Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence
OTTAWA, Monday, November 25, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11 a.m. to study the public interest implications for large bank mergers.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Our first witnesses from the Department of Finance are Mr. Gerry Salembier, Ms. Colleen Barnes and Ms. Rhoda Attwood. The Deputy Chair of the committee, Senator Tkachuk, has asked to make an opening statement.
Senator Tkachuk: Before the Standing Senate Committee on Banking, Trade and Commerce commences hearings on the public interest aspects related to bank mergers, which it was invited to do in a letter that was co-signed by ministers Manley and Bevilacqua, I would like to read the following public statement:
Currently, neither minister responsible is scheduled to appear before the committee on the matter of bank mergers, a fact that is very disappointing to at least Progressive Conservative members of this committee. The lack of appearances by ministers before Senate committees, such as the absence of then-Minister Martin during the examination of the Financial Services Act, is an alarming trend. Martin's refusal to appear was seen by many as an affront to the spirit of democracy and as an insult to the parliamentary process. Minister Martin's lack of appearance wilfully left the issue cloudy. The latest attempt to merge, by the Bank of Nova Scotia and the Bank of Montreal, illustrates the bill's legislative failure. It appears to us that the letter from ministers Manley and Bevilacqua is nothing more than a smokescreen to cover a failed government policy, and we expressed this view during Question Period in the Senate chamber. However, in the best interests of sound financial policy, we believe that this proposed examination is still important to undertake, even if perhaps we should have withheld our support of this format of hearings until we had secured the minister's appearance.
The committee's chair, Senator Kolber, has assured me that he was unable to get either minister to appear, even though Minister Manley told the House of Commons, under questioning by the Right Honourable Joe Clark, that he would appear at an appropriate time. Senator Kolber did tell me that Mr. Manley would appear in February. It is unclear to us if February and appropriate are one and the same thing. The February time frame is unacceptable to the committee members on this side because we agreed to fast-track this special study in order to publish our findings before the end of December. Minister Manley, also in his reply to Joe Clark, said that he did not want to prejudice the hearings by inserting his personal views into the process. While I cannot speak for the Liberal members of this committee, I can assure Minister Manley that we would not find their powers of argument so persuasive that we would not be intellectually capable of agreeing to offer our own views on the matter at hand.
I do not believe that these hearings will add clarity to the process if the policy of this government continues to be at the whim of the Prime Minister. Canada cannot afford the chaos and uncertainty that this kind of policy creates. Tens of thousands of Canadians are employees of financial institutions and banks are a primary feature of all Canadian pension plans. Thus, their economic performance has repercussions far outside the Langevin Block, and their continued health and stability are important to the future of all Canadians. Following the aborted merger attempt in October, it is not only financial institutions that are looking for political leadership; Canadians are looking for political leadership — especially since the current Prime Minister has announced his intention to resign. Further, Minister Manley, in particular, has aspirations of leading this country, and I believe it is of the utmost importance that his position and leadership on bank mergers be outlined here before the public and before us.
I, therefore, formally invite the Minister of Finance, once again publicly just as I invited him before through the Chairman of the Banking Committee, and the Minister of State for International Financial Institutions to appear before the Senate Standing Senate Committee on Banking, Trade and Commerce before we table our final report this December. I would also like to add that former Finance Minister Paul Martin, prime ministerial hopeful, is most welcome to attend as a witness to give us his take on what the public interest should be.
Senator Angus: I would simply like to add to Senator Tkachuk's statement and to evince my wholehearted support for the views he has expressed in respect of the appearance by the ministers to these hearings. First, in the letter to you, sir, it is not spelled out in what way or how the minister finds a lack of clarity in the present law and in the guidelines that were circulated and published by the Department of Finance after the passage of Bill C-8. Thus, we are being asked to give clarity when we do not know in what ways the minister finds it to be unclear in the first place.
Second, and more important, this morning's newspaper made it clear that the House Finance Committee, which was privileged to receive a letter from the minister, has indicated that they are too busy with budget considerations, pre- budget studies, et cetera, to be able to focus on this particular subject. Indeed, the House committee has not focused at all, yet. Therefore, as Senator Tkachuk said about the importance of this matter for all Canadians, for the financial community generally, and for the financial institutions in particular, it seems that this ``unclarity'' has been imposed upon us in respect of when there will be clarity.
Senator Prud'homme: I just took note of this statement by the Honourable Senator Tkachuk, and I will put aside the partisanship long enough to say that it is quite ``heavy.'' I would like to offer two suggestions. First, this should be referred to the steering committee to determine if and when the ministers would be available. I would certainly be interested in hearing from ministers Manley and Bevilacqua. I speak as an independent member of the committee. We heard from Minister Bevilacqua on the collapse of Enron and his comments were highly enlightening for the committee members. I am sure that it will also be very enlightening for the members of the committee who have decided to study the merger, a very highly important issue for Canadians. Personally, I would happily support any motion to invite these ministers to appear as witnesses when the steering committee sees fit in its agenda. There should be the possibility of hearing the two ministers — or at least one of the two — because of the mandate that we were given under your able chairmanship this morning.
Senator Tkachuk: I would like to add, senator, that the steering committee has already considered this matter. Senator Kolber has issued invitations to both the ministers. They have refused, hence the statement. We have already gone through this, so there is no point in doing it again. Thank you for your support on having the ministers appear, however.
Senator Prud'homme: I would prefer to hear the witnesses while we continue this discussion on how we can do — if it is at all possible — and put it back to the committee.
The Chairman: I am not sure that I know to what you refer.
Senator Tkachuk and his colleagues have asked that both ministers appear. We gave their message to the two ministers in question, and they said that they did not think that they ought to appear. They took the position that if they are asking us for advice, why would they come to give us advice?
I reported this to Senator Tkachuk whom I assume reported it to his colleagues. There is nothing much else we can do. Everybody has now, I believe, agreed to go through this week of hearings and develop a report at some time. After he has deposited his budget, Minister Manley will come to talk to us on anything we want.
Senator Tkachuk: Is it the view of the Liberal members of the committee that the minister should appear prior to our report?
The Chairman: No.
Welcome, members of the Department of Finance. I understand you do not have an opening statement.
Mr. Gerry Salembier, Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance: That is correct, Mr. Chairman. We are here to answer questions that committee members may have on the merger review process as it is set out or on the merger legislation that is associated with it.
The Chairman: Who would like to start from the conservative side?
Senator Tkachuk: We have been asked to look at the public interest guidelines as they relate to bank mergers. Does the department have a paper on what the government sees as the public interest? I understand Minister Bevilacqua was to outline in a speech the government's public interest guidelines as they relate to the merger of the Toronto Dominion and the Bank of Montreal. He was to outline public interest guidelines that they had to meet before the merger could take place. Do you have anything that would be helpful to us in that regard?
Mr. Salembier: As I indicated, we have no opening statement for the committee. You asked whether we had a paper on the public interest matter. We do not have a paper that gets into any more detail than we have already put into the letter that was sent to the chair of the committee. That represents the minister's views on the matters about which he considers important for this committee to provide some further clarification.
Senator Tkachuk: There has been no thought by the Government of Canada as to what the public interest of Canadians should be if there is a bank merger?
Mr. Salembier: As I indicated, the thoughts of the minister on the subjects are contained in the letter that was sent to the chair of the committee.
Senator Tkachuk: Has not the department done any work on this? Has the department any background information that would be helpful to the Government of Canada or to the committee?
Mr. Salembier: We have no paper for you on that subject, senator.
Senator Tkachuk: I find this unbelievable.
Senator Angus: I do, too.
Senator Tkachuk: Why are you here then? You do not represent government policy. You are department officials that execute government policy. We expect you to be helpful to our process. There are no documents, no papers, no studies, no criticism or analysis of what happened in 1998 or what happened in the last merger attempt that was put forward to the government that would be helpful in our process here. Is that correct?
Mr. Salembier: The views of the government on what should be considered in the analysis of a bank merger are set out, first, in the merger review guidelines. These guidelines have a lengthy list of factors to be included in a public interest impact assessment that is to be produced by the banks. The minister's letter to the chair of the committee requested further clarification on four aspects of those guidelines.
Senator Tkachuk: Chairman, I will turn it over to the other side because I know that my members beside me are not only in shock, but want to follow this up. I will turn it over, and we will go from there.
Senator Kroft: Let me see what I can do to bring something constructive to this. We have the merger review guidelines that form an appendix to the legislation now in place. We have the letter to the chairs of the two committees.
The merger review guidelines contain a list of things that the minister or the government would be examining in arriving at their decision relating to the public interest in the merger.
As you well know, over the few next days we will be hearing the views of most, it if not all, of the CEOs of the major financial institutions. These witnesses will no doubt be expressing their views as to what they think the considerations should be in the public interest and what they think is reasonable and important.
I can only assume that during the period leading up to the passage of the existing legislation — and since the passing of that legislation — there has been ongoing discussion among officials of the Department of Finance and the banking industry. This would be the normal course between any industry and a branch of government in trying to arrive at a policy framework.
We do not wish to put the government at a disadvantage. We will be hearing from the CEOs of the banks. You are the closest thing that we have to a CEO of the government, therefore, could you indicate if there are any areas in the guidelines or elsewhere with fundamental disagreement between the department and the banks, or do the guidelines here reflect some form of a consensus? This is the only opportunity that we will have to hear from the government. I do not want to hear later that the banks are in disagreement with any areas of the guidelines.
It would be useful if you could indicate whether you think that there are any areas within the framing or the definition of ``public interest'' where the government and the industry are at odds. Are we dealing with a consensus position?
Mr. Salembier: I would have to suggest that the bank CEOs must speak for themselves with respect to their view on the criteria that we have set out for them. I do not think it is quite correct to say that the merger review guidelines represent some kind of a consensus. The document was not negotiated.
Senator Kroft: I am asking if they do. I am assuming there was much discussion between you and the industry leading up to the publication. Do you feel the results of the discussion represent a consensus position or, in your view, are there points that you disagree upon?
Mr. Salembier: I believe it is not correct to say that it is a consensus since the document was not put to the banks for their agreement in any way. This document was set out by the government to indicate what factors should be taken into consideration in the review of any bank merger application such as the minister is required to conduct under the act.
That being said, broad outlines of the criteria that are now set out in the merger review guidelines were a matter of public record through the interim report of the MacKay task force in 1997, the actual final report in 1998, the deliberations of this committee which led to a report in 1998, and the House Finance Committee.
It is safe to say we have not had any indication from the banks in the regular course of discussions we have had with them that the contents of the merger review guidelines are somehow at odds with the conduct of banking operations as they are normally carried out. I am not aware of anything in the guidelines that presents impossibility or an insurmountable difficulty for the banking industry.
Senator Kroft: On the issue of timeliness — the indicated time frame of about five months being the turnaround time — are you concerned that that is out of step with the views of industry? Has that been a sticking point in any of the discussions?
Mr. Salembier: Honourable senators, I believe that the absence of a time frame would have been more of a sticking point than the time frame we put in. From the point of view of an industry representative — again, you will have to ask the bankers this when they appear before you — faster is always better for any governmental approval process. That being said, the five-month time frame, in our view, represents quite an appropriate and somewhat compressed time frame for conducting the complex analysis that is required for these sorts of transactions.
Senator Setlakwe: When you speak of no real insurmountability of problems in matters of public interest if mergers take place, are you referring particularly to the problems that may occur when banks close branches or when small and medium-sized enterprises or individuals are unable to get proper financing? Is that a concern of the department?
Mr. Salembier: In suggesting that the merger review guidelines do not pose any insurmountable difficulties or that the banking industry has not indicated so, I was referring to the requirements that are set out in the guidelines on the information that the banks are required to include in the Public Interest Impact Assessment. These requirements include the business case and objectives for the mergers; the possible costs and benefits to customers, including small businesses; the timing and impact of branch closures and alternative service delivery mechanisms; the contribution of mergers to international competitiveness; the effects on direct and indirect employment and the quality of employment; and the ability of the banks to develop innovative technologies. These are the factors set out in the guidelines. We had not had any indication that explaining these sorts of things would pose any insurmountable difficulties.
As you can tell from that list, the two factors that you mentioned — the branch closures and the impact on the availability of small business financing — are indeed things that we consider are important to bring to bear in an analysis of any bank merger.
The Chairman: Could you briefly compare how our review process with those of other countries?
Mr. Salembier: Yes, by all means.
As I believe others have indicated in testimony before this committee, bank mergers are a highly charged issue in just about every country, including the United States. We are often compared with the United States in many important respects relating to the financial sector regulatory framework for obvious reasons. Our institutions compete with theirs and, in a certain sense, our regulatory framework competes with the American regulatory framework. In the United States, bank mergers are reviewed by the Antitrust Division of the Department of Justice as well as by the Federal Reserve Board and the office of the controller of their currency.
It has been said in some quarters that the U.S. system is, in some sense, less politicized. In that connection, I would make a couple of points. First, in the United States, a decision was made in the late 1990s — 1997, I believe — that saw the passage of legislation prohibiting any bank merger that would result in a deposit market share of greater than 10 per cent. If applied in the Canadian context, that would, for example, have precluded the acquisition of Canada Trust by the Toronto Dominion Bank that we approved in 2000. That legislation also prohibits any bank merger that would result in a greater than 30 per cent deposit market share in any one state.
The process in the United States also provides for public hearings. For example, the merger of the Bank of America and the Nations Bank, which I believe was back in 1998, was subject to public hearings, as was the merger of First Union and CoreStates. The merger of the BankBoston and Fleet Financial Group in the U.S. Northeast was also subject to public hearings, and they were quite highly charged, emotional hearings. A number of political figures, including the mayor of Boston and the Reverend Al Sharpton were involved in the process of developing an acceptable package of divestitures for the merger that resulted in the bank now known as Fleet Boston.
Another relevant point of comparison, in our view, is Australia, where the structure of their banking system is very similar to that in Canada. Four major banks account for the lion's share of market share in Australia as compared with five here. Of course, Australia is a federal state with a division of powers.
In Australia, the government currently has a moratorium on large bank mergers. The four largest banks, the National Australia Bank, the Commonwealth Bank, Westpac Banking Corporation and the ANZare subject to the so- called ``four-pillars policy,'' which is a matter of policy and not legislation in Australia. That ban was based, in large part, on concerns about access to small business financing. The government of Australia has said that until the state of competition improves, that moratorium will remain in place.
Australia does have a merger review process that is similar in important respects to that which is in place in Canada. There are, for example, concurrent reviews by competition authorities and prudential regulators. These agencies provide their findings to the federal treasurer, the analogue of our Minister of Finance, and their Bank Act requires that the treasurer give his final approval to any bank merger.
The treasurer makes his decision in accordance with what is set out in the Australia legislation on the basis of a national interest test. That test encompasses both the competition and prudential issues. It also addresses broader public policy concerns, such as employment, regional development, and the efficiency of the banking sector. This is closely analogous to the situation we have in the Canadian bank merger review guidelines.
There are others international examples I could get into if the committee is interested, but those are the two that we have looked at and which I think most closely resemble and are most instructive for the purposes of the Canadian debate.
Senator Angus: As you have probably detected, we have a bit of a problem with the process we are going through. However, it is my hope that we can accede to the ministers' wishes and your department's wishes and, as Senator Kroft suggests, come up with something constructive.
I would like to start my question by referring to the letter that was received by Senator Kolber and Ms. Barnes, MP, the chair of the House Finance Committee. With respect to the five banks in Canada with more than $5 billion in equity, could you itemize that list of banks for us, please?
Mr. Salembier: They are the Royal Bank of Canada, TD Canada Trust, CIBC, Scotiabank and the Bank of Montreal.
Senator Angus: Did that include the National Bank?
Mr. Salembier: No, the National Bank's current equity is in the area of $3.8 billion.
Senator Angus: How much does HSBC have?
Mr. Salembier: It is certainly well below that — I believe it is somewhere in the area of about $1 billion.
Senator Angus: What about the Laurentian Bank?
Mr. Salembier: It is quite a bit below that, somewhere in the area of $700 million.
Senator Angus: Thank you very much. This letter is on Department of Finance letterhead, and is signed by the minister. I assume you had some participation in or knowledge of the letter when it went out. Is that fair?
Mr. Salembier: Yes.
Senator Angus: This letter indicates how the approval process breaks down under the provisions of Bill C-8, as I guess it was known when it was going through Parliament. You indicate that the Competition Bureau has a certain role to play. Indeed, they have their own guidelines do they not? Just for clarification, the Competition Bureau has released a set of bank merger guidelines. These are not to be confused with the Department of Finance bank merger review guidelines. Is that correct?
Mr. Salembier: That is correct. The Competition Bureau has a set of merger enforcement guidelines as they apply to banks, which govern the analysis that the Bureau conducts. That analysis forms part of the overall bank merger review guidelines which, as you point out, are described in the introduction of the letter.
Senator Angus: The letter states that the Office of the Superintendent of Financial Institutions, OSFI, has the role of reviewing the prudential issues. I think the members of the committee understand what those are, and will be interested to hear what OSFI has to say. The letter further states that the ``government'' addresses public interest issues. Your average Canadian thinks the Competition Bureau is part of the government, and I think it is too, do you? I think OSFI is as well. Is that right?
Mr. Salembier: Yes.
Senator Angus: These organizations are part of the government, so I assume another part of the government then takes care of public interest issues. Is that right? What part of the government is that?
Mr. Salembier: The Minister of Finance is charged with making that decision.
Senator Angus: I guess, by association, that means those of you in the department.
Mr. Salembier: We provide advice to the minister to aid him in making that decision.
Senator Angus: You will recall when Bill C-8 was making its arduous way through the system, it was a very difficult process. I think I measured it to be about 36 inches high when it was on my desk, and your officials were helping me find my way through it. As it made its way through Parliament, there were critical comments made by many, both in the House of Commons and in the Senate. For example, I pointed out in a speech that our surveys indicated that it was not a very popular bill, insofar as these kinds of issues can be. We determined, for example, that there were many technical things that made it an important piece of legislation for the better functioning of our financial systems and for banks and other financial institutions.
There were, however, elements related to mergers, thresholds that were being applied and so forth. It became clear, based on all the evidence and representations provided, that they would have liked greater clarity in the bill. One of the things the Senate Banking Committee, under the inspired, able and aggressive leadership of our chairman, could not figure out was why our committee was left out of the process. It was delineated in the first draft of the bill. Indeed, the minister and others in your department saw the wisdom of writing into the process that matters involving the broad public interest would get submitted not only to the House Finance Committee, but also to this committee.
The Chairman: I am very flattered by what you say, but I assume you have a question.
Senator Angus: I do. I am trying to establish that we have some history in this matter, and that there was an established process. Today, I see in this letter — I also saw this at the time in the act — that the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce would be asked to conduct public hearings into the broad public issues that are raised by a specific merger proposal. Is it fair for us to understand that we are here today in that respect: A specific merger proposal has been made and we are being asked to check into those broad issues of public interest arising from that proposal?
The Chairman: Senator, we do not all read the letter that way.
Senator Angus: I am just reading it. I can do it in French.
The Chairman: You can do it any way you like, but that is your conclusion.
Senator Angus: It says here that we ``would be asked to conduct public hearings into the broad public interest issues that are raised by a specific merger proposal.'' I am asking if there is a merger proposal, and if we are being asked to consider it. Is that why we are here? If it is not, he can simply says he does not know.
Mr. Salembier: There is no merger application before the government at this time. The reference in the letter is a reference drawn directly from the merger review guidelines, which are carefully phrased to express the intent of the government to ask this committee and the House Finance Committee for their views in these public interest matters, in the event that a merger is proposed and the merger review process is therefore underway. The process is not underway at this time.
Senator Angus: The answer to my question is then, in a word, no. We are not here today to help advise on the public interest issues relating to a specific proposal.
I will then try to determine, as my colleagues to my right have been trying to determine with me, why we are here. The second paragraph in the letter states that since the release of the Department of Finance guidelines, ``some stakeholders have stated that the public interest tests associated with the bank merger review need greater clarity.'' Could you tell me what stakeholders have suggested that, as well as their concerns?
Mr. Salembier: There have been statements by a couple of bank CEOs over the past year or so. Those include Ed Clark of TD Canada Trust. I believe other bank CEOs have made similar statements. Mr. Nixon from the Royal Bank made a statement some months back in the same vein. However, since you have both of those gentlemen appearing before you later today, I think you could best direct your question to them for the specifics of where they consider that the guidelines could use some further clarity.
Senator Angus: That may well be the case. We now know at least that Mr. Gordon Nixon and Mr. Ed Clark have ``stated that the public interest tests...'' et cetera. Are there others? We do not know.
All I would really like to know is why we are here? I do not think it is unreasonable for me to put it to you, as the senior representative of the Department of Finance, to tell us — and I am asking you if you would kindly tell us — what are the problems that have been made known to you by some ``stakeholders'' in terms of their interpretation of the public interest?
Mr. Salembier: The four items raised in the letter are the best description I can offer you of the matters in respect of which the governments believe it would be important to seek further clarity. You have the letter in front of you so I do not need to repeat them.
Senator Angus: Did stakeholders make written submissions to you in respect to the lack of clarity?
Mr. Salembier: No.
Senator Angus: When you say ``some stakeholders have stated...'' are you basing that on press reports when Gordon Nixon goes to an IDA meeting and says X and Y? Are you referring more to formal meetings where the Royal Bank may have, quite properly in the normal course, applied for a meeting with the appropriate officials in Ottawa to ask for clarity? Did those kinds of meetings take place with stakeholders, and if so with whom and when? May I have some details, please?
Mr. Salembier: It is based largely on public reports, press reports and statements, as I indicated earlier, and industry conferences where senior banking executives have indicated that they are hopeful that some further clarification would be forthcoming. There are no specific submissions or specific meetings in which detailed requests were made of the government for clarity on particular points, no.
The Chairman: I might point out that in the advance submissions by some of the CEOs the plea for clarity seems to run rampant through their submission.
Senator Angus: That is true. I have noted that and I took note of the gentleman's invitation for us to question those witnesses, which we will. However, this is very important for myself, and I believe for many members of the committee. The Department of Finance has asked us to hold hearings on these issues and you have delineated the four particular bullet points, which seem to speak for themselves.
You are saying the concerns of the stakeholders have been made known to you through the public media, not in a formal way directly. Is that your evidence?
Mr. Salembier: Yes.
Senator Angus: You, sir, and your colleagues, Ms. Barnes and Ms. Attwood, have been intimately involved with the process and the bill went through. Do you think the guidelines are clear as drafted, inasmuch as they emanated from your good selves?
Mr. Salembier: They emanated from our good selves initially some three or four years ago. Since that time, comments have been made to the effect that further clarity would be merited. The government agrees with that contention to the point where it would be worthwhile for this committee and the House finance committee to see whether some additional clarity can be provided to respond to the concerns of the industry in this respect.
I could discuss in slightly more detail, if you like, each of the points that are raised in the letter.
Senator Angus: Would you please? It would be helpful. I believe it was our expectation that you would be making a statement today to do just that.
Mr. Salembier: With respect to access, there is a variety of means by which Canadians access their financial services. It is no longer the case that a bank branch is the only way to do most of the financial transactions that the average Canadian has to conduct. It is the government's view that access to financial services has to be broad based and not limited to a select few, and that that access should be provided to Canadians both in rural areas and in urban areas as it is key to the health of their communities.
We also believe that the quality of the access that is afforded to Canadians is important, and that in a developed economy it is crucial that Canadians have access to the most technologically sophisticated financial services possible. In looking at the implication of a bank merger we would expect that access would have to remain broadly based regionally, including in rural communities, and we would also expect that the quality of access to financial services for Canadians should not be significantly reduced by a bank merger.
On the question of a choice amongst financial service providers and the availability of financing for small businesses, there is a generally accepted view that a robust choice amongst financial service providers is a key benefit to Canadians, both as individuals and as businesses. Such choice also makes an important contribution to the broader economy since financial services are a key input into virtually every other economic activity. It is important in that regard that businesses or individual consumers have a range of choices amongst multiple service providers when they are, for example, making the case for obtaining a loan. It is possible that, in a proposed bank merger, divestitures of branches or lines of particular businesses would be recommended by the Commissioner of Competition. In that event, the strategic use of those divestitures might provide an opportunity to create or to strengthen new or existing players in the financial system.
In regard to the creation of long-term growth prospects for Canada through more effective Canadian-based internationally competitive institutions, honourable senators are well aware that Canada now has a competitive financial services sector. We hope to build on this in the event that any bank merger proposal were to come before us. In our view, it is in the public interest that financial institutions have a platform for the kind of long-term growth that would support high quality jobs and create opportunities for broader economic growth within the North American economic space.
As Canadian companies grow and become more international, it is also useful to consider the role that Canadian banks might play in meeting the financing and financial advisory needs that Canadian companies face abroad through the greater availability of financing, or through more sophisticated financing structures or instruments at home, in the United States market or elsewhere.
Finally, on the fourth item in the letter, which refers to any adjustment or transition issues, including the treatment of employees, in any large merger between two large companies there is a potential effect on a great many people's livelihood and lives. Therefore, when we consider these transactions, including the smaller transactions that we have already considered and approved over the past few years, the treatment of affected employees continues to be an important consideration as part of the public interest.
Employees can be affected in a number of ways through involuntary termination, through relocation, or having to adjust to a different job within the same organization. In that respect, the issues that would have to be considered for mergers in the financial sector, including those that are the subject of these guidelines, would include the number of involuntary layoffs, any severance packages that may be offered to employees, assistance with geographic relocation, retraining assistance and early retirement packages.
Senator Angus: Those are the four points upon which the department would like us to focus and bring greater clarity.
The Chairman: No, that is not so. Our main challenge is to try to define what is in Canada's best interest. They have made it abundantly clear that of course it is in Canada's interest that people have access to banking, et cetera, but that is adjudicated by Mr. von Finckenstein's area. The question, as you pointed out very well, of whether the ensuing entity is financially viable — the prudential issue — is looked after by OSFI.
What is totally unclear, apparently, is what is in Canada's best interest. It is up to us to define that and to try to determine whether a merger is in the best interests of Canada.
Senator Tkachuk: Give us a merger to look at.
The Chairman: We have to have some guidelines first. That is what the banks and the stakeholders are asking for. If you do not want to give guidelines, that is fine, but that is what we have been asked for and that is what I think we have to do.
Senator Angus: Chairman, I am appreciative of your assistance to the witness in answering.
The Chairman: I am not trying to help him.
Senator Angus: I think he needs help.
The Chairman: That may be, but you can see that in the submissions the matter is gone into extremely thoroughly by the banks' CEOs.
Senator Angus: I am trying to get a sense of our mandate. I am pleased to have had the witness outline the four points, but I understand it goes way beyond that, which is the long and the short of what you have just said: Is it in the national interest of Canada?
The Chairman: Yes, and how is that defined?
Senator Angus: I would like to pursue my questions, if I may.
The Chairman: Four other senators wish to ask questions.
Senator Meighen: You will be glad to know that I will be mercifully short as Senator Angus has been on the track that I would have pursued.
It seems to me that we are faced with the task of defining a concept that I think escapes definition. I do not see how we can define Canada's national interest with any clarity unless we have a specific proposal to consider in a specific context. What may be Canada's national interest today will not necessarily be Canada's national interest 10 years from now. The witness has added clarity. I do not mean this with any disrespect, but what he said in amplifying the criteria is self-evident. That is what I would expect.
You have assisted me greatly by saying that it really is not this; it is really to determine what is in Canada's national interest in the context of a bank merger. It is extremely difficult to do that without a context. We can all mouth platitudes about high paying jobs, more jobs and access for all Canadians. Those are all valid objectives. Politicians are elected to decide what is in the best interest, and they are elected to do so in a specific context.
What more do you, sir, think we can add to what you said and to what is laid out in the letter and the PIIA Contents as described in the merger review guidelines?
Mr. Salembier: On this question of national interest, I should try to bring a little clarity to this exercise. In a narrow sense, we are asking the committee for your views on the considerations that should apply in the analysis of any merger that may come forth.
Senator Meighen: Here they are.
Mr. Salembier: I would agree that quite a volume of material has already been gone through.
Senator Meighen: Are we missing something in those documents?
