Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 37 - Evidence - Afternoon Sitting
TORONTO, Tuesday, November 3, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 1:00 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, welcome to our afternoon session. Our first witnesses this afternoon are Mr. John Palmer, who is the Superintendent of the Office of the Superintendent of Financial Institutions, and Mr. Nick Le Pan, who is the Deputy Superintendent of Operations for OSFI.
Following OSFI's presentation, the Chairman and Chief Executive Officer of the Canadian Imperial Bank of Commerce will make a presentation to the committee.
Thank you very much, gentlemen, for your attendance before this committee. Mr. Palmer, I would ask you to present your opening statement, following which we will turn to senators for questions.
Mr. John Palmer, Superintendent, Office of the Superintendent of Financial Institutions: Thank you, Mr. Chairman and members of the committee, for inviting us to be here and for giving us an opportunity to express some of our views on the report of the task force.
Before I begin, I should point out, Mr. Chairman, that we have prepared a 20-minute opening statement. However, in the interests of brevity, I would like to leave out some of that.
The Chairman: I was just about to ask you to condense it so we can turn to questions.
Mr. Palmer: I am wondering if we can take the longer statement as read.
The Chairman: Absolutely.
Mr. Palmer: Before getting into substance, I would like to congratulate Mr. MacKay and the members and staff of his committee on the successful completion of a very substantial undertaking. I know the amount of work that went into our presentations to the task force and, thus, can certainly appreciate the work accomplished by the task force in grappling with the multiplicity of very broad and complex issues within a tight time frame.
Also, I would like to compliment this committee on its study of comparative financial regulatory regimes, which study was tabled last month. It forms a useful companion piece to the report of the task force. It will be particularly useful, if and when we get into the implementation of task force recommendations. Many of the findings in this committee's report are welcome. In a personal sense, I am particularly grateful for the reference to the need for OSFI to have adequate resources to discharge its responsibilities.
What I want to focus on today is the importance of balance between policy objectives that are sometimes conflicting. The task force is seeking to achieve some very important policy objectives, including increased competition and enhanced consumer protection. However, recommendations to achieve these objectives could have an adverse effect on the government's ability to achieve other objectives, including depositor and policyholder protection and a high level of public confidence in the financial system.
We recognize that important benefits may result from many of the task force's recommendations, but we also perceive that some of the recommendations may give rise to offsetting costs or risks. In our view, the possible costs and risks of task force recommendations, which should be considered along with the potential benefits, include: increased risk of failure of institutions, and losses to depositors and policyholders as a result of a number of proposed initiatives intended to increase competition and open up the financial sector; conflicts arising from expanding OSFI's statutory mandate with respect to competition and innovation and consumer protection; and thirdly, an apparent conflict between increased transparency in some areas and reduced transparency in others. Let me expand on some of these issues.
Many of the report's recommendations have as their direct goal or indirect consequence the opening up of the Canadian financial sector to more participants. As examples, I refer to the proposals dealing with ownership policy, the possible lowering of initial capital requirements for new participants, and branching by foreign banks.
While the goal of these recommendations is to increase competition and efficiency, resulting in more choice by and lower costs for users of financial services, the consequences of opening up the market to new entrants may be the establishment of institutions that pose increased risk and, ultimately, additional cost to the system. This is not to say that the goal of increasing competition and efficiency is not a legitimate one or that it cannot be accomplished; nor should this goal necessarily be rejected only because it would increase the risk of institutional failure. However, as this risk increases, it is necessary to consider the consequences.
It may be necessary, for example, to ensure that existing public expectations with respect to the degree of protection in the system are lowered. More emphasis may have to be placed on the issue of disclosure. The adequacy of existing regulatory tools may have to be reconsidered, and it may even be necessary to reconsider the role of regulation and supervision in a more fundamental way.
In our view, it is essential that, in the discussion that must accompany the implementation of measures designed to increase competition and efficiency, Canadians be made fully aware of the risks and the price to be paid.
With respect to OSFI's role in the area of competition, regulation and supervision necessarily involve some degree of intrusiveness into the affairs of institutions, which may have direct and indirect costs and, therefore, some impact on competitiveness. As part of its statutory mandate, OSFI is required to fulfill its role with due regard to its effect on competition. This is a passive requirement but, in our view, a useful one because it helps us resist the temptations of excessive regulation.
As we interpret this requirement, OSFI's duty is to interfere as little as possible with competition, but we do not see this giving us the responsibility to actively facilitate competition. Instead, OSFI's overriding objectives, currently, are to safeguard depositors and policyholders from undue loss and to contribute to confidence in the financial system.
Recommendation 112(b) suggests that OSFI's mandate be revised to make it clear that OSFI has the responsibility to balance considerations of competition and innovation with its current statutory obligations with respect to safety and soundness, suggesting perhaps an equal footing. However, the task force also states that it does not believe that OSFI's role should be to actively promote or foster competition. We are not opposed to competition and innovation, both of which are indispensable to the proper functioning of the financial services sector, as well as its vitality and growth, but because they are not matters within OSFI's control, they may sometimes conflict with safety and soundness.
For example, our current mandate emphasizes the importance of early intervention into the affairs of troubled institutions. The need for early intervention was one of the lessons learned from the financial sector problems of the 1980s. It has been considered and promoted by the government, by both the House of Commons Finance Committee and the Senate Banking Committee, and was codified in our 1996 mandate.
The addition of a specific responsibility for competition and innovation might put increased pressure on OSFI to increase regulatory forbearance, to the detriment of early intervention and the early resolution of problems. In addition, combining matters of competition and innovation with OSFI's current mandate could make OSFI less independent and more vulnerable to pressure based on non-regulatory concerns.
In approving new entrants to the financial system, regulators traditionally apply a fit and proper test to the people behind any application. If competition were a more important part of OSFI's mandate, OSFI might be placed under pressure to accept less than desirable owners of financial institutions.
We would ask you to consider whether issues of competition and innovation belong more appropriately to the market and to other government players. Although we have reservations as to whether the encouragement of competition should be within our mandate, we do believe that more can be done to develop an open, regulatory approach that will encourage competition. There were some useful suggestions in this regard in your report, including greater reliance on disclosure and a careful cost-benefit analysis before new regulations are introduced.
In our view, any approach to lighten the regulatory regime should still include the principle of firm, early intervention but could involve fewer regulatory and supervisory procedures, particularly for institutions in sound financial condition.
Recommendation 112 proposes that OSFI's mandate also be broadened to include more responsibility for consumer protection issues. OSFI understands the need for additional consumer protection and fully supports these initiatives. We are inclined to add that our safety and soundness focus may be one of the most important aspects of consumer protection within the financial services industry. We like to think that we protect consumers now by helping to preserve and enhance the ability of institutions to meet their financial obligations to those consumers.
However, the reservations that I have expressed with respect to increased responsibility for matters of competition apply equally to the proposals for increased responsibility in the area of consumer protection. First, an expanded consumer protection role may conflict with OSFI's responsibility to promote safety and soundness. For instance, the recent vanishing premium issue pitted policyholders against insurance companies over the issue of duration of premium payment based on estimated rates of inflation and investment return.
Certainly, OSFI has a responsibility to protect policyholders' interests, but how should OSFI best do so? By maintaining an adequate level of safety and soundness in the institutions, or by advancing particular consumer interests? It is unclear which role would take precedence in the event of such a conflict if consumer protection ranked equally with depositor, policyholder protection in a new mandate given to OSFI.
Further, OSFI does not have the resources, skills or even the management mindset now that would be required to fulfill an expanded consumer protection function. We would have to hire new people with relevant experience. In short, although we support consumer protection initiatives, we would ask you to consider whether OSFI is the right body, the body best suited, to take on a consumer protection mandate.
Let me now turn from these general issues to a brief discussion of some of the specific areas of the report relevant to OSFI's current responsibilities.
Recommendations 29 to 41 propose a number of changes to the rules concerning ownership of financial institutions. If these recommendations were accepted, they would alter the current rules in important ways. Schedule I banks and mutual insurance companies that chose to demutualize would no longer be required to be widely held. Ownership requirements would be based on the size of the institution. When combined with recommendations 4(a), 4(c) and 9, which would permit respectively the incorporation of institutions with less capital, differing degrees of regulation based on size, and the facilitation of activities by foreign institutions, the potential exists for more closely held, commercially linked institutions.
It is our view that closely held ownership of financial institutions provides greater scope for risk than widely held ownership and that commercial links further exacerbate the risk. The history of financial institution failures in Canada tends to support this view.
Recommendations 25 to 28 propose that institutions be permitted corporate structures best suited to their operations. They also set out principles for the regulation of holding companies and recommend that the current restriction on downstream investments be reviewed. Recommendation 26 also recommends the development of a new financial holding companies legislation.
It has always been and continues to be our view that financial holding companies raise a number of issues and present a number of risks that do not arise under a widely held ownership applicable directly to the regulated financial institution. They would also significantly add to and complicate OSFI's regulatory and supervisory challenges. While the principles enunciated by the task force in connection with the regulation of holding companies would lessen some of these risks, the risks and complications cannot be eliminated altogether.
As noted by the task force, its recommendations with respect to holding companies are based on suggestions received from OSFI. These suggestions were made with the reservations that I have just expressed. They represent what we saw as minimum standards for providing a reasonable degree of protection to depositors and policyholders of regulated financial institutions within a holding company regime.
Further, our development of these principles was based on the assumption that holding company structures would be available only to widely held institutions. As the task force has recommended that the regulated holding company regime be extended to closely held institutions, these principles might have to be reviewed.
We support the proposal to review the current restrictions on downstream investments in conjunction with the holding company regime. In fact, we believe this review should occur irrespective of whether the government proceeds to implement a holding company regime.
Recommendation 113 proposes that OSFI should have a board of directors with specific responsibilities. Your committee made a similar suggestion in recommendations 7 to 11 of your recent report. In principle, we support these recommendations. While a number of technical details would have to be addressed, we are of the view that the creation of a board of directors would provide oversight of important administrative and management matters, thereby increasing accountability and ensuring effective use of financial and other resources, and would contribute expertise and experience to OSFI's processes.
However, in defining the board's responsibilities, care would have to be taken to ensure that the powers of the superintendent and the minister were not undermined and that the existing accountabilities in the system, from the superintendent to the minister and from the minister to Parliament, were not altered.
Recommendation 42 proposes that OSFI work with the Canadian Institute of Chartered Accountants to eliminate competitive disadvantages caused by inconsistent treatment of goodwill in business combinations. We support this recommendation, and are pleased to advise that action has already been taken along the lines recommended. During the question period following this presentation, we would be pleased to provide further details.
I would like to close with one more general observation. The result of many of the recommendations would be to create new or differently structured types of financial institutions, but the report contains little guidance with respect to new regulatory powers that might be required to deal with them. Such powers could well be needed, particularly if OSFI is to be expected to continue its policy of early intervention. Some of the newly created institutions may experience difficulties, or indeed may fail, and rules governing their exit from the system could be as important as the rules encouraging their entry.
In summary, we support the objectives of the task force to encourage greater competition and innovation within the Canadian financial system and to enhance the protection available to consumers. In doing so, we think it important to understand the implications of any changes made to achieve these objectives with respect to the safety of the system and the ability to protect the savings of depositors and policyholders, and to carefully weigh the benefits and costs of any change.
At the end of this process, we think the challenge presented to you and to the government is to achieve the optimum balance between these benefits and costs. It will not be easy to find the right balance, but it is essential for Canadians that you do so. Good luck in your important work, and we await your questions.
The Chairman: Thank you, Mr. Palmer.
In your opening statement, you stress the importance and value of transparency and thereby essentially market or consumer information. As you know, in a report done by our committee at the beginning of October, we, in fact, suggested the desirability of beginning to move the Canadian system toward the New Zealand system, which is a system based on substantially more openness and transparency than is the situation in Canada at the present moment. Am I correct in hopefully inferring from your stress on transparency that you are in accord with our position on moving in the direction of New Zealand? How is that for a wonderful leap?
Mr. Palmer: That is an interesting opener, Mr. Chairman. We think the New Zealand experiment is interesting, fascinating and deserving of careful study. We think that, as it evolves, it should be possible to borrow lessons from their experience. However, we would suggest a cautious approach to the New Zealand experiment while this process of study is continuing, for several reasons.
First, it is new. The New Zealand model has not been tested against the backdrop of a serious recession. Second, the New Zealand financial system is unique because most banks are foreign owned. New Zealand really does have a belt-and-suspender system. The belt is its new system of disclosure and very, very onerous director accountability; at the same time, it has the suspenders of consolidated regulation by the home supervisors of the institutions who have operations in New Zealand.
I will make a further point, which we may want to come back to. If you step back and look at what is happening in the world, and look at the number of countries in which serious financial problems have occurred, you see that one of the common denominators is very weak banking and financial institution regulation. Thus, there are many countries in the world that have to move toward a traditional, high-quality solvency regulation model before we think about allowing solvency regulation to wither away, as the New Zealanders are, in effect, proposing.
Our focus has to be on reinforcing, in developing countries, the sort of solvency, supervisory and regulatory models that you see in the major industrial countries, getting those well-established, before we collectively take the next leap forward. This cannot be done in a piecemeal way. There has got to be greater consistency around the world as to how financial institution regulation and supervision is done.
The Chairman: Nevertheless, would you agree that it is worth keeping a watching eye on what is happening in New Zealand.
Mr. Palmer: No question.
The Chairman: Just a question of clarification. At the top of page 13 of your brief, you say that regulated financial holding companies create supervisory problems for you, problems that you do not get if you do not have a holding company, if you are dealing only with the basic institution. I find that very difficult to understand. If the holding company is regulated, or if the financial institution is regulated, I do not understand why the internal corporate structure creates a regulatory problem. I understand how it would be a huge problem if the holding company were unregulated, but that is not what MacKay proposes, and so I do not understand why reorganizing the pieces but continuing to regulate the whole creates a problem for you.
Mr. Palmer: As we have indicated, Mr. Chairman, we do not think it is necessarily an insolvable problem.
The Chairman: I do not even understand why it is a problem at all -- beyond the regulation of what is there now.
Mr. Palmer: Sure. Part of the answer depends on what you put up in the holding company. If it is a true bare-bones holding company with no operations of its own, if it is simply there to own a bank, to own an insurance company, to own a mutual fund company, then we are probably not talking about something that is too complex. However, if you have additional operations up in the holding company, if you expand the --
Senator Angus: For example?
Mr. Palmer: You may have --
Senator Oliver: A grocery chain?
The Chairman: No. Just so that we are clear, the MacKay references had absolutely no commercial link, so the grocery chain model is not on under MacKay.
Mr. Palmer: If you stick closely to the MacKay model and have no commercial links, no activities within the holding company group, which you would not find now within a Canadian banking group, then the additional complexity is not all that great with respect to the activities of the holding company. You have simply got one more body and you are trying to track which activities are where.
The one area where you do have a challenge, though, is in developing capital requirements for the holding company. If you have a holding company that owns a bank and a life insurance company, and a P and C company, and let us say a mutual fund company --
Senator Angus: And car leasing.
Mr. Palmer: What are the capital rules going to be? Like most regulators, we operate on the precept that if there are to be holding companies they should be a source of financial strength to the individual entities, not a source of weakness. There has to be capital in the holding company which mirrors the capital requirements of the regulated financial institutions, in our view. However, developing those capital rules for a consolidated entity of the kind that I described will be a very complex challenge, not impossible, but something that will require some work and will be more complex to administer.
Senator Austin: I want to turn your attention to a part of the written presentation that you did not actually read into the record, and that is on page 10, the reference to ministerial and other discretion. You say that this discretion would reduce supervisory and regulatory transparency and that such increased discretion may be warranted and, in some cases, absolutely necessary to address an evolving financial sector. You go on to say that the two approaches may be seen as inconsistent.
