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RBC’s Nixon cites lack of loan demand for economic malaise

From Thursday's Globe and Mail

Gordon Nixon, the head of Canada’s biggest bank, says he’s desperate to lend and do his part to kick-start the economy. There’s only one problem: wary businesses and indebted consumers don’t want his money.

“Our biggest challenge right now is to put credit out,” the Royal Bank of Canada chief executive officer said Wednesday at a conference in Washington. “Loan demand is very low.”

Mr. Nixon’s remarks come amid a contentious debate over the role of banks in the economic recovery – or lack thereof.

In some quarters, there is a feeling that financial institutions are restraining economic growth by applying unnecessarily strict lending standards after getting burned by the financial crisis. The RBC chief insists that is not the case with him, nor is it the case with his rivals, with whom he is engaged in “fierce” competition.

“We have never been more aggressive,” Mr. Nixon said during a panel discussion on the financial crisis hosted by Thomson Reuters, the University of Toronto’s Rotman School of Management, the Atlantic Council and the Government of Canada. “We have balance sheet to go at all levels,” Mr. Nixon added, using bankers’ jargon to say that he’s sitting on plenty of cash that he would like to lend to households, businesses and investors.

Business loans to Canadian residents by chartered banks was little changed between June and September, oscillating between a monthly average of roughly $177-billion and $178-billion, according to the Bank of Canada’s most recent data.

Companies are uninterested in taking on debt because the global economic outlook is uncertain, clouded by the likelihood that the European economy will tip into recession. Businesses also are sitting on record profits built up during the initial burst of growth that followed the 2008-2009 recession, allowing executives to finance operations with cash on hand.

Households in Canada appear to be thinking twice about record debt levels. For example, the monthly average of personal loans by chartered banks surged to $68-billion in August from $56-billion in January, 2010, a 21-per-cent increase. But the growth of personal loans suddenly stalled in September, according to the Bank of Canada data. The monthly average of outstanding credit-card loans was $63-billion in September compared with $64-billion in April.

Mr. Nixon was participating in a day-long event hosted by the Canadian embassy meant to highlight Canada’s relative economic success during the financial crisis. Financial regulation figured prominently in the discussion, and Mr. Nixon’s remark about the weakness of demand for loans had the effect of undermining the international bank lobby’s case against tighter scrutiny.

The Institute of International Finance, the Washington-based lobby for more than 450 financial institutions, has sought to push back against the Group of 20’s move for tougher banking rules by arguing the effort is hindering the banking industry’s ability to lend.

Bank of Canada Governor Mark Carney, who was appointed to lead the Financial Stability Board of international regulators this month, has countered that argument by saying the reason banks aren’t lending is because demand is weak – precisely Mr. Nixon’s observation on Wednesday.

It was unclear whether Mr. Nixon realized he was stomping on one of the key messages of the bank lobby. Regardless, the RBC chief was on message for most of the rest of his presentation, saying the G20’s regulatory push addresses “some of the wrong problems” and that rules have become needlessly complex.

Mr. Nixon contends the financial crisis was primarily caused by poor U.S. housing policy that encouraged households to take on too much debt and banks that were allowed to let their lending grow out of proportion to the amount of assets they had in reserve. But authorities, he said, have created rules that go well beyond these core issues.

“It’s very important that we have regulation that isn’t overly complex,” Mr. Nixon said. “Unfortunately, that’s not the way the regulatory environment has evolved.”