Mr. Salembier: It is the contention of a number of people from whom you will hear later today that there was some clarity missing from these guidelines. A number of years have passed since we first put them out and it is the view of the government that there is some merit in seeing whether additional clarity can be brought to the description of those considerations as laid out in the merger guidelines.
Senator Meighen: I do not see where the government is specifically indicating that they need help in adding clarity. Perhaps because I have not yet had the opportunity to read the statements of the bank CEOs, I have not heard from them where in particular they find a degree of murkiness. Can you help me? Is it all the criteria or one or two in particular?
Mr. Salembier: These are the four laid out in the letter in respect of which the government thinks it would be useful for your committee to probe further with the representatives of the financial sector from whom you will hear later today.
Senator Meighen: If I am not mistaken, you too, sir, said that there was a lack of clarity in some of these areas. Can you tell me where the lack of clarity lies?
Mr. Salembier: I elaborated slightly on the four areas in my statement a few minutes ago. I do not have a great deal to add to that. The international competitive issue is one upon which this committee has focused quite a bit of attention in past years. It is important to understand that Canadian financial institutions that are competitive abroad learn from their experiences abroad. These experiences brought back home can enrich the depth and quality of the financial services offerings they bring to Canadians and to Canadian businesses.
That is the kind of consideration for which it would be helpful to have a bit more clarity. It is not one that I can offer you a great deal more clarity on than I have just added here.
Senator Meighen: With great respect, it seems to me that any competent CEO of an applicant for merger would go into those details with a greater degree of flair and competency than was exhibited in the past. However, that is not for me to judge.
What eludes me is an area where there is lack of clarity. I cannot see it. I see areas that should be addressed and areas that cry out for explanation, but I see no any lack of clarity.
Senator Prud'homme: You said at the beginning that you had no statement to make, and we immediately started with questions. However, later, in answers to some of my colleagues, you seemed to have a very extensive and well- prepared brief. It would be interesting for those of us who are less knowledgeable to have that statement. If you would give it to the committee clerk, I would appreciate that.
My colleague keeps asking: What are we doing here? Any legislator knows there is something in the air that is bound to come eventually. We know that merger is in the air. The question is when it will hit us. Will it hit us when we are ill prepared and unable to react, forcing us to react after the fact? I feel very comfortable discussing the possibility of future mergers. Having just become a member of this committee, I have no prejudice either way.
My colleagues have for asked the names of the five major banks. However, I am highly concerned about the number of people. Can you tell us the number of employees that each of these banks has? I am much more interested in how people will be affected than in how businesses will be affected. How many people would be affected or believe they would be affected?
When I go into a bank, people ask me whether their jobs are in danger. I do not know the answer and that is an area in which I think this committee could do a good job. Can you tell me now how many employees each of these banks has?
The Chairman: All of this is public knowledge. We will get it put together for you and inform you as soon as we can.
Senator Prud'homme: Surely, Mr. Chairman, if it is public knowledge, I am sure Mr. Angus knew which are the five major banks of Canada, and yet he asked for that information to build his case.
The Chairman: We have a lot of work to do.
Senator Prud'homme: That is all I want. I am not abusing anything.
The Chairman: We will get the information for you.
Senator Prud'homme: I am asking if he knows how many people. That shows an interest of the Department of Finance.
The Chairman: The financial service sector in Canada employs 235,000 people. Do you happen to know how many employees each bank has?
Mr. Salembier: I do not have it broken down. I can provide that information for you.
Senator Kelleher: Mr. Chairman, was an actual proposal recently put to you by Scotiabank and Bank of Montreal with respect to a possible merger?
Mr. Salembier: I have no knowledge of any such proposal, no.
Senator Kelleher: What suddenly prompted the information from the media? That is what I have to go by. What then prompted the denial of any such proposal if it had not been made?
It would appear the Prime Minister ruled it out. That is what I understand from the media. If it were the case that no proposal was made, on what basis would he rule it out?
Mr. Salembier: Senator, I have no information I can offer you on that whatsoever.
Senator Kelleher: Let me try to tackle this from another direction.
If the Prime Minister, as it is said, ruled it out when no proposal had been made, do I take from that that as long as the Prime Minister is presently in office, he will not entertain any merger proposals?
The Chairman: You are putting the witness in a very unfair situation. He cannot possibly answer that question.
Senator Kelleher: I do not mean to be unfair.
The Chairman: I am not suggesting you mean to, but I do not know how the witness can answer.
Senator Kelleher: All he has to say is, ``I cannot say.''
The Chairman: I know what he can say, but I feel I should comment as Chairman.
Senator Kelleher: I think I am entitled to ask anything I want.
The Chairman: You are entitled to ask anything you want. That does not mean it is right.
Senator Kelleher: I have asked it.
Mr. Salembier: I have no information on it whatsoever.
Senator Kelleher: He does not need any help from you, senator.
Senator Prud'homme: You know he cannot answer.
Senator Kelleher: Let him answer it and not you. Obviously, you do not know very much about cross-examination.
Senator Prud'homme: Yes, I do.
Senator Kelleher: You should not be intervening.
The Chairman: Let us move on.
Senator Kelleher: Perhaps this senator will stop interrupting me.
The Chairman: He will.
Senator Kelleher: Thank you.
We have been asked to comment for the minister on this. Am I to assume that if we do answer it, then the banks will be free to make further proposals?
Mr. Salembier: The banks are certainly free to make merger proposals, yes. We have received no merger proposal that I am aware of at this point.
Senator Kelleher: Perhaps my question is confusing. As I understand it, the Prime Minister apparently has said that he will not entertain any proposals for now. We have now been asked by the government, or somebody, to provide clarification and to advise the government. Am I to assume that, once we do this, the Prime Minister, or the Government of Canada, will then be open to proposals for mergers?
Mr. Salembier: I cannot speak for the Prime Minister. I have no knowledge of what the Prime Minister knew or did not know. I can tell you, though, that the government has set out a merger review process, which is there for the banks to use if they see fit. If, in their business judgment, a merger proposal is appropriate, the process is there for them to bring one forward.
Senator Kelleher: If, in fact, a merger proposal comes forward after we have given our answer to the government, would the government officials be open to proposals at that time?
Mr. Salembier: I can tell you that the government is open to merger proposals. That is why we have set out a merger review process.
Senator Kelleher: I am confused. You keep saying the government is open; yet the Prime Minister has apparently shut it down. Am I missing something here?
The Chairman: Yes. The witness has said he has no knowledge of what the Prime Minister has done.
Senator Kelleher: Did the department play a role in any discussions before the Prime Minister decided that he was not open to merger proposals at this time?
Mr. Salembier: I have no information I can provide you on that, senator, whatsoever.
Senator Kelleher: You are a member of the department. Surely you can tell me whether you did or did not.
Mr. Salembier: I had no knowledge of any merger proposal. I still have no knowledge of any merger proposal that is before the government.
Senator Kelleher: I understand that. Prior to the Prime Minister making his decision, did the department give the Prime Minister any advice in this area?
Mr. Salembier: I am not aware of any advice that was offered to anyone in respect of that. Are you speaking now of the merger reported in the newspaper?
Senator Kelleher: Yes.
Mr. Salembier: I am not aware of any advice that was provided to anyone in respect to that alleged merger proposal.
Senator Banks: I have a bias, which will become evident. It is always a pleasure to hear from witnesses who are as knowledgeable as you are.
I am a bit of a curmudgeon because I did not like the changes in our regulations for financial institutions that have led to the effective demise of trust companies in this country. Trust companies used to be trust companies, which actually meant something. It really does not any longer. That is the extent of my bias.
Since we do not have a specific proposal to discuss, and since we do not know what reservations the banks have with respect to the clarity of the guidelines that have been set out, I have to ask you a philosophical question. Departments have philosophical views, I hope.
The banks' argument, to some degree, consists in saying that to successfully compete in the world and to provide better financial services to Canadians, they sometimes need to get bigger. There are many pieces of evidence around these days that bigger, in the corporate sense internationally, is not necessarily better. In fact, there are some stock issues that have gone very far south following mergers.
Does the department buy the philosophical argument that to do better for us and to do more good, banks may need to merge? There must be a general opinion about that subject.
Mr. Salembier: I am sorry to disappoint you, senator, but we do not have an opinion on that point that is capable of generalization across all potential mergers. The merger review process is there to guide the government through its consideration of any specific merger that might be brought before it. The advantages or disadvantages of size will differ depending upon which merger proposal might be under consideration. Some will offer advantages in one direction while in others the disadvantages may be greater.
Senator Banks: The question ``How would the Canadian national interest be served by a bank merger?'' is a philosophical one because we have no merger proposal before us. The answer to that question must be, from your standpoint, is that you will refer to the guidelines for mergers that are set out. That is the position, period. Is that correct?
Mr. Salembier: I think that is safe to say, yes.
Senator Banks: I have read, as I am sure you have, the putative submissions to us by the people from the banks from whom we will hear. You are not able to air with us any specific reservations that they have or misgivings they have with respect to what they find unclear? I was interested in your expansion of the four criteria, and it was clear to me. I am not sure how it could be unclear to anyone, given the nature of the questions being asked. However, you cannot now tell us, in respect of the meetings you have had with the banks what they have said — informally or otherwise — about what specifically must be made clearer to them so that they can consider it. It seems to me we are chasing smoke here a little bit.
Mr. Salembier: There is not a lot more I can tell you beyond what I said in my elaboration on those four points a few moments ago. It is a question best addressed to the bank CEOs themselves. They will have to produce the information required on these points as part of a public interest impact assessment, if they choose to bring forward a merger proposal. Each merger proposal, if any are made, has to be examined on its merits. That is the purpose of the merger review guidelines that we have set out: to ensure that the relevant considerations, in as much specificity as possible, are brought to bear in that examination.
Senator Banks: I will ask you about something you said. You said the department hopes that it will be able to build better competition upon the basis or framework of a merger. Would you tell us how that would help? The average Canadian, I think, including me, does not understand how a reduction in the number of major banks would lead to increased competition.
Mr. Salembier: I made that statement in connection with the possibility that divestitures, either of branches or of complete lines of business, might be required as part of the resolution of any anti-competitive concerns that the Commissioner of Competition might find in the analysis of a merger proposal. Let us look at a past example — which would be the safest to deal with here, since, as you point out, we are not faced with a merger proposal at this time. When the Toronto Dominion Bank acquired Canada Trust, the credit card business of Canada Trust had to be divested in order to remedy the concerns the Commissioner of Competition had in respect of the concentration that would have resulted otherwise in the credit card marketplace in Canada. The issuing side of the credit card business — that is, the consumer side of the credit card business of Canada Trust — was sold to Citibank Canada, and the merchant acquiring side of the credit card business was sold to First Data Corporation, which is a large U.S. non-bank processor of merchant acquiring information. The forced divestitures of those two lines of business resulted in new entrants in those two lines of business coming into Canada. This is an example of what I was referring to when I mentioned that we would, in the event of a merger application, use it as a means of building further competition within the Canadian marketplace.
Senator Banks: We have new entrants into the Canadian financial sector of American-based companies.
My last question is about something that is not putative or hypothetical and about which there is historical evidence. Has the Canadian national interest been served, in the department's view, by the mergers that took place between the Bank of Toronto and the Dominion Bank of Canada, on the one hand, and the Imperial Bank of Canada and the Canadian Bank of Commerce? Have those things resulted in improvements in the Canadian national interest?
Mr. Salembier: I am afraid I will have to plead, despite my grizzled appearance, that those two predate me.
Senator Tkachuk: Shall we spell out that there is a process now? Just so people understand, there is a process now. Let us go through that. I know it will take a little time, but we are trying to establish our work for the rest of the week. We are trying to establish some clarity to this situation.
Presently, if two banks want to merge, after they do all their business, they go to someone in the federal government to say, ``We want to merge.'' To whom would they go first, just so we have this on the record? There is a process.
Mr. Salembier: The first step in the process, as set out in the merger review guidelines, is an application in writing to the Competition Bureau, the Superintendent of Financial Institutions and the Minister of Finance indicating an intention to merge.
Senator Tkachuk: Once that takes place, what is supposed to happen after that?
Mr. Salembier: At that point, the applicants are required to prepare a public interest impact assessment, the contents of which are laid out in the merger review guidelines. The specifics of these contents are, in fact, the stuff of discussion during hearings of this committee.
Senator Tkachuk: Just to stop you there, sir: Once that is done, then the House of Commons Finance Committee and the Senate Banking Committee would review the application, with the high priority given to public interest, and make recommendations back to the minister or to the government of the day. Is that correct?
Mr. Salembier: That is right.
Senator Tkachuk: At that time, the minister has a right to say ``yea'' or ``nay.'' Is that correct?
Mr. Salembier: You have missed a few steps in there, but yes.
Senator Tkachuk: Briefly describe the few steps I missed.
Mr. Salembier: The Competition Bureau will conduct its assessment of the competitive implications of the transaction, and the Superintendent of Financial Institutions will conduct its assessments of any prudential implications of the transaction, concurrently with the hearings that this committee and the House Finance Committee will be asked to conduct.
The Minister of Finance will be in receipt of the reports of the Competition Bureau, the superintendent and the two committees within five months for his decision on whether or not the transaction can proceed to the next stage, which would be negotiation of remedies to address any anti-competitive effects or any prudential concerns.
Senator Tkachuk: I do not want to speak for the banks, and I do not want to speak for you. However, I want you to be able to speak for yourself.
In the process that we have now, where does it break down? It seems to me a good process. Where does it break down? What would cause us, rather than studying an actual BMO-Bank of Nova Scotia proposal, to be studying general stuff that we have gone over before? Where does it break down? Where are the problems?
Mr. Salembier: I do not see that the process necessarily breaks down. There are some respects, on which I elaborated over a half an hour ago, in respect of which the government believes some further clarity could be added. However, I would not suggest that the process breaks down.
Senator Tkachuk: Is that further clarity to the last point, which is the public interest as it relates to any merger whatsoever. I think that it what they are asking for. Are we supposed to give them advice on whether a merger should take place or note take place?
The Chairman: Absolutely.
Senator Tkachuk: Is that what we are being asked? I thought we have made that decision, or at the least the government had set up a process for it. I just want to know. Is that really what we are supposed to be doing here? The chairman seems to think ``yes.'' What do you think?
Mr. Salembier: I would refer to the words of the letter, which was the impetus for this set of hearings, which is that we would ask the committee to provide us with advice on the considerations that should be brought to bear in assessing the public interest.
Senator Tkachuk: Senator Kelleher raised some interesting points on the present process. I will ask this question of all the witnesses: As far as you know, the Department of Finance was not involved in the Bank of Montreal-Bank of Nova Scotia proposal?
Mr. Salembier: I have no knowledge of any Bank of Nova Scotia-BMO proposal.
Senator Tkachuk: Perhaps the deputy minister would be able to help us out if he showed up. That is important for us to know.
Mr. Salembier: There is no information I can provide you that would help you with the answer to that question, senator.
Senator Tkachuk: We have Competition Bureau witnesses; we can ask those people these questions.
The banks seem to want a process that would prevent someone circumventing a merger while it is taking place. Is that the concern of the banks? A process is laid out. They do all this work, but along the way someone can circumvent the merger before it goes through this process. In other words, before it goes to the Department of Finance or the Competition Bureau, there is someone sitting around minister's office saying ``yea'' or ``nay'' before anything happens at all.
Mr. Salembier: You would probably best ask the banks that question.
Senator Tkachuk: We would like to ask the minister that question. This is important. Obviously, from you we are not learning much about how the last process broke down as we have read in the papers. I hope that we can hear from other officials as to whether they have received information on this matter and whether they were beginning to do their studies and whether there was a formal application. That is what I am trying to get at. I am trying to make my case that the minister should be here to explain what happened. Thus, we can do our studies with information that only they, it seems, can provide. That is why I am asking these questions. If you cannot answer, that is fine.
Mr. Salembier: I am afraid I cannot answer that question. I have no information for you that would shed any light on that subject.
Senator Kroft: Much of what we are struggling to find out here we will find out by asking the banks.
There are two things that I would like to know as background information leading into our sessions with the banks. As you say, other than advance copies of submissions, all we know is what we have gathered by speeches and media, et cetera.
When we were reviewing competitiveness in the banking system in terms of the MacKay report and then Bill C-8, one of the things that we came to understand from all our investigations was that foreign banks were not interested in participation in what we would call ``retail lending.'' That came at us repeatedly. There was a level of banking in which they were interested. However, they were not interested, with a few minor exceptions, in playing a role in being competitive in the retail banking community. It is now some time since we gathered this information. Is there any reason why we should have a different view of that now than then?
Mr. Salembier: It is fair to say that competing outside one's home market as a retail bank is a difficult proposition that continues to be the case now as it was during the course of the deliberations to which you refer. However, there are major institutions worldwide that have made quite a success of it. HSBC is probably the best example in Canada and Citibank is another example. Certain institutions have been able to — through dint of effort over the years, and persistence — to make quite a go of it. Recently, ING's entry into the Canadian market has created a difference in the retail-banking scene. The challenge is a significant one for most retail banks outside their home market; but it is not insurmountable.
I think you are referring to the deliberations on Bill C-8. Since those discussions, the Royal Bank has made acquisitions in the U.S. market that it believes to be a significant set of inroads into that banking market. The challenges are significant, but a number of institutions believe they are up to the challenge.
Senator Kroft: We have various considerations and criteria. I would like your comment on a case that is made from time to time by bank people and in media that because of the enormous extent to which bank shares are held by Canadians directly and indirectly through pension funds and other vehicles, that the price and stability of bank shares on capital markets is a consideration in arriving at a view of the national interest in terms of a merger.
Mr. Salembier: The factor that argues most prominently in the government's consideration of a merger would not be directly the impact on bank shares, but more generally the impact on the growth opportunities that a merger might pose for the institutions affected within the domestic market and, more importantly perhaps, abroad. The advantages such as they might be to a larger institution, in terms of its ability to penetrate foreign markets, would be one of the aspects that I would expect most merger proponents would try to make evident to the government in the context of its consideration of any merger proposal.
Bank share prices, per se, are not directly a concern. However, certainly indirectly the growth opportunities that a merger might provide for an institution would be a prominent concern.
Senator Kroft: Are you thinking in terms of a bank using its securities in the course of an acquisition, but that there is not necessarily a public policy interest in providing support or stability for the shares of banks any more than there is for any other company or industry?
Mr. Salembier: Looking at the broader impact of a merger proposal is certainly important to the government. That will perhaps include an impact on share prices. However, the institutions have a responsibility to conduct their business in a fashion that is most advantageous to their shareholders. The government's responsibility is to put in place a regulatory framework that allows them to do that.
It is our belief that the merger review process that we have set out and on which we are asking this committee for some further clarification, forms an important part of the regulatory framework that will allow banks to pursue the business strategies they consider to be most advantageous to their shareholders.
Senator Angus: I will try to focus on the process. During the Bill C-8 hearings and after the bill was enacted, we heard from the stakeholders that as a result of that legislation and the regulations and guidelines in relation thereto that the process for bank mergers had become more cumbersome than before. Do you agree with that?
Mr. Salembier: I would have to say ``no.'' I am not sure I agree that stakeholders broadly speaking have that view. Perhaps some do, while others do not. We have a reasonably balanced view of the set of regulatory reforms that we brought forward in Bill C-8. In other words, it was broadly supported by stakeholders.
Senator Angus: Let me confine the stakeholders to which I am referring to the five banks that you identified earlier. Whether or not their complaints are well founded is another thing. However, would you agree with me that they did complain that it seemed that they could not engage in the huge expense involved in examining a possible merger and getting all the accounting and other professional advice and putting together a combination of these two organizations in such an atmosphere of doubt?
Mr. Salembier: They would have to advise you as to whether they consider the process too onerous. I believe the reaction to our framework was a reasonably balanced one.
Senator Angus: You have heard that it was their view that they found it more cumbersome and difficult following that legislation, which was designed to provide clarity.
Mr. Salembier: I have heard that view but I am not sure I would generalize it to all stakeholders.
Senator Angus: I would not generalize it to all stakeholders, either. That is another story. I tried to confine it to the big banks.
After that legislation came in — and I am now relying, as you did, on press reports — I read that bank mergers are off now as a result of this process. Yet we have heard and we have read in the papers that recently two of those banks decided they were not off. In another report I read that one of the witnesses who will be coming to these hearings, Mr. Réal Raymond, CEO of the National Bank, holds the view that all of this process should be removed and that a combination of banks and the process related thereto should be left to the workings of the marketplace in the private sector. What do you think of that comment?
Mr. Salembier: The marketplace in which merger proposals have to work out includes a well functioning regulatory framework for the financial sector. The merger review process that we laid out is part of that framework. Some feel that it is too onerous, but not everyone holds that view. The legislation provides for a decision by the Minister of Finance on amalgamation and that is part of the regulatory framework under which institutions must operate. That being the case, we felt that the merger review process that we laid out would provide something of a road map to institutions that wished to pursue a merger.
Senator Angus: In response to my colleague Senator Banks a moment ago, you gave an answer that prompted this thought. We could hear the witnesses and consult the documentation and materials that are made available to us and we could send back our commentaries to your department — which we will do in the fullness of time. Yet is it not a fact that holding these hearings and submitting our findings does not preclude the officials in the Department of Finance necessarily from coming to the conclusion that at the present time in Canada, there should not be any mergers among our five major banks and that our banking system is just fine the way it is?
Mr. Salembier: You have a couple of double negatives in your question, senator, but it is not the job of the Department of Finance to conclude that as a general proposition mergers are or are not a good thing. Our job is to provide advice to the Minister of Finance on any merger applications that might come in. The merger review process is there to provide some guidelines as to what factors will be taken into consideration in the provision of that advice.
Senator Meighen: Given that answer, what would your role be if the Minister of Finance, who has the ultimate say, were to indicate, prior to your study, that he would not approve in the foreseeable future. Would you continue with your study unless and until the major proponents withdrew their proposal or would you abandon it?
Mr. Salembier: That is a hypothetical question. I really cannot speculate on that.
Senator Meighen: ``Public interest'' is not hypothetical but it defies definition. This is a real possibility if we can lend any credence to newspaper reports about that type of intervention. It may be in the view of Minister of Finance, contrary to the national interest, to countenance at a particular point in time any mergers. If he were to make such a statement — which is not entirely hypothetical I would suggest to you — would you continue the study or abandon it?
Mr. Salembier: I cannot respond to that hypothetical question. However, I can tell you that the Government of Canada has and still has the option of doing what other governments around the world have done — namely, to declare a moratorium. This government has not done that. There is no moratorium on bank mergers at this time.
Senator Meighen: I am glad to hear that.
The Chairman: My own personal opinion, Senator Meighen and colleagues — and I want to hear all the evidence — is that it would be possible for this committee to conclude that bank mergers are either good or bad for Canada. Why could we not do that?
Senator Meighen: Until the next study or forever?
The Chairman: Forever is a long time. In the immediate future or what have you. Why do you find that so preposterous? That is our job.
Senator Angus: We are going to make a statement today, then. I read in the press that you were absolutely in favour of bank mergers.
The Chairman: I said that, speaking for myself, I was in favour and I still am.
Senator Prud'homme: You can be convinced otherwise by the end of this week, however.
The Chairman: Yes, by the end of the week, if I hear testimony to the contrary. Do not most people going into a hearing have some kind of personal bias? Do we come in with blank minds? I do not think so. You did not; I did not. I am sure my colleagues on this side did not. I want to hear what the evidence is.
Senator Meighen: The Prime Minister's biases are not hidden either.
The Chairman: I do not have the vaguest idea. I do not know anything about that particular case.
Thank you very much, Mr. Salembier, for your time, effort and cogent answers.
The next group of witnesses are from the Competition Bureau.
Mr. Gaston Jorré, Senior Deputy Commissioner of Competition, Mergers Branch, Competition Bureau: Thank you for the opportunity to discuss public interest issues as they relate to bank mergers.
Mr. Richard Annan, on my right, and Mr. Gerry Birks, to my left, accompany me today: both men have experience with financial sector mergers.
I am here today to provide you with an overview of the process we will use in evaluating mergers in the financial sector.
[Translation]
With your permission, I would like to make a few introductory remarks and then pass the floor to Mr. Annan who will take us through a presentation on the merger review process.
We gained some experience in bank mergers in 1998 when we had simultaneous mergers to review. In addition, we also had the opportunity in late 1999 to prepare an analysis of the TD Bank acquisition of Canada Trust.
[English]
In evaluating each of these transactions, the Competition Bureau has used the approach set out in the bank merger enforcement guidelines. These guidelines are available on our Web site and articulate the analytical framework used by the Competition Bureau when assessing the competitive effects of a bank merger.
[Translation]
The process described in the bank merger enforcement guidelines was used in all of the bank merger reviews that we have looked at in the past four years and will continue to be used in any future transactions.
[English]
The analytical framework used in evaluating bank mergers is very much the same as for any other merger review: It is fact-based and must take into account the current structure of the industry and the operations of the parties in question. When we are presented with a bank merger proposal, our results may be different than those arrived at in 1998 based simply on the ongoing evolution of the industry.
It is important to note that competition concerns may often be remedied. For example, in the TD Bank Canada Trust transaction, we were able to successfully resolve all the concerns by the divestiture of a certain number of branches, and by the sale of most of Canada Trust's MasterCard portfolio.
As a consequence of last year's amendments to the financial sector legislation, there are two technical changes to the Competition Act that will have an impact on the Competition Bureau's process.
[Translation]
Under the new legislation, the Commissioner will have the authority to communicate information that is specifically requested in writing by the Minister of Finance. This new section of the Act will allow the Commissioner to provide information collected, received or generated in the context of the merger.
For his part, the Minister of Finance must certify that the information can only be used for the purpose of making a decision in respect of a merger or a proposed merger. This differs from previous practice where the Commissioner was prohibited under Section 29 of the Competition Act from providing any confidential information. The other section provides that the Competition Tribunal should not make an order in respect of a merger under the Bank Act that the Minister of Finance has certified is in the best interests of the financial system of Canada.
This section has been amended to take into account the new power the Minister of Finance has to impose terms and conditions on such mergers.
[English]
The new process indicates that the Competition Bureau will have five months to complete its examination of any proposed merger.
The clock does not start ticking when the merger proposals are announced; it begins when the Competition Bureau has received all the information necessary to complete its analysis.
Finally, as an independent agency, it is the Competition Bureau's responsibility to evaluate transactions in a fair, transparent and predicable manner. Our competition analysis proceeds independently from the other review processes. The analysis results, and our conclusions are then sent to the Minister of Finance and the parties involved. The Minister of Finance then weighs the prudential competition and public interest issues to arrive at his decision.
We believe that the public interest and competition matters are generally complimentary with both trying to achieve an efficient market, low prices and high quality service to Canadian consumers.
[Translation]
I will now give the floor to Mr. Annan who will take us through the merger review process as it relates to banks, and I would encourage any questions that you may have as we proceed through our presentation.
[English]
Mr. Richard Annan, Major Case Director and Strategic Policy Advisor, Mergers Branch: We have a short presentation for you. This is a treetop or simplified view of the analytical framework that we use under the Competition Act for mergers and in this case, bank mergers. We have passed out the bank merger enforcement guidelines, as well as the letters that were made public in 1998 that outline our conclusions with respect to those two bank mergers.
If you wish to have a more in-depth appreciation of the process, I encourage you to read those materials.
On page two the legal test questions whether the merger would substantially lessen our competition. Essentially, we try to determine whether the merger creates, enhances or preserves market power. By that we mean, the ability to maintain prices higher than competitive levels. A typical benchmark that we use is a 5 per cent price increase over a two-year period. We also look at the non-price dimensions of competition, such as the reduction in the quality of service.
We look at both the unilateral or interdependent exercise of market power. Unilateral market power concerns itself with the raising of prices by the merging parties, and interdependent market power relates to the reduced amount of competitive vigour as a result of the change in industry structure.
As set out in the guidelines, there are three steps in the review: the examination stage, the decision stage and the remedy stage. If the Minister of Finance decides that the merger should proceed, then the remedy stage is conducted under the Remedies for Competition Act.