I seem to have misplaced a one-page criticism of the MacKay report -- perhaps one of my colleagues has it. It dealt with ministerial discretion. The essence of that criticism was that if the recommendations of the MacKay report in the area of ministerial discretion were to be implemented completely that discretion would impinge on your objective decision-making, not just in terms of safety and soundness, but in terms of transparency in policy.
I wonder if you could just define for us further your view of the MacKay report's recommendations as they affect ministerial discretion.
Mr. Palmer: I would not suggest to you that we have an overall view on whether the task force struck the right balance here. We simply wanted to signal it as an issue. As evidenced by your report, it is an issue about which you are conscious. You had a discussion of rules-based versus discretionary regulation.
Rules-based regulation is often more closely linked to a transparent regime, in which the rules are clear and all of the players, both the users of financial services and those who would offer financial services, know what those rules are. In a discretionary regime, in essence, you have got a small group of people who may make decisions on the basis of some objective and some subjective criteria, and including criteria which may not be known to all of the players. There are pros and cons of each, as you point out in your report.
One of the most discretionary regimes seems to be that of the U.K., a regime that is also well-regarded by financial institutions for its flexibility and lack of rules. Hence, discretion is not necessarily a bad thing. We simply wanted to signal to you and to other people who will be working with and making important recommendations about the report that there is an issue here and a question of balance.
Senator Austin: Do I understand you to be saying that in terms of broadly based public policy there is a case to be made for ministerial discretion, particularly as recommended in MacKay 4(a) and 33, and, if I could interpolate, that the changing global and continental financial environment is such that no rules can anticipate every emerging situation and that therefore the ministerial discretion is something that Canadians should have in reserve? Is that a synopsis of opinion, or am I taking it one step too far?
Mr. Palmer: I think you are perhaps going one step too far. We believe that there is a case for discretion. We would oppose regime that was completely rules-based, particularly if those rules were all based on financial benchmarks. In many ways, the MacKay task force adds to the existing level of ministerial discretion, and I think Canadians would have to be satisfied that that does strike the right balance. We are not saying that it does not strike the right balance. We agree with you that there has to be some discretion in the system.
Senator Austin: Let me turn to an item that was not raised in your presentation, and that is the issue of regulatory overlap. We had CDIC officials here discussing, amongst other issues, recommendation 114, which states, in effect, that OSFI should have the sole responsibility for promoting standards of sound business and financial practices and that the present overlapping statutory mandate of CDIC on these subjects should be repealed.
If I can summarize the CDIC presentation correctly, it was that the status quo was the best of all worlds; that the status quo was based on experience and a clear understanding on both sides of who did what.
Could you comment on that particular recommendation, please.
Mr. Palmer: Senator, we do not have strong feelings on this. If you were designing the system from scratch, we would certainly favour the placement of the standard-setting responsibility with OSFI. We think that that is where it belongs. Not everyone shares this view.
We now have a system of standards in the case of the CDIC member institutions and a system of compliance that goes hand in hand with this, popularly known as SARP. It has gone through its teething pains, it works, and we do not think there is a particular need to change it.
Senator Austin: Thank you. Let me move on to overlap in prudential regulation between federal and provincial governments. We had evidence on this topic this morning. One witness expressed concerned about OSFI not having a direct role in the supervision of that part of bank functions, the investment banking side, feeling that there is an exposure. I would like to have your comment on that.
Also, David Brown of the Ontario Securities Commission yesterday told us that there was an attempt at his level to raise a new dichotomy in responsibility, one being the prudential role for OSFI for all currently provincially regulated financial institutions with the securities commissions in some way taking responsibility for bank supervision, where that supervision related to securities operations. What is your comment with respect to that?
Mr. Palmer: I am going to divide the answer into two parts. I will make some broader comments, and then I will ask Nick Le Pan, who is in charge of supervision for OSFI and who works directly with those banks that have securities operations, to comment on the issues there.
If you were redesigning the financial sector and could control all of the pieces, including the federal and provincial pieces, you would move in the direction of the recommendations of the Australian Wallace commission, which really established two regulatory bodies, a prudential regulatory authority and a regulatory authority responsible for consumer protection, including investor protection along the lines of what securities commissions are responsible for now. That seems to me to be a very sensible model, and if Canada could ever move in that direction, we think that OSFI would be the natural body to evolve into the Canadian equivalent of the Australian prudential regulatory authority.
But can we get there from here? Mr. Brown has some interesting ideas of how the securities administrators might move toward a virtual national securities commission, even if it cannot be achieved on a legal basis. We are very supportive of Mr. Brown's initiative. If it becomes possible for that affiliation of organizations to take greater responsibility for consumer protection functions outside the pure securities area, I think the system would be much better off.
As you will have observed, we have reservations about expanding OSFI's role in the consumer protection area, so this would fit rather nicely with that model.
Let me move now, through Mr. Le Pan, to a more specific comment on the challenges facing us in dealing with the securities subsidiaries of the banks that we regulate, because it is an important issue.
Mr. Nick Le Pan, Deputy Superintendent, Operations Sector, Office of the Superintendent of Financial Institutions: There is no question it is a challenging area, a fast evolving one, and a complicated one.
Your question was premised on the presumption that we have no direct involvement but, realistically, that is not the world as I see it. In the business world, the line of division between a securities dealer and a bank for a particular operation is a pretty blurry one. They often share trading floors and dealers.
Senator Austin: The dealer might conduct the same transaction on behalf of two different entities.
Mr. Le Pan: Exactly. For the banks we have, essentially, supervision responsibility for the whole entity on a consolidated basis. As a practical matter, that means that we are looking at aspects of the consolidated entity that involve the investment dealer, the subsidiary, or the affiliate, and it is why we want oversight responsibilities for holding companies.
I will give you a couple of examples. We set capital rules on a consolidated basis. Quite recently, international bank regulators developed capital formulas for market risk involving the use of fairly sophisticated models for measuring the value at risk. The models used by major banks do not differentiate between the bank part of the operation and the dealer part of the operation.
Our office is required by those international regulatory agreements to validate those models so that they can be used to determine the total capital of the enterprise. We spend a fair amount of time on that. It is a challenge because the level of sophistication required is quite high. We are always playing catch-up. We have done a good job compared to some other players in industrialized countries, and I am quite pleased about that, but I will never claim that this is a "snap." We are still considering the control systems that are being used in the consolidated operation, including the dealer operation.
Recently, announcements were made about personnel moving back and forth. In fact, wealth management at one of our major banks will now be run by somebody who was going to move from a position in the dealer subsidiary to be the vice-chairman at the bank.
Ultimately, with banks, we will do whatever we have to do to deal with safety and soundness issues. We consult, cooperate, and share information with provincial regulatory authorities. We continue to enhance that procedure. This is an evolving area. To suggest that, somehow, we are outside of this and that there is a black hole about which we know nothing, is not an accurate representation of the situation.
Senator Austin: Mr. Le Pan, have you ever experienced any refusal on the part of any provincial securities regulator to give you information you have requested?
Mr. Le Pan: No, cooperation with securities regulators under existing MOUs is good. We start with the institution, that is, the management and board, the control structures, the risk-management structures, and the internal and external audits for the whole of the conglomerate. Oftentimes, the information about the operation of the whole group, including the securities subsidiary, is available from the institution. We have no problems sharing that information, but we do have appropriate confidentiality agreements and so forth.
Senator Austin: If you ask for and receive information on the bank's position on hedge funds, on hedged currencies, on a derivative situation, will you be able, from that, to get a clear picture of that bank's condition?
Mr. Le Pan: I am confident that, when it comes to sharing information with provincial regulatory authorities, we have an adequate system.
As I said earlier, when it comes to considering exposures, our first step is to find out what a regulated institution's consolidated exposures are, off balance sheet and on balance sheet.
Senator Austin: Are you comfortable with the situation?
Mr. Le Pan: We are comfortable with our ability to get the information, yes.
Senator Tkachuk: My questions relate to the issue of competition. You talked about the increased risks associated with branch banking as well as the adequacy of supervision and the cost. Can you be more specific? Is the concern related to the capital requirement? Is it related to branch banking? What, specifically, is the concern, and where are the increased risks?
Mr. Palmer: That is a fundamental question which relates to the thrust of the task force report and our view of it.
The task force recommends that a number of changes be made to increase the number of entrants, the number of players, in the financial system; to reduce capital requirements, and to streamline the processing of applications by OSFI. It also refers to lighter regulation for small institutions.
It also suggested an even more flexible entry regime for foreign banks than was proposed by the government a few months ago.
It further recommended that the system permit closely held banks, banks with commercial links at the smaller end of the size scale.
There is nothing wrong with any of those recommendations but, taken together, they increase the prospect that there will be risky institutions within the system. History shows us that institutions that are closely held -- owned by a single owner or a small group of owners -- tend to be riskier, have a higher failure rate than those that are widely held. Institutions that are associated closely with commercial activities tend to have a higher failure rate. Institutions with relatively low capital levels, we think, have had a higher failure rate simply because they are smaller and cannot diversify their activities.
If we have a number of risky institutions, a number of more failure-prone institutions in the system, then what do we do? One option is to simply do nothing. We can take the position that we have a very safe and sound system now. Indeed, the MacKay report points out that Canada has one of the safest systems, and the implication is that maybe we can afford to give a little in terms of safety and soundness to have the benefits of greater ease of entry and more players. That is a perfectly legitimate position to take as long as Canadians understand that is the position, and more parochially, as long as they understand that OSFI will not be able to prevent some of these new entrants, some of these new players, from failing.
Another response is to go beyond the "do nothing" stance and to take the position that, because we are going to allow more risky institutions into the system, we will add to the powers of the regulator in order to reduce the chances of failure that might otherwise occur. These powers could be in the form of the ability to assess additional capital. There could be a number of steps. It could be even tougher early intervention powers to move these new institutions out of the system when they get into difficulty.
There is a number of possible responses. All we want to point out is that the MacKay task force is shifting the balance slightly between competitiveness and safety and soundness to ensure that Canadians understand the implications of that.
Senator Tkachuk: Is safety and soundness related to size?
Mr. Palmer: That is a good question, and I am reluctant to give you a quick yes or no answer. If you polled OSFI in 1993 -- to pick a year rather arbitrarily -- the response from most of my colleagues would have been an overwhelming "yes." Now, with a greater array of techniques available to institutions, including derivatives, oddly enough, for diversifying their exposures, I do not think there needs to be as much of a correlation between size and risk, or lack of risk, as we might have thought at one time.
Senator Tkachuk: In the course of hearings we have heard many conflicting presentations. I think most senators would like to see more competition, but they are very concerned about safety and soundness issues. Do you share our concern? Are you not as concerned as we are about what may happen when and if the banks merge? They tell us they want to play a new role in the global marketplace, that they have to compete, and that is why they want to be bigger. Does that raise safety and soundness concerns? It concerns me and I am sure it concerns you. Could you expand on that a little bit?
Mr. Palmer: Let me first explain why, in answering your first question, we were focusing on the smaller institutions.
The schema in the task force report is, as we understand it, that we should be prepared to accept a bit more risk at the bottom end of the size scale. At the upper end of the scale, they are recommending that institutions still be widely held, and be free of commercial links which we think are important risk-mitigating recommendations. However, at the lower end of the scale, dealing with smaller institutions, they are recommending that we be prepared to accept institutions with commercial links with closely held ownership. There is a bias to accepting more risk at the bottom end of the spectrum.
As to our concerns vis-à-vis the large banks, particularly those that would like to merge, I would turn that over to Mr. Le Pan who is in charge of our prudential review of the bank merger proposals.
Mr. Le Pan: I believe the question was whether we are concerned about the risks of larger institutions who merge or who may want to expand significantly into other business lines or geographically.
Senator Tkachuk: More specifically, would you address the fact that they would be outside of our boundaries and using Canadian money?
Mr. Le Pan: The first point I will make is we have not finished a review of what any particular merger might entail. I cannot respond on any particular transactions they may want to enter into.
As a general matter, however, I think it is very difficult to know whether risk increases or decreases based on size, geographic scope, or participation in particular business lines. International experience does not support a conclusion one way or another. Some very well-managed, significant players, internationally, have done very well. However, historically, some very important players have suffered losses, though not life-threatening losses, in the recent past.
I am distinguishing my remarks from a system problem that exists in a particular country. Leave that aside. That involves a whole different set of issues which I can talk about, but I do not think that was the purpose of your question.
Our experience is that Canadian institutions are not just playing within Canadian borders. Indeed, they are very much, on both the banking and the insurance side, outside of Canadian borders in a major way. Risks are inherent in certain activities in which they are involved. Some of those activities are higher risk than others.
We look at whether the quality of the risk mitigants, the risk control systems, the capital levels, and the reserving levels are appropriate for the kind of inherent risks in the activities, and balance those two, so that the net risk, if you will, is manageable from the point of view of the overall safety and soundness of the institution. Clearly there are many examples where the expansion of geographic scope can actually reduce risk because it diversifies risk. There are other examples in which expansion of scope can lead to control problems, if not managed appropriately, and can lead to surprises. There is experience of that internationally.
I sympathize with you, because it is difficult to reach a clear-cut view on this. Ultimately, it will become a judgment call. My sense is that it is very difficult to come up with a clear analytical dividing line that says up to this stage or in this kind of way it is fine and beyond that, no, because so much depends on the kind of mitigants and situations that I have described.
The Chairman: I am getting a somewhat mixed message from the two of you. Senator Tkachuk put it so well when he said that there is a desire to increase competition. You, as the regulator, fundamentally do not want any failures because that causes you all kinds of grief. Your bias would inevitably be in that direction.
As you will recall, when Confederation Life failed, this committee was very quick to respond by saying that, if you have a regulatory system in which there are no failures, the regulatory system is, in fact, too tight in the sense that you are not giving people sufficient flexibility.
Indeed, in that particular case, we are left in a situation where it appears that the policyholders, on the basis of evidence CompCorp gave us, will have suffered nothing and some of the subordinated debt holders will have lost, but that is the nature of investments.
There is, perhaps, a bias among my colleagues who might be inclined to say that, if we make this system a little bit more risky and, in return, get the benefit of somewhat more competition, that is where we would come down, rather than the other extreme, of being too heavy on safety and soundness. Yet, when I listen to the two of you, I am not sure that we are at a different point in the spectrum. Is that a fair assessment?
Mr. Palmer: I do not think we are necessarily at a different point in the spectrum. The response that you are suggesting your committee might well make is not necessarily wrong. It is a perfectly legitimate response for this country to make to the challenge of the task force report.
All we are saying is that, if Canadians want to move in that direction, we should understand the consequences; and, if there is a higher institutional failure rate, please accept that in judging OSFI's performance.
We have worked very hard to try to explain to Canadians that we do not attempt to purport to supervise a failure-proof system, but many Canadians judge us harshly whenever a failure occurs. I still get letters saying, "You screwed up on Confederation Life." We do not think we did, and we think, at the end of the day, the results will prove that the system worked, by and large, as it should have worked in those circumstances. However, it is an issue.
We think there needs to be great clarity about what the government eventually decides. If it decides, as you suggest your committee might recommend, to accept a bit more risk in the system as the price of gaining more new entrants, more competition, than so be it; but let us understand what we are doing.
Senator Kroft: Given the new challenges we face with new types of institutions, the technological explosion, the interrelationship of world markets and the complexity of trading operations and electronic commerce, I want ask you a question I put to Mr. Mackenzie this morning to which he responded that I should ask somebody else because he has been away too long.
It seems to me that the technological explosion in the world has to have had enormous implications on your ability to do your job. We know that government is engaged in a constant war with the private marketplace in trying to retain its talent. I recognize of course that, like everybody else, you have budget implications. From a resource capability point of view, how are you positioned to be able to handle this global technological expansion?
Mr. Palmer: We are not where we need to be. We are working hard to upgrade our staff levels, and to upgrade the specialist talent we have. We recently went through a reorganization which calls for the creation of a number of specialist positions in such areas as technology in capital markets, in order to help us close the gap between what the institutions are doing and what we are able to understand and supervise. We are making some progress, but it is slow.
