BUSINESS/ECONOMY

Rumors of a run on a bank

PATRICIA BEST July 22 1985
BUSINESS/ECONOMY

Rumors of a run on a bank

PATRICIA BEST July 22 1985

Rumors of a run on a bank

BUSINESS/ECONOMY

It was Stampede Week in Calgary, and in the windows of Northland Bank’s Fifth Avenue headquarters grinning cardboard cowboys posed with their paper sacks bulging with money. But Northland president William Neapole had little to celebrate last week. A midweek report in The

Edmonton Journal proclaiming that Northland, Canada’s 14th-largest federal bank, with assets of $1.25 billion, was losing customers, swiftly led to rumors that the bank was facing a run on deposits. Then Neapole was faced with the task of trying to convince the public that new, smaller deposits would offset the large depositors who had withdrawn from the institution. The activity, Neapole told Maclean's, was “one of those phantoms that hopefully dies a natural death.” Still, he acknowledged that since late May the bank has borrowed an additional $119 million from the Bank of Canada—it already owed $85 million—to cover cash shortages.

In the banking community every rumor is taken seriously—a bank failure would both reflect and cause structural problems in the economy. In the case of Northland, analysts said that large corporate depositors such as pension funds have been pulling out of Northland since March as a result of several other finan-

cial collapses caused by the weak Western economy. Said one executive in the Calgary office of a major Canadian bank: “Consider that 75 per cent of our loan losses are in Alberta, but for us that’s only 20 per cent of our business. Regional banks do not have that luxury.” Deposits of more than $60,000 are not covered by the federal government’s

deposit insurance program, and, as a result, large-account holders tend to move their money quickly if they suspect that a bank is having difficulty. In Alberta analysts said that smaller

banks are to some extent the victims of the province’s economic uncertainty, caused largely by falling oil prices (page 35). Indeed, the Canadian Commercial Bank (CCB) is already undergoing major difficulties and would be particularly vulnerable to a drop in oil prices. Said Terry Shaunessy, banking analyst at Merrill Lynch Canada Inc.: “The CCB could be taken right out.”

Investors reacted to the Northland rumor by trading the bank’s stock in unprecedented num-

bers—the 211,000 shares traded on Thursday and Friday on the Toronto and Alberta stock exchanges roughly equal the amount traded in a normal month. A quarter of those shares crossed the floor in one trade 20 minutes after the markets opened Thursday. The fact that there were willing buyers — and that the price fell only slight-

ly—appears to be a favorable sign for Northland. But at week’s end other recent financial collapses, the bank’s past performance and the economy were all tending to undermine that confidence.

For his part, federal Inspector General of Banks William Kennett denied that there was a deposit drain. “There isn’t a run on the bank,” he said. But Shaunessy declared that the bank was indeed in difficulty. “Maybe they don’t have people lining up in the streets, but by my definition they’re having trouble keeping deposits without assistance,” he told Maclean's. “Isn’t that the same thing?” At the same time, federal officials, who would not discuss the affair openly,

have been expressing private concerns about Northland for months. And Maclean's has learned that Minister of State for Finance Barbara McDougall was involved in intense discussions concerning Northland immediately before her early July departure for Paris and a month-long French-immersion course.

The government of Alberta is a solid supporter of Northland. Treasurer Lou Hyndman declared on Friday that the bank is “stable.” The province is Northland’s largest depositor, with about $70 million in the bank, and a large creditor —last month it picked up $5 million of a $16-million debt issue by the bank. In March Alberta joined Ottawa and the six largest Canadian banks in a $255million rescue of the CCB.

In Ottawa, Commons finance committee chairman Don Blenkarn, who has heavily criticized Kennett for lax regulation of CCB, told Maclean's that the central bank has lent CCB about $1 billion since then. But Blenkarn also emphasized that the Conservative government in Ottawa might, in some conditions, allow a bank to fail, despite assurances from the Bank of Canada that it would not allow a bank collapse.

Northland appears to be partly a casualty of CCB’s misfortunes. Declared Neapole: “Northland is caught in a spillout effect that’s not a normal circumstance.” Still, the connection between the two has some foundation. Both are Alberta-based regional banks with a high proportion of commercial depositors and large loans still on their books from the province’s boom days in the late 1970s.

Most analysts say that Northland’s management is making major efforts to rearrange the bank’s affairs and win new deposits. Said Neapole: “The thing we find exasperating is that people aren't acknowledging that management can make a difference.” Since March, Northland’s personal deposits have increased from $360 million, or 35 per cent of the bank’s deposit base, to $500 million, Neapole said. The bank needs the help: this week Northland will announce the actual extent of its borrowings from the Bank of Canada up to the end of May—the $119 million that Neapole told Maclean 's about last week.

Still, the adverse publicity has drawn some customers to the bank. One man walked into Northland’s Toronto office last Friday and deposited more than $200,000. He was doing it to return a favor, he told a branch official: 15 years earlier Neapole, then a Royal Bank assistant branch manager, had lent him $20,000 when he was in desperate need. “The funny thing is,” says Neapole, “I didn’t even remember his name.”

-PATRICIA BEST, with Ann Shortell in Toronto and Roberta Walker in Calgary.