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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 8 - Evidence 

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OTTAWA, Thursday, November 28, 2002

The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 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 witness this morning is Mr. Peter Downing.

Mr. Peter Downing, TG International Management Consultants: Honourable senators, thank you for this opportunity to express my view that public accountability statements should be an integral part of potential bank mergers public interest impact assessments. I will support my view with the four handouts that I have provided, along with a copy of my brief.

Table 1 consists of the examples of 96GRI performance indicators that I will be discussing. I have given you three public accountability statements, and the blue-covered VanCity document.

I will refer to VanCity's 2001 accountability report. I have provided a copy of an article I wrote entitled ``Table 1.'' Honourable senators may want to look at the right-hand sidebar that says, ``Will corporate citizenship sustainability reports become boasting reports as former Senator Stewart predicted?'' The senators' statement may be applicable today. I have also handed out the RBC Financial Group's community report and CIBC's black and white 2001 public accountability report.

First, I wish to put my ideas in the proper perspective. I am a capitalist. I am pro-business. I accept Peter F. Drucker's principle that management's first responsibility to society is to earn a profit, and then to grow the business. I am neither against earning record profits nor bank mergers. However, I do believe responsible capitalism is the only way to grow long-term shareholder value in 21st century. I adhere to Druckers' advice that senior management has the responsibility to take actions that promote the common good so as to offset the deep-seated hostilities against profits. That is what an effective public accountability statement can do.

Just as the merging banks' financial statements will be of interest to shareholders and investors, the public accountability statements will be of interest to stakeholders and the public. Canada's financial institutions with equity of over $1 billion must for the first time issue an annual public accountability statement. The MacKay task force report foresaw public accountability statements as a means to provide a basis for constructive and focused dialogue on how financial institutions can serve Canadians better.

This morning I am asking the Standing Senate Committee on Banking, Trade and Commerce to direct future bank merger proponents to include an effective public accountability statement in their public interest impact assessment that will answer the question: How will the public interest be better served? An effective public accountability statement will have comparable, progressive and reliable information.

The core content disclosures mandated by the March 21, 2002 Public Accountability Statement Regulations is a bank merger public interest issue. Financial institutions that must issue public accountability statements are to describe their contributions and the contributions of their affiliates to the Canadian economy and society.

The March 21, 2002 Public Accountability Statement Regulations call for 12 core disclosures: a listing of affiliates who operate in Canada, and details on their goals and participation in community where community development means social, cultural, economic or environmental enrichment of a community. They also ask for six specific economic contributions and four or five corporate employee social contributions.

The problem is this: The six economic and the five social core disclosures that were selected by the MacKay task force over four years ago will now be seen by the stakeholders and the public as being limited in scope in contrast to the growing body generally accepted sustainability reporting practices.

Sustainability reporting, also called ``triple bottom line reporting,'' encompasses the economic, environmental and social aspects of an organization's performance. An effective public accountability statement should also report on the policy intentions of the law. VanCity's 2001 accountability report does this.

There are seven Canadian companies that have voluntarily issued what is called the global reporting initiative, GRI, sustainability reporting guidelines reports. Two of these companies are from British Columbia: VanCity and B.C. Hydro. Two are from Alberta: TransAlta and Suncor Energy. There are two mining companies from Ontario: Inco and Cominco. From Quebec, there is Hydro-Quebec. In the Sudan, Talisman Energy issued corporate social reports in compliance with the international code of business for Canadian business.

Two federal financial institutions pre-empted the banking reform legislation and issued public accountability statements for their October 31, 2001 fiscal year: RBC Financial Group issued its third annual community report, and CIBC issued its first public accountability statement. VanCity also issued its 2001 accountability report. This is VanCity's third bi-annual social report and the second time that it has voluntarily reported on the core contents of the public accountability statements.

At the end of August, while in Johannesburg at the World Summit on Sustainability Development, Prime Minister Chrétien made a second important announcement that passed without any public comment. Prime Minister Chrétien referred to the GRI guidelines when he remarked that the time had come for corporation to report to the community on the economic, environmental and social impacts of their operations. That is what public accountability statements must do.

Table 1 is a snapshot of sustainability or triple bottom line reporting. It reports on the environment, as well as on economic and social performance. In this case, the GRI has 96 performance indicators. The public accountability statement regulations have 12 and they look at the economic output.

I ask you to look at this because there is more to social performance indicators than how much corporations give to charities. You will notice that under the social performance heading, items such as employee retention and job satisfaction are studied. VanCity assesses this on their own employees. They talk about human rights and suppliers. In this situation, they even talk about social issues that the service may impact. These are the same social issues that banks are looking at when they are asked to provide service for seniors and the disabled. It is quite comprehensive. Under the heading of economics, they ask if there are any major economic issues that come up with the product. This sustainability reporting is more comprehensive than what the regulations require. In the case of bank mergers, there is concern about loans to small business.

I will now turn to the state of the art of public accountability statements. Four years ago Senator Stewart talked about ``boasting statements.'' While they do deserve credit for being the first, RBC Financial Group's 2001 community report and CIBC's public accountability statements were not comparable, progressive, reliable reports. VanCity's report was.

The MacKay task force allowed that the format and content of annual statements should be left to the discretion of the individual institutions. While this may avoid imposing a restrictive, ``one size fits all'' public accountability statement reporting framework, in practice the lack of a common reporting framework will make economic and social performance comparability between financial institutions very difficult. It will also cloud the public's comprehension of the merger's proponents' public interest impact assessment exercise.

For instance, RBC and CIBC did not compare their current year's performance with prior years. RBC presented viable economic data on both its Canadian and worldwide operations, where CIBC reported only on its Canadian operations. The RBC reported its world employment at 67,000 people and reported Canadian corporate taxes at $2.2 billion as a lump sum. In this situation, the public accountability statement regulations asked that the employees be broken down between full-time and part-time. They also asked that taxes be broken down between federal and provincial. CIBC did that. They showed their employees by province and by territory and showed both their federal and provincial taxes. They talked about the amount of employee taxes they paid. It was a more informative document.

I would like to bring your attention to the VanCity report. If you look at page 14, you will see that VanCity has given key performance indicators for the last six years. This is an excellent sustainability reporting practice. You will also notice that they have an indication of where you will find more information in the report. This makes the report more transparent.

They now report on their economic performance. In past years, they did not. I must admit that I sent them a criticism, in which I said they should report on the triple bottom line. They never replied, but this year they have reported it.

On page 15 are a series of performance targets that show what they have looked at, and in what years they said they were going to do something, and where they are in relation to those targets. It is a performance statement, not a boasting statement. On page 16, there is a list of their future targets and an action plan. To VanCity's credit, they might be in the only organization in the world that has taken Drucker literally; they have made their senior management responsible to take action. They have actually named senior executives who are responsible to take these actions. I do not know of any other company that has done this in their annual reports.

The Chairman: Is this really necessary? It takes up a lot of time, effort and money. I assume that it is meant for more esoteric investors. The average person would not read this.

Mr. Downing: No, the average person may not read it.

The Chairman: You are up to 20 minutes on your time, so if you could get on with it a bit and give the senators a chance to question you.

Mr. Downing: What I am saying is that VanCity produced a progressive report that is in the public interest.

They made statements that they did not back up. They changed their reporting format, which was equivalent to changing your income statement from one year to another, and did not report on the effects. The public interest issue at hand is that the reporting integrity of the public accountability disclosures will become as important to the stakeholders and the public as when merger proponents present their public interest impact assessment. If the public does not believe this assessment then there are some problems.

VanCity's 2001 report will be the reporting standard by which primary and strategic stakeholders will assess the effectiveness of other accountability statements. Public interest expectations will not be met if financial institutions limit their disclosures to the regulations mandatory core content. In effect, the PSA reporting practices can be prolonged by a poor public impact assessment.

I am asking that progressive, reliable accountability statements should be an integral part of the bank merger public interest impact assessment and post-merger reporting practices. As recommended by the MacKay task force, the Minister of Finance should be able to enforce bank mergers promised undertakings.

An effective annual public accountability statement will give Canada's financial institutions a competitive licence to operate both in Canada and international markets.

Senator Meighen: I understand what you are advocating. We are trying to determine whether public interest is clear, or whether greater clarity can be brought to the matter. You suggested that greater detail in terms of the public interest impact assessment based on annual enhanced accountability statements should be incorporated. Is there anything else that you could suggest to us that would bring greater clarity to the question of public interest?

Mr. Downing: I define public interest as the common good for Canadians.

Senator Meighen: That is a succinct definition, and I wonder if one can do much better. It seems to me a bit like trying to define beauty; it is subjective. Obviously what is in the best interests of Canadians will vary from year to year and decade to decade. I find myself struggling with the challenge of trying to put down a definition that would be comprehensive and timeless. I am not having much success.

Mr. Downing: To determine the common good we look at the impact of the environment, the economy and society. I agree that it does change over time. However, it is a starting point and a framework to work on, as opposed to having the five banks produce five different type of statements to which there is no commonality.

Senator Meighen: I take your point. Do you think that generally speaking bank mergers are in the best interests of Canada and Canadians, or does it depend on the merger at hand?

Mr. Downing: It depends on the merger at hand. I am not against mergers, but I do not necessarily think it is the best way to go. If the marketplace can handle a merger, I do not see why they should be restricted on the basis that the other conditions are met. If they meet all the conditions, I am not against it.

Senator Meighen: We have had evidence from a number of witnesses as to the enhanced efficiencies that have been brought about by bank mergers. However, that leads to wondering how many mergers there should be. What if you get down to one bank. Presumably, that would be inherently inefficient. Mr. Greenwood suggested that a minimum of three banks would be required in order to preserve the efficiency of the marketplace.

Mr. Downing: That is an interesting way of looking at it. I am not personally convinced that mergers create new efficiencies, certainly not from what I have read or heard about. They may want to do it depending on the marketplace. However, I do not think that it would be to the common good of Canadians to get down to one bank.

Senator Meighen: Do you think that it is important for Canada to have a bank that is big enough to participate in global markets? I mean a bank that is in the top 20.

Mr. Downing: That would be nice to have. Does it mean that they would have a better hold in Southeast Asia? I do not think so. It will definitely help them in the States, but I do not see it helping anywhere else around the globe.