We did have a fairly significant adjustment to our salaries at the lower end of our pay scale. That was very helpful because it slowed down the serious turnover we were experiencing at the examiner level, particularly in Toronto. That has strengthened us, but we are still unable to go to full market in terms of the salaries that we pay at the upper half of our pay scale, and it does put us out of the market for many of the specialists. We have to be rather clever and creative. We have to look for people who are, perhaps, retired but still bright and enthusiastic, as many retired people are, and we have to look for secondments. We have to look for people who are not necessarily interested in remuneration but are interested in a job that is very challenging and a good learning experience -- younger people, for example, who may want an opportunity to see things from the regulatory perspective before going back into the financial sector.
We are hoping that this kind of resourcefulness will enable us to recruit and retain some of the people we need at the specialist level. It remains to be proven. We may, in the end, have to come back to the government and ask them for the sort of policies that have already been conferred on the Ontario Securities Commission and the FSA in the U.K., which is to move to market-level salaries all the way up the pay scale.
Senator Kroft: How do you deal with virtual organizations? Wells Fargo is the example that is most often referred to, but any others that are operating without any physical presence whatsoever in the country.
Mr. Le Pan: Let me first say that there are several kinds of virtual organizations. I will take two, given your question. One is the Wells Fargo kind of example, which is the case of an entity that does not have a physical, or in many cases, a legal presence in Canada. The second would be the virtual kind of entity that is referred to as a financial institution that has a physical presence but where most or all of the services are electronic, out-sourced to wherever, which is sometimes what people mean by a virtual organization.
There are various versions of the first case, which involves people who may merely access financial services over the Internet from a provider located somewhere else. In that case, fundamentally, we are not, nor do we seek to be, accountable for regulating that entity. The real issue then becomes appropriate disclosure to people dealing with that entity about what its status is. To that end, we have made considerable efforts on our Web site and on our disclosure material, to better indicate whom we regulate.
Therefore, if a consumer is considering whether or not to buy financial services from an entity in a tax haven, that consumer can dial us up on the Internet and determine whether that entity is regulated by us. If the entity in question is not regulated by us, at least that consumer knows where he or she stands.
Issues regarding those kinds of entities are flagged in the task force report -- for example, other kinds of protection, other than just safety and soundness, with respect to consumer redress mechanisms, and so forth. The task force report addresses some of those important and complicated issues. It is difficult to sort them out fully because there will be entities that exist, if you will, in places where there is not an adequate regulatory regime. At this point, in order to regulate these entities, the correct response is effectively a disclosure kind of response, absent some kind of international agreement that has no holes in it, which I do not believe is realistic in the short term, nor do I interpret the task force report as believing it to be realistic in the short term.
With respect to the kind of virtual entity that is regulated by us, licensed by us, the issue becomes one of how we adapt our supervisory regime to deal with the various kinds of risks inherent in that entity as compared to a more classical kind of entity, one that has bricks, mortar, and a vault, to use a simple example. As well, we must address issues that we face even with many institutions, issues regarding the quality of risk management and the quality of oversight reliance on other parties, including external and internal audit. Many regulators are working assiduously and have put out considerably useful guidance to industry, which is the basis for supervision, about how to deal with virtual entities. We must also address outsourcing arrangements, vis-à-vis the quality of good arrangements. Next is a classic kind of supervision effort, albeit tailored to the kind of risk.
Part of the lesson on these kinds of entities is not only that we have an immediate challenge to keep up, just like many organizations do, but also that we will continue to have that challenge. We must continually be upgrading skills and continually be leaning on some of our international networks. There is increasingly a great deal of sharing of information amongst regulators internationally about how to deal with these more innovative entities. To us, that is very useful in addressing practical problems with these entities.
Senator Kroft: This morning, Mr. Mackenzie expressed some concern about the banks, if there were a merger situation, having to deal with that enormous complexity in addition to the Y2K problem. I know this is not a fundamental part of the MacKay report, but it does relate to the kind of burden that is on you in a rapidly changing environment.
Mr. Palmer: We are spending a lot on that.
Mr. Le Pan: There are several questions in there. Let me talk about what I think is the question about the link between the mergers and Y2K. Is that fair?
Senator Kroft: What I am interested in addressing is the regulatory challenge of the Y2K issue.
Mr. Le Pan: With regard to the regulatory challenge of Y2K, there is no question that that is an issue. However, let me address four significant points. First, we have been addressing this issue for three or four years. Indeed, I noticed something by the Gardiner Group in the London Financial Times a few days ago that Canada is in relatively better shape than other countries.
Second, we will not guarantee that there is not going to be a Y2K problem in an individual institution. It is ultimately the responsibility of that institution's management and board of directors to sort out those kinds of problems. As part of our supervision system, we will identify people. We put out guidance as to what are best practices for dealing with different parts. For example, identification of mission critical systems and renovation of those systems is supposed to be finished by December of this year. That is consistent with the international guidance. Across our total system, we are measuring where institutions are relative to that guidance. That leaves 1999 for testing. We will follow-up on our testing results, identify outliers, and work with those as part of our supervision program to reduce the risks, but we are not running a risk-proof system.
The level of appreciation and the action being taken to address this issue are very high. The progress of institutions across the spectrum has been very good. Major institutions, of course, have been aware of this issue for a long time, have gone a long way towards getting into shape.
Other institutions that deal with outsourcing providers will sort out how they can best deal with the issue. We cannot guarantee there will no problems, but we are proactive in dealing with this from a supervisory perspective. We are seen, I think, by both the institutions and by independent groups as doing at least a credible job.
Senator Angus: Gentlemen, I will not ask you any questions about the chief actuary, including why he is not here, nor will I ask you what you think about the mergers of the banks that are on the table since we are not supposed to get into those areas, specifically.
However, everybody does seems to want to discuss the mergers, and you have talked a lot about your mandate in your brief and in your comments. You actually quoted sections from the statute that governs your mandate. As you know, currently there is underway, with respect to the bank mergers, a Competition Bureau review on the one hand and an OSFI review on the other. What is in your mandate that relates to mergers? Can you demystify this subject?
Mr. Palmer: Senator, at this stage, we are responding to a request from Mr. Martin to comment on the prudential aspects of the merger proposals. In essence, I must consider if there any prudential reason I should say no. We think that because we are a prudential regulator, focused on the safety and soundness of the institutions that we regulate and supervise, this falls squarely within our mandate.
If we were going through a formal approval process for these merger proposals, we would be examining the same prudential issues we are looking at now, along with a number of other more detailed issues, including compliance with legislation issues which is also an important part of our approval process. These are issues we would be dealing with in a normal regulatory approval process in any case.
Senator Angus: Is your examination based on what you already know about the capital levels of the institutions involved and other documents and data you have in your possession as the regulator, or does your participation involve an investigation to uncover new material?
Mr. Palmer: There is some new material. I would ask Mr. Le Pan, who is involved in that prudential review, to talk about some of the specific issues that we are probing.
Mr. Le Pan: We will certainly use the existing information we have on the condition of the institution. Normally, in any significant transaction, we will look at items such as the business plan for the merged entity. What is the plan for key risk control functions in the entity? We will try to understand what the financial situation would likely be going forward -- would it change, would it be improved?
We are all aware of the fact that a range of mergers have worked and a range of mergers have not worked. Obviously, it is in our interest to try to make some high level assessment of things, such as the awareness of success factors, and the plans to deal with potential issues that may arise that are important in making a merger work. This increases the chance that the institutions will achieve the kind of objectives it wants to achieve and continue to be strong and vibrant. To that end, we will do things like spend time trying to understand the extant literature from academics, consulting firms, and others who outline the key success factors or the things to watch out for, including the adequacy of plans and so forth.
We will tailor the generality of our review to suit the amount of information available. At this broad level, our review may be less than a full, detailed review.
I hope that gives you a sense of the kinds of things we would look at, in addition to pure capital and financial results.
Senator Angus: You pointed to the MacKay recommendation about changing mandate of OSFI to include competition. Innovation brings with it potential conflicts and other downsides, and you have urged caution. It seems to me that, in assessing the safety and soundness of a proposed combination of enterprises, there are many factors to be considered, including competition and so on. I cannot see how that falls within your mandate, because the environment in which this will take place is so hypothetical.
Mr. Palmer: The important point is that those sorts of issues go beyond the scope of the prudential review that we are now carrying out. We are focusing only on prudential factors, not competition factors. Others are looking at those.
Mr. Le Pan: That includes prudential factors in the context of the regulatory legislative environment that exists today.
Senator Angus: You have pointed out the possible problem with the recommendation as it relates to your mandate. I am assuming, and it may be wrong to do so, that, in terms of the mandate of OSFI, the status quo is an option and does not need changing. However, do you believe that some changes would improve your ability to be an effective supervisor in the new environment? If so, what specific changes would you recommend?
Mr. Palmer: Our starting point would be that the status quo is a good option. Our mandate is really quite recent. It was incorporated into our legislation in 1996 after a great deal of debate. This committee played an important role in that debate and probably kicked off the process with its report in the fall of 1994. Therefore, we think it is quite legitimate to think about giving us an opportunity to work with that mandate which incorporated a number of important new features, for example, the importance of early intervention, without making further modifications to it.
We are not opposing changes. These are really policy decisions. We are simply saying that, if you give us a strengthened responsibility for competition, if you give us a significantly enhanced responsibility for consumer protection -- because we really do not have much in the way of consumer protection responsibilities now -- then there may be a price to pay, and that price may result in some conflicts or some watering down of our ability to be able to function effectively as a solvency regulator vis-à-vis the institutions that we supervise. However, we are not being presumptuous enough to say no.
Mr. Le Pan: My view is that, if you consider the kind of things that are in place to try to promote competition, changing our mandate is probably a lot less important than dealing with issues like ownership policy, lower entry requirements, and extra powers for second-tier institutions.
Senator Angus: That is fair enough. It seems to me you do have adequate powers, even in a fairly substantially changed environment.
I want to put one question to you about the anticipated change in the environment, a change that would increase the number of players, the number of deposit-taking institutions, for example, the credit unions. We have heard evidence about the dearth in the country of second-tier retail -- that is, smaller banks and financial deposit-taking retail-banking institutions. One way to improve that situation in Canada, in a harmonized way, both federally and provincially, is to remove the shackles from the credit unions and enable them to fill this void. The credit unions themselves seem to think that would be a great idea; they seem to be keen. I am wondering if within your mandate, unchanged as it will be, going forward, there are safety and soundness concerns that you would like to signal for us, if that were to happen.
Mr. Palmer: Are you referring, senator, specifically to the credit union recommendations?
Senator Angus: Yes.
Mr. Palmer: The short answer is yes. There are safety and soundness considerations associated with any change within the system; any expansion of an institution creates safety and soundness considerations. Therefore, although we are broadly supportive of the direction of the report with respect to expanding the opportunities for credit unions, we recognize that if there were great changes and great expansions there would be some risks as well.
One issue that worries us is the notion that the credit unions centrals could become both providers of financial services as well as liquidity pools for the individual credit unions they serve. In our opinion, the existing legislation creates a separation between their function as liquidity pools and their function as lenders and requires that separate subsidiaries be established to carry out the lending function and other financial services. That is something that we would want to watch very closely. However, we think that all of those issues could be addressed in expanding the opportunities for credits unions in Canada to fill that void that you were referring to.
Senator Angus: Do you think there is a void and, if so, would it be good to try to fill it?
Mr. Palmer: Is there a void? That is a more complex issue, an issue of perception as much as reality. Without going on at great length, I would argue that there is more competition in Canada, particularly at the retail level, than many people understand, but there is a perception of a void. That issue is powerful enough that it does have to be addressed.
[Translation]
Senator Hervieux-Payette: People talk a lot about ways of increasing competition within the financial services sector and of streamlining regulatory processes, and one way of doing this without putting the system at risk is to increase transparency. I would like to ask you several questions about three areas in particular. If regulatory processes were streamlined and more comprehensive activity reports required -- and for all sectors of activity -- would you be satisfied with the system then? Are consumers, clients and shareholders aware of the areas that present risks for each financial institution? I am speaking for people outside the industry, not only for inspectors of financial institutions. Do we know what loans are risky, which countries are involved and what the by-products of these loans are?
In your opinion, are we seeing better reporting on all of these activities which would help us to streamline the more formal regulatory processes now in place?
Mr. Palmer: It is difficult to answer that question by a simple yes or no. We are working on it. Transparency has improved as a result of our efforts and the efforts of our commissions to achieve the objective that you have described. There is still more to do to ensure that each investor or depositor understands all of the major risks associated with each institution. It is more important for us to improve transparency for our depositors, who are our clients, so as to make them more aware of the risks posed by institutions.
Senator Hervieux-Payette: Transparency means several things to me. A second option might be to change the ownership rule from 10 per cent to 20 per cent to ensure that there are people on the boards of directors of banks who are there not to serve the banks, but rather the interests of shareholders. In your opinion, would increasing this percentage from 10 per cent to 20 per cent improve transparency and at the same time, put more distance between bank directors and administrators?
Mr. Palmer: We run a certain risk, in my opinion, if we increase this percentage, but 20 per cent is still less than 50 per cent and it is difficult for a single group to control all activities, along with all of the other pressures, and promote transparency at the same time. I think we could live with the 20 per cent figure.
Senator Hervieux-Payette: As part of the process of streamlining regulatory procedures, could we not consider, for example, decompartmentalizing services such as debit cards and ATM withdrawals and deposits? In other words, could we not find some way of making services much more open and universally available, so that the 5,000 ATMs become a common service point for the entire financial services sector? Do you think that this would put the system at risk or would it in fact increase competition at the service level, and not just for those who have the means to invest in these technologies?
Mr. Le Pan: First of all, we are not experts in interactive modes. I believe the issue here is competition and access to the system. The idea behind these recommendations is that by opening up the sector to more participants and by changing the rules, the system could become more competitive and more widely used. That is a valid argument. We could see some results. In other countries, there may be variations in the level of service available. In some locations, the service available is as good as it is here in Canada.
May I follow up on your first question? When we talk about transparency, we are not saying that we expect everyone to have a clear understanding of the risks that large or small institutions take. That is why our system provides for policy holder compensation and protection. People do not need to know every single detail, but I agree that we must encourage transparency, because the system has evolved over time and is the product of considerable experience and expertise. Above all, we must encourage transparency to protect those who have no idea of the risks involved.
[English]
Senator Oliver: Mr. Palmer, time is almost up, but I have three questions that I would like to get on the record, just because I think they are important for our study. You can answer whichever ones you think are most important for our study.
Do you agree with Allan Greenspan, Federal Reserve Chairman, that technology will lead to a future with much less government regulation; that, as we move into a new century, the market-stabilizing, private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures? What we are really talking about here is a form of forbearance.
When you are pondering the answer to my next question, I would ask you to keep those American monoline operations that are offering financial services -- for example, GE Capital, Microsoft, which wants to become a bank -- in mind. My question is: How will you do a prudential review of those Internet-type financial operations that are operating in Canada? How can you regulate them?
My next question relates to a claim made by Mr. Mackenzie, who was here earlier this morning, that the task force failed to deal with the process to resolve institutions in financial difficulties. In other words, is it a failure of the entire task force report to deal only with entry strategies, that is, trying to get new players into the game, but not with exit strategies, which you would be concerned with?
Finally, I would be interested in your views on how this new clearing system will work.
Mr. Palmer: I will try the first two, and then I will ask my colleague to talk briefly about the payment system recommendations.
With respect to Mr. Greenspan's remarks, the short answer is that I agree with him but that the nirvana he describes will not occur tomorrow.
Senator Oliver: Even with the forces of the Internet and new technology?
