May 6, 1965

DECENNIAL REVISION AND EXTENSION OF CHARTERS

LIB

Walter Lockhart Gordon (Minister of Finance and Receiver General)

Liberal

Hon. Walter L. Gordon (Minister of Finance) moved

that the House go into Committee to consider the following resolution:

That it is expedient to introduce a measure to provide for the decennial revision of the Bank Act and the extension of the charters of the existing chartered banks till July 1, 1975, and to provide further for certain changes in connection with the administration of the Act.

Motion agreed to and the House went into Committee, Mr. Lamoureux in the Chair.

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LIB

Walter Lockhart Gordon (Minister of Finance and Receiver General)

Liberal

Mr. Gordon:

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?

Some hon. Members:

Oh, oh.

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LIB

Walter Lockhart Gordon (Minister of Finance and Receiver General)

Liberal

Mr. Gordon:

I do not think I am exaggerating, Mr. Chairman, although I hasten to add that I am not a lawyer and must bow to those who are members of that exalted profession.

In the past the courts have expressed the view that the essence of banking is the accepting of deposits which are transferable on demand by cheque or a similar instrument. This definition, which differs from the one proposed by the Commission, could be applied through the medium of the clearing system which is now operated by the chartered banks under the Act to incorporate the Canadian Bankers' Association. This is the channel through which settlement is made for the cheques issued by other institutions as well as banks.

The Royal Commission recommended that membership in the clearing system should be broadened to include all institutions engaged in "banking" as they defined it, and therefore requiring clearing facilities. They also proposed that there should be par clearing for out of town cheques. The Government intends to give further consideration to these recommendations before proposing any changes in the legislation relating to the clearing system.

The present Bill is, therefore, simply one to revise the Bank Act itself. It will cover the present eight chartered banks and extend their charters for a ten year period commencing July 1 of this year. It will also apply to any new banks incorporated during this ten year period. The various amendments which are being made in it represent a substantial move toward the general objectives proposed by the Royal Commission.

It is proposed, as recommended by the Royal Commission, to allow the banks to make conventional mortgage loans. The banks will be permitted to charge going rates of

May 6, 1965

interest on these loans if they meet certain specified requirements. The Bill provides that the entry of the banks into this part of the mortgage lending field shall be on a gradual basis. It is expected that these proposals will provide more competition in this important area of the capital market and pave the way for a reduction in the average cost of mortgage borrowing.

It is also proposed to provide explicitly that banks may receive the same rate of interest on N.H.A. mortgages as is fixed by the Government for other authorized lending institutions. It is hoped that this step will encourage the banks to resume N.H.A. lending and by so doing reduce the amount which the Government has found it necessary to do in recent years.

Apart from the foregoing exceptions with respect to mortgage loans, the present 6 per cent ceiling on interest rates will be retained.

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?

Some hon. Members:

Hear, hear.

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LIB

Walter Lockhart Gordon (Minister of Finance and Receiver General)

Liberal

Mr. Gordon:

As long as the general level of interest rates remains reasonably close to current levels, the exceptions being made in the case of mortgage loans and the customary service charges on personal loan plans should allow the banks to adopt somewhat more flexible interest rate policies on both loans and deposits. If, however, at some future time there should be a general rise in world interest rates which would make these proposals unworkable, then the Government would reconsider the 6 per cent limit.

It is proposed that the minimum Canadian cash reserve of the chartered banks be reduced from 8 per cent to 7 per cent of Canadian deposits. The Royal Commission recommended a system of cash reserve requirements involving different cash ratios for different categories of deposits, the result of which would have been to reduce the cash reserve requirements for the chartered banks. The Government does not feel that there are large enough differences in the types of deposits held by individual chartered banks to make it necessary or desirable to have as complicated a cash reserve formula as that proposed by the Commission.

Provision is also being made for a secondary liquid asset ratio which the Bank of Canada may impose from time to time and vary between 6 per cent and 12 per cent of Canadian deposits. This measure will replace the present voluntary agreement between the banks and the Bank of Canada regarding secondary reserves, and also replace the power to vary the cash reserve ratio which has been

Bank Act

in banking legislation since 1954 and which it is proposed to discontinue.