In the examination stage we obtain documents, conduct interviews, and obtain submissions from the merging parties. We also set up interviews and obtain documents from the competitors. We try to gain information from customers and, in this context, Small Medium Enterprises, SMEs, are of interest to consumer groups and other industry stakeholders. The Competition Bureau's staff members often have a working knowledge of these areas, and this is part of the expertise that they bring to these mergers. We also hire industry experts. In 1998 we hired quite a number of outside industry experts that included former senior bankers, investment bankers, economists and econometricians.
We have also amassed an extensive database using the Canadian Bankers Association's database, and have augmented it with information acquired from the non-participants in that database. As a result, we have created an extensive snapshot of what the Canadian financial system looks like regarding market share for various types of products.
The analysis itself includes four steps: The first step is the market definition stage; the second is market shares and concentrates on the defined markets; the third step is key competition factors; and the fourth step is the consideration of efficiencies.
The market definition procedures define both the product and the geographic markets. This is a challenging thing to do in the context of banking services. We try to determine whether there are close substitutes for various kinds of products. Trying to ascertain whether a loan and a line of credit are close substitutes, versus something else, is not always an easy exercise. This may be clearer in manufactured products such as the comparison between a car and a bicycle.
In the case of financial services, the differences in prices and functionality are not always evident. This is also difficult exercise. After having gone through this particular exercise, we think that there are numerous relevant product markets in personal banking. Transaction accounts are the core drivers of the relationship between the banks and consumers. We think that residential mortgages, personal loans and lines of credit are separate as product markets.
We looked at transaction accounts and at related services, such as cash and coin, cash management, night depository services, and at operating loans. All of these items are important for all businesses including small ones. In our 1998 evaluation, we looked at a number of other product markets that we determined were not problematic: short- term savings that include GICs, money market funds and Canada Savings Bonds. These all comprise one kind of short-term savings. An investment-related product was long-term savings such as stocks, bonds and mutual funds. There was a great deal of competition in that area.
In terms of businesses term loans secured by collateral are considered as another product market. That market includes leases and non-residential mortgages. Those areas were not problematic for us. In 1998 we also had a look at credit card markets and other markets in the securities, but I will not speak in further detail on that subject.
Markets also have a geographic dimension. Here we look at customer behaviour. How far a customer will go to search out alternatives? How far are people prepared to go to import? How far will suppliers go to provide competition in a particular geographic market? This is also a difficult exercise. We look at a number of different questions: What are the shipment patterns, in this case? Where are the customer drawing areas? Would that change if there were an increase in price? What is the importance of physical branch location versus alternative distribution mechanisms? Obviously, the market is changing and will likely continue to change in the future. We also looked at the use of Internet telephone banking and automated banking machines.
In terms of geography, we have determined that the personal and SME product markets are locally based and branch-dependent. For the residential markets, there are alternative means of selling mortgage originations. In 1998, we determined that the markets were essentially local, although we acknowledged that because of mobile sales forces, they were developing a more regional pattern.
We have a safe harbour threshold concerning market shares. This is consistent not only in the case of banks but throughout the merger process. If the merging parties have less than 35 per cent market share, or the top four firms in the industry have less than 65 per cent with the merging parties accounting for 10 per cent, or less, then it is unlikely to raise a competition issue. That is a safe harbour.
We looked at these guidelines closely and came up with a screening mechanism. Many product markets and multiple geographic markets are essentially local, and there can be hundreds of relevant markets to consider. Thus, we needed an efficient screening mechanism. We have divided the markets by colour for ease of reference and communication. The red markets are classified as the combined parties that have over 45 per cent of market share in transaction accounts. Orange markets hold between 35 per cent and 45 per cent, and the green markets are the safe-harbour markets at less than 35 per cent.
The actual algorithms are outlined in the bank letters and are a bit more complicated. However, by and large they are the main drivers.
We have also examined the degree to which bank mergers would reduce competition through interdependent behaviour. A number of indicia were looked at: the number of sellers in the market; situations where the barriers to entry were high; the stability of the market shares; the transparency of pricing between competitors; industry cooperation; and multi-market contact. If there is a significant reduction in the number of players at either the local or national level, there could be cause for concern about the effect of these indicia on the competitive vigour.
Beyond market share, the act directs us to say that market share alone cannot be a reason for finding substantial lessening, or prevention, of competition. We have to look at a number of other factors that are key. For example: the barriers to entry to industry, foreign competition, the effectiveness of the remaining competitors, the degree of change in innovation — technology change in this example could reduce barriers to entry and make existing and new entrants more possible — and the removal of a vigorous competitor.
In 1998, we found that barriers to entry, or expansion, were high in the banking industry and that the need to have a large branch network did not seem to have been replaced by technology. We also found that it is important to have a branch network, both for selling and for problem solving; that brand names are important; and that switching costs are significant. There is certainly quite a degree of customer inertia in banking and, to some degree, technology can make switching costs higher, in terms of direct deposit of salary or automatic bill payment. These activities make it a bigger problem for customers to change their banking relationship. Of course, they are not afraid to change but it does make it a bit more difficult.
We found that technology was unlikely to replace the need for physical presence for the following five to 15 years. Again, we were looking at competition effects within a two-year period. It clearly fell outside our period of analysis.
In terms of efficiencies, there is a possible defence to a merger. The efficiency gains must outweigh the negative effects on the competition. For those gains to be counted, they must be essentially unique to the merger. They cannot be achieved by other means such as joint ventures and internal growth.
After completing an extensive analysis, we reach a decision stage. At that point we send the report to both the Minister of Finance and the parties involved. The report is made public. I believe that this committee will receive a copy of the report.
The minister will decide whether the concerns can be addressed. If the minister decides that we should proceed to remedy stage then the Competition Bureau will be in charge of the negotiations of the remedies. Assuming those discussions are successful, the Minister of Finance, in addition to any concerns and remedies on prudential and public interest concerns, could approve the transaction subject to terms and conditions, if any.
The analytical framework that we used in 1998 is still in place. It has not changed. We will apply that framework to any future transactions. We also consider the effect of changes in the marketplace. We would look at the specifics of the proposed transaction.
We are open to questions.
Senator Kelleher: The media reports that the Bank of Nova Scotia and the Bank of Montreal are considering a merger proposal. It appears that the Prime Minister told us that he does not want any mergers at this time.
Assuming that is correct, what role, if any, did you people play in those discussions with respect to that proposal?
Mr. Jorré: The first time I learned of that proposal was in the newspapers.
Senator Kelleher: Were you asked for advice with respect to this proposal?
Mr. Jorré: I was quite surprised with what I read in the papers.
Senator Kelleher: Am I correct in assuming that it is legal to have mergers in the Canadian banking industry?
Mr. Jorré: It is legal to have mergers in any industry. The proposed merger must go through a merger review process under the Competition Act. In the case of banks, other steps must be taken as well.
Senator Kelleher: If the Prime Minister has nixed the proposed merger, and you were not consulted about it, how good can this process be?
Mr. Jorré: I cannot comment on what may or may not have happened. I do not know. Furthermore, we play a specific role under the bank merger process in relation to competition issues under the Competition Act.
Senator Kelleher: No advice was requested?
Mr. Jorré: I learned that there might have been such a transaction by reading about it in the newspapers.
Senator Kroft: My question is directed for the purpose of the work we must do to understand where your work stops and where the determination of public interest in the governmental or political sense starts. While I appreciate the clarity of what you have said here, could you briefly define where your work stops? We are interested in the public interest and with Canadian interest. Could you try to define where your functions stop?
Mr. Jorré: The first phase is assessing the transaction. We assess it from a competition point of view. At the end of that phase, we provide a letter giving our assessment.
You have examples of the letters that we provided for 1998 transactions. The facts will differ by case, but we provide an assessment of that sort stating our views on competition issues.
That product goes to the Minister of Finance along with other things such as the prudential advice from OSFI. The minister has our assessment to assist him in making a decision. If the Minister of Finance stipulates that there are to be remedies to allow the transaction, it is our role to negotiate competition remedies.
Senator Kroft: To what extent do you look at the business requirements of the bank? Do you consider the business impact on the entity? Do you consider if it would hurt them in their long-range business development? Would it be costly to them? Would it affect share price or affect their growth potential?'' To what extent do you look at that side of the equation?
Mr. Jorré: Our focus is on the competitive impact to ensure competitive prices, competitive services and quality of service. We are not concerned with the effect of that on the business as such.
In general, we believe that when you have a competitive marketplace you also have the most effective economy and the most effective businesses.
Senator Kroft: You work under the philosophic umbrella that a more competitive marketplace is for the greater good of those in it?
Mr. Jorré: That is the foundation of the Competition Act, yes.
Senator Kroft: If an entity were making the case that there may be some negative implications for the competitive effectiveness in the domestic marketplace, but in the broader, overall picture of global development and industrial development the price is worthwhile, would you consider the trade-off? Would you not try to justify a reduction of competitive conduct?
Mr. Jorré: No, we would not.
Mr. Annan: There are two elements. We direct legal tests to determine whether the merger substantially lessens or prevents competition. Second, there is a deficiencies defence. For example, if the merger were to create significant deficiencies that outweigh and offset those competitive effects those kinds of concerns might come into play.
Senator Oliver: It seems to me that one of the main concerns of the big five banks is that the minister, OSFI, the Competition Bureau, the House of Commons Finance Committee and the Standing Senate Committee on Banking all make certain determinations that lead to duplications.
The banks hold the view that there is enormous duplication in the activities of the Banking Committee, the House of Commons Finance Committee and you.
The Banking Committee's job is to look at a public interest impact assessment and what impact this merger will have in the public interest. They have to look at considerations that should apply in the public interest whenever mergers come up.
Where would you suggest the line be drawn between the work of this committee and other parliamentary committees? What should be done to avoid the issue of duplication, or is duplication always going to be the case where we hear the same witnesses and analyze the same things? If so, what certainty is there for the banks if this committee decides in one way and you decide in the opposite way on an issue?
Mr. Jorré: I am not sure that there is duplication in the sense that the kind of assessment that we do, which is very exhaustive and detailed. Again, we go at a level of detail that is really quite in-depth. I refer you again to the letters we sent in 1998 that delve into numerous markets and numerous products. I do not believe anyone else does that kind of assessment. I am not sure how much duplication there is in what we do, because I think it is raw material which is available for the overall decision and which examines, quite exhaustively, the competition issues.
Senator Oliver: Is there anything that the Senate Banking Committee does in terms of its public interest impact assessment that you also do? I am trying to find out where the duplication is.
Mr. Annan: Honourable senators, perhaps I can help. I am thinking of an example that does not relate to banking but is certainly of topical interest, and that is the merger between Air Canada and Canadian Airlines. Also, at the time, the Minister of Transport was very much concerned with the public interest of that transaction. Subsequent to that, there were changes to the Canada Transportation Act and the Competition Act to put in a new merger review process for that.
In that transaction, there were undertakings relating to competition issues that were negotiated by us and given to us by Air Canada. There were also undertakings given to the Minister of Transport by Air Canada in relation to public interest issues other than competition issues. Of the two undertakings that the Minister of Transport received, one was with respect to employment and what was to be done with unionizing employees for a period of time. The second undertaking related to access to communities and the sustaining of air service to particular small communities. I would suggest that things like employment or access are issues that should be considered in the public interest, but those are not the type of issues we would look at.
Senator Oliver: My second question relates to Professor James McIntosh. You have said that your 1998 analytical framework remains the same today. I am sure you have read some of the articles of Professor McIntosh. He is critical of your analytical framework. He says your criteria and methodology was wrong in the analysis you did of the bank mergers proposals in 1998. I would like to read two lines from what he says. I would invite you to comment so that the record can have your direct response to a scathing criticism of your methodology. He said:
In your review of the requested bank mergers in 1998, the Competition Bureau was sceptical that there would be any gains in efficiency arising from the mergers. This was based on their perception of what American researchers had found when they looked at scale efficiency in merger results involving U.S. banks. I believe that they misread this literature and they failed to consider its deficiencies, which by that time had been well documented.
Do you agree or disagree with those conclusions?
He went on to say that you should have been looking at models from the Japanese and other banks because the American bank models you looked at were too small and much smaller than any of our five Canadian banks. What do you say to that? Are you familiar with his writing?
Mr. Annan: I am not. However, I can tell you what we did do in that case.
We went through many economic studies and looked at banking efficiencies. In fact, we hired one of the leading U.S. experts on banking efficiencies. His conclusion was that if a bank merger is successful, then it is likely to obtain efficiencies. However, looking at the great number of bank mergers that have actually happened in the United States over the last several decades, the evidence has been that about half of them do not achieve efficiencies. In fact, in some cases the costs go up; therefore, they are not successful. In the other half of the mergers, some of the cost savings are achieved. However, one of the indicias of success is whether or not you have had prior experience in doing large merger integrations, which these particular parties did not. That was a factor in our analysis.
There were a number of other things we looked at in terms of efficiencies relating to that, not the least of which is the standard under the Competition Act is now subject to jurisprudence and overview. There is an appeal right now to the Federal Court on this issue of what is the appropriate standard.
In relating to the issue of the academic studies, we hired one of the leading experts in this area, and that was the advice we got at the time. I also know that there are many banking studies that claim that economies of scale are exhausted at a fairly low level, although I have heard from other critics that say those are out of date and more modern studies would show there are still economies of scale to be achieved for large mergers.
Whether or not in the future there will be scale of economies is clearly a question we will have a close look at.
The Chairman: What would you do if you were given compelling evidence that if we maintained the status quo in our banking system that within five to ten years we would be foreign-dominated, have a big problem with sovereignty, and have a problem with Canadian businesses wanting to have Canadian banks finance them when they went global? What if that sounded very ominous, and you had to make your assessment of a given merger? How would you balance the benefit of the collective to the benefit to the individual? Would you only look at the competition, or would you keep Canada's national interests in mind, if you could define it that way?
Mr. Jorré: Other than where the efficiency defence applies, our statutory role is to look at the competition aspects of this.
The Chairman: You would get involved with the macro?
Mr. Jorré: Not in the way you are describing. I believe the reason that the government put in place this process where the Minister of Finance gets a variety of advice is, no doubt, to consider the other issues.
The Chairman: That is where we come in. We look at the macro.
Mr. Jorré: The whole public interest.
The Chairman: It must be. That is why we are here. Otherwise, I am not precisely sure why we are here.
Senator Banks: When you are examining prospective bank mergers are you acting in the Canadian national collective interest?
Mr. Jorré: Under the act we are there to protect the public interest and competition.
The Chairman: That is not a clear answer for me. I do not know how you define ``the public interest.'' Is it the small guy who needs a bank branch? I admit that he ought to have one. However, in order for him to have one, should he screw up Canada? Excuse the expression. I do not know the answer. I am hoping we will find the answer this week.
Mr. Jorré: I said we are there to protect the public interest in competition.
The Chairman: Okay, in competition.
Senator Banks: The intervention was welcome, because it is the thrust of the question.
Section 94 of the act sets out the act under which you operate. I agree that the government has to be able to govern. The government stands or falls on what it decides. The minister, in the end, can override anything that you or the tribunal to which you might refer something, says. If you and the tribunal were to determine that bank mergers were not in the public interest, the minister could override that in what is described in the act as the interests of the financial institutions in Canada.
Do I have that right?
Mr. Jorré: If we determined that there were anti-competitive issues and, furthermore, if those could not be resolved in some way, then the Minister of Finance has the possibility under the statutory scheme to override our advice.
Senator Banks: That may be wonderful or not, depending on the circumstances. The last bank mergers were not permitted to take place. I ask that you communicate your view of the historical efficacy of the last bank mergers, in the terms that you set out, to the clerk. They were a long time ago, and I know the circumstances were different. Were the last major bank mergers that happened, those of the Toronto Bank and the Dominion Bank and the Bank of Commerce and the Imperial Bank, good in respect of applying the concept of the national interest to them?
Mr. Jorré: I do not think we are the right people to answer that question. You are asking were they effective or not for the institutions.
Senator Banks: You are right. Let me rephrase. If you applied the present criteria to those mergers, would they have been permitted or not permitted to merge?
Mr. Jorré: I think it is probably impossible for us to answer that. We would have to have access to the same quantity of information for what happened back then that we had in 1998 in order to judge things. It was, at the time those transactions took place, a very different world. I do not think we would be in a position to answer that.
Senator Tkachuk: Just to go over some ground that I went over with the previous witnesses. We do have merger review guidelines right now, and I want to emphasize the point that there is a process for bank mergers to take place. They apply to you, and then applicants prepare a public interest impact assessment while the Competition Bureau, OSFI, the House of Commons and the Senate conducts reviews. Advice is then given. The minister, as laid out in the legislation, has the right to say ``yea'' or ``nay,'' whereas in the United States, there is a process and politicians do not interfere in that process. They set it out and the process takes place. They have a process that they go through and it is then it is a ``yea'' or ``nay.'' Is that not correct?
Mr. Jorré: I am afraid we are not in a position to comment on the American process.
Senator Tkachuk: Is it your opinion that in the act the Minister of Finance can intercede at any time in the process? That is what is published here as the merger review guidelines of the Government of Canada.
Mr. Jorré: I am not entirely sure I understand your question. Our process is one that proceeds independently, once we are notified of a bank transaction. We do our work, produce our results and then communicate our results to the Minister of Finance.
Senator Tkachuk: I think the financial legislation gives the minister the authority to say ``yea'' or ``nay'' to bank mergers. Can the minister do it at any time, or does he have to wait until the process is complete?
I think Parliament plays a big role in whether a merger should or should not be allowed, because it is stated in the guidelines that when there is an application, there is a process and then Parliament has a big role to play. I want to know when the minister can stop this process from taking place and not involve Parliament.
Mr. Jorré: You are correct that the Minister of Finance can pre-empt the process. We will not do a review if that happens. I am speaking with respect to us. I am not commenting on anyone else's process.
Senator Tkachuk: He can stop the study midstream?
Mr. Jorré: Yes, under Section 94.
Senator Tkachuk: Okay.
[Translation]
Senator Setlakwe: At the time, in 1998, you wrote Mr. Flod to tell him that you will not in favour of the bank merger. You stated among other things that will lead to reduce competition.
Has your opinion changed since that time? Would new factors pursuit you to initiate a new study that might lead you to change your opinion from what it was in 1998?
Mr. Jorré: In our work, we must every time analyze the facts as we see them. Markets evolve and we must examine the situation at the time the application is put before us. It is very possible that the facts have changed since 1998.
[English]
Senator Banks: Did you just say we have an application before us?
Mr. Jorré: No, I meant at the time that you have an application.
Senator Prud'homme: Is it fair to say that if you have a request for a merger and you go through the process and you come to the conclusion that it is not in Canada's interest to let the merger occur, the minister or the executive can decide to go ahead regardless of your findings? Is there any possibility that this could happen?
Mr. Jorré: We may conclude that there are anti-competitive issues, and the minister may decide to do something different.
The Chairman: Honourable senators, we shall continue our study concerning the public interest implications for large bank mergers. We are pleased to have with us Gordon M. Nixon, Peter W. Currie, and Elisabetta Bigsby, from the RBC Financial Group.
Mr. Nixon, I assume you have an opening statement. Please proceed.
Mr. Gordon M. Nixon, President and Chief Executive Officer, RBC Financial Group: Mr. Chairman, honourable senators, at the outset I wish to state that RBC does support the Government of Canada's initiative to bring greater clarity to the merger process. I believe we are in agreement that the existing process is not clear. This causes confusion for members of our industry, and may result in decisions that are not in the interest of clients, employees, shareholders or the Canadian public.
In addition, because the current rules do not provide clarity, there is uncertainty about outcomes. Uncertainty is clearly a barrier to growth in any industry, including our own.
We support all efforts to not only determine whether mergers are in the public interest, but also to establish guidelines and definitions around the process. This is essential to good business decision making, as well as sound public policy.
In particular, you have asked us for views on the major considerations that should apply in determining the public interest implications. As set out, the merger review process already addresses the public interest in two ways: The Office of the Superintendent of Financial Institutions will assess the impact of any transactions on the safety and soundness of Canadian banks; and the Competition Bureau will review the impact on competition in Canada.
There are, however, some additional areas of public interest that I will address in my remarks. First, I believe that mergers should be examined in terms of their long-term impact on Canada's future prosperity and standard of living. Specifically, we should be looking at whether the creation of larger, more internationally competitive financial institutions would enhance Canada's economic growth.
Second, it is important to consider how mergers would impact Canadians with respect to access to and choice of financial services. In particular, we need to look at the total spectrum of delivery channels and providers, and understand how new technology and existing competitors fit into the equation.
Third, I believe it is important to look at the transitional issues caused by mergers in terms of their short- and long- term implications. For example, what impact will mergers have on the number and quality of jobs in Canada?
Fourth, I believe it is in the public's interest to have a merger review process in Canada that is consistent and competitive with other countries. Specifically, we need a process that has clarity, transparency and predictability and one that can be completed in a reasonable time frame.
I should to say up front that in my opinion consolidation of the financial services industry would be strategically good for our country. Increased scale is important for the continued health and development of our industry, both in Canada and increasingly in a North American marketplace. Even with mergers, Canadians will have access to an extremely competitive financial services industry and will receive the benefits of increased scale. Consolidation will also help the industry build efficiency and profitability, which is good for clients, our international standing and our reputation as stable counter parties.
However, I cannot and will not suggest to your committee or the Canadian public that bank mergers do not need to be carefully managed. There are concerns relating to execution, short-term job dislocation, head office reductions, service disruption and the impact on our communities. These are all real issues. Nevertheless, we believe these concerns can be managed in a way that meets the public interest and delivers the long-term benefits of strengthening the Canadian financial services industry.
With that background, I should like to return to the four points identified for discussion, starting with the long-term impact of mergers on Canada's future prosperity and standard of living.
The financial service industry is important for our country. It contributes to the creation of long-term growth prospects for Canada, both directly, as one of Canada's world-class industries, and indirectly, as an important contributor to the success of other Canadians and Canadian firms.
Banks have over 8,300 branches and more than 16,800 ABMs across Canada. We provide financing and credit to Canadian individuals and businesses. We are large employers, with over 235,000 employees and an annual payroll of close to $16 billion. The six largest banks last year paid almost $5 billion in Canadian taxes. We all know that countries need strong, viable financial services industries to support their economic growth and well-being.
As I have stated before, I believe that a sectoral strategy for excellence is crucial to improving Canada's productivity and advancing the prosperity agenda. I also believe that business, government and other key constituents must work together in partnership to develop the right policies and macroeconomic climate for our key industries. We have an opportunity to cooperatively develop a financial services policy that gives our country and our industry a competitive advantage, as well as facilitating increased competition.
Canada's financial services industry is among the best and most competitive in the world. We should be proud of that. Canadian banks offer very price competitive services when compared with our U.S. counterparts and virtually all countries, and also do so on a convenient, nationwide basis. According to a recent report by Standard & Poor's, Canada has one of the most efficient banking systems in the world, with leading-edge infrastructure, good management controls, very competitive lending spreads and competitive service fees. Canada's financial services industry is among the best in the world for many reasons, including because government and the banks have worked together.
With these strengths, Canadian banks have the potential to be globally strong and to reap economic benefits for our country. One might ask why, if our industry is so good, we should be concerned with improving it and why we have not been able to take advantage of our potential. The reality is that despite having a strong foundation on which to build an internationally competitive industry, Canadian banks lack the scale and capital and are becoming less globally relevant.
What potential contribution can bank mergers make to the international competitiveness of Canada's financial services sector and to the international competitiveness of other Canadian firms? First, they can help achieve the scale required to continue to provide individual Canadians and businesses with internationally competitive services. If one looks at the top 20 financial institutions in the world by market capitalization, virtually all of them have been active in consolidation, even in their domestic markets.
Second, Canada needs internationally competitive industries. They generate the capital and jobs to support ongoing economic vitality. They are key to maintaining a level of investment and innovation that keeps bright young people in Canada and generates the overall employment creation that the country needs.
Third, in our experience, consolidation leads to competitors with a broad array of products and services. Economies of scale and scope mean they are more efficient with lower unit costs. This offers Canadians the potential for lower prices and greater choice. For example, there were concerns about competition when Canadian banks entered the mortgage, retail brokerage and mutual fund markets. Instead, we saw increases in volumes, lower prices and greater product variety. The fact that banks cannot sell insurance through their branch network, in my view, does a disservice to Canadian consumers.
I believe that innovation is the key to long-term growth for Canada, a view that I know is shared by the federal government. Many factors are at work here, but clearly we need to have the investment resources available to fund leading development in technology. Mergers reduce duplicate investment, freeing up resources to invest in additional innovation.
RBC spends just under $2 billion per year on information technology. About 15 per cent of that number, almost $300 million, is spent on new development. If our maintenance dollars were spread over a bigger base, allowing spending on new investments to increase, this would contribute to innovation in our industry and in the country. Not only would this result in growth in productivity for Canada, it would mean additional jobs in higher value and professional areas.
Consolidation would also help support the future growth of our industry. It would give financial institutions greater financial strength to expand outside of Canada, where relative size has a direct impact on investments and acquisitions and the ability to advance international growth strategies.
We believe the industry's expansion in the United States is good for Canadians. It will allow us to increase scale and spread our overheads over a wider base. Our resulting improvement in cost structure will mean more competitive pricing in Canada. In addition, there are significant spin-off benefits to the economy from building strong, globally competitive companies. Finally, financial institutions need to expand internationally to grow and to continue to provide healthy returns to the millions of Canadians who directly invest in our shares.
Analysts understand this and understand the challenges we face in seeking to grow abroad because of our relative small size. The traditional discount on Canadian banks attributed to slower growth rates and uncertainty over consolidation attests to this.
The next area of public interest I should like to address is the implication for Canadians regarding access to and choice of financial services. Understandably, Canadians are concerned about the effect of consolidation on competition in our industry. The Competition Bureau review set out in the merger review process will ensure that there is adequate competition for Canadians. As well, there has been a lot of discussion about how any change might impact the access that Canadians have to financial services and the availability of credit, especially for small business.
It is our job to manage our total distribution network efficiently so that clients have reasonable access. Almost 95 per cent of transactions now occur outside our branch network, where we have and will continue to invest in alternative distribution channels. However, we know that despite this incredible increase in the use of ABMs, on-line and phone banking, 70 per cent of our clients still visit our branches at least once every three months for advice, to handle complex transactions or to resolve issues.
Over the past years, we have expanded our mobile sales force significantly to provide our clients with investment and lending advice at times and locations convenient to them. Mobile sales forces, on-line banking and phone banking help provide service to clients who might find it difficult to come to a branch; for example, Canadians with disabilities or those located in remote areas. We recently announced capital investment plans for our branch network, in part to address access needs, and we are testing alternative ways for servicing low-income Canadians. For example, our Cash & Save location in Toronto was recently developed in partnership with St. Christopher House and the local community.
In summary, increased investment in alternative channels as well as our core branch network is a continued priority. Clearly, we must address the issue of access for Canadians as part of any merger initiative through continued expansion of new distribution and by encouraging competition through the sale of branches. Many institutions have indicated a desire to acquire branches as well as infrastructure in the event of consolidation in Canada. I do not believe that anyone in the industry would be against a constructive discussion of remedies to deal with this issue.
Next, I should like to address the issue of availability of credit from two perspectives — first, small and medium- sized business. Another key issue for Canada is that we must improve our ability to grow our small and medium-sized enterprises and to develop more market and industry leaders.
It was in the interest of addressing this issue that RBC Financial Group worked with Canadian manufacturers and exporters and the Canadian Federation of Independent Business to study how Canada can help its small and medium- sized business enterprises prosper and grow. That study can provide valuable input into the parliamentary review process. While we are far from perfect, small and medium-sized businesses are well served by the Canadian banking industry and we all want to continue to grow this important sector.
Our study shows that loan availability and competitive pricing in Canada are strong and that entrepreneurs are accessing a wide variety of financial providers. While there is a shortage of high-risk debt and venture capital, mergers will not affect this issue.
Large business is another issue. Large corporations recognize that more internationally competitive banks would be better positioned to meet some of their needs. However, they also express concern that consolidation among the large banks could restrict their access to credit. This would be a valid concern if the market for credit were limited to the big five Canadian banks. However, in reality, it is not, nor should it be.