Senator Meighen: What about Canadian companies operating in those areas?

Mr. Downing: It might help to a point, but there are many American and other banks out there. They have to play catch-up if they go there. By sticking with the States, they may have a better chance for growth. I do not see them competing successfully.

Senator Meighen: They can compete outside Canada if they build up. In their view, there is very little room to grow in Canada.

Mr. Downing: I agree with their strategy. Whether they would be successful is another issue.

Senator Meighen: VanCity is an organization that has come to our attention in a favourable way a number of times. One of the things that we on the Banking Committee have noticed over the years is that Canada is distinguished by the fact that it has a weak second and third tier banking financial system. Do you think that anything can be done to help encourage the growth of credit unions, community banks, regional banks, and bank facilities in grocery stores. In other words, can you think of any alternatives to chartered bank branches?

Mr. Downing: At the time the MacKay report was released, I thought that we would see a great proliferation of credit unions.

Senator Meighen: Why has had that not happened?

Mr. Downing: The gentlemen from CS CO-OP might speak to that. Instead of more credit unions we have more ATMs in grocery stores. I do not know if that has cut out the CS CO-OP. Perhaps they are not aggressive in their marketing. Perhaps they do not go out and go after the business.

Senator Setlakwe: Given that we are not opposed to bank mergers, most of the CEOs who came before us have stated an interest in merging in order to expand into the United States. The Scotiabank is already involved in quite a few countries.

Since some Canadian banks have already expanded successfully on their own in the United States, are bank mergers the only way for them to go now?

Mr. Downing: I am puzzled with what you are saying. I am not against bank mergers. I think that growing on your own is a more constructive way of going about it. They have not been held back in any way. By bulking up they end up having maybe better security shares, but it has not stopped them. Other than this year, they have been making record profits. In some cases, they are making more money than ever from the States. I do not see that a bank merger is the only answer to growing in the U.S.

Senator Setlakwe: I wonder to what extent Canadian profits are going to be converted to American losses when I see certain reports such as the one that has come out this morning from the CIBC.

Mr. Downing: I agree with you 100 per cent. There is a possibility Canadian banks that go to the U.S. will not be successful and that the Canadian public will pay for the losses.

Senator Mahovlich: Do shareholders represent the public at all or do they just consider the bottom line?

Mr. Downing: I do not know the figures for the banks, but I guess that perhaps 60 per cent to 70 per cent of their banks are owned by pension funds. The average person does not know what their pension fund owns.

When I look at shareholders, I look at pension funds because they are the ones with the most votes. The person on the street has very little power. To me, the shareholders are the pension funds.

Senator Mahovlich: I recall years the White Rose corporation. It was Canadian. I think that it was the only Canadian company that we had in the oil business at the time.

Shell Oil came in and made a presentation. The president of White Rose at the time turned Shell down but when he put the offer to the shareholders they decided to sell it.

White Rose was a great Canadian company. I do not know what the public interest was at the time, but I think they would have wanted to keep it. We have to be careful with regard to what shareholders think and do.

Mr. Downing: The shareholders have the influence through the pension funds. If enough people say to their pension funds that they want a certain type of investment, then it will happen. I do not think civil servants have much influence on their pension fund.

If you want to keep it Canadian, which I am not against, you have to get to the pension funds that have the influence and that influence is found in the board of directors.

I realize that the CEOs want mergers. When they come here and ask to have mergers it is with the approval of their board of directors. There is the other level.

Senator Kelleher: Minister Manley has asked this committee to assist him with a definition for the meaning of ``public interest.'' Most senior bank executives who have appeared before us have agreed with the need for a definition and have tried to suggest what that should be.

However, Mr. Clark, the President of TD feels that the present wording is clear enough. I suppose he has a concern that the banks could be burdened with an entire new overlay of regulations or criteria, which will make it more difficult for the banks to operate. He feels the banks are already regulated enough, and he would not like to see more heaped on them.

Could we have your opinion about that, sir?

Mr. Downing: These bank merger situations, to the best of my knowledge, will give them a $1 billion dollars common cost savings. They pick up $1 billion right off the bat and then they can grow the business. I am not too sympathetic if you have to work hard to get that $1 billion dollars. That is what a merger will do. If you have to work, so what? It is hard to earn a $1 billion dollars, and it should be.

Senator Kelleher: I have always found it difficult.

Your answer does not surprise me given your presentation this morning.

The Chairman: You said that mergers were not the best way to grow. I do not know whether you are right or you are wrong.

Does it strike you that we have a fine financial services industry in Canada? Most economic pundits think it is one of the best in the world.

Do you think it would make sense to encourage the banks to grow as exponentially as possible and bring back more profits and jobs to Canada?

Mr. Downing: They are efficient in what they do. There is no doubt about that.

They could go to the States and to a certain point be successful, but it is still a new ball game. It is easier to be successful in Canada than it is in the United States.

The Chairman: You do not just get the good seal of approval because you are merging. Everything depends on two things: an idea and a vision and somebody to execute them. Sometimes the execution does not work, but that is not our problem here. We have to decide or make a comment on whether we think the vision is the right idea.

As Senator Setlakwe points out, the CIBC failed in one of their ventures in the United States, but that does not mean that all other banks should not try to do the same thing.

Ms. Brisebois: You have to take certain risks. We are in business to take risks.

The Chairman: Is that not what business is about?

Mr. Downing: That is correct. You take risks. The statistics show that in the majority of cases, mergers have not been successful. Fifty-eight to 60 per cent of mergers do not create new value for the shareholder. Perhaps the other 40 per cent have been very successful.

Fifty-eight to 60 per cent of mergers do not create new value, or added value. They have not been that successful for the shareholders.

The Chairman: You mean mergers generally?

Mr. Downing: That is correct. They are not necessarily a good thing.

The Chairman: Where on earth did you come up with that number?

Mr. Downing: I can get it for you. It has been around for a couple years now. Even at the time of the MacKay report this information was out about bank mergers in the U.S.

The Chairman: You are speaking only of bank mergers?

Mr. Downing: I am speaking mergers in general. If you look at the mergers of Nortel and JDS, you will see that they have not been successful.

The Chairman: You are referring to the telecom business, which is a sad story, but it is not because of mergers.

Senator Mahovlich: Their failure has been due is some part to mergers.

The Chairman: I would argue that statement.

Senator Meighen: Mr. Downing has some statistics.

The Chairman: If you have statistics on please send them to the clerk of the committee. We would like to look at them. There are some fantastic institutions in the United States that got to where they are by merging. If you look at the top 20 banks in the world, you probably will not recognize most of the names.

Mr. Downing: I will happy to find you the information.

The Chairman: We would appreciate that.

Senator Setlakwe: You are saying that a company can make it big as easily by merging as they can by going it alone?

Mr. Downing: That is correct. Given the option, I would go it alone. It does not mean that other people would do the same. For all I know CLARICA and Sun Life may be a successful merger.

The Chairman: Royal Bank went from number 20 to number 55. I do not know if that is good or bad for Canada. I suspect that it is bad. We are having hearings to try to determine that.

Mr. Downing: I hope I have added to your deliberations.

The Chairman: Our next witnesses are from the Retail Council of Canada.

Ms. Diane J. Brisebois, President and Chief Executive Officer, Retail Council of Canada: The Retail Council of Canada, RCC, holds the position it has expressed in the past; we are not opposed to mergers. Rather, the relevant test is pragmatic, that is, the impact a merger would have on competition in the provision of financial services and on the quality and availability of those services to Canadians.

Before I continue with my remarks, I want to note that we are in the presence of a great merchant from Thetford Mines, Senator Setlakwe. The bustling downtown of Thetford Mines has incredibly good retail sales. It is a bit of a plug, but I thought I would give it any way.

The Chairman: Ms. Brisebois, I have to tell you that these entire hearings have centred around Thetford Mines and we have to put a stop to it. As a matter of fact, the honourable senator has asked our committee to make it a tax-free zone.

Ms. Brisebois: We would support such a recommendation, Mr. Chairman.

We fully endorse the objective of ensuring a strong and competitive financial industry in Canada, and for Canada. It means having a financial industry that is continually aligned with the needs of all communities, to have convenient local access to financial services at competitive prices.

In our submission on Bill C-8, we recommended that the proposed consultation on bank mergers be specifically extended to include consultation on any remedies negotiated by merger participants and the Competition Bureau. We will be pleased to provide the committee with some examples relating to this issue at the end of our presentation. We believe it is a very important point to make.

We are an industry trade association. We were established in 1963. We represent 9,000 members across the country, in all formats, including national, regional, department stores, discount stores, mass merchants, specialty chains, independent stores and on-line merchants.

Our members account for more than two-thirds of Canada's total general merchandise retail sales. About 90 per cent of our members are small independent retailers who own one or two stores. RCC serves its members through its main office in Toronto. We also have offices in Vancouver and affiliate offices in Montreal, Winnipeg and Edmonton.

The association regularly consults with its members on the critical issues relating to financial services and the payment system. In fact, when we survey our members, the issue of bank mergers and payment systems are always in the top three issues of concern.

RCC advocates legislation and policies that facilitate the availability of competitively priced financial services that retailers rely upon in their day-to-day operations.

In 2001, the industry accounted for 5.4 per cent of Gross Domestic Product, GDP, and provided 1.8 million jobs or 12 per cent of employment. The total value of retail sales was $290 billion. The sales of general merchandise, which excludes auto and food, were $105 billion.

Retail is the third largest industry in Canada, comprising over 215,000 establishments, approximately 10 per cent of this country's business establishments. Retail is one of the most regionally dispersed industry sectors, with businesses located in virtually every community, including the most remote regions of the country.

One of the dominant characteristics of the retail sector is the small size of most of the establishments. Some 46 per cent of retail establishments have four or fewer employees. Seventy per cent have fewer than 10 employees and most of the smaller establishments are owner-operated.

RCC's extensive work on financial institution and financial services issues has deepened our recognition of the diversity and complexity of retailers' needs. All of our retailers have one common need; access to high quality, competitively priced services. In this regard, RCC supports the need for consultation on potential mergers among Canadian banks. As stated earlier, RCC is not opposed in principle to mergers.

This submission will discuss two areas in which we believe consultation should be extensive and supported with substantial in-depth research. The two areas in question are: loans to small businesses and the availability of local banking services.