As I have already announced to the House in statements on September 22, 1964 and February 16 of this year, the Bill contains measures to place limits on certain resident and non-resident holdings of bank shares and to prohibit shareholdings by governments. So far as non-residents are concerned, these measures are similar to those which have already been enacted for Federal insurance, trust and loan companies.

The Government agrees with the views expressed by the Royal Commission regarding the undesirability of too close affiliations between banks and other Canadian corporations, and the Bill provides limits on both share ownership in such cases and interlocking directorships.

The Government hopes that part of the future growth of our banking system will take place on the basis of an increasing number of banks. The revisions which are being made in the Bank Act should encourage such a development. In order to make it easier for applicants to get a bank charter when they can meet all the specific requirements of the Act, it is proposed that a new bank may be incorporated by letters patent, with the House of Commons having the right to annul such letters patent within a stated period of time.

It is hoped to proceed with the second reading debate on this Bill as soon as possible, and to propose then that the Bill be referred to the Banking and Commerce Committee for detailed study and discussion. It may be necessary, Mr. Chairman, to propose legislation extending the present bank charters beyond June 30, depending on the progress made with the proposed Bill.

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PC

George Clyde Nowlan

Progressive Conservative

Mr. Nowlan:

I hope, Mr. Chairman, that the last statement of the Minister was not an understatement, but I am fearful that his prognostication may prove to be correct. Certainly those on the Banking and Commerce Committee will have, I presume, a relatively long and interesting session in dealing with this Bill if the House and the Committee of the Whole see fit to send it on to that Committee, as I assume will be the case.

As the Minister has said, we have had a Royal Commission dealing with this subject; a Commission which sat for some three years, I think, and brought down a report a few months ago-a lengthy, voluminous and very, very able report. It may be that all hon. Members, as the Minister intimated a few

May 6, 1985

Bank Act

minutes ago, will not agree with all the recommendations in the Royal Commission report, but certainly I would hope and expect that all hon. Members, particularly those who may be sitting on the Committee, will make it a requirement to read that report very carefully and rather intently.

It is not my intention this afternoon, Mr. Chairman, to deal in any detail whatsoever with the resolution which is now before us. The resolution has only four lines; it is very brief. It says "it is expedient to introduce a measure", and so on. "Expedient" in this case, of course, is the usual phraseology. But it is more than expedient; it is necessary by law because, as all hon. Members know, the time has come when we must proceed with the decennial revision of the Bank Act, and that is what is now before us. If we cannot conclude it before the 30th day of June, then certain remedial action will have to be taken; otherwise all banks of Canada will come to a stop and close their doors from the 2nd day of July, and that is something, of course, that could not be tolerated for a minute.

The Minister referred briefly to some points in the legislation that he said would be brought forward. I do not intend to refer to them at all. I think the proper course as far as we in the Opposition are concerned is to await the text which will be brought before us as soon as we have first reading, and then on second reading we can deal in some detail with the various provisions contained in that Bill.

[DOT] (3:40 p.m.)

On the basis of what the Minister said, I have no hesitation in saying that we on this side of the House in the Opposition will support the passing of this resolution. We would like to see the resolution pass at a relatively early date so that we can have the bill before us. I presume it will be a lengthy and voluminous bill probably running to scores and scores and scores of clauses, so we will have ample opportunity to examine those clauses before proceeding to second reading. I think, Mr. Chairman, that is all it is necessary for me to say at this time as far as the Official Opposition is concerned.

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NDP

Robert William Prittie

New Democratic Party

Mr. Pritiie:

Mr. Chairman, I agree with the hon. Member for Digby-Annapolis-Kings when he says we will not delay proceedings at this stage, and I hope we will be able to study the bill very soon. In the absence of the hon. Member for Nanaimo-Cowichan-The Islands I should like to make a few comments on the Minister's statement, but even though I speak

[Mr. Nowlan.l

for the hon. Member and from his place I do not pretend that I can match his knowledge of banking and monetary affairs.