Mr. Palmer: Not tomorrow. I tried to respond to that in answering the chairman's questions about the New Zealand model. We have two phases to go through. Phase one is that we have to deal with globalization and the increasing interlinkages of financial institutions and global economies, and that means strengthening of traditional regulation and supervision in many of the developing countries, where it is comparatively weak. Therefore, phase one involves strengthening the type of regulatory model that we have in Canada and in a number of other countries.
Phase two involves making much better use of market discipline so that some of the regulatory apparatus can wither away, as the other elements of market discipline are developed in many of these other economies -- for example, good accounting rules, a well-disciplined, honest auditing profession, which exists in fewer countries than I might have liked you to believe a few years ago, well-informed financial analysts, and honest governments, to name a few.
A number of these factors have to be in place before you can have the sort of model that Mr. Greenspan is talking about. However, there is no question that that is the direction in which we are headed. I think that is one phase away from the first phase that we have got to go through.
Senator Oliver: Microsoft as a bank?
Mr. Palmer: Microsoft as a bank. Mr. Le Pan talked about virtual banks, Wells Fargos and the others, and how we deal with those.
Many of the same steps that we currently carry out would apply if, for example, Microsoft or a company like it were to apply for a bank charter under the recommendations of the MacKay task force. Even if they were using the Internet as a service delivery mechanism, as increasingly banks in Canada are doing already, we still need to review asset quality. We still need to review the quality of management. We still need to review the models that they use to control the risks that they take on. We still need to understand the risk-management processes generally. We still need to look at quality of governance.
Hence, many of the traditional regulatory and supervisory steps that we use would continue to apply. The electronic delivery mechanism is really a bit more of a red herring than sometimes I think we recognize.
I will ask Mr. Le Pan to respond to payment system question.
Mr. Le Pan: Your question related to how this new payment settlement system would work. The question deserves more than a one-line answer.
There have already been many developments in the payment system, and many continue to happen. There are many, what I might call, "devils" and "details" in the payment system, and it is important to understand them.
Broadly, the proposition in the MacKay task force is that there would be broader access for institutions that are appropriately regulated, and there is some discussion of how that would operate. That is another example of something we are not automatically opposed to, in fact, quite the opposite.
To understand how that would function to deliver some of the benefits mentioned in the previous question, we would have to examine the details and determine whether any offsetting adjustments should be made to regulatory and supervisory resume.
Senator Oliver: Did you want to talk about an exit strategy that Mr. Mackenzie suggested was not in the MacKay report?
Mr. Palmer: I did refer to that in my opening remarks; it is an important issue. That is not an issue that is incapable of being addressed; I was simply pointing out that it is not something that the task force report focuses on.
If it were decided by the government that we would move in the direction that the task force is recommending, and encourage a variety of new entrants under a variety of conditions, we would have to decide on the types of exits from the system. Would they resemble the exits that exist now? Would OSFI be encouraged to maintain its early intervention guide for those new institutions?
If there were no answer to that, we would assume yes, but I think we need some direction on that. Some thinking would have to be done about it.
The Chairman: Senators, our next witness is Mr. Flood, the chairman and chief executive officer of the CIBC.
Welcome again, Mr. Flood. We are delighted to have you here. I note that Mr. Kluge is here with you.
Mr. A.L. Flood, Chairman and Chief Executive Officer, Canadian Imperial Bank of Commerce: Mr. Chairman, as you know, we have been invited here today to talk about our vision for the financial services industry and our response to the MacKay task force report.
The MacKay report's vision for Canada in the 21st century focuses on the competitiveness of the financial services industry, and the role it can play in the future economy. At CIBC, we agree, because we believe one of the most important issues facing Canada today is this overall competitiveness.
Today, modern economies around the world are going through a significant transition moving from the industrial age to the information age. The revolution in information and communication technologies is escalating and intensifying competition among nations, as well as between individual companies. The result is a new set of challenges to legislators, regulators and business leaders worldwide.
Canadians can be proud that we are entering the next century with a strong economy and a quality of life that is among the best in the world. We cannot take our well-being for granted, however. The question Canadian leaders -- as well as ordinary citizens -- must answer is this: How do we maintain the competitiveness that supports our extraordinary economic success in achieving a high standard of living?
I think that we must address three powerful forces if we are to secure a strong future for Canada as a competitive nation.
The first force is technology, which is the fundamental driver of modern economies. Under its widening influence, we have learned that the assumptions and policies appropriate to the industrial age are inadequate to the demands of the digital and information age. New technologies have undermined historical cost models, making it much easier to leap the traditional entry barriers to consumer and business markets. This is true in financial services, as well as in any other enterprise.
Second is the human factor. The most successful nations increasingly will be those that measure their wealth, not in resources, but in knowledgeable people. The wealthiest nations will be those that can produce, attract, and retain well-educated people with advanced and flexible skills. We need to ensure that we have industries with good prospects for the future, and that are able to provide good jobs that will keep our children in Canada. In the last 15 years, more than 30,000 Canadian professionals left Canada for better opportunities.
The third factor is productivity. The more interconnected global marketplace means that we compete not only as companies, but also as countries. Productivity gains are the ultimate foundation of rising living standards. Without them, the purchasing power of Canadians cannot increase. Income gains that are not rooted in productivity improvements lead only to higher prices, not to greater spending power.
Canada is one of the most trade-dependent nations in the world. More than 40 per cent of our GDP is tied to trade, and we must ensure that our productivity growth allow us to remain competitive. For more than two decades, we have failed to meet this challenge. Thirty years ago, Canadian productivity in manufacturing was well above U.S. levels. Today, it is more than 20 per cent lower. One result is the reduction in Canadian living standards. Real income per capita has fallen almost 5 per cent thus far in the 1990s, the steepest reduction in the post-war era. Our declining currency is another result of this trend.
The fall in our productivity is a result of many factors, including taxation policies, regulatory structures, lower investment in research and development, and a branch-plant mentality that reinforces the idea that we can be a second-tier economy with second-tier corporate competitors.
This need not be our destiny. Canada can, and must, continue to lead in technology development and application. It must ensure that the industries that support technology growth remain competitive. Canada can and must ensure that the next generation of knowledge workers has meaningful jobs, and industries in which to work. Finally, Canada can and must leverage technology advantages and the strengths of our knowledge workers into a higher level of productivity than our competitors have.
We must continue to have a strong, innovative, competitive, Canadian-owned financial services industry -- one that is able to meet the needs of consumers in our home market, and able to grow abroad. Ensuring that should be a critical part of our response to these issues as a nation. The MacKay report makes an important contribution by providing a framework to achieve this.
Canada's banks have a critical role to play in supporting our country's transition to the information economy in two important ways. The first way is our traditional role as lenders, advisors and investors in knowledge-based industries at home and abroad. In addition to our banking role, however, we are also builders and investors in technology in our own right.
The financial services sector is arguably the nation's largest private sector user of computers and telecommunications services and products. At CIBC, for example, we spend about $1.2 billion a year on technology. Part of that is to build and maintain the high-volume computer systems that support our nationwide branch, credit card, Interac, telephone banking, and automated banking machine operations. Recently we formed a new joint venture with Hewlett-Packard to extend that capability into commercial applications for electronic commerce. We plan to market these applications throughout North America and the world. As a result of this, we have created a global centre of excellence for new job opportunities in Canada in one of the fastest growing areas of the new economy.
Strong banks create good, knowledge-intensive jobs, not only in banking, but also in a range of supporting industries such as marketing, law, accounting and technology. The average salary in the banking sector last year was one-third higher than the average Canadian industrial salary. The number of knowledge workers at CIBC alone has grown by more than 25 per cent in the last three years.
Strong banks are important overall contributors to improved productivity in the broader economy. Countries with efficient, well-regulated financial services industries have the fastest rates of growth. Regulators in the U.S. realize that consolidation in the banking industry is necessary in order to support continued productivity growth, and they have given speedy approval to dozens of large mergers.
In Europe, governments in smaller countries such as the Netherlands and Belgium have actually encouraged their banks to consolidate to improve efficiency. That will allow their industries to remain strong in the face of growing competition from much larger financial institutions in neighbouring countries.
Consumers and businesses in these countries will have the choice of banking with a domestically owned, first-tier competitor. Belgian and Dutch industries that compete on world markets have domestic allies to support them abroad. These mergers will also ensure that, as first-tier global competitors, they will provide knowledge-based and head office jobs, a greater domestic tax base, greater control over the safety and security of their domestic financial infrastructure, and other benefits of national ownership. Canada is also a small country in financial terms, and should be looking to do the same.
Technology, knowledgeable people and productivity are the key prerequisites for any successful economy in the 21st century. One major task ahead is to find a way to ensure that our financial services industry can make the maximum contribution to enhancing these three prerequisites.
Mr. Chairman, I believe the MacKay task force has described in great detail the kinds of changes and challenges we face as an industry. They have stated quite accurately that the status quo is not sustainable. They also describe the powerful international competitors -- both bank and non-bank -- that we face as a result of worldwide consolidation and deregulation. The emergence of massive, powerful competitors with vast resources to invest in technology, people, product development, and marketing is rapidly breaking down local geographic barriers to markets, and making them global. This new competition is good for consumers, and it will be good for our economy because it will enhance our productivity.
Maximum consumer choice from maximum competition is the vision that we put forward in our submission to the MacKay task force a year ago. A detailed outline of our vision is included in the kits that we have distributed. In that vision, we stress the importance of ensuring that we continue to have strong Canadian-owned financial service companies.
With powerful new competitive forces shaping our industry, we face a choice. One option is to consolidate with a competitor in order to achieve sufficient size and efficiency, and to allow us to continue to provide the range of consumer and business banking services that we do today. Alternatively, we can reduce or eliminate our presence in some businesses and markets, and survive as a niche player.
As the MacKay task force noted, mergers are a legitimate business strategy. We propose to merge with TD because we believe our two companies are an excellent fit. We will be better able to provide new services and products to Canadians, thereby giving them much greater choice. We also will be able to grow our business in North America and abroad through acquisitions and internal growth, and we will have an enormous potential to repatriate the profits to Canada.
To do these things, we must be allowed to grow. We want to be a first-tier player. The Canadian financial services industry is the kind of knowledge-based industry where we can develop world class competitors with benefits to Canada and individual Canadians.
To be truly competitive in the 21st century, Canada must produce more first-tier internationally competitive companies, particularly in knowledge-based businesses, where the job growth is expected to be the highest. The financial services industry is a logical choice.
If Canada does not produce at least some first-tier players from this knowledge industry, my question is where will they come from? I do not think it would be either good public policy or good business to place all our faith for future growth in natural resources or manufacture. To tell us that we cannot merge would be tantamount to telling an industry with one of the best opportunities for global success that is cannot grow.
We are aware that the relative size of Canadian banks raises issues about competition. That is why we support the task force proposal to open up Canadian markets to greater competition. That is why we are working closely with the Competition Bureau to look at the market impact of our proposed merger.
We do not believe that the creation of some first-tier, Canadian-owned financial institutions would be incompatible with a competitive domestic marketplace. There are nearly 3,000 financial service competitors operating in Canada today, including several first-tier non-Canadian financial institutions.
Greater competition in Canadian markets is already stimulating an increase in the number of Canadian-owned second-tier players. The proposed national community bank, a national consortium of Canada's credit unions, is a good example of this. This new player will be able to evolve, in part, because it will be able to take advantage of the payments system -- the infrastructure built by Canada's banks. We welcome this new venture.
We understand that Canadians have concerns about the impact of mergers on many other issues besides competitiveness, including communities. We think the MacKay report's proposal to conduct a review of community impact is a good one, and we will support that process.
CIBC's commitment to communities -- including the involvement of our employees -- is well known. Last year we were the largest corporate donor in Canada, and we are a leader in community participation and commitment.
These and other issues must be addressed and resolved so that the public understands the need to change, and ultimately puts its support behind a Canada that has an unqualified opportunity to succeed. We need to understand clearly the broad choices before us. As a nation, we must realize that we have the ability to compete with the best in the world. Our regulations and our laws must support and encourage this vision.
We urge this committee to consider the potential of our industry to contribute to the enhanced competitiveness and future growth of our nation. Help us to remain at the forefront of the information age, and to provide new opportunities for our children.
A strong Canadian-owned financial services industry with an abundance of choice and open to all competitors should be a cornerstone of our economy in the next century. At CIBC, we are confident we can be part of that future. To be competitive as a company, however, we need to operate within a context of laws and regulations that make us competitive as a nation. That means policies that are flexible and responsive to the rapid changes that are transforming our world.
We believe that the MacKay task force has set out a useful blueprint for action, one which calls on all of us as representatives of particular industries, as regulators, and as advocacy groups, to set aside narrow interests and build a system that meets the needs of Canada's consumers.
Senator Oliver: Earlier today we had representatives from some of the foreign tier-two banks here. They told us that they have had difficulty really becoming major competitors for you and the other big banks. This is because of certain regulatory problems, and because of certain taxes that have been levied.
The World Economic Forum indicated that Canada ranks in the top 53 countries on bank safety, but places us 41st in terms of the presence of foreign competitors. Why do you think that, to this day, we have not been able to develop any kind of a second tier to really compete with you?
Mr. Flood: There are two areas there. One is foreign competition; the other is domestic competition.
Senator Oliver: Do we have either today?
Mr. Flood: On the foreign side, there have been restrictions, and that is a fair complaint. The tier-two foreign banks have had to form subsidiaries, and that has been a constraint relative to the amount of larger transactions they could do, particularly when serving the large corporate and government markets. We support the MacKay report's proposal to open that up, and to allow foreign banks to establish branches for wholesale business. We think that would open up the system.
The other area is withholding tax. Today, withholding tax is not applicable on transactions with a term of five years or greater. I think that the MacKay report also recommends that that be opened up to any transaction.
Those are two major obstacles faced by foreign banks. If they were removed, that would open up competition.
Mr. Holger Kluge, President, Personal and Commercial Bank, CIBC: Perhaps I could add one more item. In the past, bricks and mortars prevented the foreign competitors from duplicating our business. What the Canadian banks have done is to build networks -- like CIBC has done with 1,400 branches. It was too costly for Citibank or any one of the other foreign banks to do that.
The new world of technology does not require you to make that kind of investment. The new virtual banks like ING will not have to make the investment that we had to make in the past. With further refinement of regulations, I believe that they will be able to compete head-on with the Canadian banks.
Senator Oliver: My second question comes from some remarks the president of the Hongkong Bank made when he appeared before us in Vancouver. He said that he feels very, very strongly that one of the obstacles to tier-two competition has been the fact that we do not have full functionality of automatic bank machine networks. He made that point very, very strongly to us.
Would you be willing today to open up your networks to all banks? Foreign banks would then have sudden and immediate access to 19,000 new ways to serve their customers.
Mr. Kluge: They do have access today as far as payment of bills and withdrawals are concerned. Are you specifically referring to giving foreign banks the ability to make deposits in our system?
Senator Oliver: That is right.
Mr. Kluge: Canadians value having immediate access to their money.
If a Hongkong Bank customer deposits an empty envelope into a CIBC ATM, who is accountable for that? That is a key issue to be resolved, and another is what would happen if a cheque were returned. It becomes technical when we get into that, but that is the key issue from a payment system point of view.
The Chairman: Mr. Kluge, when you started down in that direction it reminded me of, as Yogi Berra would say, "déjà-vu all over again."
The fight with the Competition Bureau to open up the Interac system was three or four years long, and I remember all the arguments that the banks made to resist opening it up. Those arguments were always made around the issue of safety and soundness. In my view, however -- and ultimately in the view of the Competition Bureau -- the real issue was restricting competition.
I do not dispute at all that there is a problem. When I hear banks starting in on the full functionality issue, however, all of the red flags go up. I am concerned that we are back into another attempt to use the safety and soundness argument when, in fact, the real objective is to restrict competition.
You do not necessarily need to comment on that, but that is my view and reaction.