The availability of loans to small businesses is an ongoing concern and one on the top of the list for all of our retailers. RCC receives numerous calls from its members who state that banks' lending decisions are unaccommodating and often based on policies that rely far too extensively on third-party credit ratings that may not be accurate or up-to- date.

Members tell us their local bank branches have less and less influence on money lending decisions. They tell us that loan decisions often do not show an understanding of either local realities or new opportunities. We recommend that the consultations should explicitly include the availability of loans to small businesses, including timeliness and the criteria of financial institutions' lending decisions. Legitimate concerns on this matter should not be underestimated. They have read media reports that have highlighted the degree of risk financial institutions have taken to extend their markets. The sizes of losses that have been incurred are difficult for most of our retailers to understand. Our small and mid-size members understandably become angry when, as a 10-year profitable bank client, they are told that they represent too great a risk for a loan.

It is even worse to be told by a regional banking centre that funds have been denied because the financial institution has filled its quota for the type of financing sought by the retailer. The committee will have to consider the impact that mergers would have on the balance of lending priorities for the new, larger, financial institutions and whether they would be more or less willing to finance and to extend loans to small and medium-sized retailers.

Our retailers are dependant on banking institutions in each community in Canada. Retailers are regular and heavy users of local banking services. These services are not discretionary services for retailers; they are essential to the day- to-day operation of a retail business and fundamental components in the Canadian financial system. The large banks grew from providing basic banking services in local communities and the markets were substantially protected for them.

Retailers correctly believe that their contribution as clients to the growth of Canada's banks entitles them to demand that these banks sustain their obligation to serve the communities that helped build them. Financial services must be available locally and at convenient hours. It would be impractical and very detrimental to consumers and the Canadian economy if it became increasingly necessary for small owner-operated retailers to close their stores in order to travel a considerable distance to obtain services, which indeed is the case today in some areas of the country.

This challenge would be particularly severe for retailers in smaller communities that lose choices of a local branch, but would also impact retailers in larger centres. In smaller communities the loss of a local branch would force retailers to travel substantial distances for financial services that can only be done face-to-face.

As well as the burden of extra cost and time involved in travel, there may be additional personal risk involved in transporting cash receipts to a distant branch. Even within urban areas the loss of a branch in a local community can substantially increase the time required to visit a branch for service, even though the physical distance may not be great. Coupled with current bank-imposed restrictions on hours of service, this loss of a local branch could damage an entrepreneur's ability to operate his or her store.

This does not only affect independent merchants. The manager of a chain store faces similar requirements to carry out a range of transactions with the local branch and would suffer similar time costs and risk pressures. Retailers require timely access to credit facilities that understand the circumstances and needs in local markets. They need the opportunity to sit with their banker in person to negotiate terms and conditions for services in the context of local realities.

Retailers require the services of a local financial institution branch to promptly deposit cash and cheques to maintain sufficient deposit balances to pay expenses. They require convenient access to night depository facilities to make deposits when banks are closed.

A sample list of the financial services used by retailers is included in the table attached to this report. The list includes the frequency with which retailers use each service, whether the service can be accessed remotely, or whether it requires in-branch face-to-face interaction. Banks have made progress in implementing Internet banking capabilities, however, such services are typically an additional cost to the retailer and they do not displace the need for personal interaction.

We have listed the products and services required by retailers of all sizes, their frequency of use, and the access to the service to give you an idea of the relationship our retailers have with their local branch and their local financial institution.

The table shows that retailers have a frequent and ongoing need to visit their branch. Some of the important services, like depositing cash and cheques, and obtaining change can require frequent visits to the branch. This stems from the nature of the retail business that involves a high volume of payment transaction.

While a large percentage of payment transactions are electronic, the receipts from cash sales remain critical to small retailers in managing cash flow. Almost all services require some form of personal interaction with the bank or its processing entities to negotiate and start the service and to make subsequent changes to the service agreement, even if the retailer has a long-standing relationship with the institution.

A merchant is dependant on his or her local branch and financial institution. The chart itself shows how deeply a financial institution's services are integrated into the business of a retailer.

Our retailers are not opposed to mergers, but they feel it is extremely important that two issues be addressed before mergers are approved: how we deal with loans to small businesses, and the access of services in the communities they serve.

We hope that this position is of assistance and we look forward to answering any of your questions.

Senator Meighen: How we can best determine what communities should have a branch of a chartered bank? There must be some communities that are just too small to warrant a bank branch. Where do you draw the line if my assumption was correct?

Mr. Ken J. Morrison, Banking and Payments Services Consultant, Retail Council of Canada: I was going to start by saying Thetford Mines, but I probably should not.

Senator Meighen: That is a large and flourishing community. I am referring to smaller places.

Mr. Morrison: That is a difficult question. One has to consider the cost of delivering services to those communities. We believe that the banks should go into those communities and look at what is happening. They should consider how their institution might enable more success within that community now, and in the future. We believe they should follow the old banking model in this regard. Years ago, bankers lived in the communities, and saw what was happening and were aware of what was going on.

Senator Meighen: Suppose what they see is not favourable. Maybe the community is not as prosperous as it once was, and there is no guarantee that situation will change.

Ms. Brisebois: I know that I speak on behalf of the small-town retailers when I say that they are not expecting to receive a guarantee that there would be branches in every community. However, we need a set of guidelines to help the stakeholders agree what minimum service is needed. This is not a black or white answer. Each community is different and their needs are different. Some of the communities are commercial while others are residential and their banking needs are very different from one another.

I would look at the demographics and the concentration of business in that community. Then I would look at the number of bank branches that are in the community now and compare that to the number that would be there after a merger. I would then look for a best-case scenario.

It is a difficult question to answer and it is going to be a challenge for us to answer it efficiently.

Senator Meighen: I read in your submission you want a greater in-depth public consultation in the affected areas. Is this analysis not required in a bank-merger scenario, either in discussions with the Competition Bureau or in the PIIA according to the guidelines of the Department of Finance? Do they not have to discuss these things?

Ms. Brisebois: We believe it is important for the bureau to discuss and declare those issues. Mr. Morrison can give us an example of TD Canada Trust and the information that was not provided following that merger and the effect it had on our sector. We believe there must be full disclosure on why the merger was accepted, the impact it will have, and the decisions taken around it.

Mr. Morrison: The example deals with the opportunity to consult on remedies that are negotiated by the Competition Bureau between merging parties. In the specific example of TD and Canada Trust, one of the requirements of that merger was that Canada Trust and TD Bank together sell a portion of their credit card business, particularly the MasterCard business, which they did to a large processing entity.

On the surface, that company looked like an organization that could step in and do what the Competition Bureau had assumed they would be able to do. However, there was no opportunity for the retail community. This dealt with accepting credit card transactions from the retail stores. There was no opportunity for the retailers to question that organization to determine which services they would keep in Canada. The organization was not headquartered in Canada.

Ms. Brisebois: The retail stores did not have opportunity to ask if that organization could provide the services provided by both TD and Canada Trust. Indeed, they were not able to provide those services for at least 30 days.

We maintain that it is not good enough that a decision is made and discussions undertaken by the bureau. All the affected stakeholders need to be involved in some of the discussions, and the discussions need to be more public.

In this case there was a negative impact on the industry. We no longer are doing business with this third party because of the problems that our retailers faced with the lack of services and the lack of support provided by them.

We believe that that issue could have been resolved if it had been discussed at the time.

Senator Meighen: I am surprised that the Competition Bureau would not have asked them their intentions and whether they could provide the same service. Let us assume they were asked, and they guaranteed that they could do everything the former credit card company had done.

Ms. Brisebois: That is why we mentioned on that an in-depth market research is needed to ensure that whomever provides the new service is indeed capable of doing so.

Senator Meighen: Were they incapable or did they refuse? Were they inherently incapable of providing that service.

Mr. Morrison: They were capable. An organization that takes on a piece of business in Canada does not necessarily grow in the manner expected. The economies of scale are not necessarily there. Then they start to rationalize the decision process.

Senator Meighen: How do we prevent that, Mr. Morrison?

Mr. Morrison: One of the requirements would be to have well documented, well-entrenched commitments and any remedies negotiated as part of that process. It is not good enough for me as an organization to say, ``I commit to provide services in 10 communities I am buying branches in. I commit to provide the same level of services in a MasterCard or other credit card area.'' I must have something specific for an extended period of time to ensure that the service will be there.

The Chairman: I do not understand. If a retailer accepts MasterCard, is it not just a matter of flicking the card through the machine? Perhaps you could find out what went wrong? Do they not want to do business?

Ms. Brisebois: It is a bit more complex than that.

Mr. Morrison: If I go into a store and use my credit, they do put it through their machine. An organization is needed to take that transaction and pass it off to the bank or financial institution that issued the card to you. It makes sure that the funds are there and then deposits that transaction into the retailers' bank account.

Senator Meighen: Some banking people have told us that applicants for small business loans vary in their risk profile. Some are riskier than others. The chartered banks seem to have a concern that it is unwise from a public relations point of view to charge more than 3 per cent over prime. Would your members accept more loans with some being at higher rates or a smaller number of loans at lower rates? Is there an appetite for loans at 5 per cent or 6 per cent over prime?

Ms. Brisebois: The nature of loans is in itself a risk, so I do not think we need to debate that. However, I really cannot answer that question. We can provide you with information and data in regards to the relationship between retailers and financial institutions and some of the problems they have had in the past.

Does that have anything to do with the cost or frequency of the loans? I cannot answer that.

However, there is no question that without adding any more substance to this it is indeed something that comes up every time there is a discussion. There is frustration. It could be lack of information or lack of understanding, but certainly it is an issue that is top of mind for all of our small businesses. It is the number one issue.

Senator Meighen: The banks tell us that the number of electronic transactions is increasing. That is good, because people then can do some banking business without having to go to the branch. I am surprised with the fees for electronic transfers.

Surely, the banks have given you some justification for the size of the fees. What would that be? I would have thought that it would cut fees down because it eliminates the human factor.

Ms. Brisebois: I suspect most of us did.

Senator Meighen: Have you been given any explanation?

Mr. Morrison: No. Indeed, senator, they fees started out low, but they did not continue to stay low.