The Banking and Commerce Committee will certainly be very busy with the proposals the Minister has made. Not only will they be dealing with the revisions to the Bank Act, but I believe they will have referred to them during the session also certain revisions to the Bank of Canada Act.

The Minister's statement dealt with a great many important points, including some of the recommendations of the Porter Commission. It is interesting to note that the Government has been very selective in accepting the recommendations of the Porter Commission; a great many of them have been left out. The Minister told the Committee that he will be recommending changes to the Bank Act concerning ownership of shares by foreigners and by provincial governments. The Minister also expressed fear on February 16 concerning provincial ownership of shares in chartered banks, and apparently he has a general fear that the ownership of shares by Provinces will in some way affect the federal monetary authority.

The answer to that, given at the time by my colleague the hon. Member for Nanaimo-Cowichan-The Islands, was couched in his usual forthright, concise manner, and I can do no better than repeat it now. As reported at page 11364 of Hansard for February 16 last the hon. Member said:

I take very strong exception to the final part of his statement, which proposes to prohibit investment in chartered banks by any provincial governments. I am surprised that the Minister of Finance should be so obviously ignorant of banking techniques in this country that he would suggest for one moment that the ownership of shares in a bank by a provincial government would raise questions of jurisdiction over monetary policy. That is absolute nonsense, and I am sure the Minister is aware of that. It is technically impossible for that to take place, and if he is in doubt in that regard I suggest he consult with the Governor of the Bank of Canada, who I am sure will disabuse his mind of this nonsense.

Now, Mr. Chairman, I should like to elaborate a little on this point. I think this fear has been greatly exaggerated by the Minister, and I notice that a number of editorial writers in this country have picked it up. I cannot believe that shares held in one or two banks by one or two provinces can have a very important effect upon the monetary policy of this country and upon general economic conditions. After all, we have at the present time eight chartered banks, and if the applications at present under consider-

May 6, 1965

ation are granted we will have 11 chartered banks, so a very small minority interest by one or two provinces in one or two banks cannot make very much difference to the total picture of monetary policy in Canada.

In any case, Mr. Chairman, I suggest that the powers presently held by the Bank of Canada and by the Inspector General of Banks are quite sufficient to regulate the chartered banks. At least that is what we have been told, and I am sure it is true. Whether the shares are owned by private organizations and individuals or by public organizations does not make much difference; the Bank of Canada and the Inspector General of Banks have adequate power over all chartered banks at the present time.

I also suggest that in any case the provinces have a good deal of power to influence economic conditions in the country even though they do not have control over monetary policy. The collective budgets of the provinces these days are very great, and they can be used to exercise some control over economic conditions in the country. Therefore I submit a small amount of ownership of shares will change that situation very little. I also suggest that the Premier of British Columbia has far more impact upon the economy of this country through his control over the natural resources of the Columbia River than any ownership of shares in any bank would ever give him.

I realize that insurance companies, trust companies and mortgage companies are not now credit creating institutions in the same sense that banks are, but they do accumulate large amounts of funds and they can decide who shall receive those funds, for what purposes they are to be used and in what parts of the country they are to be used. Therefore it seems to me only logical that if the provinces are to be prevented from owning shares in banks they should also be prevented from owning shares in these other financial institutions.

It seems to me that the General Development Corporation of the Province of Quebec would be in this category, and I question very much whether the Government will take any steps against that body. Yet the step they are now taking regarding the banks really will not have that much effect if the provinces can invest in and gain control of other financial institutions, as they are doing at the present time and as they will probably continue to do in the future.

If the Minister proceeds to introduce this amendment to the Act concerning the prov-22620-63

Bank Act

inces he can expect a great deal of opposition to that amendment in this House. He can also expect opposition from the Premier of British Columbia and from the Premier of Quebec, and in light of the present state of affairs in Canada today the opposition of these gentlemen might be more important than ours. Nevertheless this particular amendment will not be accepted lightly and will be opposed with a great deal of vigour. I am sure the Minister is aware that on March 26 the Legislature of British Columbia gave third and final reading to the amendment to the Revenue Act of that Province which permits the Province to buy shares in existing banks.

