Tremors in the vaults

MARK NICHOLS September 1 1986

Tremors in the vaults

MARK NICHOLS September 1 1986

Tremors in the vaults



A year ago, during the worst banking crisis in the nation’s history, Canadians suffered a loss of faith. On Sept. 1, the almost unthinkable occurred: after spending more than $1.3 billion in a desperate effort to keep the Edmonton-based Canadian Commercial Bank afloat, Ottawa abandoned the fight and forced the nine-year-old institution into liquidation. At the end of the month a second Alberta-based institution, Calgary’s Northland Bank, also failed. That created a crisis of confidence in Canada’s financial institutions. In the months that followed, a third bank was forced to merge with a larger competitor as concerned depositors moved their accounts away from various smaller banks and trust companies.

The loss of deposits has ended, but the banking crisis has still not subsided. Major regulatory reforms pledged by Ottawa a year ago have not been instituted. And Western Canada’s resource-based economy is rapidly weakening under the impact of slumping commodity prices. As a result, three regionally based trust companies are struggling to survive and fears are mounting that a new rash of failures could set off a wave of bankruptcies and put new pressures on a financial system founded on faith.

Reacting to that threat, federal regulators across the country are involved in an intensified effort to catch problems before they result in failures. The Office of the Inspector General of Banks has hired special staff to perform regular on-site inspections. And if a financial institution is in trouble, the Canada Deposit Insurance Corp.(CDlC) has a new policy of sending in consultants to help deal with the situation.

The problems are greatest in the West, where the Vancouver-based Bank of British Columbia is still recovering from last year’s crisis. Plummeting world prices have dealt harsh blows to most of the region’s resource industries, from petroleum and natural gas to lumber, potash and grains. The uncertain financial future of borrowers in those businesses has further undermined the West’s dream of

building a strong, regionally based financial sector. “The outlook is not great,” said Terry Shaunessy, a bank analyst with the Toronto-based investment firm of Merrill Lynch Canada Inc. “When you are a regional bank and the region gets into a problem, it gets pretty tough.”

The difficulties of Western institutions have grown in recent months as the value of loan assets has continued to deteriorate. Many of them are heavily encumbered by overvalued real estate loans left over from the boom period of the late 1970s and early 1980s. “There have been some strains placed on the entire financial community by the difficulties in Alberta,” said Ronald McKinlay, chairman of the CDIC, which guarantees deposits of less than $60,000 in accredited financial institutions. “You only have to walk around Edmonton and Calgary to see what has happened in the past few years and the fantastic investment that was made there. The oil shock has created tremendous havoc in Alberta.”

Ottawa so far has not carried out the financial reforms designed to prevent a similar event from happening again. Nor has the federal government appointed a successor to William Kennett, the former inspector general of banks who resigned in March with many observers blaming him for a large part of last year’s banking troubles. Last week a report by the Toronto-based accounting firm of Coopers & Lybrand Canada, headed by Chairman Warren Chippendale, concluded that Kennett’s office had failed to adequately supervise the troubled banks.

The damage from last year’s bank failures was contained largely through the combined benefits of cash and credit infusions from the Bank of Canada and the efforts of leaders in the banking community. Last October, after a flood of withdrawals threatened to bring down the fundamentally solid Mercantile Bank of Canada, Ottawa pressed the Toronto-based institution into merging with Montreal’s National Bank. Since then, the Toron^to-based Continental Bank of Canada, |which suffered an outflow of $1.2 billion in deposits within two months of the CCB’s failure, has shown evidence

of a strong recovery. In July it was able to reduce its standby credit from the Bank of Canada to $500 million from $1.5 billion.

But there remains concern over the future of the Bank of British Columbia, which is still fighting to regain its health after a hemorrhaging of nearly $1 billion in funds by large commercial customers in the months following last September’s bank collapses. Its line of credit with the Bank of Canada reached $900 million by last March. But that amount has now been reduced to roughly $600 million. The bank reported loan losses of $36 million last year. But since then it has undergone a major restructuring, laying off 300 employees in a cost-cutting drive. It also closed 19 branches across the Prairies and two of its four overseas offices. At the same time, the bank stopped trying to win back major commercial customers and shifted its emphasis to small and medium-sized depositors. Emulating Chrysler Corp. chairman Lee Iacocca, who went on television to promote his ailing company, the bank’s charismatic chairman, Edgar Kaiser Jr., appeared in a series of TV advertisements aimed at reassuring small despositors.

