BUSINESS/ECONOMY

The banks recharge

MARY JANIGAN February 3 1986
BUSINESS/ECONOMY

The banks recharge

MARY JANIGAN February 3 1986

The banks recharge

After five months of spectacular failures and near escapes, the banking crisis appeared to be easing across the nation last week. In Winnipeg, Justice Daniel Kennedy of the Manitoba Court of Queen’s Bench ended a four-month legal battle when he appointed a liquidator to wind up the affairs of the defunct Northland Bank of Calgary. In Toronto David Lewis, chief executive officer of the Continental Bank of Canada, announced that a run of withdrawals had finally stopped after what he called a “nightmarish” three-month crisis. And in Ottawa, Justice Willard Estey of the Supreme Court of Canada resumed his inquiry into the collapse of the Northland and the Edmonton-based Canadian Commercial Bank (CCB), while some bankers declared that tough federal proposals to regulate banks are not needed. “The system ain’t broke and don’t need fixing,” Robert Macintosh, president of the Canadian Bankers’ Association, told the commission.

The Estey commission is midway through a parade of witnesses who are testifying on what caused the collapse of the two western banks last year— and what should be done to prevent

future failures. So far, the commission has concentrated on the CCB, which received a $255-million bailout package last March—only to be declared insolvent in early September. But the appointment of the Northland’s liquidator has cleared the way for Estey to examine that bank’s demise in late September. The inquiry will also make recommendations on how to improve Canada’s banking system.

But the heads of the country’s largest banks say that the government should avoid full-scale intervention in the system. William Mulholland, for one, chairman of the Bank of Montreal, told shareholders last week that the banking industry is stronger because of the dramatic collapses. “Regulatory supervision is not, and cannot ever be, a replacement for the disciplines imposed by the market,” he said.

Last fall Minister of State for Finance Barbara McDougall tabled draft legislation in the Commons to strengthen Ottawa’s control of financial institutions in large part because of growing public concern over the bank collapses. Under those proposals the inspector general of banks and the superintendent of insurance would receive sweeping powers to order a financial institution to stop questionable lending or investment practices. The insurance superintendent would also receive the power to reject unrealistic insurance or trust company valuations of real estate security backing a loan. That is a power already in the hands of the bank inspector general—but so far he has rarely used it.

Estey will consider those and other tough regulatory suggestions as he weighs testimony by bankers, officials and politicians. Indeed, many witnesses said that although they had participated in the CCB rescue they had not known the extent of the bank’s problems. Many have blamed each other for the failure. Retired banker George

Hitchman, who investigated the CCB for Ottawa last summer, said that $1 billion of the bank’s $2.4-billion loan portfolio would never be recovered.

Former CCB director John DesBrisay told Estey last week that the bank’s reputation suffered because Toronto financier Leonard Rosenberg—who was arrested by Ontario Provincial Police last week on fraud charges in connection with a controversial 1982 trust company seizure by the Ontario government—was on the board of directors in 1982. As Bank of Canada Gov. Gerald Bouey testified last month:

“There is no mystery about why the bank failed. The only mystery is why we did not know more about the condition of the bank last March.”

Estey will also inquire into the Northland’s failure following last week’s 18-minute hearing to appoint a liquidator. President William Neapole, who had opposed liquidation, withdrew his opposition without explanation. All other parties, including some shareholders who once hoped to revive the bank, agreed that Toronto-based Touche Ross Ltd. should wind up the Northland. James Morrison, head of the liquidation team, told Maclean's that the task “will take years.”

While the Northland, a small bank only eight years old, finally gave up its fight, Canada’s seventh-largest bank, the Continental, was reporting reassuring signs of stability. Last Oct. 31, after nervous customers had pulled $1.2 billion in deposits out of the bank, then-president Lewis announced a $2.9-billion rescue package: a threemonth, $1.5-billion line of credit with the big six chartered banks and a sixmonth, $1.4-billion term loan with the Bank of Canada. Last week Lewis said that the Continental had renewed the line of credit and extended the loan to July 31. Although the bank lost another $1.2 billion in deposits in November and December, Lewis said that there had been “a slight but not significant improvement in January.” But, he added, “the outflow has stopped.” Despite signs of renewed confidence in the banking system, repercussions will likely be felt for some time. McDougall, responsible for overseeing the banks, is relatively unscathed because inquiry testimony indicated that she had opposed the initial CCB rescue. But Finance Minister Michael Wilson will be under pressure because Ottawa paid $875 million to cover uninsured depositors—and that cost will show up in the deficit. Public scrutiny may also have hurt the standing of the inspector general of banks, William Kennett. The Estey inquiry must determine whether Kennett was misled by the banks, whether he lacked the tools to determine a bank’s solvency or whether he was not vigilant enough.

Meanwhile, the major bankers and Ottawa are continuing to argue over how much new regulation is required. Last week Macintosh conceded that Kennett’s office needs more manpower. “But the banks are of the view that the current system is effective,” he added. Estey—and taxpayers who will ultimately pay the bill —may challenge that confident assertion.

-MARY JANIGAN with MICHAEL SALTER in Toronto, ALISON HARE in Ottawa and GARRY MOIR in Winnipeg

MICHAEL SALTER

ALISON HARE

GARRY MOIR