Generally, Mr. Chairman, we approve of the measures which the Minister has suggested will be designed to retain Canadian control and ownership of chartered banks. As far as I know only one has slipped out of Canadian control, and we trust that these measures will be such that this will not happen again. I should like to suggest though, that funds of the Canada Development Corporation might be used at some time to regain control of the bank we have lost to owners who do not reside in Canada. I do not suppose the Minister wants to introduce any retroactive legislation, but he might put a new section into the revised Act which would provide that if the shares of the bank which has been lost to Canadian ownership come up for sale again, the Canada Development Corporation should have first chance to buy them, which would perhaps rectify the mistake made in the past.

The report of the Porter Commission will be very important for hon. Members of the Banking and Commerce Committee and for the hon. Members of this House who will have to consider the report of the Committee later on. The hon. Member for Digby-An-napolis-Kings suggested that this report should be studied very carefully, as I am sure it will be, particularly by members of the Committee.

There have been a number of commentaries on the Porter Commission report and I should like to recommend to hon. Members one commentary which I read only recently. This is an article in the winter 1965 issue of the Queen's Quarterly by Professor J. C. Weldon. Very briefly, he says that the Porter Commission recommends modest institutional reforms of the existing system, but he complains that they did not relate Canadian banking to the total economy. And, indeed, there were no professional practising economists on the Commission. However, I merely

May 6. 1965

Bank Act

mention the article, which I think should be required reading for those members who will be actively considering the new provisions for the Bank Act.

My colleague the hon. Member for Na-naimo-Cowichan-The Islands has suggested that the Banking and Commerce Committee have quite wide scope and wide terms of reference when these matters are referred to it. In particular, he would like to see the whole question of international liquidity studied by that Committee. This is an active subject these days and is a matter of concern to the major trading nations of the world. [DOT] (3:50 p.m.)

My colleague has this point in mind. Whenever the Bank Act has come up for review, as in 1934, 1944 and 1954, some theme has always emerged from the Committee hearings. In 1934 it was related to the central bank, which was new to Canada at that time. In 1944 the late Senator G. G. McGeer presented certain policies to the Committee. He was a Social Crediter who had infiltrated the Liberal Party. In 1954 it was the relationship of the central bank to the chartered banks.

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?

An hon. Member:

It went further than that; it went to the Senate.

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NDP

Robert William Prittie

New Democratic Party

Mr. Prittie:

We will be discussing the Senate tomorrow.

My colleague suggests that this question of international liquidity might well be discussed this year by the Committee, before which some expert witnesses could be called. These Committee hearings can be very educational. These hearings, through the medium of the press, can be educational. I think this is a very good thing, because there are not more than four, five or six members of this House who understand very much about international monetary matters. I am certainly not one of them.

My colleague also suggests that many members of the press do not understand much in this regard. If this educational process could be a feature of committee hearings, as a result of the calling of expert witnesses in this field, I think there would be a general widening of public understanding of this very important subject.

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?

An hon. Member:

Let us call General de Gaulle.

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NDP

Robert William Prittie

New Democratic Party

Mr. Priiiie:

Yes, we might call General de Gaulle.

Mr. Chairman, I conclude these brief remarks by informing the Minister that when

the Bill comes before us for second reading many Members will have studied its details and will be in a position to speak about it. I would also remind the Minister that he may expect a great deal of opposition to the amendment concerning provincial governments.

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SC

Horace Andrew (Bud) Olson

Social Credit

Mr. Olson:

Mr. Chairman, as is well known to the Minister of Finance and to all other Members of this House, we in this party have always taken a keen interest in fiscal and monetary policies in Canada. We all realize that the decennial revision is now one year late. We hope that the Standing Committee on Banking and Commerce will commence its work at once so we can avoid any further delays in this revision.

I was very interested in some of the remarks made by the Minister of Finance in his opening statement, but I was unable to completely understand all he said in regard to what he referred to as the central theme of the Porter Commission report. I was not sure whether this was also to be regarded as the central theme of the Bill which is to be brought in to incorporate these changes.