Mr. Kluge: Senator Oliver wants the banks to have a blank cheque for access to ATMs. I just threw in one little caution -- some of these issues need to be worked on. As a bank, we are open to opening up the payment system.
Senator Oliver: I am not taking about the payment system right now. Are you or are you not in favour of opening your ATM network up?
Mr. Kluge: To deposits? If a foreign bank would give me an indemnity for anything that went wrong when a depositor placed a deposit, I would certainly look at that.
Senator Oliver: Mr. Flood, in earlier public statements, you have said that one of the things that concerns you about the MacKay task force is that, if all of the recommendations are implemented, we would really be in an era of a lot more regulation. At the time, you said that had fears about some of those regulations. You talked about heavy new regulations in areas of coercive tied selling, privacy, and accountability statements. Today you really toned that criticism down.
Where do you stand on the regulations in the MacKay report?
Mr. Flood: I have said that I support the regulations. My concern is over whether they will be a heavy burden to all of us as we work through this process. We need to find ways to streamline these regulations and make them efficient, without a heavy cost burden. That is the only thing I am concerned about.
I do not see anything on the regulations in the MacKay report that bothers me from a regulation standpoint. I am concerned about the efficiency, however. When you go back to the productivity argument, we have high debt and high taxes in heavy regulation. Today we already deal with 85 different regulators, and I think that somehow this country has to get some of the same regulations. They do not have to be "all-national," though.
When we spoke before the MacKay task force, we recommended that we get the same regulations, and then try to get the provinces and the federal government to agree on them. We would like to streamline the regulations and to automate them, and I am sure there are ways of doing that.
Senator Oliver: You have hinted in your presentation today that if you cannot merge, you will have to become some form of a niche player.
If you do merge, however, will you not also have to become some kind of a niche player? Most other large banks in the world are doing that, and are moving away from being universal banks.
Mr. Flood: I do not think we would pretend to be a global bank, but certainly we could be a much larger North American bank.
Senator Oliver: With a special niche?
Mr. Flood: Once you get outside of your home market, you can be a universal bank in your home market. There is no reason why the new CIBC could not be a universal, full-solution banker to all markets within Canada. I think that is our vision.
When we go into the United States, we can operate from a broader base. If you look at the TD and ourselves, we already have a very broad platform to expand in the United States. We would still be niche player in the United States, and we could become a smaller niche player in Europe, Asia, and the other continents. We would not pretend to be a global bank.
On the other hand, if we do not merge, there is no question that we will get smaller. We will have more foreign competition, whether it is through technology or globalization, and we will have more domestic competition. There will be less revenue for CIBC, and we will have to reshape ourselves.
Senator Tkachuk: I have a number of questions. You brought up the mergers in the last part of your presentation. In the brochure on the facts about the proposed merger, you also have a list and a pie graph of your percentage of the total domestic assets of the Canadian financial service sector. Some concern has been expressed, as you say, that the mergers will result in 70 per cent of Canada's banking assets being controlled by just two banks.
Our concern is banking. I mean, there is competition in the mutual funds business. There are a lot of investment dealers. There are lots of insurance companies. I would like to see more trust and mortgage loan companies, but there are quite a few, and there is a bit of foreign competition there. I think our concern is the core banking services; the ability of citizens to do their normal banking, put in their money, pay their bills, get their mortgages, get loans to start businesses, and get money to help out with farm. Would you not say that you have 70 per cent of that market locked up if the banks merge?
Mr. Flood: Let us look at what it would be like in five years, assuming that the MacKay recommendations are all implemented. Let us look at the vision of the future, and let us redefine what banking is all about.
First of all, let us look at an insurance company. Today an insurance company is in the life business, but its major growth is in wealth and in selling mutual funds.
Consider the banking business. We were in the deposit business; today there are growth areas in mutual funds and wealth management. The same is true of mutual fund companies and other financial players. If all of these companies have access to the payments system, they will be in the transaction business. They can do that in every community, if they so wish.
We have to redefine our thinking. We have to get our minds around the fact that we are dealing with financial services -- not banks, not insurance companies, not trust companies, not credit unions, not mutual fund companies, and not financial planners or brokers. Look at it from the context of the financial services industry, because all of these companies will have access to the payment system. They will offer direct transaction banking. They will deal with whichever areas consumers, businesses, and large corporations want.
This will be done through different choices, different products and different delivery systems, whether it is bricks and mortar, people or electronic. You have all these things coming at you. The web sites are also a factor, as is the reality of opening up the markets to foreign competition. It will be a much different landscape than you are looking at today. I think you have to consider the whole financial services industry.
Our challenge, even after we merge, is to keep up with all this competition. Putting two companies together is a challenge in itself. To be successful, we will have to retain that 14 per cent and 7 per cent. That is the upside -- that is my upside. We could easily go down from there. We have to get our mind around what the world will look like five years from now. We are not dealing in time slots of today and yesterday.
Senator Tkachuk: I know what you are saying, and we continue to hear it. If you are a small businessman in Melfort, Saskatchewan or Prince Albert, however, and you are looking for a loan, is there anybody on this loan chart who did not give out loans 10 years ago? Would insurance companies give out loans?
Mr. Flood: Five years from now, it might be Manulife or Sun Life, it might be Wells Fargo, it might be ING, or it might be a credit union. If you open it up to competition, and if there is money to be made in those markets, people will penetrate them. That is what you have to look at.
Mr. Kluge: In Red Deer, Alberta there is a company called Trimerica Financial Corporation. It is now a 100 per cent owned subsidiary of Citicorp, and they have four offices in Red Deer, Alberta. They provide financing, and they take deposits from small and medium-sized companies.
It is possible for smaller companies to go there, if they put their minds to it.
Senator Tkachuk: Let us talk about that for a bit. One of the task force recommendations calls for allowing banks to sell insurance within their branches. We have had a lot of presentations from the casualty and property insurance people, and they say that that would be unfair competition. I notice that you did not mention that in your brief, or perhaps I did not see it.
Perhaps you could tell me how that would work. They say that problems will be caused by the fact that the banks will have a conflict of interest and a competitive advantage, because they have all the personal information about their customers.
Mr. Kluge: We have been in the insurance business for about 25 years. We have 2.2 million insurance customers. They are mainly in the creditor life insurance business, although, for the past four years, CIBC has also been in the property and casualty business. There are tight restrictions on privacy and on tied selling. No information can flow from CIBC to the subsidiary -- our insurance sub -- and vice versa. It cannot happen.
As far as tied selling goes, I looked at our statistics for fiscal 1998. We received 12 tied selling complaints. They went to the branches, and only three of them escalated to our director of sales. I do not believe it is a big issue.
Are you asking why the banks want to be in the insurance business?
Senator Tkachuk: I do not think any of them care who owns the insurance businesses. We all would like to see more people in insurance, and especially property and casualty.
The concern stems from selling the insurance out of the branch. No one is concerned about the fact that the bank owns the insurance company and is out there marketing insurance. The concern that people in the P and C business have expressed is that, if the report is adopted, the banks will be selling insurance from the branches.
Mr. Kluge: That is already happening in Quebec, and in most western countries. Canada is one of the only countries in the western world where this is not happening.
A good example is Quebec. This is not an issue in that province, and the Caisse Desjardins can do it there. Incidentally, the industry has grown there. It did not shrink as a result of this.
Senator Tkachuk: Their concern is the information that the banks already have within the branches. How will you prevent tied selling? Parliament is trying to make laws to ensure that tied selling does not happen. We are actually following through with assisting you in preventing tied selling, and yet you want to sell it in the branches. Why do you want to do that? I do not understand it. You are already selling it out in the marketplace.
Mr. Kluge: We want to do it because it is easier for the customer, and because that is what the customer has asked us to do. If you look at any research that we have, 67 per cent of Canadians said that, if given the choice, they would like to have the option of buying from the branch. It is convenient.
The people that sell insurance have to be licensed professionals. If they do not conduct themselves in a professional manner, they lose their licenses. It is the same thing with a financial planner. There is no difference in that.
Senator Tkachuk: If you are selling it out of the branch, who will be doing the sale? Will it be your present salespeople? Will it be your loans manager or the manager?
Let us take Melfort, Saskatchewan as an example. You have a loans manager and a manager of the branch. Who will be selling the insurance?
Mr. Kluge: Neither of those people is licensed. You have to be a licensed insurance agent to do that. At CIBC we already have about 1,000 insurance people. Over 250 of them are licensed to sell insurance products.
Senator Tkachuk: There is already a broker in Melfort, and the bank is probably his or her banker. What happens to the president of the brokerage firm when he comes to the bank to speak to the person who is now, in effect, his direct competition?
Mr. Kluge: That is life, and that is competition. Are you saying that there should be no competition for an insurance company?
Senator Tkachuk: No. I am not.
Mr. Kluge: As I said, you have to be licensed. Perhaps that insurance agent would love to work for the bank. As a licensed agent, he could sell insurance through the bank, and he would have broader access because of our brand name.
It is like having two car dealerships in town. In this case, you have two people selling insurance.
Senator Tkachuk: In Melfort, Saskatchewan, the broker will do business with the banker, who is his competition. The Ford dealer will go to see the bank who is his competition, and that, you say, is just too bad? That is life? I mean, how many businesses can the banks get into without a risk of conflict of interest?
Mr. Kluge: I do not see how we can be in a conflict of interest situation if we abide by privacy standards and by tied selling standards. As I said, you have to be a licensed insurance broker to sell insurance.
Senator Tkachuk: I know that.
Mr. Kluge: Before I got involved with CIBC, the insurance broker that I used sold life insurance, but he also sold financial planning. He sold GICs and mutual funds, loans, and mortgages. Are you suggesting that it was a conflict of interest for him to do that? We are just simply saying the same thing: Give us the same opportunity within the law, and within the profession.
Senator Tkachuk: I will pursue this a little further. The banks seem to be trying to convince people that they are in a business like any other, but they are not. The banks are given a special privilege by the state to take deposits, to take people's money, and in return the state asks that you extend credit. That is an important privilege.
If you go into competition with your customers all over the place, do you not think that that is an abuse of the privilege you have been granted?
Mr. Kluge: I do not follow you. Insurance companies take deposits, take mutual funds, and take in funds. I do not see that as a difference. There is very little today to distinguish an insurance company from a bank. We are all broader, and all of them are broader financial institutions today.
The insurance company has argued that, every time the banks get into something, we somehow destroy competitors. The banks went into the consumer lending business, however, and look where consumer loans are today. They are at the lowest level ever. We went into the mortgage business, and the same thing has happened. Lending rates are at the lowest rate ever. We went into the mutual fund business, and we introduced no-load funds. We went into the discount brokerage business and, therefore, we have new fees for people who do not deal with a full service broker. Same thing in insurance, and we are offering insurance at a lower premium.
In the end, that is our submission to the task force. Let the customer decide how he or she would like to shop. Would customers like to go to an insurance company, or would they like to go to a bank? In the end, it is the customer who should decide. It is the consumer's choice, and I have lots of competition.
Senator Tkachuk: You say some of these other items have decreased in price. At the same time, however, the charges for writing a cheque have gone up, have they not?
Mr. Kluge: Well, I would say to you that 42 per cent of our customers do not pay any service charges. You cannot just take an isolated case. It depends on which bundle you are in.
Senator Tkachuk: If you write cheques on an account, you do not pay.
Mr. Kluge: If you have a certain balance, you do not pay. If you are over 60 years of age you do not pay.
Senator Tkachuk: People who are wealthy do not pay, but poor people pay.
Mr. Kluge: Not necessarily. If you are over the age of 60 and you are poor, you do not pay. You do not pay any service charges at CIBC. If you are a student, you receive a 50 per cent discount.
We created a new competitor called President's Choice Financial, in partnership with Loblaws stores. They provided us with the infrastructure and with their customer base. In that environment, customers deal with us electronically -- which is much cheaper -- and there are no fees, no service charges.
Senator Austin: I would like to take you through some of the proposals in the MacKay report that relate to ownership and control. I would like to have you give us a practical overview of how these work in the real world of banking.
First of all, to establish what we are talking about, what would the market cap of the combined CIBC-TD be, just so I can get a relationship to the world of market caps with your competitors?
Mr. Flood: I would say about CAN$22 billion today.
Senator Austin: That would be about $16 billion U.S.
Mr. Flood: Yes.
Senator Austin: There is a table in the October 1998 edition of the industry magazine The Banker. According to that table, $16 billion would make you roughly the same size as the German Commerzbank -- actually, it is $14 billion -- and Banco Santander is $17.5 billion. You would still be a long way down the list from UBS, which is $63.4 billion, ING, which is $49.8 billion, or HSBC, which is $48.3 billion.
At $16 billion, how do you feel about your competitiveness, first in the North American market, and then globally?
Mr. Flood: We are still pretty small, and that is why we are proposing a merger. If you look at half of that figure, we are at $8 billion. We are a pretty small player, and that is our challenge.
When we are inside Canada, we are seen as a big giant. When we get out in the world stage, we are seen as a pretty small player. The paradoxical problem is that we cannot seem to change the mindsets of Canadians -- we cannot convince them that we should have first tier companies, rather than a branch-plant mentality. That is my argument.
Senator Austin: I think the concern in Canada, as expressed by my colleague Senator Tkachuk, is that somehow increased productivity would be at the cost of service to Canadians and employment of Canadians. That is an argument that goes around in a bit of a circle, but it is a serious domestic concern.
At any rate, you feel that size will make you more competitive in the continental market; how does it make you more competitive?
Mr. Flood: We think that by merging the two companies with a larger platform, we can provide more services to our customers and we can keep more customers. Also, we can create more jobs. We can continue to have a strong base in Canada and then we can start to build a base in the United States.
Ideally, what we would like to do in the next step would be to make a major acquisition in the United States, but that will depend on the opportunities and on how many banks or financial services companies will be left. We have already bought Oppenheimer. We have a full-service brokerage company. TD have bought a number of discount brokerage companies. So our strategy would be to bring those two together and sort of compete head to head with Schwabb and some of the those types of operators rather than going head to head against Citibank or Bank of America or Bank One and people of that nature.
It comes back to the previous discussion of having to pick your niches in a market the size of the United States, but we think that at the end of the day, with a larger platform, we have a better opportunity of expanding with that platform than going alone, and that is the basic fundamental argument.
Senator Austin: Well, as to growing the bank to retain your competitiveness and your profitability I, for one, am comfortable with that.
Before I turn to the MacKay report specifically, let me just ask you for a comment on an observation made in the Financial Times in an article on October 12, 1998. The headline is "Loose Wires in Canadian Bank Merger Plans." I guess their headnote writers are very creative. The article refers to CIBC and TD wanting to consolidate a continental presence in investment banking using Oppenheimer and TD's discount network, currently the third largest in the U.S., and it says this:
Both banks are expecting 10 per cent cost savings within three years. However, while the deals have been touted as a way to make Canadian banks international players, most of the expected savings will come from consolidation in the domestic market.
That is the view out in the professional world and it goes back to the questions that Senator Tkachuk is asking. Could you comment on the accuracy of that observation?
Mr. Flood: I think it is fair to say that the biggest overlap would be at the head office, where there is the head office administration and then the computer centres. We should be able to combine our computer centres and get greater integration through those. So that is where the overlap would come.
In the international operations in the United States our operations sort of complement each other, as they do in Asia and Australia and to some extent Europe. The other side, which is what we have argued in our original submission, is that we are investing in businesses that are growing. We are investing in electronic banking through the supermarkets. I think of our deal with Loblaws, their deal with Wal-Mart and Sobeys and others, and also the whole area of wealth management, discount brokerage and mutual funds. These are growth areas in which we think we can create more jobs.
We will see some consolidation in some areas and elimination of jobs. In other areas we want to expand and grow. Again, our operations complement each other wonderfully and so there is a great opportunity to build a company that can grow and expand and truly be a great Canadian company, if allowed to do so.
