Gerald Grattan McGeer
I do not think the minister would agree with that.
Subtopic: CONDITIONS GOVERNING TEN-YEAR EXTENSION OF BANK CHARTERS
I do not think the minister would agree with that.
As I said a moment ago, when I was interrupted, I had come to the third form of assets which a bank holds, namely securities and bonds, Dominion of Canada bonds. The fourth form of security is promissory notes, as well as any collateral, which they hold with them, for the repayment of loans which they have made to customers.
Let hon. members look at any bank statement-and I say this without fear of contradiction, although I know it will be a shock to the hon. member for Parry Sound. I know the hon. member did not intend to mislead the committee, but I say that he did mislead the committee when he said that any bank had a dollar's worth of security or a dollar's worth of cash in any of its vaults in the form of inner reserves.
I come now to the fourth item of bank assets. The fourth item is securities in the
form of promissory notes which a bank holds, in order to secure repayment of loans which it makes. Now we come to the place where inner reserves arise. In this instance I am reading from the financial statement for 1943 of the bank of Montreal, and I find this item: "Current loans and discounts, less estimated loss provided for"-and then the item extended is 8215,000,000 odd.
That statement simply means this, that the bank of Montreal holds promissory notes for loans which it has made to customers in excess of 8215,000,000. But it just shows $215,000,000 in the statement, because bankers know they are in a hazardous business. Every year they take losses. They know they may not be able to collect the par value of the notes which they hold for loans they have made; therefore they must make a compensatory adjustment, and if they are to have a true financial report they must make a compensatory adjustment to bring down the total par value of loans to the actual amount which they will finally recover. That is the inner reserve - item; it is simply a bookkeeping item. There is not a dollar of security behind it. There is not a dollar of cash there. There is no hidden loot.
Why, to hear some hon. members talk one would think that the banks of this country have hidden away in some corner of their vaults, piles of stocks, currency and securities for hidden or inner reserves. Nothing of the kind happens. They do not hold a dollar of cash, and they do not hold a dollar's worth of securities under this item of hidden reserves. It is simply a bookkeeping entry, simply a writing down of the amount of their loans from par value to the amount which the experience in banking tells them they will 'finally collect. You can pick up any bank statement and you will find that item, or a ' similar one-"less estimated loss provided for."
When I approached this problem in the committee on banking and commerce and I found that the banks were not required to report to the Minister of National Revenue, the taxing minister, the amount set aside as an item to protect them against loss they would eventually have in the collection of their loans, I did not think that was proper. I thought banks should be placed in exactly the same position as all other industries in this country. I thought banks should have to report to the Minister of National Revenue the amount they had set aside in the reduction of the par value of their loans, in order to reach the true value of their loans. I moved an amendment, but when the minister indicated
Bank Act Amendment
that he was bringing in an amendment to provide for what I had in mind, I of course withdrew my motion.
We have to-day in the Bank Act the fullest possible protection in that regard. The Minister of Finance has no option. The act says that the Minister of Finance shall report the amount of the inner reserves to the taxing minister, so that the taxing minister will at all times have full information.
With that amendment in the Bank Act the banks of this country, so far as inner reserves are concerned, are in exactly the same position as every other industry. One can pick up tne financial reports of canning companies, steel companies or other industries in Canada, and he will find that they all make a similar compensatory deduction for anticipated loss, and that they do not disclose the amount to the general public.
I did not catch what the hon. member said a moment ago, as to whom, under the amendment, the banks are required to report.
I said that they were required to report to the Minister of Finance, and that the statute goes on to say that he shall pass on the information to the Minister of National Revenue.
No; that is done only under certain circumstances, according to subsection 9. It is only if he, in his judgment, regards the hidden reserves to be in excess of what they ought to be. If he decides it is all right, the Minister of National Revenue never knows about it.
The Minister of National
Revenue has the same power in respect of banks, under the National Revenue Act, that he has in respect of every other taxpayer in Canada.
I understand that.
That is apart altogether from this provision. This is an additional superimposed protection. It leaves alone, untouched and unmodified, the power of the Minister of National Revenue over the banks, and that power was the same as it is for any other taxpayer.
Quite right, but the only reason I interrupted was-
The ACTING CHAIRMAN (Mr. Golding):
I am prepared to accept the hon. member's interruption.
The hon. member inadvertently, I think, gave the committee the impression that under the amendment the banks are now required to report to the Minister of National Revenue. That is not the amendment. I draw the hon. member's attention to section 56(9). Under the amendment the banks, as heretofore, report to the Minister of Finance, not to the Minister of National Revenue. But if in his opinion the Minister of Finance believes that the banks have set aside in excess of the amount they ought to have set aside, then the amendment requires him to notify the Minister of National Revenue. And at that point the section stops. The Minister of National Revenue is not obliged to take any steps. My hon. friend will recall that the evidence showed that right down to this investigation the banks had never notified or advised either the Minister of National Revenue or his deputy, of the amount they set aside for hidden reserves. That is the record. [DOT]
I thank my hon. friend for his interruption and, in fairness, I propose right now to read into the record the gist of subsection 9, leaving out the superfluous wording.
Where in the opinion of the minister an amount set aside or reserved by any bank . . . for the purpose of meeting losses on loans, bad or doubtful debts, depreciation in the value of assets . . . the minister-
That is the Minister of Finance.
-shall notify the Minister of National Revenue and the deputy minister of national revenue (taxation) of the amount so set aside and of the amount of such excess.
That is exactly as I stated it.
Yes. I have concluded what I intended to say about inner reserves. I wonder if at this stage in the debate*the hon. member for Parry Sound would be good enough to withdraw the statement he made that the banks might have millions of dollars worth of Bank of Canada notes set aside in their vaults as inner reserves.
I do not withdraw it because it is literally and actually true. I have just found a reference in Mr. Clarkson's evidence, and I will refer to the evidence of Mr. Tompkins who also makes the same declaration. I asked Mr. Clarkson what form these inner reserves took which were in the custody of the banks, and he said they were partly in cash and partly in securities.
We cannot both be right, but I say positively that every bank in this country reports in its financial statement every
Bank Act Amendment
dollar of cash, every dollar of Bank of Canada deposits and every dollar of securities in the possession of the bank, and that the so-called hidden reserves item is simply a bookkeeping entry.
What would the bookkeeping entry represent?