Ms. Brisebois: No, the rate of fees goes against any formula we have seen in business where usually there are economies of scale. It seems that as more transactions are performed, the costs are not going down, but are going up.

It is an interesting formula that would get a lot of retailers in trouble if they ran their business that way, but it does work for the banks.

If we track the fees that are paid by merchants to financial institutions in regards to all sorts of services, not only electronic services, we find that the fees have not gone down. We discussed that with quite a bit of passion on a regular basis with financial institutions.

Senator Meighen: Do your members have a position on the question of alternatives to the large chartered banks? Is there an appetite to see the second tier of banking, such as credit unions, regional banks and Schedule B banks, grow?

We have all been a little surprised that the second tier banking has not grown more than it has. It has been an ongoing question in this country as to why second and third tier have not grown much?

Mr. Morrison: We continue to be hopeful that we will see the reality of some growth. I have read that there is such an appetite. It is difficult for a new organization to penetrate into where there has been such a large share of business among a small number of players for so long.

The relationship between a retailer and a financial institution often becomes entrenched making it difficult for the retailer to set up a new relationship with a credit union. If the bank relocates he may find it necessary to travel to a different town rather than switch to a different institution.

Senator Meighen: It may be difficult, but it would depend to what extent he or she is committed to that other financial institutions. They may get angry from time to time, but if they are a satisfied, they will not switch.

Mr. Morrison: If they are not satisfied, they will switch.

The other question that the retailer must ask is: For what length of time is the new institution going to stay in the community? Can they make that switch? It is not just today, but what it will be like tomorrow.

The Chairman: I get the impression that the big banks are not nice to small businesses. If the mergers take place, do you think they will be any better or worse?

Ms. Brisebois: It really depends on the mergers and who is merging with whom. It depends on how successful this committee and future committees are at setting guidelines and conditions for those mergers. There are too many ``ifs.'' We are not opposed to bank mergers. However, we are more concerned with the quality of the service, competitiveness and accessibility of the service. If those three issues are guaranteed, I suspect we would have no problems with the mergers. We will continue to have a love-hate relationship on occasion with our financial institutions, but it is in the best interests of both parties to try to work together and that is what we are trying to do.

Senator Setlakwe: I have been active in your community for some years, and I could go on until late this afternoon with questions about the banking system and the retail sector. I agree with everything you have said because I have lived it. The concern is not whether banks are going to merge, but to what extent the banks change before the merger, and to what extent will they change after the merger. That is the concern of the retail community.

You mentioned a personal relationship between a bank manager and the retail customer. I see that the relationship between the two has deteriorated because bank managers have either been eliminated, or the banks have merged with other cities and the services are no longer as personable as they could be or should be. That is an important aspect of the retail business that influences all kinds of retailers.

When you talk of the services that are going to be available if mergers occur, I think we you should also talk about what services are available at the moment. I see the present services as being deficient.

In the province of Quebec there are many retail institutions that are controlled directly or indirectly by the Government of Quebec. In many instances, this is because the regular financial institutions neither available nor interested in financing that kind of a business. I suspect that the banks are not interested in realizing a 3 per cent return on their investment when the CEO has indicated that his shareholders expect an 18 per cent to 20 per cent return on investment. The government provides the loans and it does not care how much they invest or how much is lost or won, because the government does not know what it is doing. The losses are sometimes tremendous, and they should not be doing the financing. The banks should be doing the financing. I would like your views on that.

Ms. Brisebois: I would prefer not to comment on what the Government of Quebec has decided to do in its wisdom to support or not support financial services. However, I will agree with you in regards to the challenges facing retailers and how they are perceived in regards to risk for loans.

The most important point that you made is that the biggest challenge for many of the retailers is when a loan decision is made not by a local branch manager, but by a manager that might be located 300 kilometres away. If the regional branch manager in Calgary is making a decision on a loan in Lethbridge he will have little sense of the reality of the environment and the kind of business this person is running. This situation creates an enormous number of challenges.

The current situation is not perfect; however, it is not to the point where we should sound the alarm. We must insure that the bank mergers do not impede competition but add competition to the marketplace.

I believe, and I suspect most retailers believe, that the more competition there is in the marketplace, the more available services will be a both the local and regional levels. There is more than one answer to that challenge in regards to how retail businesses perceive banking and vice versa. Certainly a competitive environment would help retail businesses across the country.

Senator Setlakwe: Let me put it to you this way: Banks merge and they expand. It takes three to five years for them to get their computer system functioning properly. Their interest is obviously on the new business they are trying to create. To what extent will they be able to maintain the level of accessibility that they now have if they do that?

Ms. Brisebois: That is assuming that mergers would not allow other competitors to fill the void. That is then that an important question: How do we encourage other financial groups, financial institutions and other corporations to become involved in the marketplace to fill the gap that might exist after a merger, assuming there would be a gap? It comes back to the issue of competition, the issue of foreign banks, the issue of who would pick up those branches that might be discarded if there is a merger and it is assumed that those branches are not productive. Those are all the issues that need to be addressed.

If those issues are addressed properly, I do believe that chances are the services will remain competitive and might, in fact, improve.

Senator Setlakwe: From what we have heard, the only ones who would be new players in the field are credit unions who would be buying discarded branches from chartered regular banks and possibly — the caisses populaires in Quebec is expanding their business.

Foreign banks have come and gone in this country. The largest foreign bank right now is HSBC. HSBC takes the traditional view of expanding into regional and metropolitan areas. I commend that, but are they the only player? Will there be others? I do not know. It certainly does not look like it at the moment. HSBC has not merged with any other bank. Their home base is in Great Britain and they have handled their expansion into other countries one by one. I think that way is the proper way to proceed.

We have a Canadian bank that is doing something similar to HSBC. Scotiabank is very much involved in the Philippines, for example, but has not merged with a Philippine bank. They may have something to do with local banks, but they are keeping their money, investment and people. That is not what is happening in Canada and that is what worries me.

Senator Kelleher: You have named a number of concerns of many of the retailers. What is the best way to do handle those concerns?

There are really three sources that come into play when there is a proposed merger. One is contained within the Competition Bureau; another is contained within the Department of Finance. The third is rather nebulous and comes into play when the after the first two are satisfied. I am referring to the aspect of public interest.

Mr. Clark, the new president of TD Canada Trust, thinks there is enough clarity in the present definition of public interest. He is concerned that new regulations and criteria could be piled on to them in a merger process, and that everyone will get caught up in more red tape than is necessary.

Where do you think your concerns should be placed? Should they be placed under the Competition Bureau, under the Department of Finance, or should they be included in the public interest? You people can certainly appreciate the burdensome red tape that your members have to go through. I am sure you are not wild about seeing more red tape added to the process.

I would be interested to know where you think your concerns should come into play. Where should they be placed so that they are brought to everybody's attention before a decision is made?

Ms. Brisebois: I suspect they should be placed in all three. There are discussions that need to take place with the different departments that are looking at mergers. There are ongoing discussions with the Competition Bureau about the availability of services and the competitive nature of the market.

Our members want to find a way to ensure that stakeholders and committees involved in reviewing the bank mergers are aware of the community's concerns. Our members want to know that they are open to receive suggestions on how we might address those concerns.

Our members are extremely sensitive to red tape. I doubt that they would support any mechanism that would make it more difficult for financial institutions to do business in this country. However, a fundamental concern is the issue of availability of competitively-priced services. That issue needs to be addressed. Is that addressed through these hearings? Is it addressed by working with the Competition Bureau or the Department of Finance? My answer is that it would be all of the above.

The most important thing that we are trying to achieve on behalf of our members is that their needs and concerns are addressed in a way that does not become burdensome to either party. Our goal is to ensure competitiveness in the marketplace.

I am not trying to be general in the way I answer my questions. However, I do think that this is a complex situation. This is the first time we have been faced with this issue. I think it is frightening situation for many people because they have no idea what the world will look like if and when the mergers take place.

I have read some of the other submissions and see that most echo our concerns about the availability and quality of services, and the competitiveness of the marketplace. We all realize that this country has a huge retail economy that creates more new jobs than any other sector. We must ensure that the retail sector is comfortable, secure and provided with the services and support they require to grow and prosper.

Senator Kelleher: You mentioned the problems that were created by the merger of Canada Trust and TD. However, you do not go into it very deeply in your brief.

Ms. Brisebois: That merger is discussed on page 4 of the brief. We were clear about consultations with the Bureau in regard to any of the decisions made following a merger. Mr. Morrison gave the good example of merchant credit card services being sold to a third party without the industry knowing or understanding the impact it would have. Those are the areas where I think we can make a difference. We recommend that the affected sectors be consulted if services are transferred to other organizations. We can provide information on how the businesses run now, and the pros and cons of how that might change. That is an important part of the consultation.

Senator Kelleher: What Mr. Morrison said is not in the brief. The brief does not explain the problems with the credit card companies. Would you please send us a supplement outlining these issues? The written word has greater impact with government bureaucrats and specific examples might bring about the change you desire.

The Chairman: Thank you. I am pleased to welcome our next witness from the Consumers' Association of Canada.

Mr. Robert R. Kerton, Dean, Faculty of Arts, University of Waterloo, Consumers' Association of Canada: The Consumers' Association of Canada is a 52-year old not-for-profit organization that has units in every province and territory. CAC was the primary public interest group that urged the passage of the Competition Act.

My expertise is on the consumer end of the banking business more than it is on the other aspects of the business. I helped supervise some of the background material for the MacKay task force and have supervised two volumes published on research and consumer interest.

Are Canadian banks near their optimal size right now? Are they are doing well? Are they serving their customers reasonably well?

To find data or evidence that speaks to this issue we can look to three places. First, look at the big mergers that have occurred. I suggest the 1998 merger of FleetBoston That merger brought American banks together and created the seventh largest bank in the world. The stock value has gone straight downhill ever since the merger because of cultural and strategic problems. That merger has not been successful.

We can look at the example of the Bank Tokyo Mitsubishi. Where is that bank today? It is in the tank. It is not true that size helped them much.

The third place to look is at the independent economic studies that have been done on bank economies of scale, et cetera. Independent experts have collected a mass of evidence and most of that evidence is compelling.

There is often a strong case for merging small banks. However, once they have become very large, which is the case with our Canadian banks, we have to ask: Are they performing better as a result of the merger? We have to be careful that instead of creating a better system we are creating a dinosaur and we all know that the dinosaurs did not have a happy outcome.