As a result, said president Dale Parker, retail Skalbania: new and personal deposits began picking up through the summer. But the bank’s nonperforming loans were still about $90 million in June, and the continuing weakness in the price of oil, as well as declining revenues from many other commodities, pose problems. Still, Parker said that the bank’s nonperforming loans equal only 3.3 per cent of its total portfolio and that it has only about $160 million in energy-related loans. Added Parker: “Anything which impacts on the economy has a ripple effect, and to that extent we are affected.”

In Vancouver there are efforts to find a way of resuscitating the city’s troubled Columbia Trust Co. Ltd. With current assets of $135 million—and an equity shortfall of $3.6 million—Columbia was put into receivership by the province’s Social Credit government on Aug. 1 after rescue efforts by federal and provincial officials broke down. “We worked with Columbia’s management and had consultants in

trying to turn the thing around,” said McKinlay. “It didn’t work, but we certainly tried.” As part of that attempt, a firm controlled by flamboyant Vancouver businessman Nelson Skalbania was allowed to buy 52 per cent of Columbia for $1.8 million. But Skalbania, who declared bankruptcy with more than $30 million in debts four years ago, has his own liquidity problems, and so far he has not put enough new money into Columbia.

In neighboring Alberta, concern is focused on the fate of two Edmontonbased trust companies—North West Trust Co., which once claimed $800 million in assets, and the smaller Heritage Savings & Trust Co. Faced

with mounting losses on mortgage and real estate loans, North West recorded operating losses of more than $30 million during 1984 and 1985. Heritage, with claimed assets of $171 million in 1984, lost at least $4.4 million last year. After twice missing deadlines for filing financial statements with the Alberta Securities Commission this year, both firms technically fell into default.

But observers in Calgary financial circles predicted that Alberta’s Conservative government—which under former Premier Peter Lougheed used $85 million in public funds to help bolster North West’s fortunes— would not let the trust fail. According to knowledgeable business sources in Calgary, Premier Don Getty’s government may be planning to take over North West’s bad loans and combine those with other nonperforming trust company and credit union assets in a specially-created

government holding company called SC Properties Ltd.

Some observers say that the growing accumulation of bad loans held by western financial institutions could lead to a rash of western business failures as the banks launch year-end performance reviews this fall. Shaunessy—who predicted eight months ago that the nation’s six largest chartered banks would have to write off $2.2 billion in bad debts this year—now calculates that those banks will lose $3.2 billion in the fiscal year ending Oct. 31 and another $3 billion in fiscal 1987. Those debts have already been written off by the banks, Shaunessy said. But whether the lending institutions will try to call in the outstanding loans to indebted firms and, in doing so, “take the guy out, is another matter,” he added.

Despite mounting pressure for Ottawa to redefine the laws under which banks and trust companies operate, federal officials predict that new legislation will be delayed until Mr. Justice Willard Estey reports this fall on his 12-month inquiry into the causes of last year’s bank failures. One Ottawa source said that Estey will likely argue that the chronic problems in the West point to a fundamental weakness of regionally Sbased financial I institutions, j In the meantime, on faith Ottawa’s efforts appear to be devoted to damage control. In the Office of the Inspector General of Banks, 40 new auditors have been hired, bringing the total to 70 officials who are subjecting all institut. ns’ loan portfolios to a rigorous annual examination. Liquidators appointed by the federal government to supervise the dismantling of the two failed banks expect eventually to recover about $1.5 billion of the $2.8 billion poured by Ottawa and the country’s six major chartered banks into last year’s rescue attempt. But the liquidators are moving slowly. They are under orders, said McKinlay, to take a “statesmanlike and sensitive” approach and avoid selling assets at fire-sale prices—a policy that would only aggravate an already troubled situation in the West.