total deposits, Lewis added. Most of the money was taken out in the past three weeks, after a funding crisis forced the mid-October merger of the Mercantile Bank with the National Bank of Canada, both of Montreal.

In an attempt to stop the drain by proving that the Continental has enough money to replace further withdrawals, Lewis announced that the bank has arranged a $2.9-billion support package—a $1.4-billion, six-month loan from the Bank of Canada and a $1.5-billion, three-month line of credit with Canada’s six largest banks. Said Lewis: “If this does not work, if we are unable to restore confidence, the only course would be a merger.”

But Maclean’s has learned that in addition to the support package from the banks, the Continental has taken another unusual step to restore confidence. Lewis and his executives have successfully convinced several investment dealers to continue to trade the financial instruments—such as certificates of deposit—that the Continental offers to its clients. Indeed, since September some dealers had stopped trading Continental products. Said Robert Lavers, vice-president of Torontobased investment dealer Midland Doherty Ltd.: “If we can show investors that there is a ready market for the Continental’s products, then we can turn around the market psychology and stop the confidence crisis.”

Lewis added that the Continental decided to publicize the real extent of

its difficulties in order to stop rumors about the bank’s problems. Investment analysts had estimated that the Continental, with $6.2 billion in assets the country’s seventh-largest bank, had borrowed about $300 million from the Bank of Canada to replace lost depos-

its. With the publication each week of the central bank’s lending figures, which showed that its loans to Canadian chartered banks totalled $2.9 billion at the end of October, there were fresh questions about who was receiving funds. Last week the Continental decided to break away from what Lewis called an “insidious cycle of rumor and

speculation” by arranging a support package and then announcing the details. Lewis acknowledged that the Continental had already borrowed $1.2 billion from the Bank of Canada. But he added, “We now have access to far more funds than we need at this time.” According to some financial executives, the Continental had to enlist the help of private banks and investment dealers and avoid government-arranged assistance. Said one senior bank executive: “Ottawa has absolutely no credibility left when it comes to the banking crisis.” Indeed, testimony in Ottawa last week gave the opposition new ammunition to attack the government’s handling of the banking crisis and raise questions about the regulation of the banking system.

Supreme Court Judge Willard Estey, who is leading the royal commission of inquiry into the two Alberta bank failures, learned that the office of the inspector general of banks has inadequate legal powers to force banks to abandon unsound banking practices. Donald Macpherson, the assistant inspector general, told Estey that his office must rely heavily on moral suasion—what Macpherson called “the wink and nod approach.”

At the same time, Minister of State for Finance Barbara McDougall came under sustained attack when she appeared before the Commons committee that is studying a bill to refund the uninsured depositors in the failed Alberta banks. McDougall rejected claims that she misled the House last spring when she said that the CCB could survive with the aid of a $255-million bailout package, even though the government had learned earlier that the bank would need at least another $100 million to cover its loan losses.

But at week’s end, with more explosive information likely to emerge before the Estey cornil mission over the next six I months, Canada’s banking and I finance communities hoped z that the Continental’s bold ac1 tions would succeed in restoring confidence in Canada’s smalland medium-sized banks. Said Peter Martin, an economist at Toronto investment dealer McLeod Young Weir: “The whole system is working together to ensure that nothing happens to the Continental. Because if it does, this thing could snowball further.”

—MICHAEL SALTER in Toronto