Banking in Canada

THE ROYAL BANK OF CANADAHEAD OFFICE, MONTREAL

September, 1945

CANADA is among the leading nations of the

world in the dependability and efficiency of itsbanking system. The powers and business of

banks are clearly defined in the Bank Act, an enact-ment of the Dominion Government. This is not acreation of lawyers and statesmen arrived at once andfixed for all time. The Canadian banking system is aproduct of evolution, and it is still pliable. The BankAct, originally passed in 1871, is thoroughly over-hauled every ten years by a committee of the Houseof Commons, and other changes may be made betweenrevisions. At the decennial revisions, business peoplehave their say; the legislators of the country are alertto protect the interests of the people; the banks them-selves bring forward suggestions to improve their ser-vice, and any person or organization has a wide-openopportunity to present ideas for changes in eitherbanking procedure or financial practice.

Briefly, the Bank Act authorizes a bank to takedeposits and to deal in, discount, and lend money oncommercial paper, stocks, bonds and debentures ofmunicipal and other corporations, and on Dominion,Provincial, British or foreign public securities. Thebanks are forbidden to advance money on mortgages,though they may accept a mortgage as additionalsecurity for a debt already incurred; they are forbiddento buy, sell or barter goods, or to engage in trade.The object of these regulations is to prevent a bankfrom locking up its assets. The greater part of theassets of a bank, which consists of investments andshort-term Government bonds and other high-gradesecurities, and commercial loans, are constantly in theprocess of being collected and reinvested and re-loaned.

Other sections of the Bank Act (there are 165 ofthem) fix the maximum rate of interest which may becharged, indicate the commission the banks maycharge for collecting a bill discounted in one city andpayable in another, limit the small fixed fee for casual

advances and lay down very strict rules regarding theloaning of money to persons in any way connectedwith the bank. For instance, a director is not evenallowed to attend, let alone vote at, a meeting of abank board when it is discussing an advance to him-self or to any firm in which he is interested as a partneror director. Directors must be elected annually; themajority of directors on a bank board must be Britishsubjects domiciled in Canada; they are liable incriminal law if they help in giving any creditor of thebank an unfair preference over other creditors, or jfthey knowingly or even negligently sign any returncontaining a false or deceptive statement. Thesereturns and reports in great detail are made by thebanks to the Minister of Finance and to the Bank ofCanada periodically. The government publishes, everymonth, a statement of the position of the banks forinformation of the public, which is reprinted in certainfinancial journals, and commented on in the dailynewspapers.

Bank ofCanada

The Bank of Canada, a government central bank,was established by an Act of Parliamentassented to on July 3, 1934. Its appear-ance on the Canadian banking scene was

merely the culmination of a number of natural develop-ments which led from the colonial banking of 1867 toa modern, well-integrated national system that has putthe country in step with all the world and a paceahead of many nations. Object of the Bank of Canadais "to regulate credit and currency in the best interestsof the economic life of the nation, to control and pro-tect the external value of the national monetary unitand to mitigate by its influence fluctuations in thegeneral level of production, trade, prices and employ-ment, so far as may be possible within the scope ofmonetary action." Its Governor summed up its func-tion in this way: "Its primary duty is to see that at anygiven moment in the development of its country’seconomy there is the right amount of money in exis-

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tence, neither too much, nor too little. By money, Imean not only notes and coins, but deposits in thebanks." The Bank of Canada does no commercialbusiness except through its subsidiary, the IndustrialDevelopment Bank, the function of which is tosupplement the activities of the chartered banks andother lenders by supplying the medium and long-termcapital needs of small and medium-sized business.

CharteredBanks

While the aggregate supply of money is determinedby-the central bank, it rests with thechartered banks to provide the individualcredit requirements of commerce and

industry and of the public generally. This eliminatesall the many dangers inherent in a system which woulddistribute credit to individuals through a governmentmonopoly. There are ten banks chartered under theBank Act, and only they, and two long-establishedsavings banks, in addition to the Bank of Canada, arelegally entitled to call themselves "banks", or to usethe word "banking" in connection with their business.

