Big Canadian banks are currently abusing their powers, says HEC Montreal finance department associate professor Amir Barnea.
« I understand that the taux offert était faible lorsque les taux d’intérêt étaient au plancher, mais maintainant qu’ils ont monté, il n’est pas clair pourquoi elles n’offrent pas advantage dans les comptes d’épargne », dit- He.
Seven consecutive rate hikes in 2022 by the Bank of Canada have brought the benchmark rate to 4.25%. The major Canadian banks have followed suit and their prime rate now stands at 6.45%. It was at 2.45% at the beginning of last year.
If you have a mortgage line account with a major bank, the rate applied will most likely be close to the 7% mark after tracking rate increases for a year.
“Now that the rates have gone up a lot, it’s really cheap from banks to pay only 1.4% to 1.8% in savings accounts”, says Amir Barnea. “In some other types of accounts (RRSP, TFSA, etc.), it can be even zero,” he adds.
In investment accounts, chief investment officer and portfolio manager Alain Chung of Montreal firm Claret says that, in practice, zero is offered.
The preferential rate is 6.45% and they pay 0%. It’s abnormal. It’s a robbery.
Alain Chung, Director of Investments and Portfolio Manager at Claret
“I think it is to force us to carry out transactions and generate commissions or management fees,” believes this investment professional.
In the context in which the inflation rate is still at 6%, this situation is not acceptable, says Professor Barnea.
He believes that a reasonable and acceptable rate on savings accounts would be 3-4%.
At the Royal Bank, the country’s largest banking institution, the high-interest savings account offers a rate of 1.4%.
By way of comparison, at Desjardins, which is not a bank but is a large financial institution in Quebec, the rates offered on savings accounts range from 0.05% to 1.60%, depending on the product being purchased. have.
They are fairly fixed over time, but promotions are occasionally offered on new deposits. Currently, TFSA or RRSP savings account holders can benefit from a promotional rate of 4.25% for a limited period.
The Royal is also currently offering a 4.5% rate, but only for a period of three months when opening new accounts.
Amir Barnea admits that there are promotions, but they are always short-term. “For two months or three months, you can receive 4%. But after a few months, it was over. There are always offers on bank websites. Guaranteed investment certificates, of course, offer a higher rate, but the rate should still be higher for money in savings accounts,” he said.
The problem is that “there is no competition,” Barnea insists. The rates offered by major banks always move together. It is clear that there is something bizarre in this market. We have to investigate this. It’s really a weak market. »
Valérie Lamarre, a spokeswoman for Desjardins, says that savings accounts are primarily intended to set aside money for a short-term project or to accumulate and then put an amount into an RRSP, for example.
Therefore, we choose a savings account for its liquidity rather than its yield. If the goal is long-term savings and taking advantage of higher potential returns, other products may be considered as needed.
Valérie Lamarre, spokesperson for Desjardins
“So if you want to compare products with the same term, the difference between the rates is less important,” he says. For example, for a term savings and a fixed-rate mortgage for the same term, on January 16, the rate is 4% for a 5-year savings, while the rate is 5.69% for a 5-year mortgage. 5-year fixed rate. »
At Banco Nacional, a spokesperson points out that the interest rate structure of savings accounts is influenced by a set of criteria that include the costs associated with the management of infrastructure and products or the recurrence of funds, that is, the movement (inputs and outputs) expected from the sums deposited.
In BMO it is pointed out that when determining the price of savings products “many factors” are taken into account such as interest rates for different time horizons, different types of risk, growth aspirations, differentiation products, etc.
Management adds that savings accounts and home equity margin accounts, for example, are “completely different” products. “One is primarily for savings, while the other is a loan product. In this context, these two products are subject to very different considerations when setting prices. »
Royal Bank indicates that when considering changes to its prime rate and interest rates on deposits and home equity loans, it considers several factors, including the competitive environment, risk exposure, its responsibility to customers and shareholders, as well as the cost of funds and regulation. compliance costs.
The banks claim that their rates are competitive… But the problem is that there is no competition in this sector. They all work together. The Canadian Competition Bureau is very, very weak.
Amir Barnea, Associate Professor in the Finance Department at HEC Montréal
“A strong Competition Office is needed,” he continues. There is no real will to try to change the situation. Same with politicians. »
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The professor points out that the major Canadian banks with a presence in the United States offer rates for equivalent accounts that are sometimes three or four times higher than in Canada. “It’s just because of the competition. This is proof of the lack of competition in the Canadian market. There is more competition in the United States. Canadian banks are trying to attract customers to the US market and one way to do that is by offering higher interest rates,” he says.
Amir Barnea notes in passing that Royal Bank’s proposed acquisition of HSBC Canada should be carefully scrutinized by the Canadian Competition Office. “Is it reasonable for a big Canadian bank to buy another bank in the country? I don’t find it reasonable,” he said.
The professor also says that he sees a similar situation for credit card rates in the United States and Canada. “There is a big gap. Canadian banks present in the US market offer a lower interest rate in the US than in Canada. Why ? Because of the competition,” he says.
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