Bring back the four pillars

The big banks are getting a rough ride at Senate Committee hearings into the question of how to improve access to capital for Canada’s growing companies — including a call for a return to the “four pillars” of Canadian finance.

Recent hearings before the Standing Senate Committee on Banking, Commerce and the Economy have put the Big Six banks in critics’ crosshairs.

Among other things, they’ve been blamed for being unwilling to finance risky growth companies with their own capital, and preventing retail investors from making risky bets of their own through their control of the vast majority of the retail investment business.

Speaking to the committee on April 30, Research in Motion founder, Jim Balsillie — now chair of the Council of Canadian Innovators — called on policymakers to facilitate the creation of five or six new banks that are focused on supporting growth companies.

The day before, Dan Daviau, chairman and CEO of Canaccord Genuity Group Inc., told the committee that the big banks’ collective control of the country’s largest asset managers and the biggest retail sales forces, has also undermined the availability of risk capital — as advisors at the bank-owned dealers are pushed to favour relatively safe, blue-chip investments, at the expense of small, risky venture companies.

These kinds of complaints appeared to resonate with certain senators, including Nova Scotia senator Colin Deacon, who proposed a “de-consolidation” of the Canadian financial sector — a return to the days of the “four pillars” before the banks were allowed to acquire large investment dealers (along with insurers and trust companies).

In his testimony, while Daviau didn’t advocate for breaking up the banks, he did suggest that greater freedom for financial advisors to move firms could be part of the solution to making more risk capital available to growing firms. Pushing the large pension plans to allocate a larger share of their vast assets to Canadian growth companies, and creating tax incentives to facilitate venture investment would also help, he said.

Indeed, Daviau argued that improving the climate for venture financing should focus on the public equity markets.

“If we fix the public market everything else will fix itself,” he told the committee.

Among other things, he suggested that enabling more capital to flow into publicly traded growth companies would improve the multiples that those companies trade at, making them less susceptible to foreign takeovers, and incentivizing more early-stage investment by creating a clear exit path for investors in highly risky startups. 

At the same time, witnesses also pointed the finger at policymakers. While the big banks and their dominant position in the Canadian financial landscape were a frequent target of both witnesses and senators in this week’s hearings, much of the blame was focused on the policy framework that has enabled bank dominance, rather than the actions of the banks themselves.

Even their critics concede that are banks are operating logically, given the system they work in, which has prioritized safety and soundness at the expense of greater risk-taking.

Indeed, banking industry lobbyists, the Canadian Bankers Association (CBA), pushed back on much of the criticism levelled at the banks, arguing that the industry has done a good job in supplying credit to growing businesses.

And, they pointed at regulation as the primary reason for the banking industry’s risk aversion — arguing that banks face a litany of rules and long list of regulators administering those rules, operating at different levels of government, sometimes with conflicting mandates — all of which conspires to make banks err on the side of caution.

To encourage greater risk taking, the CBA argued, we need “smarter” regulation. And, to enable more competition, the industry needs “less” regulation, it said.

The banks’ regulators will have the chance to defend their role in upcoming meetings — with the Bank of Canada slated to appear before the committee next week, and the Office of the Superintendent of Financial Institutions (OSFI) after that.