I believe that there are two viable expansion strategies. Plan A strives to achieve an effective customer-based, high- quality service that is better than the competitors. The next step is to move into other markets and excel and attract market size that way. Plan b monopolizes the domestic markets in order to earn even higher incomes and then use that money to expand abroad. Plan A is the favourable method of growing larger.

Some of the people who have appeared before you favour plan b although they have never actually outlined it in that way. Plan B will result in every Canadian firm becoming less competitive while they pay even higher fees. The Canadian consumer will suffer a decreased standard of living. We will suffer at the domestic level for expansion abroad.

It is not necessarily true that collecting more money from Canadians while expanding abroad does much for Canada. If you look at the 1980s, you will see that foreign loans have not been the strength of the Canadian banks. That is where the biggest losses have been earned.

I refer you to the data from the National Quality Institute that shows the 1997 rankings of the service sector firms. The customer service organizations, such as hotels and pharmacies are at the top of the list. These are fairly competitive operations that strive to look after customer interest. They are performing well. Looking down the list you will see that credit unions are third from the top. That ranking indicates a strong performance. Now look down the list and you will see that the banks are rated at number 17. That figure indicates a medium performance at best.

If we look at the international data, we see that Sweden sets the best example of quality performance. They have a concentrated system.

In a monopolized system there is less attention paid to the customer. Anyone who drives on Highway 407 will understand how consumer-insensitive a monopoly can be. Cable companies serve as another example of poor customer service. Their ranking is at number 20, very near the bottom of the list. The cable monopoly is not really interested in answering your phone call.

Customer service is one of the dimensions that suffer when mergers are put together and affects the agility of the bank. When I refer to Plan A, ``A'' represents agility, which we want in Canadian banks. We may be doing as well as we can with the existing structure.

Senator Oliver: The main reason for these meetings is to look at the public interest in relation to mergers. I suspect that the public interest will begin after OSFI, and the Competition Bureau have completed their assessments. After that there will be further discussions concerning consumer access to credit and how employees and the banks will be treated during the transition period.

What in your opinion, should we be looking at in terms of the public interest? What are some of the key items that should be on the list of public interest concerns that this committee and the committee in the House of Commons ought to analyze? Should we concern ourselves with access to credit for small business or is that something that the Competition Bureau should address?

Mr. Kerton: The Competition Bureau can deal with many of those public interest considerations. Access to credit is an interesting issue because, if you have vigorous competition, then you have sellers scrambling to find people to whom they can lend money. That is what the smaller borrower wants. However, after 1980 the large borrowers found that dealing with Canadian institutions was too expensive and as a result borrowed from places like New York and Zurich and cut out the middleman. That procedure is called ``dis-intermediation.''

In that case you are able to see how the markets are working. Firms are finding the Canadian banks to be less efficient than the sellers abroad.

The really large companies, particularly multinationals, were able to escape, but that left the smaller firms to deal with institutions that are not quite as agile as we had hoped they would be.

When the Competition Bureau considers these matters they look at the foreign competition, whether the party to the merger has failed or is likely to fail, and at the availability of substitutes and barriers for new competition that is entering the market. Market entry needs investigation because we have not seen much of it. We tried to loosen some of the regulations. You will not ING's share of the market is very small.

Senator Oliver: It is growing. They are only a virtual bank, but they are growing.

Mr. Kerton: We want a force large enough to inject real competition into the marketplace. We have been shopping for a mortgage and ING did not present itself as an option that would help us much.

Ten years ago, the Bank of Montreal had a strategy that kept its mortgage rate a little lower than the rest of its competitors. The Consumers' Association can applaud that strategy as a strategy based on quality and price competition. However, their market share increased slowly and only marginally. There is a lot of stickiness in this. It seems that there is a high cost associated with switching to another bank. You might want to try to find ways of overcoming that situation.

Of the seven factors the Competition Bureau looks at one that is very important is the possible removal of a vigorous competitor. When you get down to just five or six big banks, you get to a situation where the banks do not have to discuss anything. They have a ``conscious parallelism,'' which means that they all act in the same way. When this occurs it is not necessary to serve the small lender. The target rate of return becomes 16 per cent or 17 per cent on equity and small customers that give only 6 per cent or 7 per cent returns are no longer needed.

Senator Oliver: You are addressing issues that the Competition Bureau can, does and ought to examine. Removal of a competitor is not something that has been seen as a part of a public interest test.

I am interested in items that are not dealt with by OSFI or the Competition Bureau, but ought to be dealt with by politicians looking at a public interest test. What are some of the issues not dealt with by the other two agencies?

Mr. Kerton: You would have to try and identify the characteristics of quality in the first place, because one of the things that suffers most when you move toward a monopoly is attention to customers. We need measures of quality.

When we looked at the telephone company we wondered how long it took for them to answer a client call regarding a problem. You can measure the length of time it takes to respond to a customer. That is a quality issue.

Another item that is important is the quality of documents. Canadian banks operating in the U.S. have to work to a higher standard. They must produce documents that are readable. In order to succeed in the market in the U.S., you have to deliver documents that are of a higher quality than the ones we use in the less competitive markets in Canada.

Those issues will matter more to a small firm than get the attention of bank for a loan that only returns 6 per cent.

Senator Oliver: Your maintain that big is not necessarily best. As a representative of a consumer organization, you are not in favour of bank mergers and some of your arguments indicate that even in the global market there is no real academic evidence that mergers would help our Canadian banks. Am I correct?

Mr. Kerton: Yes, you are correct.

You might also address the issue of innovation. Is innovation helped or harmed by monopolizing the Canadian market?

Senator Oliver: The banks say that if they merge, they will be able to put more money into technology and innovation.

Mr. Kerton: What would be a good test to say how well Canadian banks are doing on those scores, compared to banks in other countries? That may be a good line of inquiry.

The evidence would be mixed. Some of the banking people use efficiency ratios to show how well they are using the capital in their bank. The ratios can be compared to an Australian bank that is concentrated, or a U.S. bank where it is more competitive.

Those kinds of issues are worthwhile. I am suggesting that you add the concept of quality to the efficiency notion and ask what is happening to innovations that affect quality. My argument is that the Canadian banks are becoming leaders in ATM technology and other technologies. They are becoming leaders while at their existing size. It is true they have some back shop cooperation happening. However, that is quite a good arrangement, is it not? They do not need to merge to get cooperation with computer technology.

Senator Oliver: Most of our banks would like to expand south of the border and become bigger players in the United States. CBIC said that they had to pull out of the United State because they were losing too much money because they were not big enough to take on the task.

Mr. Kerton: I should have brought the headlines that have been in the U.S. papers. When CIBC and others went in to take over Winn-Dixie, the headlines read, ``Giant Canadian Banks Threatening U.S. Market.'' These banks are big already.

I thought that the CIBC strategy was a good one and that it would work, however, it failed because U.S. customers got used to drive through windows so an ATM was not as useful for them as it is for us in Canada. There is a different sort of banking pattern in the States. Adding ATMs in supermarkets when people are used to having access to drive through windows did not turn out to be an effective strategy.

Senator Oliver: Why did they not put a drive through window in the supermarket then?

Mr. Kerton: I do not know and at this point we are second-guessing the banks. They played their cards well, but did not succeed. I do not think we want to criticize them for experimenting. This is just what we want to see them do. We prefer to see them try new strategies and succeed, rather than making huge loans to try to earn those fat fees that were available in the U.S. money market before the last merger boom collapsed.

The Canadian consumer has to worry that the intention is to raise fees at home, go into the New York money market and try to out perform some firms that are specialized in merger making. You do not want the Canadian banks to take huge losses. To some extent, that has happened. Think of the retreat that we had to engineer after the Canary war situation in the 1980s. Two of the major banks wrote off $800 million a year, each year, for five years. Where did the money come? It came from the retail market. That is, that money came from our banking fees.

If the argument is that they want to go abroad, the response should be to succeed by being agile, Plan A, and not by using monopoly revenues from the Canadian market, Plan B, to subsidize misadventures abroad.

The Chairman: Mr. Kerton, would you consider the Bank of Montreal's purchase of Harris Bank a good investment?

Mr. Kerton: Absolutely, yes.

The Chairman: They went into the United States, bought a bank and did well. I believe we are talking about poor execution and not rotten strategy.

Mr. Kerton: Over the last 10 years the banks have not bought U.S. branches because they have been over-priced. The Canadian banks should be praised. Not buying was a successful strategy and we avoided losing money.

The Harris Bank was a positive purchase. It was not a giant U.S. bank. However, now you see Canadian banks going into the U.S. market and buying up chains of 100 or 200 branches because the prices in the U.S. assets have collapsed. Therefore, what is going is considered very sensible economics. That is, buying assets at a sensible price instead of overpaying for the assets.

Look at merger survey in the October issue of BusinessWeek. The survey covers all the major mergers over the last three or four years. Sixty-one per cent of those mergers have been failures; the buying firm paid too much money for them. That is the case with the FleetBoston merger as well. The banker merger phenomenon is poorly based in economics; it is based on unrealistic expectations of profits and paying prices that are too high.

The Canadian banks did not do that. I do not see a reason to criticize them for a sensible strategy even though it was not successful.

The Chairman: I find some of the information you have given us to be incomplete. You talk about the failure of the Japanese bank mergers. However, you do not say that it was the government in Japan that was directing most of the big loans. We do not have that situation in Canada.

Mr. Kerton: I used the Japanese banks as an example because they had been used in 1996 to prove that Canadian banks were too small. I would not have chosen them otherwise.

The Chairman: You just did. You used them as an example.

Mr. Kerton: We have to be equally cautious now. We were told that the Canadian banks were too small to compete with the giant Japanese banks, and it was not true. The Canadian banks are more agile than the Japanese banks.

The Chairman: They are too small to compete with them in Japan.

Mr. Kerton: You do not want to have to go to Japan to make compulsory loans as the bank directs.

The Chairman: As the government directs.

Mr. Kerton: Yes. I apologize.

The Canadian banks have the ability to do that size-up. It is wise to buy a mid-sized foreign operation and astute managers, because these are the people who understand the culture.