"Ours has been a banking system of unusualstrength,"said the Minister of Finance in introducingthe revision of the Bank Act to Parliament last year.Canada, while a country small in population, hasthree banks with assets of more than one billiondollars each. There has been no bank failure since1923, when an institution which was never an import-ant factor in the financial set-up went under, andnoteholders have experienced no losses whatever since1881. The rank of the chartered banks on June 30,1945, as revealed by the Return of the CharteredBanks to the Government, is shown by the followingasset figures:

The Royal Bank of Canada $1,831,605,106Bank of Montreal 1,690,091,226The Canadian Bank of Commerce 1,277,137,590The Bank of Nova Scotia 613,591,788Imperial Bank of Canada 376,323,972The Bank of Toronto 327,818,284Banque Canadienne Nationale 318,323,916The Dominion Bank 304,424,196La Banque Provinclale du Canada 120,312,360Barclay’s Bank (Canada) 35,318,657

There were approximately 51,190 shareholders lastSeptember, and the number has expanded since thepar value of shares was changed last year from$100 to 510.

Before discussing the practical work of banks inhandling their customers’ business, itWar Service might be well to recapitulate briefly

the changes wrought by war.

One of the chief wartime problems of the Canadianbanks has been that of staff. This bank had, at themaximum, 2,170 of its Canadian staff in the armedforces. This represents 74 per cent of its pre-war malestaff under forty-five, and the record of the other

Canadian banks is similar. These men were replacedtemporarily by young women. Concurrently with thedecrease in experienced staff came a marked increasein the demand for banking services. This came fromtwo sources: from the public because of ever-expandingwar activities, and from the Government because ofthe various controls, war production, requirements ofthe armed forces, rationing and other activities.

In common with business and with people generally,the banks have endeavoured to pull their weight inmany kinds of wartime service. Every branch ofevery chartered bank in Canada has been, during thewar years, an authorized dealer for the Foreign Ex-change Control Board. Almost every transactioninvolving travel outside Canada, import or export ofgoods, receipt or payment of foreign exchangenecessitated the issuing of a permit, and except whereit was beyond their authority, the banks dischargedthe responsibility of approving such applications forpermits and ensuring the proper completion and dis-posal of the forms.

The intricate machinery necessary to float thevarious war loans was put into motion with the helpof the banks, whose many branches afford nation-wideoutlets for distribution of these securities among morethan three million small holders. In addition they sellwar savings stamps and war savings certificates overthe counter, without remuneration, and provide safe-keeping facilities for bonds and certificates at avery low cost to the holder. They also perform manyother services for the Government. To all these extraduties has now been added the cashing of around 1I/4million Family Allowance cheques issued monthly bythe Government. Their handling imposes a greatadditional load upon already hard-working staffs.

Credit

Apart from providing a safe repository for savingsand surplus funds the principal business ot abank is to furnish Credit for carrying on the

business of the country. This is done in a variety ofways. Letters of Credit are issued to finance the im-portation of goods. In this way the bank exchanges itswell-known and acceptable credit for the less-knowncredit of its customers. Direct loans are made, theproceeds of which customers use for purchasing rawmaterials, paying wages.and other operating expensesor for the purchase of goods for resale.

In whatever form credit is extended there must, ofcourse, be reasonable certainty that advances will berepaid. In the case of commercial loans, for example,it is usual to require that they should be based onsaleable merchandise or collectable debts.

There is no point upon which it has become morefashionable to criticize the banks than upon theiralleged unwillingness to make loans. While it is inevit-able that bankers, being mere mortals, are subject toerror the same as all other humans, it is seldom indeed

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that a worthy and deserving applicant for a loan failsto obtain consideration. Unfortunately, sometimesthere is one whose ideas as to his merits for a loan differfrom the ideas of his banker, but this is not nearly sooften as some are led to think.

As has been mentioned, there are certain limitationson the loans banks may make: for instance, theycannot advance money on the security of real estatenor on the security of goods and merchandise except asprovided in a special section of the Bank Act. Thissectxon (88) was originally enacted during the days provincial banking, when Canadian resources wereundeveloped, and was designed to provide the bankswith security to enable them to extend credit throughall stages of marketing and processing of certain pro-ducts--from standing timber to finished lumber, fromthreshed wheat to flour, from iron ore to steel, and soforth. This is one of the distinctive features of Canad-ian banking from the credit standpoint.