Large Canadian corporations have access to capital markets and to foreign banks as sources of financing for their growth and initiatives, and these markets are extremely competitive. Although increased efficiency and larger capital bases would enhance the ability of a merged Canadian bank to lend to large corporations, consolidation may have an impact on credit limits. However, developing broader capital markets and increasing foreign competition are viable and necessary solutions to this issue, regardless of mergers.
The third area of public interest I should like to address concerns transitional issues such as employment. As I have pointed out, the financial services industry is a large employer in Canada and the potential for job loss due to consolidation is, of course, a concern. In the event of a merger, the absolute number of jobs would decline initially, as duplicate processes are brought together. However, it is our assessment that the industry would be able to redeploy many of the employees whose positions become redundant through natural attrition. For example, at RBC we need to replace over 2,000 jobs a year in Toronto alone.
In addition, the greater investment capacity of a merged entity offers the potential to create higher-value jobs in the areas of research, technology and development, thereby having a positive development on Canada's productivity.
As the banks grow internationally, we will continue to create jobs in Canada. For example, as a result of our expansion in the United States, we have created information technology and call centre jobs here in Canada.
We have seen a definite trend to upgrade jobs over the past 10 years. I have no doubt that consolidation would strengthen this. Conversely, I believe that maintaining the status quo could have serious negative implications for employment in our industry longer term. If implemented in a manner consistent with the public interest, consolidation in financial services has the potential to build strong, viable, competitive businesses with the ability to make the strategic investments necessary for Canada's future growth and productivity, while at the same time ensuring that Canadians continue to have access to competitive financial services. The key is to ensure an effective process.
This leads me to my last point, which is the merger review process.
The process as currently laid out requires merging banks to prepare and provide a vast amount of information. Application must be made to the Office of the Superintendent of Financial Institutions, the Competition Bureau and the Minister of Finance.
In addition, the merging banks must prepare a public interest impact assessment, which will be the basis for public review of the proposed merger by this committee and the House of Commons Finance Committee. Reports from OSFI and the Competition Bureau to the minister will also be made public and considered by the parliamentary committees before they report to the minister. Following all of this, the minister will make a decision as to whether any public interest, prudential and competition concerns are capable of being addressed. If so, then remedies may be negotiated and ultimately enforced.
This bank merger review process is more complex, difficult and time-consuming than what many of our foreign competitors face in their home markets. There is clearly a need to ensure that the best interests of Canadians are addressed. However, I am concerned about this process for a variety of reasons. The process, and in particular the public interest aspect of it, has the potential to render the process unworkable as a practical matter despite its broader merits.
Of course, we cannot expect the outcome of the process to be predetermined. However, as the CEO of a large financial institution, I, together with our management team and board of directors, have a responsibility to our employees, clients and shareholders to make a considered assessment of the likelihood of successfully completing a transaction before we allow the institution to undertake all the workload and risk associated with a proposed merger. Without clear guidelines, which set out the criteria for the public interest impact assessment, including how the cost and benefits are to be weighted to arrive at overall results, banks proposing to merge will be uncertain as to the likelihood of success. If the merger review process is unduly protracted, the result could easily impair the institutions involved and have negative implications for the overall industry and the Canadian public.
Therefore, our request of you is for greater specificity around the overall process and applicable criteria. We ask for clearer guidelines of what is expected. In particular, we ask for public interest criteria that do not include the issues that will be addressed by OSFI and the Competition Bureau. We need criteria that are sufficiently well defined so that we can make informed business decisions that give us a framework to structure transactions.
This process must be clear, transparent, consistently applied and completed in a time frame comparable with most public market transactions. We need a process that fosters predictability so that we can make informed business decisions. In addition, we believe that any discussion of remedies should precede the public interest elements of the process because remedies are integral to addressing the public interest concerns. We ask the committee to recommend rules that enable individual banks to make judgments and decisions. This is what we hope results from this consultative process. From a prudential standpoint, we do not believe that an open-ended process in which there is no ability for the industry to predict the outcome is in the public interest.
The government has acknowledged that mergers are a legitimate business strategy for banks. However, the merger review process has the effect of discouraging banks from pursuing this strategy. This discrepancy between policy and process needs to be addressed. This is what we hope results from this consultation.
In conclusion, I should like to reiterate our support for your efforts to improve clarity around the issue of financial services consolidation in Canada and allow us to make the strategic choices necessary to ensure the ongoing viability of our industry for the benefits of all Canadians.
Thank you for the opportunity to meet with you today. I look forward to your questions.
Senator Meighen: Thank you for a well-argued and well-presented brief, which sets out reasonably eloquently the case that you are advancing.
My question is the same as the ones I was pursuing this morning before officials from the Department of Finance, and by my colleagues from the Competition Bureau representatives. You were probably not here at the time. Although you have been helpful in your presentation, I have difficulty understanding what clarity is required in two or three instances, to which I will refer in a minute. We have the merger review guidelines. We have the Competition Bureau guidelines. In the merger review guidelines from Finance Canada, of course, we have the details pertaining to the required public interest impact assessment.
These details would, in my view, appear to cover many of the items that you have mentioned. Therefore, I am still thrashing about trying to figure out why we are here in terms of what clarity we can bring.
Having said that, I notice — and thank you for it — that near the end of your paper you say: ``In particular, we ask for public interest criteria that do not include the issues that will be addressed by OSFI and the Competition Bureau.'' Presumably, you are setting those aside and you want others. In the top paragraph of the last page, you say: ``In addition, we believe that any discussion of remedies should precede the public interest elements of the process, because remedies are integral to addressing public interest concerns.''
Are those the areas of clarity that you feel are necessary at this point, or are there others?
Mr. Nixon: I think those are two important ones, senator. The general response to your question of why we are here is one that I am not sure is fairly asked of the bank executives as opposed to the government.
Senator Meighen: We cannot persuade the minister to come and tell us why.
Mr. Nixon: One of the issues that has become clear since the passing of Bill C-8 is that there is much ambiguity and uncertainty around the process.
Senator Meighen: Give us an example, sir.
Mr. Nixon: As organizations who have looked at merging as a strategic alternative, we have received mixed signals as to whether mergers are viewed to be acceptable or less acceptable by the government. The process lends itself to a time frame and a process where, if two institutions entered into it, there would be little certainty as to what the outcome might be. There would be very little understanding as to what remedies might be required. It is difficult for businesses trying to make business decisions around whether a strategy is in the best interest of its various constituents — shareholders, employees, et cetera — unless there is some degree of understanding as to what the terms of a transaction might be that would be acceptable to the Canadian public or to the political process.
If there is greater clarity around what is in the public's interest, it would be easier for the financial institutions to make those decisions.
Clearly, discussions of remedies we think are important at the front end of a process as opposed to the back end of a process. If we understand what those remedies are around, whether they are around competition issues, which could be dealt with by the Competition Bureau, or public interest issues, then at least as organizations we have the ability to make those decisions as to whether the remedies are in the interests of our institutions.
Senator Meighen: Did you not say that ``discussion of remedies should precede the public interest elements of the process''?
Mr. Nixon: Right.
Senator Meighen: As I understand the process you would like, you would go to OSFI and the Competition Bureau to determine what their concerns might be. You would presumably come to a general understanding of what you as a potential merger might be required to do. Once you had that straightened away, as I understand you, you would then be better able to address the public interest issues.
Mr. Nixon: We are hopeful that what will come out of this process is some of the criteria surrounding the issue of what terms and conditions would be viewed in the public interest. We would hope that we would have a process that would not have duplications with respect to the requirements of OSFI and the Competition Bureau. We are fully confident in the ability of both those institutions to deal with issues around safety and soundness and the competition issues. It is a question of getting greater clarity from the government, and hopefully this process will lend itself around the area of public interest and those issues that must be addressed to deal with the public issue assessment.
We do think that remedies should take place at the early stages and during the process as opposed to at the end of the process, because remedies are clearly critical in terms of determining public interest but also critical to us as institutions in determining whether mergers make sense from a shareholders' perspective and with respect to our other constituents. In addition, it will allow us to have reasonable time-frame expectations as we move into potential merger transactions, because clearly there is significant risk to the financial institutions, to our shareholders, to the financial systems and to our clients if you go into a process without a higher degree of certainty. I think what we are reasonably asking for is a clear roadmap, so that we can make good decisions.
Senator Meighen: It seems to me, Mr. Nixon, that we are dealing here with a policy breakdown or policy question rather than a legislative one. We both referred to the public interest impact assessment requirements. That covers most of the standard stuff, I think it fair to say, or most of the normal questions of public interest. What are left are the global economic context, the national economic context and the attitude of the government of the day and the Minister of Finance. How could I possibly predict that, or you, for that matter?
The other issue of the equation is to have a short-circuiting of the legislative process, as we apparently just witnessed, where two of your competitors were allegedly seeking to merge and the Prime Minister indicated that it was not on. That is clearly nothing we can control, unless we were able, in a legislative fashion, to say that the elected authorities should not be able to intervene. I frankly think they should be able to intervene, and you said that yourself in your opening statement. However, they have to intervene in a way that helps the process come to the right conclusion. Slightly tongue in cheek, but would you rather hear that from the political authorities at the beginning of the process or at the end of the process?
Mr. Nixon: We would rather have clear definition as we enter a process so that we can make good decisions. I cannot comment on the policy side of the equation other than to say that we are hoping that what will come out of this process will be greater clarity around the criteria relating to public interest. It is certainly our understanding that that is one of the things that has been asked of this committee process.
Senator Meighen: It would be helpful today or tomorrow, without going into too much detail, if you can let us know, if you cannot right now, whether the process is flawed in terms of steps. Should the steps be reordered? Should certain steps be eliminated? Should some steps be added? I hear you say ``clarity,'' but I am not sure that I totally understand. There is a clarity of process that we can talk about, and that I understand. I think I hear you saying you wish more clarity in that respect. Do you have any suggestion as to what might accomplish that?
Mr. Nixon: I think we do. We feel the competition issue should be dealt by the Competition Bureau and the soundness issue should be dealt with by OSFI. Those should not be related to the public interest assessment side. Those issues should be dealt with by those two institutions.
We would ask for greater definition on the issue around public interest from the government upfront, as to the criteria that would satisfy the government that mergers would be viewed in the public interest.
Senator Meighen: In the abstract, like today, there being no merger proposal on the floor, as far as we know, or in the specific, when there is something on the floor, saying, ``This is what we need in order to give our political approval''?
Mr. Nixon: Before we go into mergers on the floor. If you enter into a fray where you have mergers all of a sudden in the marketplace and then a debate around public interest and remedies, that leads to a high degree of uncertainty as to whether mergers do make sense, because it will depend on what criteria you use in the public assessment. You have activity in the marketplace that shareholders will have to respond to, depending on the cost of entering into a transaction. I do not think that uncertainty is in anyone's interest. I do not think it is in the interest of our institutions or in the interest of the Canadian public. If you look at how this would occur in most jurisdictions around the world, you would have much more clearly defined criteria in place so that institutions can make decisions knowing full well whether they have the ability to meet those criteria. It is challenging for us to know whether we have the ability to meet criteria when we do not know what the criteria are.
Senator Tkachuk: Following up directly on that, what is your understanding of government policy on bank mergers now?
Mr. Nixon: I think there is uncertainty. If you were to poll — whether it were people around this room or people in the financial industry or people in government — you would get very different opinions as to what the current policy is with respect to mergers, and I think that just highlights the uncertainty that we are being asked to operate our industries in.
Senator Kroft: I think there is some clarity coming here. I have been having trouble in reading your submission, which I thank you for having, and that of others, trying to understand terms such as yours where you talk about the discrepancy between policy and process, mainly because although there may be some fine-tuning and a bit more detail required, it seems to me there is not such a disconnect. Once the process starts, there is a process that is reasonably well set out.
I think I am hearing, particularly in the last exchange, that in spite of the fact that the changes were made in the last banking legislation and that the merger review guidelines exist and that the Competition Bureau has its position well clarified and that the various responsibilities under OSFI and the connection between your industry and OSFI do not seem to be a significant issue, the clarity that you are looking for seems to be that, in spite of all these things being in place, you would like to be clear as to whether the government really in general likes the idea of mergers of banks.
Mr. Nixon: It is beyond likes the idea of bank mergers. That is a little unfair with respect to a request of the government. I think it is greater clarity in terms of what requirements the government believes have to be fulfilled for mergers to be acceptable, and I think that clearly is the issue. I do agree with your comment that our requirements around dealing with Competition Bureau and OSFI are ones that we fully understand and feel are very manageable and workable, and they are very similar to rules that other companies have to go through in terms of approving transactions or, in the case of regulated industries, dealing with their regulators. Those are very clear.
The issue revolves around the ultimate requirements related to approval from the government and complying with the public interest assessment process, and that is where I think there is a high degree of uncertainty.
You are absolutely right in that there is a process that, if two institutions chose to go into it, they would have the ability to do so, and the legislation provides for that.
The challenge for the two institutions is to make the proper decision to enter into that process and live up to their fiduciary responsibility as managers, directors and so forth. This becomes a challenge to manage, because you are asking your organization to go into a process where you do not know what sort of requirements will be required of the organization to be successful. To go into a process like that and be unsuccessful is potentially harmful to an institution.
Senator Kroft: I continue to read uncertainty into words that I hear from you and from others that, in spite of not specifically saying so, your feeling is that the threshold that you may find when you get into all this may really be very high and is perhaps rooted in a scepticism about the viability in the Canadian interest of mergers altogether; is that correct?
Mr. Nixon: That is a fair comment. If we knew what the thresholds were, then as management we could make the appropriate business decision. However, it amounts to the same result.
Senator Kroft: The emphasis in your case and going back to the time of the MacKay report is the importance of national institutions that can play their place aggressively in the global marketplace, both in terms of the institutions themselves and the shareholders, customers and the strength of the Canadian economy. With this result, it seems likely to me that most if not all of the net investment of this new entity would be manifest outside the country. The increased financial capacity would be manifested in terms of activities outside the country, whether in terms of participating, financing, acquisitions or whatever; is that correct?
Mr. Nixon: That is the case as we sit here today. If you look at the net acquisition investments of the Canadian financial institutions, most of our activity — certainly ours, but if you look at the entire industry — would be outside of Canada because there is an opportunity for us to grow more quickly beyond our borders.
The net investment into Canada as a result of mergers would be positive; it would just come from different sources. If you had consolidation in the Canadian financial services industry, it would provide an opportunity for smaller Canadian financial institutions, credit unions and foreign banks to come and play a broader role across our financial industry. That net investment is not only likely, it is a critical issue to mergers ultimately being successful for the country. You want not only to facilitate the Canadian banks growing and expanding beyond our border, but also to facilitate the opportunity for other people to come in and compete more within our borders. If we can accomplish both those objectives, it will be positive. That should be one of the primary goals of allowing consolidation to occur.
There is a natural tendency in these discussions for people to move to the extreme. The Canadian banks will not wither and die if mergers do not occur. The Canadian financial services industry — and I stress this — is one of the most successful and competitive financial services industries in the world. There are few countries around the world that have an industry as healthy, vibrant and competitive as ours.
As an industry, are we living up to our potential or ability to grow and expand and become more global, and what are the benefits to Canada if as an industry we do succeed internationally in the financial services sector to a greater degree than we are today? If we can accomplish that while at the same time maintaining a competitive environment in the Canadian marketplace, then I have no doubt that there is and will always be an extremely competitive environment in this country. From a policy perspective, that is ultimately healthy for the country. That should be one of the objectives from a policy perspective for allowing consolidation.
Senator Kroft: In your remarks, you would obviously contemplate foreign banks coming in and playing a greater role.
Mr. Nixon: Absolutely. This information was published in the newspapers. I do not think it is any secret that a number of foreign banks have indicated that they would be interested in acquiring redundant branch networks and infrastructure in the event that consolidation occurred. In the longer term, that would be healthy for the country. It would be challenging for us, as competitors. As an industry, we have the ability to rise to the occasion and compete against those institutions. I do not think keeping these businesses out is healthy in the long term, either.
Senator Angus: Your message struck me as being very detailed in comparison to the message we were receiving from witnesses like you the last time around, when the merger discussion was on the table. You have certainly argued a case that we will take great interest in understanding.
One thing that keeps coming through in terms of why the Royal Bank wants more clarity, and I am assuming the other banks want the same, is that when you get involved in the process of convergence with another bank there must be tremendous costs involved and complex arrangements to be made. Could you give us an idea of potential costs? I have read of the incredible amount of money that was spent by Royal Bank, BMO, Commerce and TD last time, all for naught, which was a drain of the shareholders' pockets. Could you outline for us how complicated the procedure is and why you need clarity?
Mr. Nixon: The procedure is extremely complex. There is a heavy cost associated with mergers. However, the greatest cost is the lost opportunity and impact on our employees and our customers of going through a process like this without a positive outcome at the end of it. That is something that is very unhealthy for the industry. That is one of the reasons that issues around clarity are so important from our standpoint.
While there is tremendous stress on an organization as you go through a merger, the biggest impact is on employees. As you go into a merger process, there is a tremendous amount of uncertainty as to potential job loss, redundancies and management team strategies. All of that is disconcerting to employees.
There is uncertainty to shareholders, which is clearly an issue. If you announce a transaction and you go through a long, drawn-out process where the terms of the transaction change throughout that process, there is no question that there is an impact from a shareholder perspective. You always run the risk, depending on the uncertainty and the cost, of shareholders ultimately making the decision that a merger is not in their interest. Again, I do not think it is in the long-term or the public interest to go through that kind of a process. The process is very demanding on an organization and very costly in terms of real dollars. I cannot remember the precise cost.
My colleagues, who were more involved in 1998, advise me that the cost was approximately $30 million.
However, I can assure honourable senators that the cost to the organization in terms of missed opportunity and impact on morale is far greater than any monetary cost. That is something we are obliged as a management team to do our best to avoid.
Senator Angus: Those costs obviously in actual dollars and other moral costs that you mentioned seem to be very material. We realize that it would probably be indiscreet to ask whether you were in the process of negotiating with one of your other banks, so I will not ask that. However, it is a competitive business out there. You highlighted it with good reason, following the people from the Competition Bureau, namely, that we have a very competitive environment in Canada. Is it so competitive? Are the advantages, which are getting bigger as you described in your statement, so great that one would be prepared to take the risk?
Mr. Nixon: Absolutely. That point is important for everyone to understand and appreciate, particularly the Canadian public, namely, that every decision has risk or reward. Ultimately, those are the decisions that we must make, namely, whether the risk is worth the reward. We believe that the risk is worth it, given the opportunity.
The other challenge we face is this: If we are not prepared to take that risk, then what will the future of our industry look like if we look out five or ten years and the world continues to grow and to expand around us? That is an issue from a policy perspective that must looked at. We have the ability to protect our financial services industry through regulation and legislation, but is that necessarily healthy in the longer term, or are we better off to build our industries and capitalize on the strength that we have as an industry to be world competitors? That is the risk that is worth taking. I have no doubt that we have the ability as an industry to live up to the potential because we do have a strong industry. If you look around the world today and look at our industries and our financial services companies, it is a positive story. That should be something of which we have the ability to take advantage.
Senator Angus: That statement you just made could well come back to haunt you. When we went through our modest participation in it last time, we were told by Mr. Cleghorn and Mr. Barrett, in particular, respecting the BMO/ RBC merger, that it had to be done, that it was urgent and that there were huge costs of technology and investment; in other words, if they did not get into the game now they were in big trouble and would go from the top 20 to 200.
Here we are now, and significant time has gone by. You are affirming that your industry is very strong. We hear from far and wide that the Canadian banking system is unique and very good and one not to be tinkered with unless the risk/reward is evident. Four years have gone by, the Royal Bank is alive and well and Canada is out there doing business in the global village.
Mr. Nixon: However, that does not mean that we have lived up to our potential. If you go back to 1998 — and one will not know — had the mergers occurred and had a strategy been pursued to continue to invest and grow more aggressively in the United States, which was clearly the strategy of Royal Bank and the Bank of Montreal at the time, namely, to significantly capitalize and invest in the U.S. personal and commercial banking business, we may well have had a financial institution here today that had been not only successful but also significantly more successful and much more significant in terms of its international leadership as a financial services organization. If you look at the top 20 financial services companies in the world today, many of them have been through consolidation and mergers in their domestic marketplace. A lot are banks that have grown in the last three or four years through consolidation, merger and acquisition. It would be very healthy for this country if we had financial institutions in that grouping. However, we do not.
That is where you must be careful about being too extreme on this issue. Our industry would not wither and die if consolidation were to occur. However, if we facilitate consolidation and we still have a competitive landscape in this country, then perhaps we have the ability to create companies that will grow and be more competitive internationally. If we are able to do that, there will be spinoff benefits to this country. We want companies in the country that are large, international and global, with head offices in this country. It is a question of potential.
Senator Setlakwe: Your submission was very clear to me. I hope that our conclusions will be as clear to you.
You answered some of my concerns in your replies to Senators Kroft and Angus; however, if I understood you correctly, increased capitalization would make you more competitive worldwide. When you said that, I was reflecting upon the fact that, some years ago, the Japanese banks were among the 10 largest banks in the world. If you look at them today, I think you will agree that, despite the what has gone on in the Japanese economy with regard to real estate lending by the banks, that situation is no longer the case today. I should like your opinion as to what you think about the importance of size in bank mergers.
At one point, I heard one of your colleagues say that the object of his mission was to satisfy his stakeholders that there would be an 18 to 20 per cent return on investment. He then went on to say that his corporate clients, and I assume that he meant his best corporate clients, gave his bank a return of 9 per cent. That leads me to my other question. That being the case, is there any interest on the part of the banks for retail banking with regard to SMEs and individuals? I know you have defended your case well in your submission, but there is a doubt out there about the extent to which your participation in an international organization will eventually affect SMEs and small borrowers in the Canadian economy.
Mr. Nixon: I will respond to the Japanese question first. I must be very careful in commenting on their financial services industry, which has been going through many years of challenges and restructuring. The challenge that their banks got into had a lot to do with aggressively expanding their balance sheets as opposed to growing through acquisition or through mergers. If you look at the 20 largest financial institutions in 1990 versus today, there has been quite a shift. Back then, the Japanese banks tended to be ranked very large as measured by assets at that point in time.
The banks that perform well today are those that tend to consolidate and grow a much more diversified financial services business, not just wholesale lending, which is where the Japanese banks ran into challenges and problems. The banks that tend to be in that top tier have taken advantage of consolidations to build their individual businesses — consumer and SME businesses, such as the Bank of America, Wells Fargo, the Royal Bank of Scotland and the Halifax Bank of Scotland. These are the banks today that rank in that upper echelon of financial services companies because they have taken advantage of consolidation.
Our strategy as an organization has been to try to make most of our investment not on the wholesale side of the equation but on the consumer and SME sector of the marketplace. We have expanded in the United States, and virtually all of our investment dollars have gone into consumer businesses and small and medium-sized business operations. There are RBC Centura Bank, which we acquired in the southeast U.S., an individual and small business bank; RBC Dain Rauscher Inc. is a retail wealth management operation; and Liberty Insurance is a consumer operation. That has been our pursued strategy.
One of our challenges, which relates to this argument around potential and scale, has been the size of our organization. Our ability to grow more quickly is, to a degree, affected by the fact that we are small, by international standards. As we grow into those marketplaces, it is more difficult for us to make acquisitions and to grow in a fashion that does not affect the fundamentals of our organization and the returns to our shareholders. Thus, we are constantly trying to manage that balance between growing, investing and protecting the value of our shareholders. We have to do that in a slow, conservative fashion, and we are prohibited from participating at a level of consolidation simply because we are small.
One can look at the situation of the Japanese banks, of the regional banks in the United States and of some of the British banks to see a different picture in terms of success and growth. Today, there are five British banks on the list of the top 20 financial institutions in the world. Those banks have tended to grow without making significant wholesale investments, if you will, or balance sheet investments, as they have grown. You really have to look at the mix.
It does come down to the issue of execution. As consolidation occurs, institutions can execute poorly and end up hurting value for their shareholders. There are examples of that in the marketplace. However, there are also many examples where institutions have actually created value for their shareholders.
Unfortunately, policy just cannot dictate that — whether companies will be successful in terms of execution. Clearly, we want to have policy that will allow us to manage that as much as we can from a risk perspective.
Individual consumers and small business represent over 50 per cent of our business in Canada. They are clearly our top priority as an organization and institution. We are continuing to invest in those areas, and significantly in the area of technology, to provide integrated packages so that we are able to provide better value and service to our customers. We are clearly attempting to grow our small and medium-size business activities in this country. We would like them to grow more quickly but, I can assure you, it is an extremely competitive marketplace. Over 50 per cent of small business is serviced away from the major banks, and there is a great deal of aggressive competition in that sector. I wish we could increase our market share in that sector because it is clearly a top priority of our organization.
Senator Kelleher: We have been told that there was a proposed discussion of a merger between the Bank of Nova Scotia, BNS, and the Bank of Montreal, BOM. We were told that the Prime Minister cancelled this proposed merger. We do not know that for certain because no officials will come before the committee to clarify this for us.
Having said that, when officials from the Department of Finance and from the Competition Bureau came before us this morning, I asked them, specifically: Do you know anything about this? They both answered no, and I asked whether anyone asked them for any advice on these issues, and once again they answered no.
The first question I have for you is this: Were you asked? I know you were not in the merger rumours but, were you asked for any advice on this, whatsoever?
Mr. Nixon: I can honestly answer no. I wish someone had asked me for advice. However, to be candid, I was in the U.K. when the news broke, and Senator Kolber called to ask me to appear before this committee. I happened, coincidently, to be meeting with Matthew Barrett the day the news came out.
Senator Kelleher: It must have been déjà vu for him. In any event, you gave me the same answer that I received from the others earlier today. Thus, I would like to ask you an additional question along this line: Do you have any idea if these merger discussions were accurate and the Prime Minister cancelled? Have you heard any rumours or ideas as to what the criteria were for cancelling this?
Mr. Nixon: The candid answer is no. I am sure that if my colleague, who will follow me today, is asked that question, I will be interested in the response.
Senator Kelleher: I am just rehearsing for him.
Mr. Nixon: I absolutely cannot shed any light in respect of the discussions that took place or how the process occurred.
We have, over the past year, had mixed signals out of different constituents in Ottawa. That simply relates to the uncertain environment in which we have been operating. Various people have divergent opinions about whether mergers are acceptable or not acceptable to the government. I honestly cannot shed any light on what occurred.
Senator Kelleher: Given your answers and the answers I received earlier and the discussion about looking for clarification, we need to look at the whole process that has been laid out for mergers. No one seems to be following them on the government side. What do you say to that? It is a rather mean question, but I will ask it regardless.
Mr. Nixon: To a degree, the proof of the pudding is in the eating. Institutions have people who believe that consolidation is a viable strategy. We have had a period of time where consolidation has not occurred. Clearly, there is enough uncertainty in the minds of those people as to whether a viable process is in place, and people have chosen to not move forward. Now, the situation is such that two institutions have attempted to move forward and someone has applied the brakes. I cannot say if that is correct, but it is important to our industry and to the Canadian public to have a set of criteria and a process whereby people can actually make decisions and there is greater transparency to the process.
We need that transparency because our shareholders and our employees deserve it. You will not have good business decisions made unless there is a greater degree of transparency and less uncertainty in the process. If we end up with that, then the organizations will be better able to determine the best interests of their constituents.
Senator Tkachuk: Do you think, under the present political circumstances, that there is any chance of any merger taking place between now and November 2004?
Mr. Nixon: There is always a possibility. I would probably say that there is a 50-50 chance of a merger, which highlights the uncertainty. I honestly do not know. It is very unclear. I would give it at best a 50 per cent chance.
Senator Tkachuk: That is the problem.
Senator Kelleher: You would not give a loan approval on that?
Mr. Nixon: If we did, we would probably end up paying a price later down the road.
The Chairman: Thank you.
Our next witness is Peter Godsoe, who is Chairman and CEO of Scotiabank.
Please proceed.
Mr. Peter Godsoe, Chairman and Chief Executive Officer, Scotiabank: With my peer group, let me say first that it is a pleasure to be here. I congratulate you by taking up the minister's letter and working on the public interest impact side.