Senator Austin: In short, you do not see the proposed merger as having a net cost to the Canadian consumer.
Mr. Flood: I would hope not over time. In the short term obviously there could be some cutbacks which would be natural, but our long-term growth should be beneficial. We have said that in five years from now we would hope that the combined operation would employ more people than if we remained independent.
Senator Austin: On the ownership policy and the expansion side, on page 80 the report talks about the ownership of banks. It says: "The current 10 per cent restriction can preclude the use of stock as acquisition currency for potential transactions that might require the granting of a position in excess of 10 per cent to a major shareholder in the target company."
Basically, as you know, the argument is to permit the ownership of up to 20 per cent, or even beyond with ministerial discretion, to promote a target undertaking, if the Minister of Finance believes it is in the interest of Canada. I guess the simple question is: are these methodologies of significance to your growth plans?
Mr. Flood: Well, you know, at the end of the day it all comes down to access to capital and our ability to expand, and, again, it comes back to our profitability, our return on capital, and our return on equity. We have to compete for customers and compete for employees, but we also have to compete for shareholders. I think that is the critical factor: Can we raise enough capital?
We are listed in Canada; we are listed in London, and last year we listed in New York, in an endeavour to broaden our shareholder base. We are competing against the Americans and the Europeans and that is a difficult challenge.
Senator Austin: Broadening your capital has to be taken in combination with Canadian public policy, which is to maintain the control of our large financial institutions in Canada. Can you maintain control, in your view, with a 20 per cent U.S. or international shareholder?
Mr. Flood: That all depends on how large we can get. If we were looking for a major acquisition in the United States, it might not be sufficient, but that would be a bridge we would have to cross.
Senator Austin: If you alluded to 20 per cent in terms of that foreign shareholder, would you feel comfortable about maintaining that control in Canada?
Mr. Flood: I think this is a public policy issue. In our submission to the MacKay task force a year ago we suggested that the 10 per cent ownership requirement be eliminated but that the minister be given discretion. I think that every country would want to keep control of its key banking, of two or three of its largest banks, and I think you see that in the United Kingdom, and you see it in the United States, Germany, France and Japan. I do not think Canada, from a public policy standpoint, would want to give up its ownership.
Again, I go back to our submissions to the MacKay task force; we argued in favour of consumer or customer choice and we argued that Canadian ownership was important.
Senator Austin: Two questions flow from your comments. If we want to maintain control, we could leave the voting control at 10 per cent, as it is now in any single form; would it help you increase your capital base to have a non-voting equity share created, which could be offered to target acquisitions, or to passive capital for that matter?
Mr. Flood: That could very well be helpful. It depends on whether the investors would be comfortable, particularly non-Canadian investors. If you look in the United States, non-voting shares are not very popular. In Canada, there are exceptions to that.
That is something that perhaps we should look at.
Senator Austin: I am curious about the discouragement that is offered to passive investors in the MacKay report; the recommendation is that the minister not grant authority to exceed 10 per cent to passive investors. Could you explain to me the distinction between an industry investment and a passive investment in the bank?
Mr. Flood: I suppose a passive investor would be more in a pension fund, for example.
Senator Austin: Say CalPERS wanted to own 15 per cent of the bank; what is the MacKay report worried about?
Mr. Flood: I am not sure.
Senator Kenny: I must say that this is the first time I have heard CalPERS described as a passive investor.
My first question concerns recommendation 2(b), which relates to corporate governance and the splitting of the CEO from the "non-executive board Chair." Your position, please.
Mr. Flood: In the proposed new bank Mr. Baillie would be the president and chief executive officer and I would be chair of the board. Both of our boards of directors have agreed to separate the two jobs.
Senator Kenny: If the merger does not go ahead?
Mr. Flood: I think our board is fairly neutral on this position, but I think they are leaning towards the separation of the two positions.
Senator Kenny: Page 6 of your presentation to us talked about banks consolidating and improving their efficiency. Can you demonstrate that large financial institutions are more productive? If so, what measures do you use?
Mr. Flood: First, in today's age of technology you have to make a huge investment. I will give you an example. We spend $1.2 billion a year and use about 25 per cent of that for investment in new revenue-producing products; 75 per cent is used for maintenance of our existing systems. I think the TD's budget is about half that or so. I believe their percentage is the same. If we put those two budgets together, we could probably spend at least 50 per cent on investment in new products and research and development to make us more competitive. That would certainly improve our productivity.
Second, we could spread our advertising and marketing efforts over a larger client base; we could do that today, using the Web, and when you move to Web sites and to the Internet, "brand" is very, very important. If you look at Citibank, Bank of America and American Express, these people are selling a global brand, and Canadians understand what that is. Once you get outside Canada, though, a lot of people do not know what CIBC is.
If we are to penetrate the U.S. market, with Oppenheimer and Waterhouse, and all those other businesses, we will have to spend a lot of money on brand advertising in the United States. We cannot do that alone. That is when the economies of scale and the productivity come into play. As I mentioned earlier, you can also combine your computer centres. You can have one head office. You can do a number of things. You can improve productivity.
Senator Kenny: Really my question was: Does efficiency always come from size or are there limits to economies of scale at some point?
Mr. Flood: I think there are. It has been proven over history that you can get to a stage where a company gets so large that it is more difficult to manage.
As we go down the road of technology and communication, things are moving very rapidly; that is why you are seeing a move towards consolidation, because it is easier to manage with the information flows you have today. Also, we are managing in a much broader realm -- not only in products and in businesses, but in geographic coverage.
Senator Kenny: I do not want to prolong the discussion about the in-house sale of insurance. I know you have a very productive subsidiary. I have seen it. It is very impressive. However, at virtually every stop that we have made, insurance agents have come and made a case to us that they really do not like this development. Are people really concerned about losing their jobs or are they concerned about having to go and work for you? Why are they coming to us and making this case always?
Mr. Flood: I guess it is a vested interest. They feel that we are moving into their business. I guess our argument on that is that the financial services business is changing to such an extent that the insurance companies are not in the insurance business anymore. As a matter of fact, you know, on the growth of sales of life insurance, there is no growth. The growth in those companies is really coming from the sale of mutual funds and financial planning. So we are bumping into each other.
What has happened is that our depositors have become investors and their insurance policyholders have become investors, and that is where we are meeting. That is why we are bumping into each other and people are sort of looking in the rear-view mirror and saying, "Well, that is a bank and this is an insurance company; why don't we keep them separate?" In fact, the customer has taken us down the road and has brought us together.
We are in a totally different business altogether. When people come in to see us, they want to look at all of their financial needs. I would suggest to you that, when they go to an insurance company, once the insurance company gets into the payments system, they will do the same thing. They will provide all of their needs, including a mortgage and a credit card. It will be an insurance policy. It will be a transaction account. So they will be in the banking business and we will be in the insurance business -- if you want to look in the rear-view mirror. I look to the future and say that we are in the financial services business. I think that is where we have to look at this in a different way. History has already proven that. The Caisses populaires Desjardins have proven that in Quebec already; they moved into this business and the business has grown.
The MacKay report indicates that a number of Canadians are not serviced by the insurance companies because they do not have the reach. We have a much larger reach, one that goes out into the rural communities and areas where people do not have the opportunity to buy insurance.
I think we can all grow in this industry. The answer is to make it a win-win situation for everybody; that is why we say we should not cherry-pick MacKay. Let us not have other people cherry-pick MacKay, either. Let us approach this in a holistic way, looking at it from the standpoint of the consumer as opposed to the historic bankers, insurance companies or mutual fund companies; let us look at it holistically from the consumer's side. If we look at it from that standpoint, I think we can make it a win-win situation for us and for the insurance agents as well.
Senator Kenny: Earlier in your testimony there was some discussion about Canadian ownership. Tell us, please, why Canadian ownership is important when we have the capacity to control and regulate. Why does it make a difference?
Mr. Flood: I say "Canadian controlled," and I think you need to have a government policy. I would say from a public policy standpoint that you would want to have it government controlled, and I think it would be beneficial to have it a Canadian-owned company as well.
I can tell you what a number of Canadian exporters have told me. Just this morning I heard a Canadian company arguing the point that, in competing for a contract in South America, they were competing against a British company, an American company, and another European company. They said, "You can rest assured that the German banks, the British banks and the American banks knew who their customer was and who they were supporting. Thank God we had some Canadian banks supporting us."
You know, we have to have a little nationalism in this country too. I think we are losing that. Quite frankly, I think we are losing something.
Senator Kenny: Really, what I am asking you is not to give us the public policy perspective. I would like to know the bank's perspective. Are you saying that from a banker's point of view, from the CIBC's point of view, you want to see Canadian ownership and that is your policy?
Mr. Flood: No. I was looking at it from a public policy standpoint.
Senator Kenny: I am asking you to look at it from the other perspective.
Mr. Flood: If I looked at it in a purely commercial sense, I would say that we could become a global bank with global shareholders and our shares could be bought for the highest price by anyone wishing to buy them. That would be the free capital market system.
Personally, I am still a Canadian, and I put my public policy hat on when I get into this issue. I think we have to be Canadians and that is why I am arguing that we should look at Canada as a country and make it competitive. The way we will make it competitive is to make it more productive. Certainly, if we do not look after ourselves nobody else will. I can tell you that.
I am always amused when I hear that we are upsetting the foreign insurance companies or we are upsetting the foreign automobile companies on leasing. When I go to Washington or to London or to Tokyo or to Frankfurt, nobody gives a damn about the Canadians. I can tell you that. They worry about the Germans, the Japanese, the Americans and the French -- and they look after them. Why don't we look after Canadians? That is the question.
Senator Kenny: You should run for office.
Mr. Flood: I think it is about time somebody grabbed a hold of this issue and became very emotional about it, because I cannot understand why we are having a debate about giving preferences to foreigners over Canadians. Why should we? Somebody give me an answer to that question.
Senator Kenny: The way it works here is that I ask the questions.
Mr. Flood: I think we should start looking at the bigger picture in this country.
Senator Kenny: On page 9 of your opening statement you made reference to community impact statements. Would that be just for banks or would it be for all financial institutions.
Mr. Flood: All financial institutions. The whole MacKay report is dealing with the whole financial services industry. I think we have to get "banks" out of our vocabulary.
Senator Kenny: Can the small guys handle that as well as the big guys?
Mr. Flood: Sure they can. Sure. Why not?
Senator Kenny: They say they cannot. They say you have 200 people to do that.
Mr. Flood: Let us not make a big regulatory burdensome thing of this. Let us make it simple. Let us make it just a simple community statement; that is all. What do you do? Let us not tie everybody up in knots over something like that.
Senator Kenny: I think the public sees the benefit to the banks from this merger. What they do not see is the benefit to them as consumers if the merger goes ahead. We already have really low service charges in Canada. We understand that. They are very competitive when you look at other countries. Despite that, why have your two banks not made a statement that you will share with your customers some of the productivity or the savings that you will accrue as a result of the merger, if it goes ahead, by having even lower service charges?
Mr. Flood: The reason we have not done that is that we are in negotiations with the Competition Bureau, and we are not quite sure what the shape of the new company will look like when we are finished with those negotiations. Also, we are precluded from sitting down and colluding in putting together a pricing package. Our legal advisors are advising us to be very prudent in how we manage that.
I would suggest to you that, once we get through all that and have an idea of where we are, and once get the authority from the Competition Bureau with good legal advice, we would like to put some packages out in front and make a customer package that would be attractive. I agree with you that that is a big issue. It is the biggest issue I run into across the country, with my customers saying, "What's in it for me?" Somehow, Mr. Baillie and I have to put that together and go to our customers and say, "This is what is in it for you."
If I understand correctly, that is where Mr. MacKay and his committee are coming from, when he talks about the public policy review process. I suspect that that is one thing he is looking at among the items on the agenda, and that is what we would like to do, but that is a big issue and it has put us, I think, at a disadvantage in this debate.
Senator Angus: I must say I was very moved by your flash of patriotism and nationalism. I was just looking at your brochure, with all these geese flying across the top. I am quite interested in geese. In fact, some people call me "the goose." What is the significance of those?
Mr. Flood: They are loonies; they are not geese.
Senator Angus: I think the significance is found on the last page there, but I would like to hear your own articulation of the spin.
Mr. Flood: We think we have become a very innovative company and we have encouraged creativity and innovation. As a matter of fact, that is one of our values -- among others of stewardship, respect and excellence -- and in order to encourage people to see beyond we have developed this. If you look at all our plans, you will see that we are trying to deal not with just today. Everybody seems to fall into this pothole: "This is what today is and that is what yesterday was." We want to look out and try to dream what the future will look like and prepare for it. So we are trying to create our people to do that. I think we have made a lot of gains in doing that.
Senator Angus: That is helpful. I have a couple of questions that I want to develop. First of all, in the normal course of your business, from time to time, do you have occasion to close branches?
Mr. Flood: Yes.
Senator Angus: Are you planning at the moment to close any branches in the normal course?
Mr. Flood: Yes, we are planning to close some branches.
Senator Angus: I am just wondering what the process is. When you decide to close a branch, I imagine it is as a result of a plan; is this thought about in advance?
Mr. Flood: Sure. We go through changing markets; whether it is in rural areas or urban areas, markets change, mines close, businesses close, and districts within a city change. Sometimes the market changes and you have to relocate; so you open new branches and you relocate. You also consolidate some branches. In some areas we put three branches into one.
In the smaller communities, the most challenging area is where we are the last branch in town; that is the most sensitive area, and we try to work with the community, asking how close they are to another town, what types of services would remain, and could we work through an agent or a post office or something like that. For example, is there a Loblaws store in town, or whatever?
We have looked at the notice period, and I know that MacKay has recommended that we move to a four-month notice, and we would agree with that.
Senator Angus: Well, you would take four months anyway in the normal course, would you not? So you would have no trouble with that.
Mr. Flood: We have made a commitment. Both Mr. Baillie and I have said that under this new merger we would be very sensitive about closing any branch under the new merger for some time. Just for clarity, Mr. Kluge tells me that we had a three-month notice period and we have now implemented a four-month notice period.
Senator Tkachuk: When you close a branch, are you closing it because it is not profitable or not profitable enough?
Mr. Flood: Generally, it is because it is not profitable. Generally, the business is --
Senator Tkachuk: Losing money?
Mr. Flood: Usually. Because if it is profitable, if it is adding, there is no reason to close it. Once a branch is there and you have the deposits, and whatnot, and there is the possibility that the town will grow, or the area will grow, you do not want to close the branch. So, generally, if you close, it is because you are losing money.
Senator Angus: I want to pursue the concept of bigness being better and bringing efficiencies. It has been suggested that you folks have been caught up in a mindset that you have developed, that you have not made your case about bigness being better, and that at this point in time you will never be able to make it because positions have been hardened.
When Mr. Godsoe came here, I suggested to him that he was more or less talking sour grapes and speaking out of both sides of his mouth depending on what time of the year it was. In any case he said that bigness is not necessarily better. This was not helpful, obviously, to disabusing people of that kind of mindset.
Mr. Barrett came in the next day and I put that to him, telling him that Mr. Godsoe had said there is not one iota of evidence that bigness is better. I put it to Mr. Barrett and he kind of dismissed it. He said, "Well, you know, some people say the world is flat and some people say Elvis is still alive." But really it is very important that, if indeed it is better, there is a sufficient element of competition out there to withstand this kind of increase in size.
I think it is only fair to give you, Mr. Flood, an opportunity to give your statement to Mr. Godsoe's comment.
Mr. Flood: I think there are choices. Every management and every board makes choices. We would like to be a tier-one player certainly in North America. When I say "we," I mean Mr. Baillie and me. We got together and said, "Let's be a tier-one player."
