The first two years of the pandemic were good for Canadian banks. Low interest rates and generous government spending led to fewer bad loans, bigger mortgages and higher merger-and-acquisition fees.
Banks booked record profits. Ottawa, meanwhile, went deep into the red. The federal government, looking at those profits, introduced new taxes to take billions of dollars out of the sector in the coming years.
Yet, even as Ottawa moves to boost taxes, it drags its feet on reforms to boost competition in the sector. Taken together, those two policies are shortsighted and will ultimately harm banks and their customers.
Ottawa should abandon its plan for new taxes on the financial industry and instead push through pro-consumer reforms, such as open banking, that will bring much-needed competition and lower fees to the sector.
The new taxes come in three flavours. There’s a temporary charge of 15 per cent on the average 2020 and 2021 taxable incomes over $1-billion of large banks and insurers. There’s a permanent 1.5-percentage-point bump in the tax rate (to 16.5 per cent) of taxable profits over $100-million. And there’s a change to tax treatment of dividends on shares held by financial institutions.
In explaining the new levies, Deputy Prime Minister Chrystia Freeland told parliamentarians any new taxes must be “clear, rational and fair.” But the reasoning here is weak.
“We basically put a floor under the whole Canadian economy, and all Canadians paid for that,” Ms. Freeland told the House of Commons finance committee on Nov. 28, 2022. “There was a particular sector that benefited from that government action, a particular sector of the economy, and that was the financial sector. It would have suffered significantly had the government not acted.”
To say that the financial sector uniquely benefitted from COVID aid is absurd. Tech companies exploded in value while interest rates were near zero. While lockdowns devastated some industries, such as tourism and restaurants, other segments of retail benefitted from a boom in discretionary spending. And tax revenue from healthy sectors will naturally grow at current rates, anyway.
Even if banks were unusual in turning a profit, why is that a problem for which taxes are the solution? Introducing taxes now – particularly after the boom times, when profitability is returning to Earth – serves only to increase costs. Higher expenses could be passed through to customers as higher fees, and could lead to less capital deployed through loans. Banks may not bear the burden of higher taxes alone; their customers and shareholders may also feel a pinch.
By contrast, a different new tax – a 2 per cent levy on share buybacks – is better. It is at least consistent, in that it affects all public companies equally. And it has an explicable rationale behind it: to encourage companies to reinvest more profits and become more productive.
But all this serves to distract from the much deeper problems with the financial sector that are harder, but more important, to solve.
This space has argued before that the banking sector is an oligopoly that leads to fewer choices and higher prices for consumers. One remedy to the lack of competition would be for the government to finally fulfill its promise to introduce open banking.
Open banking is a system for securely and efficiently sharing financial data between financial institutions and technology companies. It would significantly lower the barriers for entry to new lenders and service providers, and make it easier for consumers to switch banks.
Ottawa has studied and consulted extensively on the issue in the last few years. The lead bureaucrat on the file has already drawn up recommendations. The only thing lacking is political will. Britain and Australia have open-banking regimes in place, and the U.S. introduced its rules on Thursday. Canada should not fall behind.
Ms. Freeland said last week that Ottawa would press banks on consumer issues, such as “cracking down” on overdraft fees. But much will depend on execution. A similar recent promise to force banks to lower credit-card transaction fees ended up being more flash than substance.
More competition in banking should result in lower fees, more choices and a higher degree of innovation. Higher taxes will do the opposite. Ottawa can bank on that.