Finance Minister Jim Flaherty’s warning last year to Canadian bank executives that they should not “compete to the bottom on interest rates,” as he says he put it to them, was given a new dimension this week. Documents obtained by The Globe and Mail under Access to Information laws indicate that the Bank of Canada is equally concerned that competition to sign up loan and mortgage customers is helping to increase consumer debt loads that are already uncomfortably high. The concern is understandable but, if anything, Ottawa and the central bank should be encouraging competition in the financial sector, not questioning it.
The documents included research that found that neighbourhoods with more bank branches in them tended to have “looser lending standards and ... greater bankruptcies.” The focus was on the mortgage and housing market, which is one of the few areas of the financial sector where the average Canadian retail bank customer can hope to negotiate his bank costs. Ask your bank for a discount on ATM fees, account fees, credit card rates and the rates for lines of credit, and you will be met with a puzzled look. Mortgage rates are different; most banks will discount their posted rates to attract business, especially if potential customers can walk across the street to a competitor. The Bank of Canada’s own research from winter 2010-11, posted online, found that the more banks there are in your neighbourhood, the better chance you have of getting a lower rate, and vice versa.
Mr. Flaherty’s worries about Canadians’ debt loads are justified. Canadians, too, are worried; recent surveys have shown they are focused on building up savings and paying down debt. For homeowners, one of the quickest ways of doing the latter is getting a better mortgage rate. Competition is a proven way for achieving this. If Ottawa and the Bank of Canada are worried that low interest rates are attracting people to mortgages they can’t afford, they should look for solutions other than discouraging a market that benefits the vast majority of consumers.