At the risk of stating the obvious, as there is sometimes confusion as to what we are really trying to do, bank mergers as a valid business strategy was accepted by the government in Bill C-8. In other words, we have public policy in place that explicitly permits mergers as long as a formal review process is followed.
After an extensive public input process by the MacKay task force in 1998, the group produced a thoughtful paper. Upon rereading it, I noted that it was clear on what the public interest impact assessment should cover. The bill was passed in 2001.
More recently, as stated by both the Prime Minister and Minister Manley, the word ``clarification'' is being used frequently. If these committee meetings will help clarify this third step, then we will have more certainty and transparency. Certainly, it is the industry's desire to get the certainty and the transparency and then make the decisions.
Our hope is that it will be highly predictable, too — although, in fairness, in Europe, the U.S. or anyplace, mergers are not entirely predictable.
We should like to get the issue of mergers out of the political popularity contest. We do recognize that banks are not universally loved. Voltaire said: ``If you lend a man money, you have a secret enemy. If you do not lend him money, you have an open enemy.'' The more things change, the more they stay the same.
Rather than visit the broad public interest issues, which had been accepted, such as head office, job creation, the necessity of financial centres to grow and evolve, intellectual capital, the best and the brightest coming home and globalization, which were weighed and answered by MacKay, I would address — recognizing that Gord Nixon has also address these four specific questions posed to you and your committee and to Sue Barnes and the House committee — access, choice, long-term growth and transition issues. We could then move to questions and answers.
First, access is a legitimate issue in all regions of the country with or without mergers. It is an ongoing issue. Low- cost accounts, rural branches, branch closure regimes, formal notice periods, community consultations, access for persons with disabilities, service for old people and use of new technologies are all legitimate questions with or without mergers.
In the case of mergers, the issues can be easily resolved with undertakings and commitments if gaps exist to protect the public interest. Rural branches could be kept open, where necessary, when it is for the economic viability of the towns. ABM access could be offered.
All of the banks have low-cost retail deposit accounts for the poor, which were established in 2000. We recently renewed ours in an undertaking to the government last month.
In Canada, we are extremely fortunate in that we have escaped the severe inner city restrictions that affect a large part of the United States. Any of us who have lived in the U.S. have been exposed to that. I have lived in two different cities. We do not need a community reinvestment regime. That is not our issue. There are other issues that can be looked at.
It is legitimate to consider access issues. Is it resolvable? Yes. It is ongoing with or without mergers, in my view.
The second question is with regard to choice. I broke it down in my own mind to choice for larger companies, choice for consumers and choice for small and medium-sized companies. We are, interestingly enough, in the middle of a great decrease in liquidity for larger companies, but not so much in Canada as in the U.S., where there are many banks, particularly in the energy and telecom sectors. These concerns are real. It is not a concern or an issue for the merging of banks. The reality is that Canadian banks are too small to serve as the major lead banks in these markets already. That is not an argument for scale; it is just a factual observation.
All large companies in Canada or elsewhere, Europe, the United States, even in Japan, are being served by global giants, commercial banks, investment banks, because they must, of necessity, access the global markets, the markets in the United States, for bonds, convertible debt, et cetera. Canadian banks are not a defining factor for the corporate sector.
Turning to consumers, there are already substantial choices and concentration issues that will, and should be, dealt with by the Competition Bureau review. Specifically, looking at the deposit and investment side, if you pick up any newspaper and look at their special inserts, you will see a proliferation of choice. There are numerous options for GICs, mutual funds and various high-rate savings accounts. Subject to Competition Bureau concerns on concentration, I do not think that is a major issue in a bank merger today.
The same holds true for personal lending. There is a lot of choice available to Canadians in mortgages. One major shift since 1998 is that today mortgage brokers do 25 per cent of the business in this country — not the banks — independent mortgage brokers, up from zero. There are shifts taking place. There is a lot of choice available for people raising money for housing. Look at personal lending with HSBC, which is a good competitor. Now that it owns Household Finance, it will be an even tougher competitor. President's Choice — they are rising. There is a lot of competition in credit cards. There has been for 50 years here.
Access comes down to one main issue, as highlighted in the ministers' letter, choice and availability of funds for small and medium-sized businesses.
Again, the best line of defence is the Competition Bureau review, to assure there is a proliferation of competition, not concentration. This is a tried-and-true solution relied on for other industries in Canada and, basically, relied on in other countries that face the same problem, whether it is the United Kingdom or the United States.
Nevertheless, we all know this sector is responsible for employment — 60 per cent of all Canadians — and growth. I know honourable senators will be hearing from the Canadian Federation of Independent Business later today. I respect that federation, Brien Gray, Catherine Swift and Garth Whyte a lot. We consult with them regularly. They will have their views. More competition is better from their point of view and, indeed, it should be from their view.
Following on the RBC Financial Group, I can assure you that, to Scotiabank, we are totally committed to growing this sector, doing more, increasing our loans and coming out with new product. We have a subsidiary called RoyNat, one of the pre-eminent venture capital banks in this area. It has 1,300 clients and a portfolio of $2 billion, of which $200 million is venture capital. We do this not because we are philanthropists but because it is a profitable sector to be in, and it is loyal. It is a good place to be a banker.
Beyond this commitment, which, in fairness, does run across the entire banking industry, if any market gaps exist, I think that is where proactive public interest policy can come into play, looking for solutions from merger proponents and others. The Competition Bureau and the minister are in good position to negotiate these.
Turning to transition issues, particularly the treatment of employees, mergers, from my personal point of view, cannot and must not be about large job losses. I would not be here today if they were. It is not good business. At Scotiabank, we run our business for our stakeholders, which is an old-fashioned term, but we believe that satisfied customers are a function of satisfied employees. It is hard for me to believe that if you are having a bad hair day you give good service. It is just not on. We must have that in order to satisfy our shareholders and be important parts of our communities. We know that loyal, highly qualified, trained and motivated employees are absolutely critical to having satisfied customers. Only then do we succeed.
At Scotiabank, 86 per cent of the staff across Canada think their branch is the best place to work, which is a very high statistic. They also believe loyalty is a two-way street, which is not about massive layoffs, mergers or otherwise.
We also understand that mergers are not easy. They are very hard. I have told our people that a big bank merger in this country would be at least three years of hell. It takes about three years until you will really get to branch signage, leases and the things you do in merging branches. It takes that long. Seventy per cent of mergers, across Europe and North America, have not succeeded because of execution, cultural clashes, trying to go too fast and layoffs of people. It is not good business.
If we at Scotiabank were involved in a merger with another bank, we would approach it carefully, slowly and measured in terms of that implementation and execution. As I said, branch consolidation takes about three years. Systems integration takes two to two and a half years to complete. These are not easy tasks to accomplish.
Of course, there would be staffing overlaps. It is obvious, Mr. Chairman, that there does not need to be two bank chairmen. There does not need to be two CFOs. Hence, there would be some rationalization at head offices. Out in the broad base of our employee population, our operations and branches, it will be a two- to four-year journey. There is a lot of attrition in the system.
At Scotiabank alone, we have a turnover of 3,500 a year, mainly in those areas. It is far too high; however, it is an indication of today's labour mobility, and it is the way you would resolve this.
In a general sense, the financial sector has shown that it can handle these problems and challenges from a public interest impact point of view. The Toronto Dominion-Canada Trust merger was, in all intents, a big bank merger. Our acquisition of Montreal and National Trust and Clarica/SunLife, putting them together — each dealt effectively with that side of the public interest impact questions.
Similarly, branch rationalization has occurred in Canada in the past four or five years. In the past four years, Scotiabank has shrunk its system by about 300 branches, which was the after-effect of the National Trust merger and also of the way we will rationalize smaller branches into bigger ones. Little of this was rural, incidentally. The employee impact was virtually seamless. If you were to talk to Scotiabank people, you would find that it was done almost entirely through attrition and turnover, and also because we grew rapidly in the electronic area, such as telephonic and e- commerce.
Let me turn to the question in the ministers' letter of international competitiveness and long-term growth prospects. The positive side of this debate in some ways is the view of ``why merge at all if it is going to be so difficult and politically unpopular?''
You certainly do not merge to get bigger in Canada. We are big enough already in our home markets to compete very effectively against new, old and foreign competitors, as well as each other. We prove that day in and day out. You do not merge to save costs. There are some cost benefits; however, as I said before, study upon study of successful mergers proves that success is about having a vision of growth, a vision of going forward, of putting good with good and challenging your people to develop revenues and products. Wells Fargo and Norwest, Royal Bank of Scotland and NatWest and, more recently, First Union and Wachovia — we have studied them all. They have all been about growth, not about cost-cutting. They all show employee continuity and buy-in, customer focus and satisfaction. It is just good business, not motherhood.
You do not really merge to gain technological scale; intellectual capital perhaps, by bringing brighter and brighter people together, but not scale. We are big enough already to invest and grow in Canada. On technology issues, we are climbing the outsourcing curve very quickly. It is part of everything you do. We outsource all our data to IBM for about $1 billion dollars. We reduced costs a bit, but what is more important is that, with that outsourcing, all the people went over. Not one job was lost. They happen to do it more effectively than we do, and we tap into their upward technological curve without us having to do so ourselves. We outsource our imaging, and more of this is coming. You merge for only one reason, in my view. There is one overwhelming reason that can be given to the Canadian people, which is the overall scale of our equity base.
Why do you need the size? It is to grow and expand outside of Canada faster. All of us are already generating excess capital, which forces us to go outside and look for acquisitions. In Scotiabank's case, this is to look in the United States, to grow faster in Mexico, the Caribbean, Latin America and parts of the Far East. Can we do this without merging? The answer is yes. The Royal Bank is proving that, others have, and Scotiabank has. However, in terms of buying in the U.S. and competing in that very important market with which we share a continent, we would be much more aggressive with a merger, because we would have the size and be able to look at a much bigger impact.
As an aside, we are already aware that the HSBC has a strategy of being the NAFTA bank. They may be sharing it with Citibank, but they are certainly not looking at the Canadians and giving seamless service from Canada, through the U.S. and into Mexico. It gets our competitive instincts up a tiny bit.
As you know, this is not what is good for Scotiabank and the other Canadian institutions. The fundamental question being asked is what is good for Canada and Canadian institutions? It is their strength and ability to compete in global markets, without protection I might add, and without a cost benefit to Canadians, provided we can get the competition access right. Our banks are proven international competitors. Scotiabank was in Kingston, Jamaica, before we were in Toronto. Others were in California in the 1960s. We compete, again without help, around the world against giants many times our size, in terms of market capitalization. We are successful. That comparative size advantage allows them to acquire, expand and grow much faster than we; nevertheless, we make roughly 40 per cent of our money outside of Canada. In a normal year, we make $750 million outside of Canada, basically in retail banking. That is quite a bit of money for our shareholders, 95 per cent of whom are Canadians. That money is coming back and enriching Canadian shareholders.
Therefore, I think a good argument can be made that internationally competitive banks are good for Canada, will create wealth for the average Canadian, will benefit them directly or indirectly as 50 per cent are indirect shareholders through mutual funds and pension funds indirectly, and will provide jobs for our best and brightest. Many of us in our banks return from the United States because the thrill and challenge of working in our banks was as good as anywhere else in the world. Opportunities are good to advance and go to the top. It is a great place to work and an advantage for our banks to be able better to grow in NAFTA and internationally.
Should we proceed to act on the McKay report of 1998 or the Bill C-8 legislation of 2001? I think yes. Banks that have the proven experience and the toughness to win out there should be allowed to grow and compete internationally, as well as in North America. Mergers are one option to that end, although not the only option. We certainly see financial sector consolidation across Europe and in the U.S. Canada should not create an artificial barrier to wall itself off from this. This sort of policy rarely works in the long run. In many ways, outside of protection for our cultural industries, it is contrary to our drive as a country. Most of our industry is open, from oil and gas to manufacturing. Maybe not railroads yet, but Paul Tellier is on to that. Why should banks not be more open as we drive to eliminate barriers and grow trade? To do so, we have to clarify this review process somewhat.
In conclusion, Mr. Chairman, Canada now has the right public policy and the right processes in place for bank mergers. The McKay task force, thoughtful, consultative and, as I said, almost two years in the making, did assure that. If you reread the report, the points are very much what was put to this committee in the letter. The Competition Bureau and OSFI reviews are very clear to all of us in the industry. We know what to expect. We fully support clarifying the public interest review to ensure access and choice are maintained and transitional issues are managed appropriately, which I am confident they can be.
Senator Angus: We are fortunate to have as our counsel Eric Reguly of the Globe and Mail. I am sure you read his briefs. I would like to remind you that I am from the ``belle province de Quebec.'' In Quebec, we have an old expression that I find you have to use pretty often in life, which is ``Only fools never change their minds.'' We know you are no fool, Mr. Godsoe. Taking our lead from the press, as we seem to do a lot in this town, you appear to have changed your mind. I am not going to get into a line-by-line cross-examination of your transcript from the last time, although Mr. Reguly has outlined two or three obvious questions we might ask you.
The conventional wisdom at the time was that you, because you are a canny businessman — you are not the CEO of Scotiabank for nothing — got left at the post. The other guys got out ahead of you in what, by your admission and everybody's affirmation, is a very competitive business.
Now you have gotten out ahead of the game. I do not know whether you took a walk in the snow with Senator Kirby, or anybody else, for that matter, but you have changed your mind, sir. Is that correct?
Mr. Godsoe: There was much speculation in your question, and given you gave me the one-line answer that I am no fool so I changed my mind, I prefer to stay with that. There is a little history here, too.
In 1996, the CEOs — and I am the only one old enough to have still been at that meeting; that is how long we have been talking about this — requested of then Finance Minister Martin a review of the financial services industry. You will recall that we were not popular. We had service charges under Blenkarn, we had Red Book reviews, and a number of other things. Therefore, we asked for a studied review, somewhat like back to the Gibson area, which set banking. Out of that came the MacKay task force, set up at the end of 1996, and that task force was supposed to define what we could and could not do, including mergers. It has now reported. In 1998, there was no process whatsoever. It was very uncharted.
Today, it is quite clear, although still a little grey as to what the will is, and I think Gord Nixon put that well. When you are uncertain, you do not proceed. However, with that, we have firm legislation; we have a firm process. We can merge. I think that was a seminal change. I have been talking with our board since 2001, saying that we have to consider that one option. It is the law of the land, or you repeal the law. If you have a law, you have to look at it as one of the options you should be considering, and that was a big change to me between 1998 and 2000.
Senator Angus: That is interesting history. The key words I take from that response is that it seems to be relatively clear, but the will may be somewhat of a grey area. My colleagues and I, and, I assume, the colleagues of the chairman and the other side over here, are curious to know whether a proposal was on the table up until the time we were suddenly asked to bring clarity to this grey area. Obviously, we cannot get into what is the government's will. Tell us what is going on, please?
Mr. Godsoe: Much of it is speculation, and it is difficult. I am reading the newspapers as avidly as you are to find out what went on. Apparently, it is quite interesting. I can say, just as an aside, that it is not helpful when you are trying to run a bank, because it gives employees uncertainty, and the last thing I want is even more of this. I much prefer to stay on public interest impact assessment and whether we can make this clearer for the industry, so it can go forward.
Senator Angus: We need to know for our enhancement interest.
Senator Tkachuk: How did it fail you?
Mr. Godsoe: I do not think that is what happened. In many ways — and I am not confirming or denying it — since mid-2000, it has been clear to us as an industry that big bank mergers were going to be allowed legally. That did not mean they would be welcomed politically, nor it did it mean that the public interest impact assessment, other than the parts that have been defined, would be totally clear. We were clear in our own minds what the Competition Bureau might or might not have done. We watched Canada Trust and Toronto Dominion, and we had the other two. We can model. With respect to Scotia with any of the other four banks, I can tell you, probably within 30 branches, what we would have to do in terms of divestitures. We all can do that. We know where the OSFI or the fiduciary one would be.
Therefore, that was the grey area and it is in the realm of politics, which we are not very good at. We have proven that time and again. That uncertainty then causes people to talk, and all of us have talked to our boards. We probably talk to our board every second meeting on this issue. We talk to each other. We consider whether the regulation banning insurance in banks will be lifted and many different things as the world keeps changing. The talks are ongoing.
We talk to government. It is not just one minister but many ministers we have talked to. We talked to Minister Manley when he was the Industry Minister. We talked to caucus and civil servants throughout, and I am sure our peer group does, too. We were getting grey answers and still are. What has been abundantly clear — and government policy has not changed in the past two years, in my view — is that legally banks can merge. The big banks can merge if they want to. The process is clear. It is three steps. The third step is not vastly different from the points that were outlined in MacKay and in the legislation. Much of it is clear to us. Can we deal with small business? Can we deal with jobs? Can we deal with Competition Bureau issues? Can we deal with access? Parts of it are not clear, so we have been tentative. Therefore, you have seen no mergers coming forth.
Hopefully, part of what is coming out of this is a clarification that if you come forward with a proposal and you go through the process, the government will not change the rules at the end of the day. The process will be, for example, yes, mergers are a viable strategy for Canada. If it is considered to be a merger that is unacceptable, you would be informed partway through the process, and that would be fair.
Senator Angus: Were you so informed?
Mr. Godsoe: No, absolutely not. In this two-year period, we never asked directly.
Senator Angus: You put no proposal forward?
Mr. Godsoe: No.
Senator Angus: There has been no merger between Scotia and BMO put forward to the government?
Mr. Godsoe: Scotia has talked about mergers with a variety of other parties throughout this. That means you are talking with other people, too. It would be logical to assume we talked to Bank of Montreal and others, for example, insurance companies, but it has always been clear it was our decision. We would have to make a decision and come forward with a formal approach to Ottawa, which was never done.
Senator Angus: I want to read you one passage of your transcript from the last time:
...Scotiabank's position is that these mergers must be analyzed very thoroughly, because from our viewpoint they represent bad public policy. This is bad for competition, bad for choice, bad for consumers in small business, bad in terms of potential concentration of risk and power, and it creates a concentration that is unhealthy in a country the size of Canada.
The proposed mergers would eliminate one-third of our country's banking system as we know it. As far as I know, this has never before been done in a developed country. We would be moving to levels of concentration that are not seen anywhere else in the world. Mergers would mean that almost 70 per cent of virtually all core banking markets would be in the hands of two banks. That is, 70 per cent of everyday banking services, services that touch virtually every Canadian household: personal deposits, transaction accounts, loans, mortgages, and small and medium-sized business lending.
Having read that and the rest of your transcript, which is in a similar vein, I can only conclude that you have decided that only fools fall in love in your new deal.
Mr. Godsoe: We did not have a new deal. What changed, as I said, was that public policy accepted it and said that if the Competition Bureau rules — and they came up with lower numbers than I quoted then, and the numbers are even lower today — then we would be a part of the process. Either we would merge, or not. It is not something you do easily, because I think some mergers would not work and some would work. It has changed.
Senator Angus: If those are the rules, you might as well play.
Mr. Godsoe: I play by the game.
Senator Kroft: You were getting very close on this issue of clarity, and it is a word that permeates every submission and every article that we have seen, as well as the testimony of our previous witnesses. As you watched Mr. Nixon ahead of you, he crept closer, and then you have now used language that I found helpful. I am coming to a conclusion that I want to play back words from a few minutes ago to make sure I understood your intent.
The process that you have taken us through is obviously quite clear. You say that on an ongoing basis in your discussions with the Competition Bureau that part of things is really quite clear. Nobody talks about OSFI, and we assume that you know quite clearly where you stand there.
In terms of the procedure under the national interest of the Canadian interest section, you have even offered that that is really quite clear, and I believe I am quoting you correctly when you say that what is really quite grey is what the will is, and that in talking to officials you are getting grey answers and have been getting grey answers and still are.
It seems to me — and I should like to remove any doubt about this — that the essential absence of clarity is that in spite of the process what is quite unclear is the real intention of government, given a good case. Obviously, a bad case, we would all agree, should be thrown aside. However, even given a good case, the question that is not clear is whether this is the will of government or the preference of government, or whatever word you want to use, and that that is what you are suggesting is where the major element of uncertainty lies. Am I correct in interpreting that?
Mr. Godsoe: You have put it well. When I say grey answers, I believe what you were getting was on the one hand and on the other hand. There is a will here. There is a clear outline of what has to be done in terms of process, what issues you might have to address, but there was no clarity, and this is helping to bring clarity. Government policy said, yes, if you come forward with a good merger it will get a viable hearing. If we do not want mergers in the country — and that is a very fair conclusion to reach — then for the benefit of the industry it should be better to have that clarify. If we do, then we must have that transparency; otherwise, there will be too much that will not be seen. I believe transparency is healthy — healthy in running companies and healthy in this sort of process. That is why you are getting so much of these two words without specifics.
Senator Kroft: If I were to ask you, as I had noted that I had intended to do before you made your statement, for a few examples of things that are not clear in the process — it is really not a necessary question because we have really got the answer. It is not that you could not give some that would be unclear, but by far the pre-eminent question seems to be a clarification of what the government's preferred policy would be.
Mr. Godsoe: Yes, I think so. We went forward post-MacKay. We took parts of MacKay and we left parts out. MacKay was supposed to be a balance. Banks could get insurance distribution ultimately, banks and insurance companies could merge, banks could merge with each other. Parts of these came out of MacKay and parts did not. However, it was supposed to set the template for this next decade.
I feel strongly that the only rationale is to get bigger and go abroad, but this must be counterbalanced by what I understood as public interest impact, which was small business availability, branches in rural towns, being part of the economy, giving access to the poor in terms of cities and whether they have an account that is viable. Many of these issues are really local and Canadian, and are Competition Bureau and legitimate concerns. We never totally understood the political process because 1998 was partly about politics and partly about having no clear path whatsoever.
Now I feel we have a relatively clear path in my mind, but we are not absolutely certain or you would not see an industry that is arguably one of Canada's most successful sitting and not making moves. We are a long way away. We are two and a half years out.
Senator Kroft: In many things, there tends to be idealization as to what happens elsewhere. You made an interesting comment on another key word that we are hearing a great deal about, which is predictability. I want to go back to your point on that. I took your observation to be that we should not get carried away with the fact that we have the only place where things are not really predicable and that these mergers are in fact pretty unpredictable or susceptible to political or other issues.
Mr. Godsoe: General Electric, Honeywell and European Union were turned down. The last big bank merger in the United Kingdom was turned down by the competition authorities because of too much concentration. In the United States, when Fleet merged with Bank of Boston, it was a very politicized process because there were two gigantic banks up in New England, but they could resolve it. They knew they could be turned done on competition authority theory, and they could make mistakes there, or they would have to deal with special interest groups who were bringing up legitimate concerns. However, they knew the will of the country was that if they came forward with a good merger this would be accepted. I am not sure that question has been answered in Canada.
Senator Oliver: I should like to continue in the same vein. As I understand it, the OSFI part you understand, the Competition Bureau part you understand, then you come to the third part, which is political, and it seems to me that what you are saying is that there are two aspects of the political. The second part of the political deals with the House of Commons committee and this Senate committee, and there are four issues that you covered very clearly and Mr. Nixon covered very clearly, such as access, choice, long-term growth and transition. You went through it so easily, like a piece of cake, that there is really not too much difficulty in your being able to satisfy those in terms of the public interest.
What you are really saying to us as a Senate committee is that the final part of the politics is this: What is the government going to do and why does the Government of Canada not clarify where they stand with respect to mergers and the merger process? That is really not for us to decide. All we can do is deal with the public impact assessment and deal with the four categories set forth in the ministers' letter to us. If you are reasonably satisfied on that, we are probably wasting our time in having a lot more witnesses come and talk to us about that, because your big concern is if you come forward with a partner like BMO are you going to be shot down again by the two people who have the say, the Prime Minister and the Minister of Finance, before you even get your process before OSFI or the Competition Bureau?
Mr. Godsoe: To clarify one thing, we never came forward with a firm merger proposal, so I have never been shot down by anyone.
I do think, however, that you do serve as a useful input. From our perspective, the reason all of us are coming down and supporting this committee's work is because in many ways you are calling the question: If these questions are answered, and if bank A and bank B can come forward and go through this process with a positive resolution, would a merger be approved? That is a pretty good question. I believe there are ways you can do it, to solve most of the issues that could come up. MacKay asked what the legitimate public interest issues are that should be addressed in a bank merger. Clearly, competition is one.
Senator Oliver: That is for the Competition Bureau.
Mr. Godsoe: There can clearly be add-ons to that if you do not feel it has been properly assessed. We know that access and having branches in rural areas are issues, whether or not we have mergers.
Senator Oliver: We can hold hearings on those issues and deal with them, but that does not seem to be the question that you and Mr. Nixon are facing.
Mr. Godsoe: You are balancing as well the third question in the ministers' letter, which I chose to answer fourth; that is, do we as a country see the banks, as part of international competitiveness, growing bigger outside the country, and is that important and valid? You are trying to trade that off against competition, access and rural services. As I said, there are one positive and three negative questions here. I think the negative questions can be dealt with positively and proactively, and I think there are many safeguards in the Competition Bureau.
With regard to the softness of a vision and values, I personally believe that in the long run ownership restrictions on Canadian banks are unsustainable. I have been telling our people that it will not be my generation but the next generation that will experience that. They are falling in Europe. You cannot use ownership restrictions in Italy or France to stop someone. There are only six banks in Mexico, and we own the fourth most profitable one. The finance minister of Mexico casually asked me why we cannot be owned in Canada when he has let us own one of the big banks in Mexico. That is a NAFTA challenge. Somewhere down the road these things will come.
You need your banks to grow and not recede. They will only succeed by being successful.
Senator Oliver: I should like to push you a little on your number one item that this committee could look at in terms of public interest impact assessment, and that is access. It seems to me that one of the major problems that you and all the big five banks have is that you forget that in the Senate we are supposed to look at regional interests. That is one of the things we are responsible for. One of the things that is happening with bank consolidation, which would certainly happen with a bank merger, is that smaller regions like Atlantic Canada would be governed and controlled from Bay Street. That would be a major problem and would, in my opinion, affect the public interest in a major way.
Our markets are different, our risk analysis should be different — although it is not, it is done by the Bay Street model — and access to capital needs are different. If you were to merge with BMO or anyone else, small businesses of $5 million to $50 million a year would really suffer due to the smallness of their needs, because you would want to concentrate most of your efforts in Toronto. I would think that in Atlantic Canada a number of people would be very concerned if that kind of a merger analysis were to take place. Neither you nor Gordon Nixon has addressed that regional concern in your analysis of access. Could you do so now?
Mr. Godsoe: I am happy to, senator. As you know, we were founded in Halifax in 1832, and we will be back there this year for our annual meeting.
Our small-business lending across Atlantic Canada has grown and kept pace with anything we do in the country. It is not scored by Upper Canadians or we in Toronto, as you say Down East. I do believe that we can solve the concerns. People like our senior vice-president, Jack Keith, and his counterparts must have the authority and must be able to deliver regionally. If they are not, we should be held accountable for it. However, I think that is true whether or not we merge. We have 30 per cent market share in Nova Scotia.
Senator Oliver: I think it would be a lot worse with a merger.
Mr. Godsoe: I am not sure of that at all. I think that new people will crop up; the credit unions will become more proactive and powerful. They are very splintered in Nova Scotia; they are non-existent in Newfoundland; and they are quite healthy in New Brunswick. There would be that type of evolution. However, it would be legitimate for people with regional interests, such as yourselves, to ensure that we give undertakings. I am not sure we would not give undertakings if asked today. We would undertake to keep our loans at a certain level because we mean to. We do not want to lose share there. We find it a very good area in which to operate.
Senator Kelleher: On the first page of your written presentation, you state that we have in place public policy that explicitly permits mergers so long as a formal review process is followed and any transactions are in the public interest.
I will not be mean like Senator Angus and ask you whether you were involved in the merger process. Let us assume there were ugly rumours like this going around and suddenly we hear from the media — because we cannot get any government official to speak to us — that, whether it is true or not, this merger that has been discussed is off. Naturally, you would want to ask yourself what process or criteria was used to arrive at this negative decision.