The Minister pointed out that the Porter Commission suggested that the Bank Act be revised to broaden its application to other financial institutions in the country, which it referred to as "near banks". It was not completely clear to me from the Minister's statement whether the Bill to follow this resolution will contain provisions which will bring these other financial institutions within the ambit of the Bank Act and under the jurisdiction of the Federal authority.

The Minister then defined a bank, and in doing so suggested there was more than one definition and that the Porter Commission's definition was not necessarily synonymous with other definitions that have been made in the past. I suggest that we will be faced with some very serious constitutional problems regarding imposition by the Federal Government of restrictions on the ownership of banks as a result of these many definitions.

There are no apparent problems in respect of applying the provisions of the existing or revised Bank Act to chartered banks, of v/hich there are now eight. There will perhaps be nine or ten before very long. However, when we consider this restriction, using the Porter Commission's definition, in respect of other institutions which are near banks there will be serious difficulty.

In the Province of Alberta there exists a large financial institution, if one wishes to

May 6, 1965

call it that, known as the Treasury Branch System. This is as near to being a bank as possible. It provides all the services provided by a chartered bank with the exception of making clearances to banks outside of the Province. Of course this institution does have a working agreement with one of the chartered banks in order to carry out that operation. This institution does not account to the Federal Government, and if the Federal Government intends to attempt to limit Provincial ownership in this kind of financial institution because it is a bank within a certain definition, the Minister of Finance will have difficulty in determining that of which the Province will have to divest itself. Surely there is no suggestion that the Province will have to divest itself of its treasury, and this Treasury Branch System is simply an extension of the treasury and its branches are quite properly termed treasury branches.

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?

An hon. Member:

That was just a gimmick.

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SC

Horace Andrew (Bud) Olson

Social Credit

Mr. Olson:

It may have been a gimmick, but it has been a very successful one. It seems to me that if we are going to have bad legislation on the books of the Federal Government, the Provinces have no alternative but to devise ways and means of providing the kind of service their citizens demand in spite of those laws.

Mr. Chairman, I have raised this subject because if the Federal Government presumes that it has the authority to bring the operation of these treasury branches, for example, within the terms of the Bank Act, and the authority to say that no Provincial Government shall own an institution of this kind, it has locked itself to a position which it is not going to be able to put into effect.

The Minister of Finance and his Government may be able to prevent the Premier of British Columbia from obtaining a federal charter or in fact from owning any of the stock of a company holding such a federal charter, but I cannot understand how he is going to prevent the Premier of British Columbia from setting up provincial treasury branches if that Premier chooses to do so. I cannot understand how the Minister can be successful in preventing such treasury branches from providing these services normally provided by chartered banks.

We must also consider the application of this amendment to the Bank Act to credit unions. When we examine carefully the activities and the services provided by credit unions, the Minister will have to agree that many of these credit unions qualify as banks

Bank Act

or near banks within the terms of his definition. These credit unions accept deposits for less than 100 days. They transfer on demand balances from one account to another. I am sure the Minister of Finance and his Government generally will not be foolish enough to attempt to suggest that credit unions will have to comply with the proposed revisions to the Bank Act.

[DOT] (4:00 p.m.)

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?

An hon. Member:

They are plenty foolish.

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SC

Horace Andrew (Bud) Olson

Social Credit

Mr. Olson:

My friend says, "They are plenty foolish". However, I do not believe they are politically stupid enough to try to impose this Bank Act on the credit unions within the country.

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LIB

Walter Lockhart Gordon (Minister of Finance and Receiver General)

Liberal

Mr. Gordon:

1 wonder if my hon. friend would permit me to ask him a question? In view of the confidence he has just displayed in the wisdom of the Federal Government, I wonder why he thinks it is necessary to make this particular speech before he has had the benefit of reading the bill? It could be that a lot of what he is saying will turn out to be redundant.

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SC

Horace Andrew (Bud) Olson

Social Credit

Mr. Olson:

I hope so, Mr. Chairman. However, at the commencement of the Minister's statement he said-if I am wrong I hope he will correct me now-that the central theme of the changes in the Bank Act would be to broaden the application of the Act to cover financial institutions or these near banks.

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May 6, 1965