We also are looking at the competitor that had already announced that it wanted to be a tier-one player. We wanted to provide some competition for them as well, not only in Canada, but on the global stage, and particularly in North America. That is a choice where we think there is a greater opportunity, and with the two organizations we believe can do that. However, there is nothing to say that other banks cannot operate in their own market in a different size, at a tier-two level or tier-three or tier-four level. You can have community banks. You can have credit unions. You can have Canada Trust, the Bank of Nova Scotia, the National Bank.
There is no reason why they cannot pick out the niche they want in their marketplace. That is a management choice. That is what we are talking about. Let us give everybody a choice and have a flexible regulatory system that allows that to happen. It is up to management and up to the board, but if we are restricted from doing that, then we do not have a choice.
Senator Angus: It may turn out to be a myth, but as we went on our travels and read other literature, one point that kept coming up, as sort of the contre-partie of "bigness," was that Canada is a very special place, which has unique demographics and a unique geography, and we should not necessarily tinker with a system that does not have, inherently, an extensive second tier in the retail field. However, as an example, this afternoon just before your own appearance the gentleman from OSFI suggested that maybe there already is an active competition in retail banking at a second tier.
Do you have any comments on that? I think it is very significant to the whole point that you are trying to make.
Mr. Flood: There is lots of competition and there will be a lot more as people move on to the Web sites and we allow foreign banks to come in and non-banks to come in. We have not talked about Newcourt; we have not talked about General Electric; and look at President's Choice Financial; they have talked about buying Provigo so that opens up Quebec, and then you have Sobeys buying Oshawa Wholesale. There will be banks all through there.
We want to have the most interconnected system through automated banking machines, but there will be lots of other people in electronic banking as well as in bricks and mortar. If people move into the payments system, all kinds of people will be in the transaction business. I think there will be a huge amount of competition, and that is what is driving us, because we think the past is obsolete and we are on the cusp of a whole new era in the financial services business.
I think you have to look at it in the same way as we looked at the communications industry. Look back at the telecommunications industry 10 or 20 years ago, and compare that with what it is today and what it will be 5 or 10 years from now. Look at the different competitors that are in the marketplace now. That is what is happening to the financial services business.
So people will have a tremendous amount of choice. This idea that people cannot walk across the street, that they are sort of frozen in bricks and mortar on four corners and are saying that those are the only suppliers -- that was yesterday.
Senator Angus: You are saying they already have a choice; they have a choice in the retail area.
Mr. Flood: Absolutely, and if you look out down the road three to five years from now, they will have far more too.
Senator Angus: When you were talking about the foreign banks coming in, you said you had no objections to these recommendations which would involve a certain limit in wholesale banking --
Mr. Flood: Well, I am not sure --
Senator Angus: I might have imagined that you were emphasizing "wholesale," but would you have any problem if they came into the retail field, or at least were allowed to come in? We do not think they will come in anyway, but would you have a problem there?
Mr. Flood: As I explained to Mr. MacKay in our submission, I used to work in New York and I managed our U.S. operations. I looked closely at the U.S. system. We are allowed to operate in the United States on the wholesale business without much restriction. We are treated on a national treatment basis in the United States, but if we wanted to take retail deposits, then we would have to have FDIC insurance and, therefore, we would have to have a subsidiary that was well capitalized.
I think the same thing should apply here with foreign companies. If they wish to take retail deposits, then they should be members of the CDIC and they should have capital and the Superintendent then can look after them directly. That is the difference.
Senator Angus: In other words, branching is okay for wholesale at a certain level, but for retail there would have to be a level playing field; you would not have a problem with a foreign bank operating retail.
Mr. Flood: They are allowed to do that today. When the Bank Act was changed in 1980, that allowed the foreign banks to come in and do that.
Senator Kroft: We have heard from a number of witnesses over recent weeks about U.S. practice in a number of merger situations where regulatory authorities have required disposition of assets, in-branch really, on a going-concern basis -- people, customers, and so on. We have also heard on the Canadian side from Mr. Clark at Canada Trust and from Mr. Nasr at the Hongkong Bank, both of whom would be willing participants in an acquisition program to expand their structure more rapidly than might otherwise be possible.
As part of working out the future picture, where do you think that type of approach might fit, as a reconfiguration or reallocation of assets and facilities and capacity in the Canadian banking system?
Mr. Flood: When we get through with our negotiations with the Competition Bureau, if indeed there are some assets or branches or clients that we have to divest ourselves of, then we will have to look at the potential buyers. Some of the buyers you mentioned are potential buyers, and there others as well, including foreign banks, credit unions and even people who might wish to start up a community bank. I think maybe we would have an auction. There is no reason why we could not do that.
It was obvious to me, as I listened to some of our competitors' statements, that they would like to have us divest a lot of our business. We think that would shrink us. We do not want to become a niche player in our home market either. We want to live within the confines of the competition according to the Bureau's requirements, but we would hope that we would be treated fairly on that basis.
Senator Kroft: Thank you for that response. You have just said that you do not want to become a niche player in your own market. That leads me to another question I have been wanting to ask. One thing that has been very interesting for us has been learning a little bit more about the credit card business. It has been, for me, quite an education to see the way in which that business has been built as a highly specialized, focused business. It is clear that not only is it a matter of scale, although that is important, but it is obviously a matter of a business having developed on the basis of enormous focus, concentration and business intent in the particular area.
Your plan for the domestic market, as I understand it, is to remain as a fully universal bank domestically, perhaps slightly more focused in the U.S., and then you will become more niche oriented as you go further afield. I think those were the steps you described.
Mr. Flood: Correct.
Senator Kroft: It has been interesting for us to see the insensitivity of the credit card business in Canada and the forces that are coming to bear on it. Do you really see the banks, all of you, remaining in that business, or is that not just becoming almost a separate industry in itself?
Mr. Flood: In the United States the banks have lost a great share of the credit card market. The specialty firms, the monoline firms, have grown enormously in the credit card business. As a matter of fact a number of the banks there have lost, or sold out, their credit card business. There are only about a half a dozen major credit card companies in the United States. There are three major monoline companies, or maybe four, and then three or four major banks.
The challenge that we will face here with the monoline companies coming in will be because of their size -- the old argument of economies of scale; we think their costs are between 15 and 30 per cent lower than ours. When you talk about competition and the benefit to the consumer and opening up your markets, this is the benefit you are seeing.
Whether or not we can withstand that type of competition over a sustainable period only time will tell, and that is why we will have to make decisions on whether we can compete. We think today we can compete on a combined basis. We will be able to put our two forces together and go head to head with the MBAs, the First USAs, the Bank Ones, and the Cap Ones, among others, and American Express. We think we can do that because we have a very good card, and the Euro Gold card, and all of those things.
However, we will have to put out a tremendous amount of energy and be very competitive, and we are already seeing declining revenues eating away at that. That is the bottom line. Everybody may be saying that there is not that much competition, but every day we are looking at our revenues getting less and less in our home market. If we stand still and accept the status quo, there is no question that we will be much smaller five years from now. We have to find new areas of revenue growth. The credit card is one area that we are being attacked on, but we will give them a run for their money; I will tell you that. You and I will have to sit down five years from now and see who is winning.
Senator Kroft: Well, at least you only have one card to worry about.
The Chairman: Two very short questions. You have not commented on the bank holding company model as proposed in MacKay or the financial services holding company model. Do you see any advantages of that to the industry in general and do you, in particular, have you any interest in it at all if it happens?
Mr. Flood: Yes. We recommended it in our submission to the MacKay task force a year ago. We recommend it. As a matter of fact, I think we were probably the strongest proponent of the bank holding company structure. We think it would give us more flexibility and there might be some businesses that would not be regulated to the same extent and we might even be able to form joint ventures, for instance.
As a matter of fact, just today we formed a joint venture with Hewlett-Packard to service our electronic commerce and run our computer centres. If that had been in a holding company, it probably could be structured with more flexibility.
Again, I go back to my experience in the United States; we have a bank holding company there and we are in the leasing business and we are in different other businesses. We can do a lot of things in the United States that we cannot do in Canada, you see. That is my argument. What is wrong with Canada?
The holding company has given us a lot more flexibility. I was delighted to see the MacKay task force pick up our recommendation on that.
The Chairman: Did your recommendation call for a regulated holding company or an unregulated holding company? I ask that because in the U.S. a number of the holding companies are unregulated.
Mr. Flood: Well, not necessarily. You have to deal through the Fed. For everything we do in the United States the Fed comes in and examines our bank holding company.
I would say that in Canada, when you look at some of the problems that the trust companies have had here, the Superintendent of Financial Institutions was not able to get to the holding company. I think that is a mistake. I think that is a failure in our system. It is important to allow the superintendent access to the full holding company, if necessary, from a regulatory standpoint.
The Chairman: Given your desire to increase your asset base and to increase your amount of equity, could you accomplish much of what you want to accomplish by your proposed merger with TD by, in fact, expanding across the pillars rather than consolidating within the pillars, such as, for example, acquiring Manulife or one of the very large insurance companies? That would add to your asset base terrifically but would not raise any of the competition problems.
Mr. Flood: Well, we hope to do that also; but, quite frankly, I think that the best argument, the best proposal, for the country to have a tier-one financial services company is to put the two banks together at the beginning, and then that gives you the platform to move out.
We are not really in the insurance business. We talked earlier about the insurance business and all that, but that is on the periphery. If you give us all the authorities and whatnot, at the end of the day, our core business is still in our deposit-taking and lending and underwriting, and all of those things. That is the business we understand and that is where our knowledge is. Obviously, however, expanding laterally would be another choice. If we are not able to move ahead in this fashion, then we would have to go laterally; and maybe on the other side we would come back to you and say, "Well, then, let us become part of a global group and we will then become the branch plant."
The Chairman: I was not going to ask the next question, but it seems to me a logical consequence of your statement that consolidation within a pillar is necessary to become a tier-one position. You commented peripherally that at that point, having done that, it would be nice to cross the pillars.
Does it not follow to us as public policy-makers that, if we accept your premise that it is desirable to have tier-one Canadian players, then one also ought to allow consolidation within the life insurance sector, but absolutely not across the pillars?
In other words, if your strategy is: "We ought to have a couple of very good tier-one banks," it seems logical that you would conclude, "We ought to have a couple of tier-one insurance companies, but under no circumstance should we allow the two to get together." Is that a reasonable conclusion?
Mr. Flood: I would not say that. I was going through a decision tree.
The Chairman: I thought you might be unhappy with that conclusion, but I thought that it was a natural conclusion.
Mr. Flood: No, but you might want to look at it from the other way, putting your insurance hat on: Maybe a large insurance company would like to buy a bank. Why would you stop them, if they wanted to do that? Why put in these artificial barriers? Why not just open it up and allow people to merge? If one of the large insurance companies wants to buy one of the banks, why would you stop them? Why not have it both ways?
The Chairman: I think we could pursue that for some time, but we have used up our time. Thank you very much, the two of you, for coming. We appreciate your being with us.
Senators, our final witness for the day is the president of Deutsche Bank of Canada.
Senator Tkachuk (Deputy Chairman) in the Chair.
Senator Meighen: Mr. Chairman, I would like the record to show that, unfortunately, I will have to withdraw at this point, since I sit on the board of Deutsche Bank. Much as I would like to hear their presentation, I think it is better that I do not take part in the discussion.
The Deputy Chairman: It is noted.
Senator Kelleher: Mr. Chairman, since I sit on the board of another Schedule II bank, I think it is in the best interest of all concerned if I also withdraw.
The Deputy Chairman: We will proceed. We have before us Nicholas Zelenczuk and Michele McCarthy from the Deutsche Bank.
You have quite a long presentation, and since we have scheduled one-half hour and one-half hour for another witness, could you summarize the points you wish to make as best you can? This will be part of the record of this committee, and we will take notes, because senators like to ask questions and get into general discussions. That allows more time to do that.
Mr. Nicholas Zelenczuk, President and Chief Executive Officer, Deutsche Bank Canada: With me is Michele McCarthy, our chief legal officer and corporate secretary.
I want to thank you for the opportunity to address the MacKay task force recommendations.
Deutsche Bank is an active participant in the Canadian marketplace and we have taken great interest in the evolving regulatory framework within which the Canadian financial services sector operates.
Our submission to the MacKay task force was entitled "Same Business, Same Risk, Same Rule," and it is my objective to build on that submission while remaining true to its theme.
The presentation earlier this morning from Mr. Stammati, the president of BCI, representing the Schedule II community, is representative of the views of Deutsche Bank Canada and I endorse his statements.
Prior to the release of the MacKay report, and since, there has been a lot of discussion on the mergers of the Schedule I banks and the demutualization of insurance companies. Far less attention has been paid to the great deal of work that has been already been done on the role of the foreign banks, the Schedule II banks, in Canada. While we appreciate the importance of the merger issues, it is our view that the issues touching on the place of the Schedule II banking community in the marketplace are also important.
There is a great deal of potential within the Schedule II banking community that has been insufficiently developed under the current regulatory framework.
I wish to set out the role and the position of Deutsche Bank in Canada in order to demonstrate that potential.
Deutsche Bank Canada was founded in 1981 and maintains offices in Montreal and Toronto. We are a wholly owned subsidiary of Deutsche Bank AG, which in terms of assets, is currently the third largest bank in the world. We have a securities dealer, and provide capital market, securities, and investments banking services to a number of institutional and corporate clients.
We have recently shifted our focus at Deutsche Bank to becoming the global centre within Deutsche Bank AG for metals and mining sector activities. I think that is an important development for us in Deutsche Bank Canada, and also helpful to our Canadian clients.
Deutsche Bank AG has adopted this strategy because they recognize that Canada is the appropriate world centre for the metals and mining sector, since most of the major players in this sector are resident in Canada.
Deutsche Bank believes that through its activities in Canada, and with its affiliation with the parent, Deutsche Bank AG, we can bring the advantages of global capital markets to Canadian companies, permitting them to prosper in Canada while opening doors for them in the international financial area. We anticipate that Canadian companies will benefit from access to the worldwide pool of financial products and clients.
With respect to the MacKay report, we wholeheartedly endorse the report's four themes, including increasing competition and empowering consumers. Although our focus in Canada is not directly on the retail consumer, the indirect effect of offering choice and competition in the institutional markets will benefit ordinary Canadians by making the companies for whom they work more successful and better able to access a worldwide pool of monies and liquidity.
In particular, we want to express our support for the MacKay report recommendation that greater regulatory flexibility be introduced in the Canadian financial services sector.
You have undoubtedly heard throughout these hearings that the foreign banking community wishes to conduct business in Canada on a level playing field, so that we can compete effectively and provide Canadian customers with the best that the world has to offer.
We believe it is important that, in an era when we are hearing again of the great brain drain, of our best and brightest leaving Canada, our operation offers those highly skilled individuals an opportunity to work in Canada in an international company. Canadians working at Deutsche Bank deal with some of the most interesting issues and innovations in the financial marketplace while remaining in Canada. We currently employ over 300 people and hope to grow our business commensurate with the removals of the barriers to competition.
As a Canadian, I want to enthusiastically convey my hope that the committee`s recommendations will permit Canada, and Canadians, to flourish as dynamic participants in the evolving global marketplace.
There are a few issues that we want to specifically address, including the place of foreign banks in the Canadian marketplace.
In December 1997, the Canadian government gave an undertaking to the World Trade Organization to permit foreign bank branching within Canada. We fear that this initiative is currently being lost in the much broader debate on the nature and the future of the financial services sector.
We believe that permitting foreign bank branching is an important first step in creating sufficient competition in Canada to protect the marketplace in the event of further mergers being approved in the financial services sector.
We trust that the committee will not get mired in the view that the MacKay report recommendations constitute a comprehensive code for regulatory change, and thereby imperil the undertaking to permit foreign bank branching.
Regardless of action taken with respect to the other issues in the MacKay report, we believe that foreign bank branching will constitute a positive development in the evolution of the Canadian financial services sector.
While we are not currently involved in retail banking in Canada, the services that we offer to corporate and institutional clients, and the indirect benefits to ordinary Canadians, are considerable.