When the people from the Department of Finance were here this morning, I asked them whether they were asked for advice or suggestions on what we should do about this rumoured merger. They said they were not asked. I then asked the people from the Competition Bureau the same question, and they said that the first they knew about it was when they read it in the papers. I asked Mr. Nixon the same question and he said that he hoped I would ask you as well.
Notwithstanding these rumours, were you invited to make any comments or give any input to the government on this issue?
Mr. Godsoe: No, and I have been staying away from the newspapers, too.
Senator Kelleher: That is fine.
Mr. Godsoe: I have been staying away from everyone on this. As I said, it was speculation and it hurts our organization rather than helps it, the more it goes on. It creates uncertainty and makes our people wonder. I will talk to 2,000 of our people in the next two and a half weeks, to assure them. I have sent an e-mail, as well, because it is disruptive.
Senator Kelleher: The Department of Finance, the Competition Bureau, Gordon Nixon and Peter Godsoe have all said they were not asked for input. If that is what has happened and the Prime Minister has suddenly stopped a process, and you say that, in other words, we have in place public policy that explicitly permits mergers, I am wondering if that belief is not now in tatters, because something seems to have been stopped here.
Mr. Godsoe: No. I think back to Senator Kroft's resumé. It has essentially been pretty clear since the end of 1999 that mergers were not going to be banned. That was the MacKay report. When legislation was tabled in 2000 and subsequently passed in 2001, it became enshrined in an act that mergers are a viable strategy, and in Canada an act takes about 10 years to change.
There was a process set up, a very long process. What was not certain was whether their were parts of the process that we really did not understand. We would talk with Ottawa. There was not really clarification in which it was said that if you did all this, answered these questions positively and came up with constructive answers or imaginative solutions to them, and the merger was valid, the minister and the politics of the time would allow a merger to go forward. That has always been a grey area. It is not us alone. We all are looking at something like a Hydro One. In any country, politics can change what happens. That is the reality of it. In effect, we were testing the political will throughout this time by talking with various ministers. I was not talking with them alone; we all were. I think that is valid, in going on with business.
That is why I welcome this hearing. Finally, we are coming to the point where, in effect, we will get some clarification. Otherwise, do not ask this committee to sit, do not ask the House committee to sit, because you are getting to this last part. The banks could come forward with a viable merger, answering the various public interest impact concerns. There are not that many concerns. We all know about service charges, credit card charges and ABM charges. There are numerous irritants out there, but the real issues are small business, availability and competition. If we can answer those concerns, and if we can make a persuasive case, would the mergers be validated? That is a pretty crisp question.
Senator Kelleher: I do not disagree with anything you said. However, does it not concern you that before the process even got started here formally the answer was no? I guess what bothers me more than anything else is what the criterion was for that answer. No one is telling us.
Mr. Godsoe: I have never had a no. As I said, in the past two and a half years, and it goes back that long, Ottawa has been clear. Legally — this is at all levels — you can merge; the process is in front of you. There is always a risk in politics, in the political environment. The public interest impact assessment lacks some clarity, in that it has never been debated at the political level. It comes out of the MacKay report. Those uncertainties were enough to make all of us uncertain as to whether we would ever proceed with a merger. We never got a no from Ottawa, and this is helping to clarify it.
The Chairman: My esteemed deputy chairman has several questions.
Senator Tkachuk: Mr. Godsoe may have inadvertently triggered the process, even though he is saying he did not. Mr. Godsoe, I do not know how old you are, but it is analogous to when we were young, where at a dance all the guys would stand in the back and the girls would be on the side, and we would be afraid to ask them to dance. We would mull around and then the girls would get tired and they would start dancing with each other. This was small-town Saskatchewan. Later on, the guys would walk out, have a few beers, and then come back and maybe then get the nerve to ask one girl to dance.
You say that Canada now has the right public policy and the right process in place. If we have the right process and the right public policy, since you say you did not make a proposal and no one has made a proposal, how do we know there is a problem?
Mr. Godsoe: You have to assume that we have five banks who cannot merge with insurance companies —
Senator Oliver: Not yet.
Mr. Godsoe: — by regulation, unless that changes. In theory, they can merge with each other, which is happening everywhere in the world. You probably read about Crédit Lyonnais today. France will end up with four banks, going to three, essentially. We just do not know who will end up in ownership. No one has made any overtures.
You have to assume that we have talked to each other from time to time. We have talked to our boards at great length, because we were uncertain of this last issue. More recently, we were watching what was going on in power. I am not using Hydro One as an example alone, but re-regulation or uncertainties. It is difficult to forecast politics. We have been hesitant. All of us would say that a merger might be right or wrong for our particular institution, but as one option to how we grow and see the world as we go forward it is one viable one that we would all have to bear in mind. The fact that we have not moved indicates that the uncertainty is enough for five banks not to look at this actively and aggressively, which they would if they were much more certain in their own minds.
Senator Tkachuk: In reference to a question from Senator Angus or Senator Kroft, you talked about a consultation process on this question. You talked about all the people you consulted, and you mentioned caucus, which surprised me. To which caucus were you referring?
Senator Oliver: The Liberal caucus.
Senator Tkachuk: Was that you consulting with the Liberal caucus?
Mr. Godsoe: No, with members; never with the caucus as a whole. We have talked to various members of Parliament off and on throughout the time. We always do. We have talked to Conservative members.
Senator Tkachuk: Did you think their answer would be no?
Mr. Godsoe: We have not been getting that answer at all. Actually, we have been getting the answer in the last year and a half that bank mergers are not really front and centre in anyone's mind. They are much more concerned with health care, education, leadership and Kyoto. However, that is not an issue. What we are really trying to do is find out how they feel, whether they think things have changed. ``Are mergers a viable strategy? If we follow a process, is it valid?''
Senator Tkachuk: Let me ask you one last question. Was there any informal discussion, then, with Minister Manley or the Prime Minister of Canada regarding a possible merger of the Bank of Nova Scotia and the Bank of Montreal?
Mr. Godsoe: I have had discussions with Minister Manley on mergers dating back five years and virtually every year since, as I have had with other ministers who are not Ministers of Finance. I just asked their advice, what they think is going on, and what they see as the future of the industry, as one of the leaders of the country; not with the Prime Minister.
Senator Tkachuk: Was there a representative of your bank that would have had those discussions, a board member perhaps?
Mr. Godsoe: No. I have had discussions with most ministers at some stage on an ongoing basis for the past two and a half years about the future of the industry, of which mergers is one very major component.
Senator Tkachuk: There was no discussion then informally with the Prime Minister or the Minister of Finance?
Mr. Godsoe: We talk about hypothetical situations. I have talked with other ministers, not simply with Mr. Manley.
Senator Tkachuk: However, you did have discussions with Mr. Manley, on an informal basis?
Mr. Godsoe: It depends on the time you are talking about, senator. We have been talking about this for two and a half years. It long predates these meetings. Ever since the MacKay report came out, ever since legislation was tabled, there have been ongoing discussions among us, finance, and the political side, whether it is the MP side, the minister side, or the civil service side, on a very broad basis. I would regularly come down and meet with a number of ministers, of which the Minister of Finance would be one, and talk about these issues, asking, ``Hypothetically, what do you think?'' Obviously, different combinations make more sense than others.
The Chairman: Thank you, Mr. Godsoe.
Our next witness is Mr. John Hunkin, Chairman and Chief Executive Officer of the Canadian Imperial Bank of Commerce. Please proceed.
Mr. John Hunkin, Chairman and Chief Executive Officer, Canadian Imperial Bank of Commerce: Let me begin by thanking you and members of your committee for inviting me to participate in this important discussion.
I would also like to thank the Honourable John Manley and the Honourable Maurizio Bevilacqua for providing the impetus for these important hearings, which, I believe, come at a critical time in our industry.
I come before you as an individual proud to be associated with an institution, CIBC, that, in one form or another, touches millions of lives across this country.
We have more than 8 million retail customers, 460,000 small business customers and more than 42,000 employees. Our shares are held by millions of Canadians through their pension plans or RRSPs. The lives of countless others are touched by our community activities, including the CIBC Run for the Cure that, this year, saw 14,000 of our employees and their families join more than 135,000 of their fellow Canadians in 38 communities to raise $14 million to aid the fight against breast cancer.
I mentioned that I am proud of CIBC and most especially of our people. I say that from the perspective of one who has spent more than 33 years of his life at the bank and whose father worked there for 44 years.
Canadian banks are part of the fabric of this nation. Indeed, much as the railroads helped to knit this country together, so have banks provided an engine of growth for Canada's prosperity. There are many ways to frame a discussion around the future of Canada's financial sector. However, we should never lose sight of the fact that banks are not about faceless institutions, but rather about people.
While my written submission attempts to provide our perspective regarding the specific points raised by honourable senators in regard to access, choice, availability, growth prospects, adjustment and transition issues, I should like to use my brief time here this afternoon to discuss the broader national interest and what a strategy of fostering a strong and vibrant financial services sector can mean for Canadians.
There are those who say that these hearings are about bank mergers. My view is that bank mergers are a viable business strategy for our industry, but only one of many.
At CIBC we are focussed on the strategy to grow our retail, small business and wealth management franchise and have invested hundreds of millions of dollars to rebuild our technology platform across our more than 1,000 branches. We have provided our people with the training and tools they need to better serve their customers.
On the wealth management side, when Merrill Lynch decided in 2001 to abandon its brokerage business in Canada, we made a major investment to buy its retail brokerage and asset management business. We have also partnered with Loblaws as part of a strategy to provide convenient and no-fee banking services through President's Choice Financial that now has more than 1.1 million customers and $7 billion in total funds managed.
We at CIBC are acting on a number of strategic fronts. Having experienced first hand the disruption caused in 1998, I do not wish to put our employees, our customers or our shareholders through another merger attempt unless we can design a process that is timely and has reasonably predictable outcomes. Predictability is of paramount importance. Predictability means that the institutions putting a proposal forward to the government can do so in the context of having knowledge of the analytical components to be used by regulators and government decision makers. This allows the key players, including the board of directors of both institutions, to make a reasonable and rational determination as to whether they should go forward.
Improving predictability will only be achieved by providing a bank merger process that is transparent and based on clearly articulated tests and criteria. Currently, the terms ``pubic interest'' and ``pubic good'' seem to be code words for politicizing the debate. I believe that we need to define what we mean by ``public good''.
The other key issue is timeliness. Banking is many things, but most of all it is a dynamic interest. Again, for the sake of our customers, our employees and our shareholders, we cannot put major decisions on hold to accommodate a lengthy decision process.
In 1998, our industry lost valuable time as the merger process ground on for almost 11 months. Some may argue that this was a bed of nails of our own making, but it was certainly not one we would wish to climb onto again.
The current bank merger review process contemplates a time frame of five months. This substantially reduces the time frame, but I believe we could do better. We would like to work with all parties to try to device a methodology that would take 100 days or less. This would significantly reduce the period of uncertainty for all concerned.
I will now turn to the larger issue as to whether Canada has or should have a national strategy for the financial services sector. By ``strategy'' I mean having a national objective to be a significant player in this all-important sector. Are we willing to let things bump along with the result being gradual but likely erosion in the size and capability of Canada's institutions relative to that of our international competitors? Size matters for several reasons.
Honourable senators have heard the argument that scale and scope are needed. If Canadian banks are to invest in technology they need to remain competitive. While there is an argument for that case, an even more critical issue today is that scale and scope affects ability and tolerance to take on risk and to serve medium and large businesses. Ironically, while there has been a great deal of needed attention placed on the small business sector where some good progress has been made, it is actually the medium and large corporate clients who are more likely to suffer from current trends.
As medium and large Canadian corporate clients such as Bombardier, Celestica and BCE continue to grow their financing needs grow apace. The lending capacities of Canadian banks have not grown as quickly as those of our major international competitors. In our case, we have made a conscious decision to limit our risks to levels that are prudent for an institution of our size. We intend to reduce our corporate loan book and merchant banking book by one-third over the next three years. We are also finding ways to reduce our earnings volatility that includes smaller hold levels for large corporate loans. While it could be argued that American or European banks could step in to fill the gap, the reality is that these institutions have tended to do so in good times but have shown far less interest when times are tough.
In this context, the national interest question is whether Canada would be better served by fewer, stronger Canadian financial institutions that could not only better meet the needs of consumers and small business, but continue to provide a Canadian alternative to our growing medium- and large-sized businesses. I believe that the answer is ``yes.''
Scale and scope can also make a difference on the retail side. As honourable senators will be aware, CIBC recently made the decision to close its electronic banking operations in the United States. We did so after three years of operations. We simply did not feel that we had the luxury of waiting four or five years to achieve profitability. The patience of our shareholders wore thin. In large part that was because they viewed the investment as too onerous for an institution of our size.
I contrast that experience with the Dutch financial conglomerate ING, which set up an electronic bank operation here six years ago and recently announced that the operation is profitable. ING is about four times larger than CIBC and got that way in a country where the government proactively fostered consolidation and that now has a very competitive global financial services sector.
What we are really talking about here today is whether Canada will have a vigorous financial services sector headquartered in Canada and led by Canadians. Toronto is the fourth largest financial services cluster in North America by employment; two years ago it was third. Financial services generates 28 per cent of Toronto's GDP and supports much of the commercial real estate market. Through suppliers, the financial services market creates countless spin-off jobs. These are good, high paying jobs that attract talented Canadians from across the country; they are the jobs we want for our children and grandchildren. These are individuals who could and would go elsewhere if opportunities were not available here at home.
They are also individuals who give generously to the United Way, the various hospitals, the arts and universities. To use one example, more than one third of the monies raised by the United Way of Toronto, $28 million out of $75 million came from the financial services sector. In the final analysis, that is what we are really talking about today: the future.
My hope, and I am sure it is the hope of distinguished members of the committee, is that we will choose to focus on building a vigorous, competitive financial services sector. My hope is that in doing so we will create a process that shortens the course, removes the hurdles and creates a more predictable result. Then, if aggregation in the financial services sectors makes sense for Canada, we can get on with it.
I look forward to your questions.
Senator Oliver: You have made a very compelling case for bank mergers. The witnesses that we have heard from today have said that we must look at the third part of the merger process; that is, the public interest impact assessment.
Mr. Nixon of the Royal Bank and Mr. Godsoe of the Bank of Nova Scotia, have stated that the first two parts of the merger process are very clear, that they understand them and know what they have to do to meet them. I am referring to the OSFI component with safety and security, and the Competition Bureau. They said that the murky part is the third part, the public interest assessment, whatever that may mean. In the letter from the minister, there were four components that they wanted us to look at. You and the other two bankers have given your general approach to those issues. I think that there is a fourth element. If we can pass the three tests, will the Government of Canada still believe that bank mergers are good and, if we pass all of those tests, will they say yes to them? The uncertainty that all the bankers seem to have in common is that they do not know whether the answer will be yes. Am I correct?
Mr. Hunkin: I believe that you are correct. The issue is what is good for Canada.. I do not think there is enough clarity. It is unlikely that another type of business would enter into a merger if there were only a 50/50 probability of it being approved. That business would naturally look at the regulatory and financial issues of the Competition Bureau, and they would be able to tell whether the merger would be approved. There are exceptions, but not often. It is very difficult to get that certainty based on the lack of more specific criteria.
Senator Oliver: When we did a study for OSFI a few years ago, some of us went to Switzerland and looked at their review process. You can do a merger there in two months. What we heard today from the Competition Bureau is that the five months that is in the legislation now only begins to run after the banks have supplied them with all of the information that they have requested. The five-month period does not begin until that time. If you send information, documents and data to them during a five-month period and they feel at that point that they have all the information they need it is only then that they begin. In essence the time period then becomes 10 months. Are you aware of that?
Mr. Hunkin: I have never contemplated that, no.
Senator Oliver: You are suggesting 100 days, so there is a substantial time difference.
Over the weekend, I read a paper about Canadian bank mergers and the public interest. You, and your colleagues have all put forth compelling arguments concerning mergers among some Canadian banks. I would like to read one paragraph from James McIntosh's paper to see if you agree with his statement and if indeed, this is your experience. He says that,
Charter banks have served as a profit centre for the Canadian economy for the last 25 years. Our banking system has also provided good service to the Canada public by offering a wide range of high quality products at reasonable prices. For this to continue, and that should be the ultimate objective of government policy, Canadian banks have to be able to compete in the home market for banking services. My results show that increasing size confers advantages in terms of reducing the costs of bringing products to the market.
Is that accurate? If you get bigger can you reduce your costs for others?
Mr. Hunkin: I agree with Mr. Godsoe that this issue is not just about costs. However, if you spend the money on development of a product and you can spread it over a larger customer base, you can reduce the development cost and, in many instances, you can reduce the delivery costs. There are cost advantages that could make us more competitive than we are.
Senator Kroft: In 1998 our committee held hearings on the MacKay report. Although mergers were not formally part of the report, the debate about them got caught up in that discussion. It was clear from one of the witnesses, and clear from the assessment of the public debate at the time, that many Canadian business groups were suspicious about the mergers.
I want discuss your statement about whether or not we have a strategic objective as a nation, and that our financial services are part of our national strength and an important part of taking Canadian companies abroad. That objective, which was well articulated, did not resonate with Canadians. It is fair to say that there was suspicion that if, the banks were off on that initiative on their own there was not a zero sum gain there would be a loss at the other end, whether an allocation of resources or commitment to the market.
I wonder whether we can find a way to national interest into a particular category. In light of what has happened since 1998 and in light of globalization, I invite you to comment on whether that case can be more effectively made today than it was made then.
Mr. Hunkin: From studying the 1998 list of those businesses that opposed the mergers I found that it was the four big banks that gave the idea limited support. One of the problems was that the banks got ahead of themselves and pre- empted the opportunity for a good, rational discussion of the whole issue. Instead, the discussion became emotional. The merger was sort of in play before the government policy was established. In terms of my involvement I will state that it was a mistake. Hopefully, this time, we can have a good, open discussion.
Notwithstanding the fact that we have legislation that provides for mergers to take place, there is doubt as to whether the country wants to see them happen. My main concern is that we enter into good discussions concerning possible mergers. If it is decided that there is no way to improve on the process, or on the clarity issues of public good, then it will be a decision that we have made consciously, rather than a decision made by default.
I believe the mergers would make a big difference to what Canada's financial services industry would look like over the next ten to 15 years. That is why it is worth our taking the time to think about it and discuss it.
Senator Kroft: In the search for clarity, the two parts that we are not involved in seem to be clear. We are trying to determine our part in bringing clarity to the public interest section.
You have had discussions with officials and with government. If you were involved in a merger proposal that you considered to be superb, would you feel that you were operating in an environment where, in addition to the legal structure, the public policy was inclined toward that merger? I am looking for government opinion. Do you think that you are in a receptive environment, or that you have to hurdle to get over in the political argument that mergers are a good idea?
Mr. Hunkin: Many of us think about mergers. The answer is that people do not feel that if they were to come forward, even though they might have a compelling case, the result would be what they wanted. They do not feel comfortable and confident with the outcome.
That is why people want to narrow down the issue of public good. These concerns must be addressed. The issue of public good remains vague in terms of how it sits in the legislation.
Senator Kroft: I suggest that you are saying the political will is more vague than the public good.
Mr. Hunkin: I did not say that. You said that.
Senator Kroft: My apologies.
Mr. Hunkin: I do not know if there is a political will in the country right now. That is why having this discussion and taking time on it perhaps will get people to understand this issue. There are differences today in the corporate sector and in what has evolved in the financial services industry over the last few years in terms of availability. The Canadian banks are not as big as we were a few years ago. I can speak for CIBC: We have announced publicly that we will cut back on the size of our large, corporate lending book. We will also cut back on the size of our merchant-banking book. Ultimately, that has an impact on the industry. The bigger you are, the greater the scale you have and the greater the risk you can have at any time. Therefore, the growth issue and the size issue are important.
Senator Tkachuk: We are participating in a first. We have the Senate committee and all of the banks in Canada trying to explain government policy. Normally, we study a particular policy and then go from there. In this case, we are trying to figure out what it is without the benefit of participants coming forward to give us leadership.
Mr. Godsoe said that they became interested in the merger process when it became legal. My view is that it was legal beforehand, but we did not have a process drawn out for it.
When your bank participated in the process in 1998, four banks were doing performing two mergers and that was not illegal. The process included the Competition Bureau and that was it. The minister delayed by saying that they had to get the MacKay task force and had to listen to what the Senate had to say about it and then they had to listen to the House. There is a process to follow. The problem is that the government has told enough people in the banking industry that there will be no mergers. That is the problem. Why do we have this process?
Mr. Hunkin: I cannot support that. It is not a matter of whether anyone says ``yes'' or ``no.'' Right now, I am not aware of what those four things are, or what the exact criteria is. That and timeliness are the issues right now. I would have great difficulty, under the present circumstances, in recommending to my board that we move forward under those conditions.
Senator Tkachuk: Let us get to that. I believe we are here because you believe that the government will say no to the merger.
You have come up with a number of good ideas, one of which is to shorten the process. That still does not get to your problem, which is public interest. It would be helpful to define the minister's role in this, because the minister can intervene at any time and say no in the middle of the process.
What is there about the public interest part that none of the bankers seem to understand? Not one of you has suggested what can be eliminated in order to make it simpler and easier for us to understand. Hopefully, the Canadian people understand.
Mr. Hunkin: I will have to repeat myself. If I wanted to discuss a merger, it would not be good enough to know that the government would not say ``no'' to my proposal. Saying ``no'' is easy. What we need to if someone to say that the proposal meets the criteria, and that they would be supportive.
However, at this point in time, as far as I can see, not even the government has the criteria for what is in the public interest. We do not have that now. Again, that and timeliness are the two main issues.
Senator Tkachuk: For a government, lack of clarity is often good, because it creates an excuse to muddle around with public policy. That is the situation that we have here. What I am trying to get at, is that no one has made an application, no one has tested the process and no one has gone through the process. How does anyone know that the process will not work out just fine?
Mr. Hunkin: We do not know, and that is the problem. That is the issue. We do not have enough confidence in the outcome to put our organizations through three or five or 10 months of uncertainty. That is one of the greatest concerns.
I do not lay the blame at the government's feet for the situation that occurred in 1998. Clearly, there was no support for what went on then, and the lack of support seemed to grow with time.
Senator Tkachuk: After all this, are we back to 1998?
Mr. Hunkin: We are still in a situation where the issue of bank mergers is a very controversial issue in Canada. Clearly, it deserves much thought. Right now, I do not believe there is the clarity that we need around the issue.
Senator Setlakwe: The preceding submissions, that referred to the lack of capitalization seemed to suggest that their objective was to enter into the purchasing of retail banks in the United States. I thought I understood that the purpose of increased capitalization was to permit you to compete internationally in important loans that you are not able to do now because you are undercapitalized. I would like you to elaborate on that.
All of the CEOs have testified to the effect that they are very effective in accessing financial services. I get the impression that that may be the case in downtown Toronto, but it is certainly not the case in downtown Thetford Mines. Could you clear up the perception that Canadians have that when it comes to loans for small and medium enterprise loans, the banks are just not there for them? The public perception is that the banks are not doing the lending and if they do lend funds it is only if they are guaranteed by provincial or federal institutions, and receive the guaranteed of 70 per cent of the inventory and so on. Therefore, would you be opposed to the Business Development Bank of Canada going into short-term loans?
The Chairman: Those are quite a few questions. Senator Setlakwe, I do not think that is part of our mandate.
Mr. Hunkin: Let me talk about scale and capital and what they are for. First, it will vary from bank to bank. Most of it falls under the category of growth.
The emphasis has been put on wealth management and growing retail small businesses. All of the banks all want to do more of that business, both in Canada and, if we were able to, outside Canada. If we ended up as part of a larger merged entity, and I had any say in it, I would be arguing that, yes, we should be looking for opportunities, not only in Canada but beyond Canada's borders, to expand and grow our business.
The issue of capital to support risk-taking in the areas of corporate lending, and in particular large corporate lending where the numbers become larger and larger over the years, has become a significant issue. We are concerned with the ability of Canadian banks to compete effectively in those areas on a prudent basis.
Some of us have been told by rating agencies that the Canadian banks have had too much participation of size in those areas.
Forgetting about abroad, there is a real issue there. Over time there can be a real issue if we do not get that scale. We will not be as useful to Canadian medium to large corporations in helping to support them in their business. It is my perspective that over the years, in the down times, many of the foreign banks that are not in here all the time are not as supportive in the down times. This is not their primary market.
There is more than one issue to the scale. It all comes around in some ways to risk, whether it is risk involving strategy or risk involving day-to-day operations. The bigger the scale you have, the more easily you can take on larger risk.
In terms of accessing financial services outside of downtown Toronto or downtown Ottawa, we think we are trying really hard. I have to tell you that I get frustrated with the obvious lack of success we have in those areas.
I do not know the answer. My guess is that if we had these hearings 20 years ago this would have been an issue at that time as well.
I do not have a great answer why we are not doing a better job in that area. I hope some of the other institutions that are doing more banking will become more competitive. Perhaps that will spur us on to greater things. We actually think we are trying hard in that area although, it does not sound like we are being very effective.
Senator Oliver: Regional advisory boards would help.
Senator Angus: Mr. Hunkin, I would like to commend you on the clarity and candour of your comments to date. I understand from your comments that there is no merger in the works or even under consideration with any of the other big five banks. Is that correct?
Mr. Hunkin: Are there rumours?
Senator Angus: No.
Mr. Hunkin: I left Toronto for two hours and look what happens. I am not aware of any, senator.
Senator Angus: You have been candid enough to say you thought the exercise four years ago was a mistake. You do not blame the government for it; it was a comedy of errors, perhaps. In any event, do you think Canada is any worse off that those two mergers did not take place?
Mr. Hunkin: We have slipped a bit in the international banking arena. There is no question about that. It is a reality, and notwithstanding the fact we have better capabilities today, we have nonetheless slipped as others have grown.
The sooner we resolve this issue the better. That way everyone can get on with other strategies and not focus on this one. If Canada wants to have a strong growing and vibrant financial institutions industry, we need all the strategic capabilities that most of the other major countries in the world possess. That includes the ability to merge. If we do not have that, then we are clearly at a disadvantage.
Senator Angus: As you say, what these hearings are about is the future, and whether or not Canada wants this. I think your current perception is you are not sure that Canada does want this. If you were the Prime Minister today, would you approve a merger between Scotiabank and Bank of Montreal?
Mr. Hunkin: I do not know about that one.
Senator Angus: What about between any two banks?
Mr. Hunkin: It would depend very much on the proposal. I think a merger would have to be a good, well thought- out proposal, but I am basically in favour of mergers as being a real viable opportunity for Canadian banks.
Senator Angus: I thought you would say that.
I talked to an industrialist the other night, and I told him about these hearings. He told me that he deals in the financial markets all the time and, as long as the economy is good, he can get his money from the Japanese banks or Morgan Chase or from the big banks that operate in the London international financial community.
However, he said, that when times gets bad, and he is the Canadian business out there, he will be one of the first businesses that they will drop. He also said that he would like it if there were a Canadian option that would at least be a major player in the syndicate he was going to.
He indicated that the other big banks out there could meet all of his needs. I am really troubled by how we could be fair if we were to approve a merger.
Mr. Hunkin: I question whether there should only be one merger. I do not think one bank would be sufficient to meet all of the clients' needs. I think you would want to have a couple of large institutions. By the way, I say ``institutions'' because we also have a number of very strong insurance companies, who are now in size and in terms of market cap as big as some of us or even bigger. That is something new that has evolved over the last few years. We are not the only large financial institutions in Canada any more. There are a number of insurance companies that are very large and profitable. If it were only one, it would be interesting trying to figure out just which combination it would be. If it was ever believed that it would be only one, then it would be fun to watch everyone scramble for the door.
Senator Angus: I read Mr. Godsoe a passage from his testimony from four years ago, when there were two mergers in play. He gave a statistic-filled response, saying the mergers would have reduced the field from five to three, and that 70 per cent of the infrastructure would be in the hands of these three. He talked about how bad it was. He used the word ``bad'' seven times. It led me to this question. I see your point now. You are saying, well, if there were only five institutions, that is one thing; however, we have all these life insurance companies and perhaps other institutions out there. Is that your point?
Mr. Hunkin: I think the issues you are dealing with, in terms of size and concentration, are things that the Competition Bureau would deal with, as they do in every other industry.