Citibank was successful in Asia in the 1970s and 1980s because of the way they operated; they outperformed all the local banks by buying the most astute local operators and improved service levels that the local banks could not meet.

The Chairman: Your message is: Be a good businessman.

Mr. Kerton: You must be agile. The idea that you have to bulk up and become a big dinosaur is a concern for us. In the long run, that dinosaur can be bought out or devoured by a foreign bank depending on changes in future legislation.

It is a question of competition. How well are these giant financial institutions able to serve all the Canadian users from firms to consumers and so on? The answer depends largely on the competition, and also to some extent on how aggressive the consumer is. Consumers can help banks become more agile and improve the quality of service. Then when you go abroad, the bank can deliver a higher level of service than, for example, the U.S. banks.

The game is not over yet. The method of expanding into the U.S. by being agile, buying mid-sized banks and using superior technology to increase market share, is slower than gobbling up each other back in Canada. However, in the long-run, it has a better chance of serving Canadians.

The Chairman: Thank you for being with us.

Our next witness will also be teleconferencing, so we will just make the switch.

We will continue our study in public interest implications for large bank mergers.

Mr. Larry M. Pollock, President and Chief Executive Officer, Canadian Western Bank: Canadian Western Bank was founded in 1948 as a schedule 1 bank. We trade on Toronto Stock Exchange and are included in the 300 index. We have 27 branch locations in Canada. Our head office is here in Edmonton. We have 600 employees. We have a wholly- owned trust company operating out of Vancouver. The unique part about our bank is that we have about 7,000 commercial loan accounts, and 87 per cent of our loan business is commercial. We have 180,000 deposits accounts as well.

Our strategy has been to provide a high level of personal service, and we have grown between 10 per cent and 15 per cent each year. Those figures indicate that small banks can grow.

Canadian Western Bank supports the merger process for a number of reasons. Canada's large banks are small by global standards. Mergers increase size, which in turn increases capital. With increased capital comes the opportunity to compete in the technological field and provide products that require scale. When I refer to ``scale'' I am referring to items such as credit cards et cetera.

Canada, historically, has not nurtured the start-up of small banks. An example of one impediment is the capital tax system that taxes away capital even before there are earnings. We should create an environment that supports new banks so that they can compete with the larger banks.

The U.S. has a few large globally competitive banks and over 8,000 small banks that provide competition and service in all communities. We should allow our big banks to become globally competitive through the merger process and allow small banks to fill any void created by the merger.

How do we fill this void? We should support new banks and find a way to convert many of Canada's larger credit unions into community or regional banks. To do this we will need a common federal regulator, standard capital requirements, and structures so that capital markets can be accessed to add capital, and standardized deposit insurance through CDIC.

The tax system should be reviewed; a $7 billion credit union is taxed as a small business, but a $1 billion bank is taxed as a large business. A level playing field will have to be achieved if we expect small banks to develop and prosper.

Residuals as a result of mergers could mean that small banks, such as Canadian Western Bank, Laurentian, credit unions, and foreign banks would be allowed to acquire the excess branches and the business in them. This could be determined prior to the merger approval. Layoffs are another residual. A condition of approval could limit or restrict staff reductions. To deal with the loss of service, there could be a small-town requirement that the merged bank operate in at least one location.

Many Canadians use electronic and ABM services. The measure of loss of access should not be focused on branches, but on access in all forms. Many geographic areas can be served via electronic means. The merger of large banks will allow Canada to develop more efficient delivery of financial products and leave space for new entrants. We have to create a favourable environment for competition to flourish. The status quo will simply keep market share numbers roughly as they are and Canada's big banks will continue to be reduced in international stature. We do not consider that to be the best scenario.

I feel it is extremely important for Canada to develop an internationally competitive banking system to keep our businesses competitive at both the local and global levels. An over-regulated, overtaxed, suffocating system will ensure we have will have a second-tier banking system. The Canadians whose savings and pensions are invested in bank stocks will never realize the true value of their investments if banks are not allowed to grow and prosper.

It is a shame Canadians do not believe they have excellent access to service provided by the banking system. They have excellent service and low costs provided by our banks. Let us take a bold, progressive step toward further development of our banking system by allowing our large institutions to compete globally and, at the same time, develop an environment where small and regionally-focused new banks have access to capital, a favourable tax structure and a regulatory environment that harmonizes the common objectives.

Senator Meighen: We are asked to comment to the minister on the question of public interest. You are one who believes that bank mergers are in the public interest.

Mr. Pollock: Yes, absolutely.

Senator Meighen: You obviously feel that mergers will open areas of business opportunities for you.

Mr. Pollock: If you look back over the years, the market share of the big five banks has not moved around very much. If we keep the status quo in this country there will not be enough wiggle room for smaller institutions to grow and develop. If we allow our larger banks to merge and form a larger and more technologically efficient operation, our customers can utilize service to provide letters of credit, trade finance, credit cards, clearing and other things that are very expensive for a small bank to provide but which we could lever off the larger, more efficient banks.

Senator Meighen: One of our witnesses yesterday suggested that mergers were fine, as long as we were left with minimum of three large banks. Would you agree with that?

Mr. Pollock: I think more than one would be nice. You would still have competition at the top end if you had two banks. I think it depends on how you serve the remaining market. If the remaining market is well served, then I do not think picking a specific number of banks will be a criterion that will grow and develop our system.

Senator Meighen: One is not a number that we would easily pick, is it?

Mr. Pollock: It depends if number two is 10 per cent or 20 per cent smaller than number one, it could still be competitive. Most other countries usually have one big dominant player with other smaller players. I am not stuck on a specific number.

Senator Meighen: On page 2 of your brief you say we should support new banks and find a way to convert many of Canada's larger credit unions into community or regional banks. Why they should be converted in the interests of greater competition?

Mr. Pollock: Smaller banks are few and far between in this country. We are one bank that has survived and prospered with a narrow niche. We have had to compete with not only the big banks, but with credit unions and other institutions, such as the Alberta Treasury Branch, which has $12 billion in deposits. Deposit insurance is all over the map, but we operate primarily in the four western provinces: B.C. has a $100,000 insured limit for credit unions, Alberta is unlimited and all deposits are insured for their full amount. Manitoba and Saskatchewan have different numbers.

We have to deal with CDIC's $60,000 limit, so if a customer comes in with $1 million, he can go to the local credit union and get a 100 per cent guarantee on that money. He cannot do that with us; he gets $60,000 of insurance. We have to compete at that level. If some very large credit unions like VanCity and CoastCapital, which are significantly larger than we are, were to standardize deposit insurance and regulation, they could move outside their existing borders and compete. Their customers could move from province to province and maintain existing insurance. They could grow and develop as well. I am not suggesting we should restrict them; we should take the shackles off and let them compete to expand their market shares. If you drill back down, you will find that market shares have not changed much, but they have consolidated each other to grow.

Senator Meighen: You also point out that a credit union would be taxed at a lower rate than your bank. Is that because they are separate entities?

Mr. Pollock: They are taxed as small businesses, which is a policy that goes back many years. They were considered small businesses, but they are not small any more. I do not know how you could consider a $7 billion credit union a small business. A credit union also receives tax deductions for the dividends it pays to its members, whereas a bank is taxed as a large business at a higher rate and has no tax deductibility on its dividends. There are anomalies. We could put a system in place to allow them to become banks. CS CO-OP in Ottawa now has a bank charter and VanCity has its own Citizen's Bank, but neither has made that bold move of demutualizing.

Senator Meighen: It has been a mystery to me why there have not been more second-tier financial institutions growing up. As you suggest, if the banks were allowed to merge it might clear some fertile ground in which to expand.

Mr. Pollock: Yes.

Senator Meighen: We have heard evidence that electronic banking is a means of responding to the needs of communities that may no longer enjoy one or more branches. However, the fees for electronic transactions do not seem to be going down as the volume goes up. Am I correct? Why is that?

Mr. Pollock: It is the customers' choice whether to use those services are not. If it costs ten cents more to use electronic transfer of funds than go to town and do it, I would suggest that it would cost you more in gas than if you just did it electronically. Many rural people are very efficient at using electronic services of all types, especially the Internet.

Senator Meighen: Is that service growing with respect to your bank?

Mr. Pollock: Yes, marginally. We try to specialize in a high level of personalized service and back that up with electronic services. The first choice for the customer is personalized service; if they don't want personal service, then they can access the electronic versions. Some other institutions have gone in the reverse form. They sign up the customer, and hope they never see him or her again.

Our niche is a bit different. We have been able to generate rapid double-digit growth in the retail side by providing that personalized service and being different.

Senator Meighen: Every bank says they are in love with the retail side. The retail customers do not always find that they are loved as much as they would like to be.

Mr. Pollock: That is music to my ears. The success of our bank is attributed to being different. We have found a niche in servicing small and medium-sized businesses in western Canada. We have been able to grow that business over 18 years in a double-digit fashion every year because there is a real market to be served.

Eighty-seven per cent of our loans are commercial. We think that we can both out-perform many of the banks and have greater return on assets. We have the highest asset returns in the industry. We have the lowest cost base or efficiency ratio on revenue in the industry. We have the highest common equity ratio in the industry as well, but we can compete. You can be a commercial player as long as you do it right. Find a niche.

I am suggesting that all the small institutions will not be the same. They will pick their niches and be specialists. A bank such as ours can compete with any of the big five on a mid-market commercial loan, but we might not be able to compete with them on a retail client who wants brokerage services, mutual funds, et cetera. Most of our retail services are plain vanilla.

Senator Setlakwe: When will you move to Eastern Canada?

Mr. Pollock: We are asked that all the time. We have come from zero market share in Western Canada to 4 or 5 per cent. There is fertile ground and low hanging fruit for us here yet.

Senator Setlakwe: Did I understand you correctly when you said that you would favour mergers because it would give you a better chance to expand if they evacuate the field?

Mr. Pollock: Possibly. It would force the regulators and the people who decide these things to take a look at our environment here in Canada and say, ``let us create an environment for smaller institutions so that they can grow and prosper more easily than they have in the past.''

I looked at the statement of a newly formed bank the other day. They have not yet made any money yet, which does not surprise me. However, they are already writing cheques for taxes. They are really having their capital confiscated before they have had a chance to grow and develop a profit stream.

Those kinds of things should be changed so that we can allow these institutions to grow and develop. They then could pay taxes from the revenue and income rather than from the capital source.