Deutsche Bank AG, our parent, has over $1 trillion in assets and $31 billion in capital. This balance sheet should and could be utilized to a greater extent in Canada to benefit corporate and institutional customers.
Currently, Deutsche Bank Canada`s capitalization is some $600 million, which makes us the second largest Schedule II bank in those terms.
Although our capital has increased substantially over the last three years, from $200 million, the current regulatory framework restricts significant growth potential.
I will give you an example of where we think the regulatory environment is uneven.
In 1995, Deutsche Bank acquired ITT Commercial Finance in North America and subsequently changed the name to Deutsche Financial Services. Deutsche Financial Services provides inventory and accounts receivable financing and we support some 1,600 middle market, small and medium-sized businesses in Canada.
When we made the acquisition, we requested that DFS, Deutsche Financial Services, be incorporated under the Trust and Loan Companies Act. That permission was not forthcoming, since it was believed that a commercial bank could not own a commercial bank.
While we believe that we are providing a valuable service through Deutsche Financial Services, since it is held to be a commercial bank, we are regulated as such and subject to their capital adequacy requirements, reporting, corporate governance, and examination requirements.
This is fine, except that we operate at a distinct disadvantage vis-à-vis our competition, who are unregulated; companies like Newcourt Credit and Transamerica Commercial Finance Corporation Canada, just to name two.
In the U.S., Deutsche Financial Services is not regulated by the Federal Reserve Board, although in Canada we are regulated by OSFI.
We propose that Deutsche Financial Services be allowed to operate in Canada, regardless of size and parentage, as an unregulated finance company like our competitors.
We believe that Deutsche Financial Services offers the kind of competition that is needed to balance the potential concentration in the financial services sector.
Resolution of tax issues was another matter we brought up in our submission "Same Business, Same Risk, Same Rule." We agree with the MacKay report that the capital tax regime makes banks less competitive. We believe it is an anomaly for an entity bringing more capital into Canada, with a view to generating more business, and therefore benefiting Canadian clients, to be required to pay a tax before that capital is put to work. In our view, this is punitive and discourages growth.
Mr. Stammati raised a range of other issues on tax matters that I think also need to be addressed.
The Schedule I banks have presented the view that the world is becoming a global marketplace, and in this context, it is our objective to grow in Canada and offer Canadians the benefits and advantages of Deutsche Bank's spectrum of services.
Canadian customers are becoming more internationally aware, and prominent companies like Northern Telecom, Bombardier, and Magna demonstrate what Canadians can do abroad. We believe that this is where Deutsche Bank can offer a service, since we have many offices in 56 countries. Not only can we facilitate the progress of Canadian companies in a wider world, but we can also bring the wider world to Canadians in order to increase choice, competition, and liquidity.
The Government of Canada, the Bank of Canada, and certain Canadian provinces have also used our services. I think it will come as no surprise to this committee, given its sophisticated understanding of the capital markets, that Deutsche Bank can offer significant advantages to customers such as the Government of Canada, when it is seeking to raise $4 billion in a currency other than Canadian.
In Canada we are particularly proud of our focus on the natural resource sector as the global centre of Deutsche Bank AG for the mining and metals business. We offer those Canadian companies a breadth of understanding in lending, capital markets, debt instruments, and the like, and help to make them truly international players. One need only read the morning newspaper to see that companies such as Placer Dome, Barrick, Inco, and many others are significant worldwide players whose mining interests, notwithstanding their Canadian base, extend far beyond the borders of Canada.
With regard to regulation, one of the overarching concerns appears to be that there might not be adequate regulation of foreign banks in Canada if they were to become branches. We believe that permission to be a foreign bank branch would not deprive OSFI of access to the type of information needed to assess whether the operation is run within sound and prudent business standards.
Given the level of sophistication of international regulators in today's marketplace, this committee ought not to be concerned that the Canadian business customer or the Canadian consumer will be adversely affected or endangered.
Let me summarize here, in the interest of time, as you have requested. Let me turn around all these many arguments that I have just sailed through.
Our view is that if foreign branch banking is delayed or mired in the larger debate of Schedule I bank mergers, the Schedule II banks will continue to operate under the current, uneven regulatory principles. The corporate, institutional and retail customer will suffer from having less choice in a more restricted marketplace.
Deutsche Bank, and other foreign banks, will be hampered in their growth in Canada and will hire fewer skilled and able Canadians. I ask you to consider whether that damage to the marketplace is significant. We need to work to ensure that our financial services sector is vital and competitive.
This committee has an important duty, which is to comment on the future and shape of the Canadian financial services sector. We believe that the hallmarks of that marketplace ought to be even-handedness and fairness, while providing the business and individual customer with the broadest range of products at the best possible price.
Thank you for the opportunity to present to the committee.
Senator Austin: Thank you very much for your presentation. I wanted to understand this: Does the undertaking to permit branch banking, which is still suspended somewhere, solve your problem with respect to the financial services business you bought from ITT? It will then be home-base regulated under the arrangements between OSFI and the German regulatory authority?
Mr. Zelenczuk: Even if the branch banking regulations allowed us to own that business within the branch, it would not solve that problem.
Senator Austin: It would not.
Mr. Zelenczuk: No. It would still be regulated as a bank. What we need to do there is to create a separate legal structure for that particular business outside the purview of a regulated environment.
Senator Austin: So you would then end up with a branch bank and a permitted subsidiary.
Mr. Zelenczuk: That is correct.
Senator Austin: That would put your ITT acquisition in the same position as any other tier two bank in terms of its competitive capacity.
Mr. Zelenczuk: It would put us in the same position as competitors like Newcourt Credit, which is unregulated.
Senator Austin: Do you take retail deposits in Canada?
Mr. Zelenczuk: We do not.
Senator Austin: If you do not take retail deposits, what is your understanding of the purpose of OSFI's regulation?
Mr. Zelenczuk: OSFI has a responsibility to regulate both the retail and the wholesale banking sector, and there are certain prudent business standards that they have identified, and that we comply with, when they audit us on a regular basis, notwithstanding that we do not take retail deposits.
Senator Austin: Newcourt and GE Capital do not operate that type of business in Canada.
Mr. Zelenczuk: They do not take retail deposits and they are not regulated by OSFI. They finance themselves in the wholesale market.
Senator Austin: How is that different from what you do? You do not take retail deposits and you also finance yourself in the wholesale market.
Mr. Zelenczuk: Except we are regulated by OSFI and Newcourt is not.
Senator Austin: I am trying to understand the real distinction between Newcourt, for example, and OSFI's regulation of your finance business.
Mr. Zelenczuk: OSFI regulates our finance business as if it were part of our regular banking business because we were required to include that as part of the bank when we made the acquisition in 1995.
OSFI looks at the finance business the same way it looks at our lending activities, our foreign exchange activities.
Senator Austin: Would it be regulated by OSFI if Newcourt had acquired it?
Mr. Zelenczuk: No, it would not. It is regulated by OSFI because it happens to be owned by a bank. That is what is causing the regulation by OSFI.
Senator Austin: I understand. Is there any underlying prudential reason, that you know of, why it is regulated?
Mr. Zelenczuk: Only that it happens to be owned by a bank.
Senator Austin: I will have to be satisfied with that answer and I appreciate it.
Why do you not go into the retail banking business in Canada? As the third largest bank in world by assets, you must have systems that would make you very competitive indeed in the Canadian retail market.
We have heard, for example, from Youssef Nasr of HongKong Bank, that he would have a lot of trouble entering the retail market if he were a standalone Canadian organization. However, with the technological and human resources support of the international banking group, he is able to provide retail service at a competitive price. In fact, I think he told us he was the most profitable of all the Canadian banks in terms of return on equity.
Why cannot Deutsche Bank replicate that performance?
Mr. Zelenczuk: I will try to speak for the parent bank, although I am not very involved in their strategic planning process. Deutsche Bank has determined that it wishes to follow more of a niche strategy in Canada, which is focusing on the national resource sector, notwithstanding that it has significant retail operations in Europe outside of its home country, Germany. The strategic decision was not to enter the retail market in North America.
Senator Austin: I know you are not speaking for the parent bank in any way, and the questions are directed at you because of your general experience in banking in Canada. If there were changes in the capital tax structure, and the level playing field were actually created in Canada, would that be attractive, in your view, to a Deutsche Bank or has it better uses for its capital?
Mr. Zelenczuk: I think at that point there might be a case for the parent bank to investigate the economics of establishing a retail organization in Canada.
Senator Austin: I am pursuing the topic because we have heard a great deal, both in the MacKay report and from witnesses, about the feistiness of foreign banks and tier-two banks being anxious to come in and compete with big banks. We are trying to find out where that feistiness is being directed.
Mr. Zelenczuk: We are certainly anxious to compete with them in the wholesale sector.
Senator Austin: We are thinking about the retail consumer at the moment, and where he can get services in, say, Melfort, Saskatchewan.
The Deputy Chairman: Or Kamloops, B.C.
Senator Austin: Exactly. I want to ask you about banking in the mining sector. What type of expertise do you develop in order to offer banking services in the mining sector internationally? Are you an international banker for mining companies?
Mr. Zelenczuk: Yes, we are. Our mix of staff in Canada includes bankers, geologists, and individuals with years of experience in the mining sector, who have joined us to service the metals and mining sector. We have employees, not only here in Canada, but in other locations, such as South Africa, Australia, London, New York.
Senator Austin: They report into Canada?
Mr. Zelenczuk: Yes. They service their clients in those locations, as well as Canadian clients who have operations in those parts of the world. In areas where we do not have offices, such as Chile, we go there as well with our clients.
Senator Austin: You have become a total service bank, and if the client needs equity, you can suggest equity alternatives, and on the debt side too?
Mr. Zelenczuk: That is correct. We can provide them with advisory, equity underwriting, and debt underwriting services. We trade their stock for them.
Senator Austin: You trade the commodity as well, so you can universally service the mining industry.
Mr. Zelenczuk: That is correct, in addition to lending to them.
Senator Austin: There are many of making money besides straight lending, and financial institutions seem to be good at finding them. Thank you very much for those answers.
Senator Callbeck: I have a couple of brief questions. You say that you provide securities and investment banking services to corporate clients. Is that just in the mining sector?
Mr. Zelenczuk: Our primary focus in Canada is on the mining sector, but we also service other clients and institutions. On the buying side, for example, we service pension funds, selling them both debt and equity securities. We service the Canadian government, and we have other corporate clients in the telecommunications, capital goods, and energy sectors.
Senator Callbeck: You really want to stay in the mining sector?
Mr. Zelenczuk: Our primary thrust is mining, but we also service other clients.
Senator Callbeck: You mentioned the capital tax, which we have heard a great deal about, and I think you also said you were in 56 countries?
Mr. Zelenczuk: Yes
Senator Callbeck: Is this the only country where you pay that capital tax?
Mr. Zelenczuk: I do not know the answer to that question.
The Deputy Chairman: I have a follow-up to Senator Austin`s question about regulation of the leasing business in Canada.
You are obviously regulated by your home country, Germany?
Mr. Zelenczuk: Germany regulates the German operations.
The Deputy Chairman: Do they regulate your offshore business as well, your Canadian and American business? Does the home country look at the whole package?
Mr. Zelenczuk: I believe that where we operate as a branch of the parent bank, they would regulate those activities. Where we operate as a subsidiary, as we do in Canada, they defer to the local regulators.
The Deputy Chairman: Thank you very much. There are no further questions.
Dr. Joseph Y.K. Wong, Village Medical Clinic: Mr. Chairman, members of the committee, ladies and gentlemen, thank you very much for giving me this opportunity to present my thoughts on the proposed bank mergers.
First, I would like to briefly introduce myself. I came to Canada about 30 years ago at the age of 19. I obtained my electrical engineering degree from McGill University and my M.D. degree from Albert Einstein College of Medicine in New York City. I am now a medical practitioner in downtown Toronto.
For the last 20 years, I have been extensively involved in voluntary and community services. I have helped resettle boat people from South East Asia, and helped fight discrimination and injustice. I have raised funds for various causes, including famine relief, medical research, the United Way, and the building of geriatric care facilities.
I was Chairman of the United Way of Greater Toronto from 1990 to 1992. Presently, I am the Honorary Chairman of the United Way here.
I am the founding Chairman of the Yee Hong Community Wellness Foundation and the Yee Hong Centre for Geriatric Care, a facility that serves a few thousand seniors of Chinese origin every day in a culturally and linguistically appropriate environment.
I am also the founding Chairman of the National Movement for Harmony in Canada, an organization established in 1994 to promote harmony and mutual understanding among Canadians, diversity and acceptance, and appreciation of differences. These are just a few of many community services I am involved in, and I have been fighting for the underprivileged for the last two decades.
I wish to explain to you today, my personal views on financial services as they affect the Chinese community, and on the proposed bank mergers.
I trust that you have read, as I have, a lot of negative views on bank mergers in the newspapers, especially lately. I just want to give you these words of caution: Do not slam the doors shut because it is the easiest thing to do politically. I personally want to see strong Canadian financial institutions able to compete with the best in the world. The global trend to free trade and free flow of capital has made it necessary for Canadian financial institutions to become strong enough, in terms of capital size and technological know-how, to compete with other huge, foreign competitors.
Mergers of large financial institutions have been happening all over the industrialized world. I do not think we can afford to sit idly by while our financial institutions are reduced to insignificant players, lacking the clout and muscle to safeguard our national interests.
I believe the real issue is for Canada's Competition Bureau and the anti-trust authorities to ensure, in the process of bank mergers, the survival of effective national competition in order to safeguard the interests of ordinary Canadians and small businesses, and to ensure accessibility to financial services in small communities.
Although it is primarily out of marketing needs, I have been glad to see Canadian financial institutions becoming sensitive to new Canadians in the Chinese community, offering them a multitude of services in both Cantonese and Mandarin, in addition to English.
On a personal note, I have been helped by many Canadian financial institutions in my various charitable causes. In particular, the Bank of Montreal has been most helpful and extended crucial support in the "Save Elizabeth" campaign to look for compatible bone marrow donors, the North Korean Famine Relief, and the Yee Hong Centre for Geriatric Care.
They very often bend the rules in order to help compassionate causes. I am not shy of standing on the side of justice, even though it might not be the most politically wise thing to do.
Many other major financial institutions, including Canada Trust, of which I am a director, have been strong supporters of the Chinese community and our many charitable causes.
It is worthy noting, however, that the Bank of Montreal and the Royal Bank have made a promise to donate $250 million over the next five years to charitable causes across Canada. That is a big increase from the $30 million or so that they are giving on a combined basis today.
While both banks have been very good to many Chinese charitable causes, I cannot tell you how important that additional support would be to us.
I am willing to answer any questions that you may have.
Senator Callbeck: Dr. Wong, you spoke of the financial institutions becoming more sensitive to Chinese people.
Are there any recommendations that you would like to see added to the MacKay report?
Dr. Wong: In the Chinese community, I think it is primarily, as I said, our marketing needs, because it is a huge community and we have had many new Canadians arriving in the last 10, 15 years. I believe Canadian financial institutions will continue to offer to do business with new Canadians in the appropriate languages.
Senator Austin: Dr. Wong, you are saying that, from your point of view, the Canadian financial community has offered strong and market-sensitive support to the Chinese community in Canada?
Dr. Wong: And to the many charitable causes in which we are involved.
Senator Austin: You are not in any way criticizing the competitiveness or the service that the banks have provided?
Dr. Wong: No, not at all. Indeed they are very good competitors and I encourage that.
On the board of Canada Trust, I was primarily working to promote these kinds of marketing techniques, and I am glad to see there are many financial institutions doing so as well.
Senator Austin: Broadly speaking, are you saying that Canada Trust and the six major banks are equally appropriate and sufficiently competitive for the Chinese community's business needs?
Dr. Wong: Yes, indeed.
The Deputy Chairman: Thank you very much, Dr. Wong.
The committee adjourned.