Every 3 months we get to hear again about how Canada’s banks made billions of dollars in profits for the quarter. Most Canadians are disgusted by it all. But there are a few simple things we need to know to understand why banks behave as they do.
Suppose a normal person, call her Jen, comes into a large inheritance, say $500,000. Jen would likely use the money in some way to try to improve her life. If she’s near retirement, she might retire a little earlier. She might change to a more fulfilling job that pays less. Whatever she does, it will likely consume the money over time.
Few people like Jen would react by trying to find a way to get even more money the next year. We tend to carry this thinking over to banks. If banks made so much money this year, why don’t they give us a break on interest and fees? Why do they need even more money?
The answer is that almost all of those bank profits get paid out to the bank’s shareholders as dividends. And shareholders want more dividends every 3 months. In fact, they want those dividends to rise over time. Whatever the banks earned this year, their shareholders want more next year.
While a big windfall for Jen reduces some of the pressure in her life, big profits for banks just create pressure to earn even more next year. You’d think bankers would be doing high fives and taking a break after earning $10 billion in a year, but this just makes them desperate to find ways to earn $11 billion next year. And if they don’t, they’ll be seen as failures.
Does this mean we should feel sorry for the banks? Absolutely not. The most important takeaway is that it’s a waste of time to wait for banks to grow a heart. The never ending new fees, fee increases, and debt promotion isn’t meanness; it’s desperation.
The cost of delivering banking services just keeps dropping as technology keeps improving. This should translate into cheaper banking and much lower bank profits. So far, it hasn’t worked out this way for the average Canadian, but the pressure remains on the banks to keep profits rising.
My response to all this is to expect banks to try just about anything to extract more fees and interest from me and my family. But I plan to pay as little as possible.