Senator Setlakwe: Is there a wish on your part that if they do merge, they will be evacuating a field that you will be able to occupy more easily?

Mr. Pollock: Yes, I think so. I also take the 40,000-foot approach and ask what is best for our country? There are corporate and large commercial clients in this country who do business all over the world. If our banks are not commercially competitive with the biggest banks in the rest of the world, then how are those commercial entities going to be served? They will need to find an U.S. or European bank to serve their needs. I have seen real examples of this happening. We would not be able to lean on the large bank to provide these trade finance services and letters of credit to other countries where they will stamp the facilities for us.

Senator Prud'homme: I am a new member on this committee, even though I have spent 40 years listening in Parliament. The banks are saying that it is easier to compete with big and that they could be bigger if they could go to the United States. I am sceptical when we say they should be in the United States.

I would like you to help me out in my reflection. Sometimes we compare things that should not be compared. All the countries are Europe small compared with Canada. Canada is vast with much regional diversity and regional susceptibilities. I am dubious to compare it to Europe where it may be easier to be smaller.

I am not sure that the overall region will be well-served by going overboard too fast and without having analysed and scrutinized the implications for smaller places. People on the Prairies are sceptical of big banks because ``big bank'' means Toronto. This may be unfair, but it is what I hear all the time.

Is it fair to always compare Canada with every other country? I have accumulated economists' projections for 30 years. I am ``amused'' to see what economists were predicting 20 years ago for today. It is needless to tell you that they were completely out to lunch.

We always say that Canada spends much more on energy per capita than any country in Europe. It seems that we do not take into account that in Canada is vast and we travel more, therefore, it costs more. We always conclude that Canada is a big energy consumer compared with any small country.

Are you convinced that we cannot have the best banking system in Canada in having competition within Canada, multiplying smaller banks in smaller regions, than to hit what seems to be the dream of big bankers to go to the United States where one bad decision would wipe our banks out?

Mr. Pollock: I recently came across a useful example. In a large transaction, a client of ours' bought goods from another country in the range of many hundreds of millions of dollars. They needed some major currency swaps to do the deal. There was not a Canadian bank large enough to accommodate that transaction. That transaction was completed by a European bank and an American bank combined.

To service a manufacturer or someone who is buying a great deal of foreign goods, in the most efficient way — in lending or in other services — you need some large institutions to accommodate those requests. At the other end of the scale, many medium and small-businesses and individuals can easily be accommodated by a number of tier-two institutions or smaller regional players.

There are two issues. It is not just the issue of Canada continuing to be served based on the status quo. To progress and stay ahead of most of the rest of the world, perhaps we need some globally positioned institutions that can compete with anyone in the world to create another tier of institutions that can satisfy the needs of the general population.

Senator Kelleher: As you know, we have been asked by the government to look into the meaning of ``public interest.'' When the President of the Toronto Dominion Bank, Mr. Clark, appeared before us, he said that he did not know how much we should look into it. It seems clear to me that ``public interest'' means public interest. I am concerned that we may be burdened with numerous regulations and new criteria. We have enough red tape in the banking business, and I do not want to see something that will end up more burdensome to us than it currently is.

On the other hand, some CEOs say public interest means one thing and others say that it means something else. What are thoughts on this matter?

Mr. Pollock: I have been CEO of this bank for 14 of our 18-year existence. In recent years, I have noticed that regulation has evolved in many positive respects over the years. It has also become a bit burdensome and costly because there are so many regulatory bodies that we have to deal with. As an example, we now have Creditor Life Insurance, which is sold by banks to insure the loans they have on their books. Provinces are tackling the federal government and basically saying that we should be regulating the creditor life insurance that is sold in the provinces. However, you cannot regulate one product in a massive institution that sells this product everywhere and does business in other countries.

You should probably take a look at standardizing regulations so that Ottawa does it for the benefit of the whole country. Now, we have regulators in each province as well as various regulating bodies in Ottawa, such as the CDIC. An entity can end up answering the same questions and providing the same reports to all of them. If that could be narrowed down, it would reduce the cost. We have the highest cost regulatory system in the world, based on the GDP of a bank. Perhaps it has been corrected too far, and we should look at how we can consolidate some of this regulation.

The Chairman: We are continuing our study into the public interest implications for large bank mergers. Our last witness of the day is from the University of Toronto, Ms. Wendy K. Dobson from Rotman School of Management.

Ms. Dobson and I served together for some years on the board of the Toronto-Dominion Bank. We thought we should advise honourable senators of that.

Ms. Wendy K. Dobson, Rotman School of Management, University of Toronto: Honourable senators, as the chairman has stated, I appear before you as an academic, but I am a director of a Canadian bank.

It is important to evaluate the public interest impact assessment issue in a larger context, and that is what I propose to do today.

The context is one of good financial sector policy, what it is and why it matters.

My comments are based on two premises and an observation, first that the financial sector is a significant producer and employer in Canada, and an inefficient sector will undermine Canada's overall productivity performance. Second, the financial services sector is impacted by international change in technology and in competition. My observation is that the public assessment process, as currently conceived, is a stumbling block, not a building block, to good financial sector policy.

Canada has a productivity problem. Output per worker is only 80 per cent of that in the United States. Our per capita incomes are well below those in the United States and lower than those in countries such as Ireland, Norway and Denmark. Unless we put productivity at the centre of our economic framework, our poor performance will undermine individual living standards, threaten our ability to support valued social programs, and threaten our recently expressed aspiration to become a ``northern tiger.''

The reasons for lagging productivity performance are part of a larger puzzle about investment, incentives, aspirations and institutions. The federal government should ensure, when it creates policy frameworks that govern Canada's key industries, that these policies are productivity enhancing.

The financial sector policy framework has several flaws, but probably none of these has a more negative effect on the productivity potential of the banking sector than the framework for bank mergers. These are permitted after an unrealistic public review process supposedly designed to protect consumer interests. The framework effectively prevents mergers because the process is onerous and its criteria for review are unclear. It is discriminatory. No other industrial mergers are subject to such a politicized and uncertain process.

Consumer interests are important, but long-term policy goals, producer interests and the national interest are just as important. In considering the long-term national interest, the government has a responsibility to ensure that financial services — one of Canada's strongest and largest sectors — becomes more, and not less, efficient and productive.

A well-developed financial services industry is a source of long-term growth. Financial institutions have the skills to pool savers' capital and the skills and resources to pool the risks that borrowers present to them, ensuring that capital is used efficiently. They are the institutions that facilitate innovation and entrepreneurship by making capital available, appropriately priced for the risks involved, to unproven new enterprises. The information and communications technology revolution that has so dramatically transformed the telecommunications and other industries, is also changing the ability of banks and other financial institutions to manage risks in ways that they could hardly have imagined five years ago.

Our big banks and insurance companies contribute to the long-term growth of the knowledge-based economy; they are themselves knowledge-based businesses. They employ and quip large numbers of people with sophisticated skills in decision-making, electronic applications and in risk management.

Whatever one might think about the efficacy of mergers and acquisitions as business strategies, the financial services industry around the world has dealt with intensifying competition and excess capacity by consolidating at a rapid pace over the last few years. It is useful to review arguments about this trend as context for judgments about the public interest impact assessment process.

Available international research on consolidation is ambiguous as to whether, beyond a certain size, growth in bank size continues to be efficient. Some analysts have observed that international competitive success may just as well depend on specialized niche-type activities based on economies of scope, rather on economies of scale. Economies of scale arise when doing one thing a great deal makes whoever does it very efficient; economies of scope arise when doing more than one thing causes each activity to be done more efficiently.

In justifying mergers, Canadian banks have argued that size is essential to compete successfully with the global monsters that confront them at home and abroad. They have argued that both access to lower cost funds and the ability to keep up with technology comes with size. So does brand recognition in the international marketplace because it influences participation in profitable businesses. Whatever the research might say, in the end, it is the banks that must compete in the complex international marketplace. It is they, not policy-makers, who should decide their business strategies.

Although there are still profitable, small banks around, mega-banks do not seem to be going away. Contrary to expectations, many of the largest mergers have been manageable. These recent large merges have tended to occur within countries and within pillars. Canadian policy-makers' assumption that banks in Canada should seek merger partners outside of Canada is not entirely realistic, given the evidence. Instead, mergers seem to be necessary, given the ever-larger size of banks' customers, their customers' need for global reach, and appetites for debt. Large balance sheets are necessary to build brand and the well-known brands tend to do business with each other. In the global context, the average asset size of the top 10 banks in the world is between three and four times the size of the largest Canadian bank.

What should we do? Good financial policy that promotes productivity growth and is non-discriminatory has eluded us in part because of a basic policy conundrum presented by the structure of the financial-services industry. Of course, this group and others have had official studies on this subject. Canada lacks a second-tier network of small savings institutions such as the ones found in Europe. Obvious alternatives, such as identifying banking as a strategic sector in Canada's portfolio of internationally competitive industries, have never received the serious study it deserves. Instead, we have assumed that as first-tier institutions consolidate, competition will decline and consumers and employees will suffer.

Why are we so certain that will be the case? In a knowledge-based industry, happy customers and employees are essential to business success. Since 1999, when the TD Bank acquired Canada Trust, it has demonstrated that concerns about branch restructuring and consumer satisfaction can be satisfactorily managed.

In conclusion, I believe that a good financial institutions policy is one that avoids discriminating against banks and that treats bank mergers like any other. At the same time, disincentives to foreign entry into the market should be eliminated to address concerns that domestic concentration reduces competition. Domestic merger transactions should be subject to OSFI, to the Competition Bureau review and to policy review by the Minister of Finance.

If the public interest assessment process cannot be eliminated, it should be constrained to a realistic, short time frame and to a focus that complements rather than duplicates the other reviews.

Banking is a key Canadian industry — one that we do well and in which we have been internationally competitive. The politicized framework of the past few years has shackled bank strategies and consigned our banks to the minor international leagues. It may be already too late to make up for lost time, but I believe we should try.

The Chairman: Thank you.

Senator Meighen: I appreciate the frankness and brevity of your report. Clearly, you are not a great fan of public interest impact assessments. As you say, in the end if we must have it, at least make it short and realistic. The two go together.