Senator Angus: Do you think they should?
Mr. Hunkin: They are the right people, because they can take a hopefully objective view of what they are doing.
Senator Angus: M. Réal Raymond, the CEO of the National Bank, indicated in his report that he feels the current process is strangling us. He believes that we are going nowhere and that no one is winning the game. He thinks that we should get back to the forces of the market if that it makes good business sense. He suggests taking into consideration other normal business restrictions, such as a healthy competition law in the country, with a von Finckenstein-type of office, and go forward with that.
Is that too laissez-faire, in your view?
Mr. Hunkin: The reality in Canada is that the Canadian banks seem to play a special role. One thing we have realized, as a result of the last go-round, is that we do play a special role in Canada. We sort of owe a higher order of responsibility to the Canadian public on these issues. Is that right or wrong? I do not know. However, it seems to be the way the world is. Some of us sort of got that between the eyes the last time. There needs to be a process. Perhaps it is more of a process than you would have in a normal merger, but it will have to get to the point where there is some sort of reasonably objective test as to what is in the publics' interest, so we can make a judgment. Furthermore, those to whom we come will also be able to make a judgment that is not just on political grounds.
Senator Angus: The big grey area is not so much the public interest as what makes good political sense for the current regime, or any other regime at the material time.
The Chairman: Senator Oliver cited a paper he had read by an economist named Professor James McIntosh. He will be testifying here. I have never met him, but I did call him to invite him to appear before our committee, and I read one of his papers, as did Senator Oliver. I understood about one-half of it because econometrics is over my head. However, I think I got the gist of what he was saying. When I spoke to him he asked me for my opinion. I told him that I had a feeling that if we do not see some merger activity a number of things will happen within the next 10 years. I said that we would be foreign-dominated; our banking institutions would be highly irrelevant on a global scale; and we would not be able to finance Canadian companies looking to expand in other parts of the world. His response was: ``You are an optimist.'' I said, ``What do you mean?'' He replied, ``All that will happen in five years if we do not something now.''
Do you share either his point of view or mine?
Mr. Hunkin: I think that is probably where we could end up. If we do get there I hope we can look back and say, ``Well, we had a great discussion, we looked at everything objectively and we made a decision.'' As far as I am concerned, that is the most you can do. That is why I hope your hearings go well, the House's hearings go well and something comes out of this that allows us to move forward.
The Chairman: Thank you for being with us, sir.
Honourable senators, we are continuing to study the public interest implications for large bank mergers. Our last witnesses for this afternoon are from the Canadian Federation of Independent Business.
Please proceed with your opening statement.
Mr. Garth Whyte, Executive Vice-President, Canadian Federation of Independent Business: On behalf of the Canadian Federation of Independent Business and the 105,000 small and medium-sized business owners we represent we want to thank the Senate committee for inviting us to appear today to discuss the review of the process for bank mergers.
We have submitted a couple of documents to which we will be referring. One document is a series of graphs, and one is our quarterly business barometer, which is an indicator used by the Bank of Canada governor, Mr. David Dodge, as well as by banks and others. We will also submit copies of our previous statement to this committee on November 5, when we reported on the MacKay task force report, and our statement to House of Commons Finance Committee on Bill C-8, respecting financial institution legislation, on March 14, 2001.
Over the next four days this committee will hear from several presenters representing the large financial institutions about why Canadian banks should be allowed to merge. The committee will also hear from officials who will explain the process to review the merger requests. Our presentation focuses on the public interest implications of large bank mergers and on the importance of the small and medium-sized enterprise sector to the economy, to job creation and to local economic development.
We will also discuss small and medium-size enterprise concerns on the availability of financing. We will identify the need to ensure there is a competitive financial sector that supports and encourages small business start-ups and expansions, and then we will conclude with comments on public interest criteria.
Please turn to graph number 2. This is Stats Canada information, but it is important because people are talking about the criteria and why should we be concerned with the public interest. This graph covers the importance of the small and medium-sized business sector. Ninety-five per cent of all businesses have fewer than 50 employees in Canada. Twenty years ago the SME sector accounted for 30 per cent of the GDP; today they account for almost 50 per cent of the GDP and 60 per cent of total employment. They are responsible for all the net new jobs created over the past several years. Small business is not only critical to local economic development, it is critical to Canada's overall economic growth and job creation.
I should like to turn to the next graph. We prepare a business barometer on a quarterly basis to use as an indicator. We started really taking notice of what we have been doing after September 11, because at that point we wondered how we could contribute. We surveyed our members on a weekly basis. We heard about the stock market; we all felt the stock market economy and we saw what was happening.
No one knew what was going on across Canada with the small and medium-size enterprises. We found that they were holding firm, and holding onto their employees and actually increasing employment. We have been tracking our indicator for 14 years. The blue line is the CFIB index of our members' expectations for their own businesses. It is one thing to ask an economist what they think will happen to the economy, or ask people what will happen to the banking community five years from now; it is another to ask an employer what their expectations are for employment, how many employees they will hire, and whether their business be better or worse off.
When we track our index against the GDP we can see what an extremely accurate reflection of the economy the small business owner has when you put it in aggregate, indicated by the yellow line. Again, Mr. Dodge has been using this. It is almost identical to the GDP growth.
Small business owners are the ``canaries'' of the economy. Following September 11, when we surveyed our members, all we heard was bad news. We heard about Enron, Nortel, we heard about the economic downturn, yet our members were telling us something different. All of a sudden there was news of the surprising economic turnaround. Little was said about half of the economy, which is the non-stock market economy. This graph shows our index and what our members were saying, which is the GDP, and the green line is the stock market index.
It shows here that our members were hit hard but they recovered quickly, and thank goodness we had small business post-September 11. Small and medium-sized enterprise is the primary reason Canada's economy is doing so well. The Senate committee report should acknowledge and make recommendations to build on this small, medium-sized enterprise strength and growth. We have all received a huge dividend because of the size of the economy, and investing in SMEs is good business.
Another graph shows the current expectations, and we release it on a quarterly basis. We will make sure this committee receives it on a regular basis. The optimism can be seen here. Only 12 per cent expect their businesses to be weaker over the next year. If you look at employment plans, you can see that 93 per cent expect to hold onto or increase employment. However, this gets to another quote that we heard, which deals with the jobless recovery.
In March our members said they could not fill between 250,000 and 300,000 jobs, and over 400,000 were created last year. SMEs are the ``northern tiger,'' so any discussion of bank mergers or further concentration of the banking industry must take into account the impacts on this economy, on business start-ups, and on business growth.
This is a very fragile situation, however, and graph 8 shows that this fall we did a study with the Royal Bank and the Canadian Manufacturers and Exporters, and it compared 400 U.S. firms and 800 small and medium-sized firms in Canada. There were three observations.
First, we found that Canadian firms were as entrepreneurial and as innovative as U.S. firms. Second, the challenges they face are similar to those of any small firm. Finally, Canadian firms identified barriers to growth almost two to one compared with U.S. firms. Therefore the canaries of the economy are telling us that there are barriers to growth and one of the barriers to growth is the current financial sector system and one-third of our members identified that as a concern.
Mr. Brien G. Gray, Senior Vice-President, Field Operations, Canadian Federation of Independent Business: Having analyzed the situation for a good long time, in his 1998 report Mr. Mackay indicated that there was insufficient competition in the marketplace for SMEs, particularly in some parts of country, notably Atlantic Canada and other rural areas of the country.
If honourable senators look at our next graph, they will see we survey on an ongoing basis through the trends in terms of the availability of financing concerns. This graph shows that in the last part of the 1980s when were in a business cycle that was not unlike the last part of the 1990s, the concerns relating to financing were around 16 per cent. As we moved into the recession in the early 1990s, it hiked up and stayed at that level. One thing that has been evident from all the data that has been accumulated by the banks and ourselves following the recession was that restrictions on supply and on credit remain tight well after we were out of the recession.
Turning to the next graph, we can see that most small businesses use a range of products and they need to be able to find those in their locality, whether it is a line of credit or a business loan or commercial mortgage and the like. That is why we have always talked about full-service banking as a criterion with respect to access. That is why, historically, the major chartered banks have been so important. We had a merger in this economy since 1998, and so there is more concentration in the industry.
The banks talk about other offerings by other players in the marketplace, however these are small players in the scheme of things for our clientele. I will discuss that shortly.
In 1997 and in 2000, we asked our firms what their median-size loans were. For 93 per cent of the small firms — those having fewer than 20 employees — the median-sized loans are relatively small. It is interesting also that we are going out into the marketplace right now.
I am sure some of you who are in rural parts of your provinces have heard that we are now moving to a system where there is either massive turnover of the local account managers — which brings its own risks to the table — or that account manager have a credit limit for authorization of anywhere between $10,000 and $30,000. If you apply that to these numbers, you see there is a problem.
The next graph is a very troubling graph. It shows authorized loan limits of under $200,000 and over $200,000. During the recession, small business was effectively flat-lined by the major institutions in the economy while the corporate sector was given greater access to funds. Now, if, as Mr. Whyte pointed out, small businesses are reaching beyond 50 per cent of GDP, we simply cannot allow this kind of trend line to continue and expect the small business to continue to be the shock absorber to economic fluctuations.
Even more troubling is the next graph. Honourable senators will see a precipitous fall in credit applications by small and medium-sized entrepreneurs. What is causing this? There is no doubt that part of it is the credit restrictions and the tight credit that has existed since the last recession. It has not really eased up much. In my view, this is a reflection of how burned many of the entrepreneurs were in the last recession by Canada's major chartered banks. I expect that they pledged that, if they were to survive it, they would probably forego an opportunity in the marketplace rather than enter a situation where the bank was calling all of the shots for their business. A number of factors probably contributed to this trend line.
I talked about the element of competition. The next graph is probably the most troubling of all. CFIB's market share data reflects that between 1989 and 2002, there was a major vacating of our market in terms of two of our biggest banks. The worst was CIBC. It was interesting that Mr. Hunkin said he could not quite understand why they could not make a go of it. To lose one-third of our market share in small business is a decision — not other competitors beating you to the mark. This is a strategic decision to vacate a key part of the economy. We think it is unacceptable. It is inappropriate to say, ``I just do not understand how it is happening.'' The Royal Bank is also losing market share, and again, for these major institutions to lose market share of this size is not by happenstance. It is a strategic decision.
The good news is, to some extent, that where possible, credit unions have picked it up. However, in Atlantic Canada and Ontario, notably, there is no second tier. The credit union movement simply is not an alternative in any considerable way for the capacity that is being removed from the system right now. The following two graphs show the small business market shares for Ontario and for the Atlantic provinces respectively. Honourable senators can see that we had six major institutions — including Canada Trust in 1998. If there were another merger — say Scotiabank and Bank of Montreal — four institutions would control some 90 per cent of the Ontario market and three institutions would control about 75 per cent of the Atlantic market.
The final graph is very interesting. Since discussion of the mergers first began, we have heard complaints about all these major foreign competitors that are bullying our major chartered banks in the market. We asked our members exactly who is coming into the market and beating our major chartered banks out for their business. We asked if member had ever had financing from these sources — not in the last year or last three years, but ever. You can see these numbers are meagre.
Another point to remember, with respect to the full-service banking issue, is that if a business is doing a deal with, say, GE Capital, it is probably because it has been ``collateraled out'' by its bank and it has to do a lease to cover a need. It is not full service banking. It is not deposits. It is not about day-to-day banking. It is not about my line of credit. It is about a one-off. To characterize GE Capital coming into the market and beating the banks to the banking business in small business is simply not the case.
What has happened to competition? Some of the biggest banks have chosen to vacate our market. There have been big reductions in capacity. There has been additional contraction and consolidation with Canada Trust and TD Bank, and through that merger, we have had a major opportunity loss in the system. We could have taken that Canada Trust platform and allowed an outside bank or another institution to become another competitor in the marketplace. It is too bad that someone was not willing to pick up all those branches from Canada Trust so we would have had yet another major competitor in the market.
Credit unions are no further ahead than they were in 1998. There is virtually no second tier in Atlantic Canada and Ontario. The foreign banks, such as ING Bank, may be here on personal services but they are not coming to a commercial situation in Bedford Mines any day soon. Community banks are simply not in the works. Reduction of branches and hours are happening everywhere, notably in your jurisdiction, Senator Oliver. North Halifax is down to one branch, I believe. The rural issue is a major theme here. There is a lot of competition in Toronto, Montreal, Calgary and other major urban centres, however, it is not so true in the regions, and that is where Canada lives. We have a vast geography, and we have to support it. It is also an issue of big corporate versus small business needs in terms of financing in the economy. The access issues are very different for those two groups.
Finally, I would say that the banks have not responded to some of the major issues that MacKay talked about, such as greater competition in banking services for our sector, controlling the incidence of account manager turnover and re-instituting decision-making at the local level. The SME sector is now half the Canadian economy, and it is growing. A healthy small business sector is a prerequisite for that trend to continue. By any standard, Canada has one of the most concentrated banking systems in the world, and I would submit the Americans would never stand for further consolidation of it. Since 1998, there has been less competition for financial services.
As we look toward the issue of public interest criteria, if you would bear with me, I would like to read from our presentation to House of Commons committee about a year ago with regard to the merger process:
...the government has laid out a comprehensive framework for the new merger review process, as opposed to the rather odd, ad hoc processes that we witnessed in 1998 and 1999 with respect to the bank merger and the TD- Canada Trust deals. It is vital that there be a full and comprehensive review of any proposed mergers that sets out clearly the pros and cons of such a merger, not just for the institutions involved but, most importantly, where the costs to the economy and the SME sector are set out clearly.
CFIB is supportive of the intent to put in place a full set of checks and balances for any future reviews, including a regulatory review, a Competition Bureau review and the PIIA review, which would include criteria to ensure full service to Canada's small business sector.
CFIB insists that this process not simply become a blueprint by which the banks would get through pre- approved or arranged hoops in place for how long, in order to gain acceptance.
Nor should proposed mergers or strategic arrangements avoid the necessary public scrutiny because of some technicality such as we witnessed with Canada Trust and TD Bank. The true measure of the effectiveness of the review process will be whether the competitive environment has been enhanced or diminished.
We have seen the letter from the minister to this committee and to the House of Commons Standing Committee on Finance and we have read the merger review guidelines. We suggest they are clear.
Our question is, ``What is not clear?'' We support the process as announced. CFIB supports the order of the process. CFIB believes that there should be early notification of the intervention opportunities. More than 10 days' notice would be good. We do not want the major banks to hijack the review process and dictate terms. We support the need for full, open and informed public debate, all regions, all sectors, all sizes, and the need to obtain data on the impact of the merger on the economy and job growth — not just for the banks involved but as it applies to our sector.
We need data on the impact for the provision of full service banks in smaller communities to help ensure that small businesses in those communities are price negotiators, not price takers and to ensure that the results of the Competition Bureau and OSFI are key to the understanding of the implications. We also are worried that promises made may not be promises kept, so the enforceability of any promises with regard to mergers is critical. We might add to the interest criteria the implications for the growth of new entrants to provide more competition in core banking services and the implications for SME growth, innovation, productivity and regional economic development. We just had an innovation conference in Toronto. Financing is a critical element of that.
Finally, we would reiterate what we told this committee in 1998: Do not permit mergers until comprehensive alternatives are established, operating and viable.
In closing, I would encourage you to focus on what is good for Canada first and foremost. The public interest is best served through more competition, not necessarily more consolidation.
Senator Tkachuk: When we discussed Bill C-8, we looked at ways to increase competition in the marketplace while making it easier for new entrants to get into the banking business. Do you believe that policy has worked? If it has, give me some examples; if it has not, tell me why you believe it has not worked?
Mr. Gray: Largely, I do not believe that it has worked, whether in respect of foreign providers coming into Canada or Canadian institutions, such as the credit unions, providing a viable alternative to the major chartered banks. In the case of the latter, it has a lot to do with their culture and structure. Some of the things that make the credit union movement so appealing to many entrepreneurs is that their independence and their local base are often things that make it difficult for them to come together as bigger units in order to bring their cost structure down to something approximating the bank's. The banks currently spend approximately 50 cents on the dollar, whereas the credit union movement currently spends approximately 70 cents on the dollar, and that figure is climbing.
We see in Quebec the credit union Mouvement Desjardins has had to rationalize severely. The approval rating for many of our members in that province for that institution are declining, because they are finding that the provision of those services is declining.
The question is: ``Will the credit union movement at large get its act together in order to provide a viable alternative in scale to the major chartered banks?'' There has not been much movement in the four years since the merger, yet there was a lot of talk in the merger year about how that might be a solution. To some extent, they had to wait for legislation, and that was part of the problem there, however, it was not the entire problem.
With regard to foreign entry, there is a lot of that coming in on personal retail products, but not that much in terms of commercial lending activity. For example, we wrote to Andy Mitchell in the fall of 2001 and raised with him a concern we had about the availability of things such as commercial mortgages in small town Canada, as well as the ability to get these kinds of financing instruments in a village or town that had fewer than 30,000 in population. We were receiving many complaints from members that they could not get that kind of financing.
The Bank of America is not coming any day soon to provide that type of financing in that community. It is for this reason that we have focused on not allowing any further consolidation or contraction of the industry until viable, established and enduring competition is in the marketplace to replace the capacity, which has been taken out.
Senator Setlakwe: Congratulations, gentlemen. I will ensure that my companies renew their membership.
The Chairman: A conflict of interest!
Senator Setlakwe: Yes, absolutely.
Senator Prud'homme: At least they are nice to the little people.
Senator Setlakwe: You mentioned that credit unions are coming along, especially in Quebec. However, the credit unions are not where they should be. You also mentioned foreign banks; I do not believe they are a factor at all anywhere in Canada.
I would like to hear your views on further government implication. I am referring specifically to the Federal Business Development Bank as a possible lending institution for short-term loans. Currently, that institution's mandate allows them to make only long-term loans. However, if they could go into the short-term loan business, perhaps you could have an institution that would service SMEs and individuals better.
Mr. Gray: It is a partial solution. Credit unions are attempting to get their act together, however, it is very difficult because of this independent culture. You have seen an example of this in Western Canada in the area around Vancouver, where several different credit unions attempted to merge. There has been something of a union, but the big ones that they have tried simply have not happened because it is difficult for them to pull from a largely individual- based system a view about getting bigger and into more commercial. That is a cultural challenge that they have.
As well, understanding commercial lending is not something that happens overnight. It has taken our major chartered banks a long time to get to where they are. Many of our members would say that they have a long way to go.
With respect to the credit union movement in Quebec, it is very highly regarded in terms of the provision of banking services to our members. Quebec is a great case study for the benefits of competition. In that province, there is the National Bank and Mouvement Desjardins — both effectively major regional banks — that not only provide good service to our Quebec members but have forced all the other players up to satisfaction levels which we do not see for those same institutions elsewhere in Canada. There must be something about being pushed to a higher standard by those two major players in Quebec.
With regard to BDC, I would say that institution has shown a lot of innovation in terms of bringing new products to the market. In the mid-1990s, when I co-chaired a working committee on small business here in Ottawa, a member of that committee stated that the problem with the major chartered banks was that they watched the BDC to see what their innovation was and whether it worked. If it did work, they would use it.
I would like to see a lot more research and development on the part of Canada's major chartered banks themselves in bringing new products market and bring more opportunities to small business. The problem for the BDC is that it is not structurally big enough to fill the capacity that has been vacated by many of these chartered banks. It is partial solution, but not a full-time solution.
Senator Setlakwe: I raised the BDC because the major banks advise me that their objective is a return of 18 per cent to 20 per cent. This would not be the case for the BDC and, therefore, the potential is tremendous.
Mr. Gray: Your point is well taken. Currently in our membership, BDC represents 5 per cent of the market, so it is still relatively small.
Senator Tkachuk: In Bill C-8, not only did we talk about credit unions and other small institutions that we hoped would be more aggressive and grow, we also talked about new entrants — that is, bank start-ups. There is a provision in the legislation to allow that to happen.
I have not seen any new start-ups. It has been about two years since the legislation was passed. Do you believe it is because it is too onerous? I find it strange that no one is interested.
Mr. Gray: The reality of Canada's banking structure is this: You must have the infrastructure established and a solid business base. I discussed this in the resubmission of our paper from 1998. I spoke about the future and what would happen if you allowed major, foreign competition to come in. I also expressed my optimism for major changes in terms of the competitive structure, even if we did not allow mergers.
If we put a moratorium on the mergers and allowed all the competition in the world to come in, our view 5 to 10 years out was that it would not change that much.
There is one opportunity that is based so much on infrastructure and the costs of getting in. I live in Toronto. In the Yonge and Eglinton neighbourhood, Citibank came in and set up a retail branch that lasted only 18 months. The biggest bank in North America could not last longer than that because there is such a dominant position by the Canadian banks in the marketplace currently that, unless you are able to come in and buy infrastructure to get a toehold and have a chance, it is very hard to enter the market. The costs of entry are prohibitive. That is why I used the word ``regrettably.'' Canada Trust was a great platform that we could have used to have yet another competitor in the marketplace and in no more important place than the biggest province in the country that does not have a second tier of banks. Quebec does; Western Canada does; Ontario and the Atlantic provinces do not.
That would have been a great opportunity. When I had discussions with senior people at the department of finance at the time, I asked if there were no other buyers for this Canada Trust deal. If Mr. Glenn had been around three years ago, we might have had yet another player, but he was not. It is now part of the bigger structure, and we have gone effectively from six down to five. I do not know whether that answers your question.
Senator Tkachuk: No, it does not. It does not explain why we have not had one entry, or heard of any potential entries, into that marketplace by anyone since the legislation was passed.
Mr. Gray: The problem in Canada is that the cost of entry into that marketplace is mammoth. We have a vast geography and a smallish population. The market opportunity may not be seen in the commercial lending sector.
Senator Tkachuk: Is it possible that the institutions governing the entry — the departments themselves — is making it too difficult? In other words, you have to have a culture that wants competition and you have to expect some failure. Otherwise, there would not be any new entries into the marketplace.
Small business can start and fail and other new businesses can start and fail. That is the way it goes. Do you think it is possible that the departments are making the soundness issue so difficult because they do not want failures? No one can enter the marketplace because departments will have to govern and supervise them and there may be failures here and there.
Mr. Gray: We have had new entrants. The Hong Kong and Shanghai Banking Corporation Ltd., HSBC, is a relatively new entrant and it is doing okay in Canada. We have had Barclay's in the past, which came and went. They are here now but they are more a mezzanine and up provider of financing. It happens; they come, try it out and then vacate. There have been a number of smallish European banks that have come in and tried certain niche sectors, but it has not always taken hold.
Mr. Whyte: This is the kind of discussion we should be having instead of just letting the banks merge. Our issue is: How do we develop a better, more competitive, financial institution sector to service the small business sector? If you are looking for criteria, we have given you some information that would be great for our sector — half the economy. Whatever we do, it is imperative that we do not have any bank merger that does not exacerbate an already tough situation.
Where is the discussion post-Bill C-8 where we all sign on the dotted line as we say, ``Yes, this is the way to go.'' Where is the discussion to prove that, to follow up on why new entrants are unwilling to come here and how to make the system more competitive in rural Canada?
Senator Tkachuk: The banks you listed were foreign entrants. We have not had any domestic groups getting together to begin a small bank in Vancouver, in Toronto or elsewhere.
Mr. Gray: I have heard of some that are in the early stages but they are a long way from complete. Four years ago, we made the point that you cannot simply import the community banking system of the U.S., which is built on a whole structure and history, and have it work in Canada. You cannot do that. The whole dynamic in this marketplace is fundamentally different. There are risks because the major dominance of the five chartered banks will not easily allow someone to come into the marketplace and grab a share, if it is key to them. If the five chartereds do not care about it, that is fine, but if it is key, they will not let anyone in that market.
Senator Tkachuk: That is the difficulty. When we discuss the issue of mergers and public interest, we only have five major players, of which one is dominant — the RBC Financial Group. If you allow two to merge, then perhaps there should be another two that want to merge. How do you decide who is allowed to merge? Do we have a hundred-metre dash to determine the winner? How do we figure it out because, in certain areas, what the fifth bank does not serve well, there will be no competition?
Mr. Gray: There is a point at which you have to ask, ``How big is big enough?'' Does it mean we should have one bank in the country? Even if we had one bank — merged them all — you would still not have the scale that they want.
Senator Tkachuk: I agree with Mr. Whyte, yet I am not against bank mergers.
Mr. Gray: Nor are we, but get the competition in.
Senator Tkachuk: I am frustrated with the fact that we have not had serious discussions about new entrants and why new entrants have not entered the marketplace. I do not get it.
Senator Kroft: I was enthusiastic about your presentation. There were a few bullets because some of your side comments, if they were in here, would have been even more illuminating. It is very impressive.
I regret that you have not done something more positive with it in terms of why we are here. You have identified a problem dramatically, and the situation exists in a non-merger environment. I would like to see the strengths of this case being put to work in terms of the issue that we have to deal with. We have had the same conversation before. You happen to be here because we are holding these hearings. The leverage that is inherent in this situation seems impressive to me. You expressed regret for the loss of the Canada Trust platform. If the case based on this data were advanced such that as a precondition to the merger deal if there were to be a significant amount of selling off of branches or other banking capacity, there would be other platforms that could come in with the infrastructure capacity to significantly change the equation. If we just sit back and express unhappiness with the situation, rather than look for an opportunity to use the conditions that can be applied in a merger session, we will miss another opportunity.
Mr. Gray: I could not agree more. I hate to say ``regrettably'' all the time but we once had a whole lot of trust companies in this country that could have served as platforms, as well. That was an opportunity lost. However, your point is well taken. We should learn from that experience and figure out how to use current platforms to enhance competition.
Senator Kroft: There is an opportunity and you have the strength of position. Let us find a way to put forward a set of criteria that, perhaps, could give us another crack at it so we will not regret the trust companies, such as Canada Trust. Perhaps we can throw loose a few hundred branches that could be part of something significant.
Mr. Whyte: May I add to Mr. Gray's comments? You are correct — we had to get your attention. That is why we put graphs together. We will send you a letter following the hearings but we had 10 days' notice of this meeting.
Senator Kroft: That is fine. I am not being critical.
Mr. Whyte: Mr. Godsoe has been meeting annually on this issue.
Senator Kroft: Nothing will happen tomorrow. We have time, and my comments were meant as an invitation to take advantage of that time.
The Chairman: Thank you for being with us, gentlemen.
Our next witness is Mr. Edmund Clark from the TD Financial Group. Welcome, Mr. Clark. Please proceed with your opening statement. We will then take questions from honourable senators.
Mr. Edmund Clark, President and Chief Operating Officer, TD Bank Financial Group: Honourable senators, thank you for inviting me to provide some views on the public interest impact assessment process proposed as part of the approval process of large bank mergers, pursuant to Minister Manley's request of October 24, 2002.
I understand that you are asking me to help you define the parameters of the public interest review process, not to give you an exposition on the pros and cons of large bank mergers at this time. Obviously, if you have questions about where I stand on this issue, I would be happy to give you my views.
At a general level, the Government of Canada appears to have already accepted the legitimacy of large bank mergers. The finance department's June 25th, 1999 document, ``Reforming Canada's Financial Services Sector: A Framework for the Future,'' states:
It is noted that in this era of rapid economic change, technological revolution and globalization, mergers and acquisitions are legitimate business strategies for growth and success.
We have, however, recently seen some ambivalence creeping in. It now appears that while large bank mergers have been formally accepted in principle, they are still not accepted in substance. My main point to honourable senators today is that until the Government of Canada makes a definitive statement as to its position, the rest of the discussion is academic. However, you have been asked to address the question of the public interest review process. Let me give you my views on this element of the debate.
In announcing the referral to this committee, Minister Manley referred to some comments I made at the Competition Bureau conference last year, where I called for greater clarity in public interest rules. I do not want honourable senators to mistake my comments for a call for more rules. I was simply pointing out that the most destructive force for an enterprise — its customers, employees and shareholders — is ambiguity about how the business should be conducted. Clarity does not need to mean more rules. In general, the fewer rules, the clearer.
I would go so far as to say that when you work through the current situation logically, it is actually difficult to find clear grounds for a public interest review process. It would be the industry's choice to be treated like any other business and not have to go through a public interest review process.