BranchBanking

Another feature of Canadian banking is the branchsystem. A chartered bank has been de-scribed as "a bank of branches, not a bankwith branches." The head office neither

takes nor lends money. All the banking business isdone by the branches, each branch enjoying a con-siderable independence. But the fact that thesebranches are linked has a very important bearing onthe country-wide economic situation, because throughthe branch system money is always seeking to find itsown level. It means that stringency of cash at onepoint may be met from another and that deposits atone place not needed for local loans may be madeavailable elsewhere. It means that all branch managersas well as head office officials, have access to country-wide information on which to base their advice tocustomers. The branch system, in which every branchmanager endeavours to run his branch as successfullyand as profitably as possible, has proven admirablyadapted to the needs of the country, split as it is intoseveral distinct economic areas. In the branchsystem, variety of risks is assured, and banks are nottied to the economic fortunes of any one section of thecountry,

The ten commercial banks have 3,078 offices spreadout over the Dominion from the Atlantic to the Pacific,many located in small villages which would be quiteunable to support an independent bank.

The number of branches per bank operated inCanada varies from 581, which is the largest number(The Royal Bank of Canada) down to 2 (Barclay’sBank, a subsidiary of the large British bank of thesame name). These offices are all managed by experi-enced officers who have received their banking train-ing in branches located in various sections of thecountry. Almost without exception the executives andofficers of Canadian banks have worked up throughthe ranks. As a matter of fact, the General Managers

of nearly all the Canadian banks, and most of thePresidents, started their careers as junior’,clerks.Branches are under control of their head offices, butthe larger banks have supervisor’s departments inmost of the provinces, which have jurisdiction over allbranches in their districts. These departments arevirtually local head offices, and have power to approveloans up to substantial amounts.

All loans are made at the branches. Branch man-agers have authority to make loans up to certainlimits, without the need of reference to higher author-ity. The maximum up to which a manager may makeloans depends upon his experience and judgment, andupon the nature of the security offered. If a would-beborrower seeks an amount outside the manager’sjurisdiction, the application is referred by the branchto the district supervisor, or to head office. Beforebeing appointed to the post he holds, the branchmanager has acquired a varied banking experience inother parts of Canada or abroad, so that he and thecommunity are protected against the risk of his takinga purely local view of local problems. This is one of thefeatures of bank training which makes branch mana-gers so valuable as members of community boards andparticipants in community activities.

Each manager for whom an employee works reportsregularly on his qualifications, as does also the inspec-tor in the course of his annual visits. All reports arecarefully kept and reviewed periodically by personneland executive officers at supervisor’s departmentsand head office, who endeavour to see that eachemployee receives opportunities and rewards in keep-ing with his ability.

In addition to branches in Canada, many Canadianbanks are also represented in the international field.Fifty years ago they established branches in New-foundland, and. shortly afterward in Cuba, in all theprincipal British West Indian Islands, Puerto Rico,and other points in the Caribbean area. The RoyalBank of Canada, in addition to being located at thesepoints, has been doing business in the DominicanRepublic and Haiti since 1912. In 1914 it opened itsfirst branch in South America, and today it is estab-lished in Colombia, Venezuela, British Guiana, Brazil,Argentina, Uruguay and Peru, with a total of 69branches outside Canada. The majority of theCanadian banks operate agencies in London and NewYork, and at least one Canadian bank is to be foundin Paris, San Francisco, Seattle, Chicago, Los Angelesand Portland, Oregon. The Canadian banks have cor-respondelat banks in all countries, through which anykind and volfime of international business may benegotiated. The complete understanding and accordwhich exist between Canadian and foreign banks willhave no little part to play in the restoration of peace.

Accounts

Deposits in Canadian banks are broadly dividedinto two classes, current and savings.These accounts, as is the case with any

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phase of human activity, have taken on other names:the current account may be known as a demanddeposit account, because sums at its credit are with-drawable on demand; the savings accounts are alsocalled notice or time deposit accounts, because thesums at credit in these accounts are legally with-drawable only after a certain period. In practice, how-ever, no bank insists upon this legal right of notice.Letus see, now, how these two accounts work out inpractice.