What about the Public Interest Impact Assessment, PIIA, that is contained in the merger review guidelines of the Department of Finance? It struck me that it covers as much, if not more than, you would ever want to know about the implications of a bank merger. What more do we need? If this were well-done and completely responded to, it would seem to me that it would answer the central questions. Do you have any views on that?

Ms. Dobson: As to the overall process of review, there are logical criteria for review by OSFI, by the Competition Bureau and by the Minister of Finance. One of my concerns is the potential for overlap. In the public sector, we tend to ignore and underestimate how markets work. In an information-based industry such as banking or any large, modern enterprise, what goes into decisions about mergers and acquisitions is often proprietary information. It is sensitive and strategic information. It is shared in confidence, if necessary, with the Minister of Finance.

However, in a months-long process with the criteria for what can be reviewed in a public process, wide open, also duplicating at times what other expert groups that taxpayers are already paying to have done, I do not see it as serving the long-term national interest. I say that in terms of the impact that the uncertainty about this process and what exactly is constituted and expected has on a private sector organization's decision-making process.

As a director of a private sector organization, there is a responsibility to ensure that the interests of the organization are carried through, especially in a complex transaction such as a merger, which has enormous implications if it is ill- defined on things like employee morale and the productivity of the organization.

Those are some of my main concerns.

Senator Meighen: I wish to get your views on another interesting suggestion that was made by one of our witnesses. That was that it might be advisable if we could, in the context of big bank mergers, get all the mergers being contemplated on the table at once. In other words, if a merger were being contemplated between two banks, it would be required that within a specified period, anyone else contemplating a merger among the big banks should put forward their proposals. Consequently, the two proposals could be judged simultaneously, and the best one selected. Do you see any merit in that?

Ms. Dobson: If it were market-driven and banks saw it in their interest to do so —

Senator Meighen: They are not required.

Ms. Dobson: — I would assume that such a process might occur. However, for regulators to stand up and say, ``We want everyone to stand up and reveal their dancing card,'' I would have to study how that might work before I could say whether it is a good idea. In principle, the less regulatory intervention in this process, the better.

Senator Meighen: You mentioned that productivity in Canada was about 80 per cent of that in the U.S. How do you measure output per worker, particularly when there are qualitative as well as quantitative factors at play?

How do other G8 countries compare to the U.S.?

Ms. Dobson: There are many measures of productivity. The most accurate measure is called ``total factor productivity,'' where one looks at what happens to output if there are small changes in not only the quantity of labour and capital, but also technology, better organization and improved skills. That is a complex measure.

The measure of labour productivity often varies from country to country. The easiest measure is to measure output per employed worker hour.

In terms of how other countries compare, I am afraid I prepared this brief at midnight one night, and I did not do all the homework honourable senators might expect on what the productivity leaks are internationally. Therefore, I cannot answer that today.

Senator Meighen: Has the 80 per cent stayed constant?

Ms. Dobson: The productivity gap that is well known in this part of Canada is one that has opened up since the late 1970s, and has persisted long enough that it is having an impact on our relative standard of living.

Senator Setlakwe: You state in your brief that:

The information and communications technology revolution that has so dramatically transformed the telecommunications and other industries is also changing the ability of banks and other financial institutions to manage risk in ways they could hardly even have imagined five years ago.

Could you elaborate on that?

Ms. Dobson: Yes. I cannot elaborate too much.

The ability to centralize information and improve through computerized means the adjudication process and, therefore, to measure risk and then to price risk, is what I am referring to. It has improved enormously because of computer-aided techniques.

Senator Setlakwe: There have been complaints, of which I am sure you are aware since you sit on the board of a bank, that that very factor has eliminated the personal contact between the bank representatives and the consumer. Is that an important factor in your mind?

Ms. Dobson: I certainly sympathize with the concerns that have been expressed about a decline in face-to-face contact and turnover in bank branches. However, if one looks at how a business in general is to be managed, a source of weakness that I believe the computerized, centralized adjudication and the changes in pricing make possible is to aggregate for the institution some of the consequences and to evaluate the risks of many of these previously decentralized decisions produced for the organization as a whole.

Where progress still has to be made is in pricing for risk. In theory, it should be possible to charge more for those transactions that are seen to be riskier. That is not always very popular. However, in statistical terms and in terms of managing risk, and if you think of banks as organizations that specialize in the bundling and managing of risk, that is what they should be doing.

The Chairman: Senator Meighen this morning approached another witness with the point you just referred to. We were told a couple of years ago by a Canadian bank during some hearings in Toronto, that for public relations reasons they would never go beyond prime plus 3 per cent. Yet, we know that the Canadian Business Development Bank — a government entity — will go up to prime plus 9 or 10 per cent. Do you think the banks should really be that skittish about doing that?

Ms. Dobson: It is part of a whole range of issues; some of which are historical other that are not unique to Canada.

Unique to Canada is the fact that many customers felt that they were treated badly in the last recession. That is the origin of part of the public backlash that is reflected in the legislation on the books today. However, Canada shares with all other countries that customers tend not to like banks. They are not very popular.

I am not sitting here as a bank director, I am sitting here as an academic. I say that banks should price for risk. It is a common practice in other countries to price for risk. In generic terms, my response to your question would be that banks should be less skittish and should price for risk.

The Chairman: The United States has 9,000 banks, most of them community banks. They price for risk. We visited Washington months ago, and it was pointed out to us that our banks would not price for risk because we do not have enough banks. We said that our banks are petrified to price for the risk, except the government-owned one.

Ms. Dobson: If there is petrifaction, it is because financial services policy in Canada has become politicized. I have pleaded publicly that we depoliticize policy and get real in this country about financial sector policy.

Senator Kelleher: The heads of the big five banks who appeared before us told us that one of the main reasons why mergers should be permitted is so that they can become larger and try to compete internationally. How important do you think it is to the economy of Canada that the banks be allowed to merge and grow so that they can compete internationally?

Ms. Dobson: You are talking to someone who covers the world and thinks globally. I have quite a few ambitions for Canadian standards of living. I have much appreciation for the intensity of competition beyond our borders and an appreciation of how intense this competition is in the financial industries. I have studied the financial structures of many countries and the international financial and monetary system. I despair sometimes at the how inward-looking the Canadian debate is.

Other countries have addressed similar policy concerns quite differently from the way we have. Basically, they have created a premise that if their financial sectors are strong and competitive they should be able to do what is necessary to maintain their competitiveness internationally.

As I said in my statement, big balance sheets are absolutely essential when you go into riskier territory, which is what doing business cross border is all about. Canadian businesses seeking to do international business should be able to rely on Canadian financial institutions and banks as well as the other capital market institutions.

As well, part of my despair is that our policy framework shackles our banks and prevents them from growing their balance sheets and from doing what is necessary to become competitive. I believe that our banks are already moving into the minor international leagues.

Senator Kelleher: In his presentation to us, the president of the Toronto-Dominion Bank expressed concerns that, by the government asking us for a definition of public interest, banks may end up being saddled with more regulations and criteria adding to an already burdensome structure problem. He feels that the definition of public interest as contained in the present act is just fine, thank you. What are your thoughts on this? I know you have no conflict of interest.

Ms. Dobson: It is an issue that I had written about long before the current president of the Toronto-Dominion Bank became the president of that bank.

We are relying more and more in this legislation on regulation. We have put the consumer interests at the top of our list. Because it is very difficult to lay out producer interests and how to promote productivity in a bank and make them sound politically popular, we have gotten things out of balance and lost track of the long-term national interest. That is one of reasons I am here today.

The regulatory structures put in place, which raise costs on banks and other financial institutions to finance them, are sufficient to address consumer interests. We should be relying more on market forces. The forces of competition in an industry where you have to keep your customers and employees happy to be successful as a knowledge based organization.

The major trend in international banking is toward increased market discipline. I would rely on that to address beyond what we have already done in a regulatory and interventionist sense to address the concerns of consumers. By consumers, which I am not sure we have ever satisfactorily defined, I mean retail banking consumers, not wholesale banking consumers, which tend to be large businesses such as General Motors.

The Chairman: You referred to Ireland in your opening statement. Ireland is an incredibly good example of things being done right. Only 10 or 15 years ago the per capita income was considerably less than that of Great Britain, and now it is higher. How did their financial sector handle this as part of their renaissance?

Ms. Dobson: I cannot answer that in so many words. The ``Celtic tiger,'' as it is called, has a history going back more than 30 years. I will not go into all the reasons for their success. I am not sure I am right, so perhaps I should not say.

The Chairman: Take a chance.

Ms. Dobson: Okay, I will.

They are a much smaller economy and they have no choice but to pursue niche strategies. I believe that they created policies about international banking centres. We talked about such policies back in the 1980s, but they never went anywhere; there were all sorts of reasons put forward as to why we should not do that. However, I believe that is an element of the structure created in Ireland.

Senator Setlakwe: They also eliminated capital gains taxes.

The Chairman: That is true.

Ms. Dobson: There is a whole list, and one cannot take any single thing out of context and say, ``that is why they are a Celtic tiger.'' If there is a single variable factor, it is the large subsidies from the European Union that were made available to them on regional grounds, which they used very intelligently and efficiently.

The Chairman: When we did our study on capital gains, one of the things that helped us was using Bertie Ahern's example of eliminating that tax.

We have asked this last question of other witnesses and I would be most interested to hear what you think. It has been held out to me by some respected economists that if all we do is maintain the status quo in our financial services industry, then the industry will kind of wither and die on the vine. In that case, we will end up totally dominated by foreign financial institutions 5 to 10 years from now and our large corporations will have trouble dealing with Canadian banks because they will be too small, et cetera. How do you react to that scenario?

Ms. Dobson: I believe that is already happening.

The Chairman: The Royal Bank, for example, tells me that they are not big enough to get into most of the syndicates now. The TD used to be the number one lender to the cable business in all of North America, not just Canada. Now, they cannot even get into the syndicates. Is that good or bad for Canada? I suggest it is bad.

Ms. Dobson: As I have said, the balance sheet of an institution matters enormously in doing international business. The balance sheets of our banks are not growing very fast, so they are losing out. I think this is already happening. You will not hear CEOs tell you that in public, but somebody should.

The Chairman: Thank you very much for being with us. You are a breath of fresh air.

The committee adjourned.

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