However, since there is a requirement for a public interest review process, my recommendation would be first, to make the area of coverage narrow; second, make the process short; third, do not let it be a ``first past the post'' process; and fourth, either announce that you are genuinely willing to consider mergers now, or tell us when you will be.
I will start with my first point: making the area of coverage narrow. As honourable senators are aware, the Canadian banking industry is one of the most highly regulated industries in the country. The challenge is to identify what problem the public interest tests are trying to solve that is not already addressed by regulations in place. I fully understand and appreciate the need to balance the interests of consumers, the industry and the national economy. I believe that is what existing legislation regulations aim to do. Many would argue that they squarely address the concerns identified under the public interest impact assessment process.
I cannot imagine that anyone believes it would be useful to have two or three sets of overlapping and possibly duplicative rules managed by two or three sets of arbitrators. The public interest review process needs to avoid creating such a situation.
The Office of the Superintendent of Financial Institutions has laid out the rules for safety and soundness and would look at the specifics of any merger. The Competition Bureau has tests for determining whether mergers are anti- competitive. The Financial Consumer Agency of Canada has regulations regarding branch closures, and monitors and enforces other consumer provisions of the Bank Act.
Rather than create a duplicate set of rules, we need to determine whether the public interest impact assessment process should deal with these issues and therefore exempt OSFI, the Competition Bureau and the FCAC from their responsibilities, or simply let those agencies get on with their jobs. If it is the former, we should explicitly agree that OSFI, the Competition Bureau and the FCAC are exempt from these reviews.
Minister Manley has suggested that the process should address questions of access to banking services for people with disabilities, low-income individuals, businesses and rural communities, but we have no clear understanding of the intention of the test or how, if at all, it differs from the intention of other guidelines that are already in existence.
We already have a human rights legislation regarding access to service for people with disabilities and industry initiatives are underway to make banking services more accessible to our visually and hearing-impaired customers.
All of the banks have already signed memoranda of understanding with the Government of Canada, setting out their agreement to provide service for low-income Canadians. On top of this, the government already has regulatory authority in this area under the new Bank Act, should it be required.
As for the transition issues that naturally flow from mergers and which may be concerns, such as employment, there are already labour laws that address employee redundancy and I believe the record would show that the banks almost always exceed the legal requirements.
The new Bank Act also created the Financial Consumer Agency of Canada and provides regulations with which we must and do comply regarding the appropriate notification of customers in the event of a branch closure. These specifically address the question of branch closures in rural communities. It is important to acknowledge that, as imperfect as we all are, all of the Canadian banks are trying to build great franchises. Here again, the record will show that in building our businesses we are conscious that, with or without specific regulations, we must take care of our customers and our employees' interests. As an example, while several years ago some suggested that the banks did not pay enough attention to small and medium-sized enterprises, in fact they were, are and will be an important element of our business. We are actively working to expand our services to this segment. The TD Bank has invested significantly in building a dedicated small business banking group, and we have seen our market share grow by 275 basis points since the merger with Canada Trust.
While there is always room for improvement, it is our responsibility and it is in our competitive interest to continue to survey our customers' needs and find satisfactory ways to meet them. The simple fact is that we are in the service business and we operate in a very competitive market where the competition for customers and for top employees is fierce.
TD's acquisition of Canada Trust is a case in point. The merger of Canada Trust with TD's retail arm was about more than cost savings. It was about extending a successful business model and preserving our customer-centric brand. It was from that perspective, rather than any government or regulatory guidelines, that we made commitments to our customers, our employees and to the London community — our largest employment centre outside of Toronto.
Those commitments included an 18-month compensation guarantee for all employees affected by the merger, an extended branch consolidation period to make integration as smooth and easy as possible for our customers and employees, a commitment to maintain existing employment levels in London, and a promise to provide timely communications to customers and employees.
I will not claim that the merger went perfectly. Suffice it to say that had we not made these commitments and created a set of operating principles at the outset that acted as the litmus test for any merger-related decision, our challenges would have been much greater and the outcome much less satisfactory. The first of our principles was that we would always put customers first.
One of the steps required in the merger review guidelines is to prepare a public interest impact assessment. This is an unusual requirement to which, to my knowledge, no other industry is subject. I would argue that through our communications strategy to customers, employees and affected communities, we created our own public interest impact assessment. I suspect that other financial institutions would do the same in similar circumstances.
My second point is to make the process short. We need to be clear about the time frame for the hearings. The commitment of the Government of Canada to complete the decision stage of its review within a maximum of five months is useful, but there are now paradoxes in the sequencing of events as they now stand.
If honourable senators agree that duplication should be avoided, then allow OSFI and the Competition Bureau to do their jobs first and put a shortened public interest review process at the end rather than run it in parallel. The political process would then become a final check. However, this must be done in an environment where the government is genuinely prepared to consider major mergers, so that we are not going through this process with the risk of being turned down not on the merits of the merger but on a mood change in the country.
Similarly, a public interest impact assessment can only really have legitimacy after OSFI and the Competition Bureau have made their decisions. As part of a merger application, we would be required to submit a public interest impact assessment offering remedial action where we think it is necessary. However, if the Competition Bureau also required remedial actions, we would only hear about them two stages and several months later.
Divestitures of branches, should they be required, are difficult to execute to anyone's satisfaction. In my review of any merger, the Competition Bureau could require us to sell branches, and therefore, our customers' business, and transfer our employees. It gives direction as to whom our customers' business cannot be sold. There have been suggestions that, on top of this, there should be a process of providing direction on who the customers' business should be sold to. Honourable senators can imagine an absurd situation where we offer to keep a branch open in a small town only to be told by the Competition Bureau that we must sell it, and whereupon selling the branch to a competitor, the competitor closes it down a few months later. The reality is that the process is difficult to conduct even under the present rules.
It is illustrative that when, as a condition of our merger approval, TD and Canada Trust had to sell 13 branches, some of them in small towns, there was no line of eager bidders anxious to snap up all of them. We found ourselves in certain situations where we were required to divest branches that we would have been happy to keep, and our customers would have been happy to stay with us.
It was not easy for the companies that did ultimately buy the branches either. This was a transition that was imposed to meet competitive regulation. Our customers and employees were enraged that they were subject to decisions that were not their making.
I am not criticizing the Competition Bureau in this matter. I am only illustrating once again that there is a potential for conflicting interests in the process.
There are more than 200,000 people working in this industry. They read the newspapers, and they are left highly uncertain about their sector, their company and their jobs. As well, capital markets are known to have short fuses and are not particularly good at digesting partial information. We need to shorten the process for the sake of the employees, the customers and the shareholders.
My third point is: Do not let there be a ``first past the post'' decision and denial of any others. The industry and the government have inadvertently backed into a position where the government is responsible not only for the regulation but virtually the structure of financial services. This is not a good proposition in the long run as it will only result in Ottawa being constantly bombarded with proposals until one hits the mark.
In my view, no merger of any of the big five banks that would be subject to the review should be approved without the others having the right to apply. Everyone should have the same option. A merger in one part of the sector affects the other parts, and they must be given the chance to respond as they see fit.
My fourth and final point is that the government should either announce that it is genuinely willing to consider mergers now or tell us when it will be willing. I do not know what went on in the last two months between other banks and the government but, like many Canadians, I do read the newspapers. In Halifax in October, Mr. Manley was quoted as saying that bank mergers are legal and ``if somebody wants to make a formal application, they are perfectly entitled to do so and I will deal with it.''
Subsequent events returned the ambiguity we have been living with for the last four years. We cannot have a situation where communication of important decisions is left to newspaper scoops. It is not productive or professional to communicate decisions about the industry in such a manner. Nor can we continue to have the on-again, off-again process that we have seen in the last month. It is in no one's interest to have a process that the public believes is just a matter of talking to the right person on the right day.
We cannot have a process where there are rumours that a large insurance company might buy a bank. If it is true, let us get it out in the open and give everyone lots of notice so that we have equal opportunity to compete. We cannot operate our business effectively by trying to keep up with the latest rumour or by reading tea leaves. We need a level playing field in terms of information and a transparent process.
We need to remove the ambiguity surrounding the government's attitude towards bank mergers as soon as possible. It appears, now, that a proposal can be rejected under public interest concerns before it is even formally submitted. The rules should not simply be amended to permit a proposal to be subjected to months of investigation by OSFI and the Competition Bureau only then to be met with the verdict of the government on vague public interest tests.
If the government is prepared to accept mergers, it should state so unequivocally now. If it intends to place certain restrictions, then these should be stated now.
If a clear statement cannot be made fairly quickly on the government's position on mergers, then the best way to remove the uncertainty for customers, employees and shareholders alike is to tell us when you will be ready. Then we can all get on with running our businesses, and if and when the mergers are deemed to be in the public interest, we will make our business decisions accordingly.
Senator Angus: I am sure I speak for all honourable senators when I say that was an outstanding, clear and helpful presentation to all of us. You have come right to the nub of it. I put in to be the first questioner. In some ways you have pre-empted the main questions I wanted to ask you. However, let me cover some points.
Am I right in understanding that you had spent, in an earlier part of your distinguished career, quite some time in Ottawa at the deputy minister level?
Mr. Clark: Yes. I was Associate Deputy Minister.
Senator Angus: You know whereof you speak, in other words. You have been here and you understand the wile of this town, which I believe is likely extremely helpful to you in the very challenging new position you have. Congratulations on your recent appointment.
Mr. Clark: Thank you.
Senator Angus: In the early part of your presentation, you stated, ``My main point to you today is that until the Government makes a definitive statement as to its position, the rest of the discussion is academic. By ``its position,'' you do not mean all these airy-fairy tests; you mean are they in favour politically, as you say at the end. Is this government politically in favour of mergers or not?
Mr. Clark: That is the essence. We have confused the public interest review with the requirement. It seems to me that there is a major area of public policy. The population deserves to know where the Government of Canada stands on the issue.
Senator Angus: On page 5 at the third bullet point, you speak about making the process short:
The political process would then become a final check. However, this must be done in an environment where the Government is genuinely prepared to consider major mergers, so we are not going through this process with the risk of being turned down not on the merits of a merger, but on a mood change in the country.
Again, it is a political mood change, finger to the wind — ``not a good month for a merger'' — that sort of thing, that kind of vagary. That brings me to my concluding question. We were surprised when we arrived here this morning and government officials sat there saying, ``Well, ask us something.'' They had nothing to say. They did not outline for us what it is they want. We are finding ourselves in an awkward position.
Given your background and understanding of the process in this city and how government works, and given your clear statement that all you want to know is whether government is in favour of mergers or not, what would you do if you were a senator? I believe you are saying there is clarity in the merger review guidelines that are out there, both from the Competition Bureau and from the Department of Finance.
On the evidence we have heard today, we would say what you are saying. I think I will just send in your paper and that will be it. Would you reply?
Mr. Clark: The reality is when governments are not clear, they are not clear for real reasons. It is not because they would not like clarity. There has been a debate around this subject. Reasonable people can have reasonable differences in view. Undoubtedly, within the government, there are differences of view as to whether they are in favour of bank mergers. I accept that.
From the reports that I have heard of what the witnesses said today, I think that there has been a change from 1998 when I appeared before this same committee. Fortunately, I have approximately the same views I had in 1998 on this matter. I do not believe the Canadian banking system per se is in danger by having mergers or not. If the government said, ``We do not want mergers. Go away,'' I think all of us would go and run our businesses and we could live without bank mergers.
On the other hand, if they say that, there is obviously an implication as an industrial policy for Canada. The rest of the world is consolidating its financial services. Our ability to extend our franchises outside Canada is probably less in a case where there are no mergers than there are. That has become the essence of the public policy discussion.
We could even live with the government saying, for a variety of reasons, political or not, ``We do not want to clarify this issue for the next 18 months, and in 18 months we will return to clarify the issue.'' Are we in a race where we should bombard Ottawa every week with a proposal and see whether one sticks, or should we go away for 18 months and see whether political events happen and renew this debate? The industry could probably live with two or three scenarios. We would just like to know which one under which we will operate because we can prosper under almost any of those scenarios.
Senator Angus: In terms of the public interest impact aspect that we have been asked to clarify in at least four areas, I wish to be sure I understand you. I believe your sense is that it is clear already. What can we add?
Mr. Clark: I am saying take it as a narrow question, not a wide question. The public interest assessment is not to decide in favour or against bank mergers because if you had an application, presumably, the government has decided in favour of bank mergers. It just wants to know whether this particular merger has any narrowly defined issues that the public should review. Do not have that review process ask for the second time whether you have met the Competition Bureau's requirements, because if Mr. Von Finckenstein says we have, we have. If Mr. Lepin says we have met OSFI's regulations, we have.
Therefore, you narrow the question down to the things that have not been reviewed by the other agencies of the government. We cannot have two agencies competing to say whether we are regulating safety and soundness or regulating the Competition Bureau because then, as a businessman, you do not know where you will end up in the process.
Senator Angus: On this first-past-the-post subject, I thought your point was outstanding. I want to be sure that I understand. You say, ``In my view, no merger of any of the big five banks that would be subject to the review should be approved without the others having the right to apply.'' By the ``right to apply,'' what I am hearing is that bank X and bank Y have submitted a proposal, and the government looks at it. Then, as a matter of fairness, they contact the other three of the big five and say, ``Look, we think there is a proposal here that we think makes sense, but do you have any proposal to make?''
Mr. Clark: There is a feeling in the industry now that there is a danger the government says, ``I like that proposal, but I do not want to receive any more because that will be too many things going on at the same time.'' That causes all of us to say that we better get our proposal up there because ``the first past the post wins the race,'' and that is not a good public policy.
Senator Angus: In your view, would there be — given that you could live with or without mergers — a bias to say if we want to evolve as a financial services sector, we need to look at concentration? Is there room for more than one merger?
Mr. Clark: With respect to whether there is room for more mergers, according to the competition guidelines, the answer is, mathematically, is yes. It obviously has different implications for different banks. If they do make a merger in order to meet the competition guidelines, there will have to be divestitures. However, that is their business decision to make by looking at it as business folks and deciding whether they are prepared to pay that price. The government ought not tell them that they cannot pay the price and that the government will decide who will merge with whom in Canada. That takes us down to a degree of micromanagement of an industry that is not healthy in the long run.
Senator Kroft: Do I read this correctly that if you had your way on a specific proposal, we would not be part of the process?
Mr. Clark: You will have to stretch to find a piece of territory that you could occupy, given how fully regulated we are as an industry.
We are happy to have a final check to proceed as long as that is what it is perceived as, a final check to proceed. If we were coming with a merger, the government would have said they are in favour of mergers. We would have come, and OSFI would have said this is a safe and sound institution. Competition would have said, ``They have met all our rules or have adequate remedies.'' The consumer agency would have looked after all of our programs and divested branches and say, ``That is all in accordance with the rules.'' You can stop and say, ``When you add up all those tests, we are still missing some little thing that did not get caught. We do not have a perfect set of regulations in Canada.''
We are prepared to live with that, but as long as that is quite narrowly defined here, we are not playing a halfway-to- the-wall game in a political process.
Senator Kroft: Thank you very much for that. We spent a good deal of time on that subject on the last round and our committee did have some views. However, I welcome your comments.
I would like to come back to the points you raise about not going with the first-past-the-post because this is an idea or a thought that, at least to me, is fresh. It does really give us an interesting view as to the situation that is, indeed, going on right now, which is that no one wants to be the last one in or miss the chance. Thus, we have created this incredibly competitive situation. It is probably wonderful for the lawyers, the consultants and everyone else. However, in terms of actually productive policy, it is questionable.
On the other hand, I am trying to think out loud as to how this would work in practice. If a proposal were received, as Senator Angus said and you confirmed, then others would be asked to engage themselves. In their desire to be fair and equal with everyone, the government is then put in an awkward position. While it is fair to everyone, does one poison the well? Let us consider that there are two or three applications in and that they are faced with doing them all. Let us assume that they all have a good solid business case, along with a good solid public interest case. If you had two or three, then the government would be driven to say, ``We cannot do all of these, therefore we cannot do any.'' I am trying to think my way through what would happen in those circumstances.
Mr. Clark: You are on to the nub of the issue. What we are saying is that the government has an advantage in that the industry is not so complicated. It is an amazing situation, but there are only are five institutions in Canada that are affected by this piece of legislation. It is quite extraordinary to take five court large corporations and say, ``You and you alone will be subject to this particular review.''
It is not beyond the wit of man or woman to figure out what are the various combinations of those five that could possibly come forth to the government. It is a simple mathematical operation.
When the government looks at that and says, from a public policy point of view, ``We like four of the combinations but we do not like the fifth,'' then it can announce that that is its public policy, too. It can stand up and say, ``We are prepared to receive applications. We are in favour of mergers, except that we will not allow this company to merge with that company.''
As you are aware in the insurance industry, it has already issued a public policy statement, not legislation, that says, ``We are not in favour of Manulife and Sun Life coming together.'' hat is a clear, transparent policy. Manulife and Sun Life know how to run their businesses. They say, ``Well, government policy on this matter is clear.''
Obviously, our preference would be that they do not get into this micromanaging that says, ``TD can merge with this company but not with that company.'' If they were so overwhelmed by that, have them tell us now and then we will run our business against that background.
That is the main thing that we are saying to them. As I say, it is not so complicated because they have it so narrowly defined as to who is caught in this particular web that they can figure out the combinations available to us.
Senator Kroft: You are very clear. Your desire not to have micromanagement is almost an inevitable result. However, if the industry can accept the directness of saying, ``You two can and you two cannot,'' and you think that would work, I am wondering how you can be non-interventionist in such a regulated environment. However, that is a pretty high level of intervention.
Mr. Clark: To put it bluntly, the government is trying to be interventionist but appear not to be interventionist. They should either be prepared to state, ``I do not want you to merge with such,'' or they should tell us we can merge. What they cannot do is say, ``I do not want to be caught looking interventionist, but wink-wink, I hope you will not come with a proposal that looks like that.'' They should not run a country that way. They should stand up and say, ``These are our policies and we will live with the consequences.''
There is a set of competition rules. To state the obvious, the Royal Bank and ourselves, if we merge with someone, would have greater branch divestitures than some of the other banks with smaller retail operations. If we want to merge and are prepared to take the price of that, then that is our business decision and we should be allowed to do that within the competition rules.
Senator Kroft: Do you see any potential for coming out of that kind of a situation, — which makes for fascinating speculation — that the divestiture orders and the forced industry accommodation that would be required might result in a stimulation of new competitive entries into the marketplace because of divestiture?
Mr. Clark: Undoubtedly, if there were forced divestitures, you will, to a certain extent, replace the lost competitors. I think that is a good thing. The thrust of my argument in 1998 was that you ought to have tough competition rules that, in a sense, force the development or replacement of the lost competitors.
Senator Oliver: Mr. Clark, what we have heard today from most witnesses either directly or indirectly — mostly it was indirectly — is that the one big issue before us is that this process has become too politicized. It has become politicized in two senses. First, it has become politicized on the part of the government — the Prime Minister and the Minister of Finance. Second, it has become politicized on the part of two government parliamentary committees in the House of Commons and in the Senate.
What I heard you say tonight in your excellent presentation, is that given the Financial Consumer Agency of Canada, OSFI, the Competition Bureau, the human rights legislation, the memorandum of understanding under the Bank Act, labour laws and other things, that we really do not need to have this final public interest review mechanism because there are checks and balances already there to catch you. What I hear you saying is that without that you can live with and deal with OSFI and with the Competition Bureau, so let us then get on with our business case.
Is that a summary of what you have said?
Mr. Clark: Yes. We certainly do not believe we need it. I think the public interest can be met sufficiently without it. If you have to have it, then make it short and make it precise and have it come at the end of the process so at least you have the benefit of knowing what all those other agencies imposed on us as part of the review process.
Senator Oliver: However, you really do not need it.
Mr. Clark: You really do not.
Senator Oliver: We still have one of the so-called ``pillars,'' which is the protection afforded the life companies. What is your view on whether that should be taken down and collapsed so that banks, if they wanted to have some kind of a merger, would be free to merge with Mutual Life, Sun Life or some of the others?
Mr. Clark: My view has always been that these are things not designed to protect the consumers. Thus, they are not in the interest of consumers. I always find it an interesting part of the political process that we are trying to have anti- customer legislation.
Clearly, to open up insurance would reduce insurance prices in Canada and provide a better product for the consumer. Therefore, banks ought to be allowed to go into the insurance selling business. However, I see no disadvantage to safety and soundness or the consumer in allowing banks and insurance companies to merge. I have not seen a credible argument that it would not be a good thing to break down that one remaining barrier between the two institutions. I think the day that a large insurance company bought a bank in Canada you would find that they would go on the other side of issue of whether it was in the interest of the consumer to have insurance sold in the branches or not.
Senator Prud'homme: I read your whole brief in both languages. It was very good translation.
Would you be happy if, in the name of clarity, the government were to say, as you have said in a few words, ``Go away. Nothing will take place in under two years.'' I say two years because I am of the strong view that the government will have an election in April, 2004 in order to avoid the new electoral map.
Would you be satisfied to hear them say that there will be nothing before at least two years? That means a future government. Then the rules will be so clear that there will not be any ``first past the post run'' between companies. Therefore, the rules are equal for everyone. No surprises.
Mr. Clark: I think you would find the whole industry would say, ``let us cash in our winnings and take that.'' They would love that solution. They would love it even more if the government were prepared to do that immediately.
I think that industry would prefer a two-year moratorium, and then after the election, there will be clarity as we are calling for. Now we at least can run our businesses for the next two years knowing we are not supposed to be out talking to each other and running back and forth to Ottawa to see whether there is any switch in the mood. Clearly I think the industry would find that a significant improvement from our current situation.
Senator Prud'homme: That would be quite a big relief to the 232,000 people working for the banking industry. They would say, ``It is clear now. We can now concentrate on having the best bank possible. If it is to happen in two years or 30 months from now, because we have been administering the bank nicely, clients are happy, perhaps we will have the best chance to pass the post before the others.''
Mr. Clark: As you know, we have a view that you build a great bank by starting with customers and working with your employees. Every week, I spend time with a large number of employees. The first questions raised at every meeting I go to are about bank mergers: ``What are you doing? Do we have a proposal? Are you in Ottawa? Are you selling our proposal?'' People are terrified that something will happen, and we will be caught napping, not having an aggressive proposal. That is not a sensible way to run an industry.
Senator Tkachuk: That was a very good presentation because it was clear, and it was to the point. I agreed with much of it — particularly about the point that sooner or later there must be some public policy to guide us, otherwise we are operating in a bit of a vacuum.
I want to follow up on a couple of your suggestions. You mentioned making the area of coverage narrow and making the process short. We had testimony from the CIBC where they suggested 100 days. Is that what you are thinking about when you say short?
Mr. Clark: I will be clear. The difference between the CIBC and ourselves is that we are proposing a specific change in the order. The existing order says that you run the public interest review in parallel to our having discussions with OSFI and our having discussions with the Competition Bureau. We are saying that that does not work. You could be telling us that you want us to keep this branch open while I am negotiating with the Competition Bureau to ensure I sell this branch knowing that the competitor will actually close the branch down. There is no way when you have your review that you know what is being demanded from us from every other agency that is controlling us in this process.
Our suggestion is you get the order right. First, the government says, do we want this or not? Do we want an application or not so we know what this is about? Then you go to the Competition Bureau and OSFI, which I think I can run in parallel because they are quite different spheres. We find out what will we have to do to meet competition guidelines; and, therefore, we will be able to state to you there are no competition problems in this. We have OSFI give you a letter stating they have no trouble with the safety and soundness of this institution. Then, when you are reviewing us, you have narrowed down the questions of your concern, and you actually know what our remedies are. You know what the proposal is in concrete terms — what we are doing with every branch we have.
I think that can be dramatically shortened. The government has imposed an overall limit of five months for the total process, including Competition Bureau and OSFI. I would like it if Mr. Hunkin's suggestion of 100 days was accepted, but I doubt the Competition Bureau will accept that they can get all this done in 100 days.
I think five months is not an unreasonable period. If you have that political agreement at the front, you take probably three or four months to get all the other agencies, followed by a shortened period of a month or two weeks for the policy review at the end where you actually know what our proposal is because we met every other agency's demands at the time.
Senator Tkachuk: We talked about ``first past the post,'' and how everyone should have a fair shot at the merger process. I totally agree with that.
However, in reality, if the competition rules are set fairly — in other words, 30 per cent of the marketplace or whatever in particular segments — once that is done, why does the government have to be involved at all? They really do not, do they? No one has to be told anything. They follow the process. Two banks get together. They have a meeting and say, we are a few points out here, a few points out there. Let us adjust that or that. Is that normal?
Mr. Clark: There is no questions this is an unprecedented set of rules for these five institutions. So obviously, it would be perfect if there were a political condition consensus eventually that says, ``We have enough rules in place. We do not need to subject it to another further political review. We just want the industry to sort itself out within the constraints we have set.''
It is a complicated set of political processes that led us to this place that we find ourselves. This has become a politicized sector. I think what is in the interest of public policy is that we find a way to depoliticize it because I think that would be in the interest of all Canadians if we could now back up a little. The way to do that is to have the government declare its policy; to have a process that is not duplicated and that is sequenced in the right way. Then if you either have no public interest review or if you do, have a very short one that is narrowly defined and that takes into account what the other agencies have already extracted from us as part of getting their approval for the mergers.
Senator Tkachuk: The third issue is entrants in the marketplace — new entrants and new competition. We have a lot of competition in Canada. We have five major banks. As I learned today, in Quebec the five major banks are not number one, two and three. The five major banks start at number three and that is the Royal. There are seven major institutions in Quebec. In Saskatchewan, all the banks are players; the credit union is a player; and HSBC is a player. There are six, seven, or eight players almost everywhere in the marketplace.
Do you have supply first or do have you demand first? If four of the five banks merged into two institutions and one was left trying to get in the door of one of them, my view would be is that that would open spaces for the other entrants to get into the marketplace. In other words, the market place is pretty full, and that is why American banks and other banks have a hard time getting in because we have a lot of banking institutions. Do you agree with that? I am thinking of Saskatchewan and Alberta. Alberta has Treasury Branches, right?
Mr. Clark: I certainly agree that we run a highly competitive industry. Canadians have a better consumer value package — dramatically better than Americans do. You cannot go in to a large bank in California and buy the same banking package at the same price as you can buy at TD Canada Trust today. We offer a vastly superior package, and we do so because we are in hand-to-hand combat competition with a lot of banks across Canada. Given the nature of the arithmetic of the competition guidelines — as long as you enforce the guidelines as the Competition Bureau did with the TD Canada Trust merger — you will have divestitures of branches that will automatically strengthen the other competitors already in the marketplace. That would be a good thing. I think competition is a great thing for the consumer.
Senator Tkachuk: I think that is good.
The Chairman: We will finish with one small question from the man from downtown Thetford Mines and you better have a branch there.
Senator Setlakwe: He does not.
Very briefly, Mr. Clark, thank you for an excellent presentation. You did say that there are narrowly defined issues that the government should review. I wonder if you included the perception that is out there — which has been discussed previously with the other CEOs — that you are just not there for small and medium enterprises and individuals who are looking for financing in regional areas of the country.
Mr. Clark: We are all highly sensitive to that issue. Frankly, that is an issue that we should continue to have a dialogue on whether there are bank mergers or not, because I do not think bank mergers will make that issue significantly worse or significantly better.
It is an ongoing issue. I think the banking system has received the message. Certainly at the TD, we have isolated three growth areas across the whole bank, small business is one, commercial is another and insurance, within the rules that we are allowed, is the third. Of these growth areas, we are putting a lot of resources into small business and commercial to try to make ourselves better at doing this job. We are particularly sensitive that we not run a Toronto- centric bank that only looks after small business and commercial and the Toronto area. I think we recognize this issue, but I think that is an issue we must keep on working on to convince the public that we are doing a good job.
Senator Setlakwe: Perhaps you should think are of opening a branch in downtown Thetford Mines.
Mr. Clark: I will do that.
The Chairman: Thank you for being with us, Mr. Clark. Yours was a superb presentation.
The committee adjourned.