Savings accounts represent the accumulations ofsmall savers who do not enter the investment marketand they are used by those who are accumulatingfunds to invest. Canadian banks have consistentlyencouraged savings, and it was not until 1933, after30 years during which they paid 3 per cent, thatthey were compelled to reduce the rate of interest,which is now 1~/4 per cent. The total of savingsdeposits substantially exceeds that of deposits payableon demand,latest figures showing more than $2 ~ billionin savings, and $13~4" billion in current accounts. Cana-dian bankers watched with interest the insurance ofsmall deposits introduced in the 1935 revision ofUnited States banking legislation, but it is significantthat branch banking and government regulation inCanada have, along with adherence to orthodoxbanking practice, carried Canadian depositors throughthe depression and war without loss. So long as thisexcellent record is maintained, there is not likely tobe any demand for deposit insurance, the systemitself being secure. That the people of Canada believein their banks is evidenced by the fact that more thanfive million of them have savings deposit accounts,averaging $494 each.

How does one go about opening an account ? It issimplicity itself. No one need hesitate to enter thebank because his resources are small or because hedoes not know tile procedure. A savings account maybe opened with $1, and any member of the staff willhelp to fill out the simple necessary form. The tellerwill accept the deposit, the ledgerkeeper will ask thenew customer to fill in a signature card and supply apass book showing the amount of the deposit. Everyaccount is given a number, which should be writtenon all cheques, deposit slips and withdrawal slips. Thepass book and cheque book are provided free by thebank. Interest is added to all balances twice a year.The advantages of a savings account are many:savings increase, so as to provide for the future; thepossession of a savings account, and the reputationof being a savings-minded person, help in establishingcredit should it become necessary to solicit a loan.

A current account is more of a business account. Itdoes away with the need to carry large sums of cash,and its use is a security against loss through careless-ness or theft. The depositor places all money receivedin the bank, and pays bills by cheque, so that hisaccount is also a book-keeping record. Because most

current accounts are active and subject to widefluctuations, and a great deal of work is entailed inkeeping them up to date, it is not usual to allowinterest on balances. Some accounts, where the balanceis not sufficient to offset the cost, are subject to asuitable charge. The service charge, as it is commonlycalled, is calculated to recompense, the bank for theout-of-pocket expense involved m operating theaccount.

The Canadian banks enjoy to a remarkable degreethe confidence of the public, due in no small measureto their splendid reputation for a high order of manage-ment. Apart from the requirements which must beobserved before a charter is obtained, there are manyother safeguards. The Minister of Finance is thetechnical head of the government regulatory system,although the immediate supervision of the bankingdepartment falls upon an official known as theInspector General of Banks. This official receivesstatements of conditions once a month, and is em-powered to conduct an examination of the assets ofany bank at any time he sees fit. He examines everybank once a year. In addition, every bank head officemaintains its own inspection department and a numer-ous staff of examiners. All branches are visited bythese men at least once a year, and a thorough exam-ination is made. Then there is a third examination, oraudit, instituted by the shareholders, the report ofwhich is made to the shareholders at the annualmeeting. This audit is conducted by two seniorchartered accountants, not members of the same firm,who are appointed annually by the shareholders froma list selected by the Government.

Only a small part has been told of the services banksrender the communities in which they serve. Theyaccept payment of bills for telephone service, elec-tricity and gas; they issue money orders, drafts,travellers’ cheques, letters of credit and other similarinstruments; they provide safekeeping for bonds,stocks and other valuable papers; they have safedeposit boxes in which valuables can be stored private-ly by customers; they provide letters of identificationfor clients travelling outside the country, and lettersof introduction to branches in the country beingvisited. Scores of thousands of people have found itworth while, before undertaking any change in theirlives, to consult their bank manager, who is alwaysready to serve them.

There might be a special postscript addressed toservice men who are leaving the forces: you will findthe bank manager eager to advise you about invest-ment or disposition of your funds, quite regardless ofwhether you are a customer of his bank or not. TheCanadian banking system is businesslike in its effi-ciency, but it is human. Its executive and officers wishto see all Canada’s service men re-established in thebest way possible. "Consult your banker" would be agood slogan for businessmen, private individuals, andservice men.

PRINTED IN CANADAby The Royal Bank of Canada