That there is never enough money to go around is far more than an axiom. It is a fact.
As a young man I worked as a concrete labourer for nearly the full year of 1979. The hours were long and the effort back-breaking. I didn't have a car, and sometimes had to hitch-hike home from work, especially on pay days when my ride went to the pub to celebrate the end of a long week. By the time I reached home, the bank was closed, meaning I had to carry around my cheque until I could find a moment during the work week to deposit it. (Yes, I'm that old. This was before bank machines were even invented.)
On the bright side, I worked such long hours that there was rarely time to spend my money. After nearly a year I had about $5,000 saved up, and I decided it was time to pull my funds out of the bank and move them to an institution with more convenient operating hours.
On a rare day off I proudly marched in to the bank to clear out my account. Being young, and confused about how banking worked I demanded my money in cash. The teller tried several times to convince me that I would be better off with a bank draft or certified cheque in my hands, rather than a wad of bills, but I was just the right combination of uninformed and obnoxious. After no small fuss, they brought out a puffy-haired manager who approved the unusual transaction and instructed his staff to gather up what was a substantial sum for the tiny rural branch in Aldergrove.
Between me and the other bank stood the local hangout, the Aldergrove pool hall. With no small trepidation, I marched by the hall with my right pocket literally stuffed with cash. Hoping to go unnoticed, I avoided eye contact and put on my best poker face, as I slid to the safer side of the road. A few of my old pals taunted me with a challenge for a game of pool, and I considered for a moment how impressed they might have been with my wadded up savings.
I looked over and said hello, paused, then picked up my pace a little, preparing to sprint if need be. They taunted me, and I glanced over at them again, trying not to break my stride, feeling foolish for insisting on cash just moments before. To let fear show, or worse, to run would have been both a tactical and a social error. Look ahead. Don't stop. Just walk on.
With a satisfied sigh, I made my way in to the other bank, noting the size and sturdiness of their vault, and feeling grateful to be done with all that cash.
Of course, if everyone tried that stunt, the system would quickly collapse. Not only do the bills not physically exist, but even the electronic dollars are intricately tied to other commitments and simply can't be unwound instantly. In fact, losing confidence in the reliability bank deposits is what bank failures are made of.
Thanks to a consistently conservative mentality among Canadian bank regulators, we have gone many years without such a failure in Canada. Our neighbours to the south have not been as fortunate, seeing literally hundreds of them tank in recent years. New, tighter regulations applicable internationally, are meant to strengthen the banking sector which is so important to the smooth flow of capital in our economies. One such regulation is called the Basel III Accord.
Impact on retail, commercial and institutional investors one implication of Basel III was a careful study of stickiness of different sort of depositors during a crisis. For example, when financial markets get nervous, short term deposits from corporate and institutional investors quickly move in to safe instruments like U.S. T-bills, while retail deposits, tend to stick around more reliably. Thus, more than ever, today's banks are provided with regulatory incentives to hold greater amounts of retail deposits, referred to as high quality liquid assets.
To retail investors, the result has been a marked increase in the attractiveness of deposit type instruments; specifically investment savings accounts, cashable and term GIC's. In many cases, individuals can achieve returns on these instruments superior to what is available in the institutional market place. A sort of reverse economy of scale has rewarded the little guy with slightly more attractive rates than large institutional depositors can often achieve in the short term investment market.
Naturally, these higher-yielding instruments have attracted interest from corporate and institutional investors, putting most issuers in the position of having to identify and differentiate rates by investor. If a bank cannot identity and segregate deposits based on their regulatory liquidity treatment, it is at risk of getting a lower regulatory liquidity benefit on the whole pool.
As a result, investment savings accounts and GIC distribution policies are differentiated by client type with slightly better offerings for retail individual investors under a certain size threshold. So far we have been able to work around this threshold by splitting very large investments among several issuers.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
