Academic journal article Canadian Public Administration

Entry Barriers and Evolution of Banking Systems: Lessons from the 1980s Canadian Western Bank Failures

Academic journal article Canadian Public Administration

Entry Barriers and Evolution of Banking Systems: Lessons from the 1980s Canadian Western Bank Failures

Article excerpt

Public policy for financial institutions faces the challenge of reconciling competing interests: banks have an interest in promoting whatever allows them to pursue the most profitable strategies in order to satisfy their shareholders, while public policy often represents the reconciliation of conflicting goals (e.g., bank shareholders versus economic development, and consumer interests versus management growth strategies). From time to time, economic development policies have put national and regional (provincial) priorities in conflict. However, over most of Canadian history, the tensions arising from the competing interests of global competitiveness of the large banks and strong competition to bring innovation to the broad domestic markets have been managed well by federal public policy-makers. Since 1867, Canada has experienced a nationally controlled banking system that is highly stable (i.e., few bankruptcies) and that has enabled the in-flows of capital needed for national economic development. However, comparing two key moments--the 1967 Bank Act, which was largely the product of the 1964 Porter Commission, and the 1998 MacKay Task Force report (1)--reveals that new and diverse stakeholders are becoming stronger in the policy process, and consequently there are different resolutions to the tension. (2) In essence, in 1967, bank interests were the beneficiaries of both intended and unintended policy changes, while bank desires were thwarted by the MacKay report, which stressed consumer sovereignty and competition. In light of the recent impetus from the MacKay Task Force to increase competition among banks in Canada, it is worth remembering the fate of the one group of new Canadian banks created in the 1980s: failure. (3) Any new initiative arising from changes to the Bank Act must be seen in the context of previous public policy towards financial institutions in Canada. Rather than being condemned to repeat history, both policy-makers and potential bank entrepreneurs would be well advised to re-examine the Report of the Inquiry into the Collapse of the CCB and Northland Bank, by Willard Z. Estey, or at least the useful summary. (4) This article deals with this important saga in Canadian banking, as well as the public debates on Canadian financial institutions, their regulatory framework, and public policy outcomes.

The stakeholders in financial sector policy

Table 1 provides an overview of key stakeholders and identifies their overall perspective as national, regional or consumer. (5) While the specific federal-provincial structure and institutional framework are uniquely Canadian, the centre versus regions, institutions (intermediated finance) versus capital markets (direct finance), and diverse publics leading to competing interests are not. Public policy towards financial institutions (FIS) emerges from a reconciliation of these conflicting interests. (6)

This list is by no means exhaustive. In fact, some groups can be broken down into finer units of analysis, including individual CEOS, interest groups and individual politicians. (7) While it is important to recognize the utility of the stakeholder approach, it is even more important to understand the fundamental dynamics driving the interrelationships. Some interactions among the stakeholders change over time, especially as specific needs and incentives and power bases change. For example, here are some important longterm domestic and international trends:

--destruction of traditional political and product market boundaries by technology and globalization;

--the growth of capital markets and dis-intermediated finance beginning in the 1970s;

--declining dependence of the federal government on chartered banks (perhaps signalled with the Bank of Canada Act in 1934 and the opening of the bank in 1935); (8)

--declining power of the federal government due to regional/international agreements;

--increasing power of the regions, essentially tied to changes in spending;

--increasing openness of the policy process; and

--the role of the domestic and international media in representing (and shaping) policy interests. …

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