Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 9 - Evidence of December 4, 2002
OTTAWA, Wednesday, December 4, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:15 p.m. to study the public interest implications for large bank mergers.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Honourable senators we are convened today to study the public interest implications for large bank mergers. Our witnesses are from Credit Union Central of Canada and Credit Union Central of Ontario.
Ms. Joanne DeLaurentiis, President and Chief Executive Officer, Credit Union Central of Canada: Before dealing with the issue of the bank mergers and the public interest, I would like to take this opportunity to update the committee on the present state of the cooperative financial system.
The cooperative financial system is diverse and complex. Outside of Quebec, the financial system is made up of approximately 646 credit unions and affiliated caisses populaires operating in nearly 1,900 locations. These credit unions have combined assets of approximately $64 billion. Our membership continues to rise and we have nearly 4.6 million members. Caisse Desjardins, the Quebec-based financial cooperative financial system, has assets of $66 billion and over 5 million members. Canada has the world's highest per capita membership in its cooperative financial services sector.
As you know, the provincial governments are the primary regulators of credit unions. Key players at the provincial level include the nine provincial organizations that manage system liquidity and their relevant trade association functions.
Credit Union Central of Canada is the system's national trade association and central finance facility. We are regulated under the federal Cooperative Credit Associations Act.
The cooperative financial system, like the commercial banks, offers a full range of financial services to Canadians and are supported by a number of affiliates that provide wealth management services, insurance services, trusts and so on. We are distinguished, however, by the fact that customers of a credit union are also its members and owners.
Credit unions operate on principles and values that emphasize democratic participation in governance and a commitment to the communities in which they are based. Member ownership ensures credit unions are uniquely sensitive to their members' needs and aspirations.
We have a number of comments to make in regard to bank mergers and how they relate to the public interest.
Canadian central is of the view that mergers within the financial services sector can produce healthy outcomes for both consumers and financial institutions. We see mergers as a legitimate business strategy and do not distinguish between mergers involving large or small institutions.
In our system, merger activity is continuous and plays an important role in enhancing our ability to provide service to our members. Between 1990-2001, the total number of credit unions and caisses populaires decreased from 2,700 to 1,772 as a result of such activity. This trend is continuing.
The recent merger of Coast Capital Savings Credit Union and Surrey Metro Savings Credit Union in British Columbia has resulted in the largest credit union in Canada; its membership is 300,000, and its assets are approximately $6 billion.
A very important merger is underway involving the Credit Union Central of British Columbia and the Credit Union Central of Ontario. These two centrals are planning to establish a combined finance facility that will produce important efficiencies for credit union operations in both British Columbia and Ontario. The facility known for planning purposes as Opco will be capable of including other provincial centrals that wish to join, and some may well do so.
Many of the witnesses who have appeared before this committee have outlined the forces that drive bank mergers and consolidations. Those forces apply equally to the cooperative financial sector. Mergers help financial institutions grapple with decreasing margins and increasing operating and technology costs. Credit unions, like banks, must find ways to reduce costs through the more efficient use of resources and find ways to spread those costs over a wider base of customers.
Canadian central believes that mergers between financial institutions are a legitimate and viable business strategy and can benefit both customers and financial institutions. Consequently, this business strategy should be available to all players in the Canadian financial system.
Big bank mergers need to be carefully considered from the vantage point of the general competition policy administered through the Competition Bureau of Canada. We are confident that this policy is capable of assessing the competitive impact of a proposed large bank merger and of identifying remedies that could help to preserve competition in select markets. Any proposed merger must also satisfy prudential standards administered by the Office of the Superintendent of Financial Institutions.
Our third point concerns competitive balance in the financial system of Canada. In terms of larger public interest criteria, Canadian central is concerned with the issue of competitive balance.
We believe that in anticipation of large bank mergers a key public policy consideration must be whether a strong second-tier of financial institutions exists to balance the market power of the big banks. Competitive balance will ensure that consumers continue to have many choices for retail financial services.
From our perspective, the most promising means of insuring this competitive balance is for the federal government to continue with measures that will strengthen the ability of the cooperative financial sector to compete against the large banks. We think it is important to give consideration to the second tier of retail financial institutions that has developed or is developing in Canada.
This committee played an important role in the passage of the federal government's recent financial reform legislation. As you know, Bill C-8 made it easier to incorporate new banks, and this effort represents the most recent attempt by the federal government to inject more competition into the banking sector.
Bank Act revisions have also featured initiatives aimed at creating more banking institutions to serve the needs of Canadian customers. So far, these attempts to foster a strong second tier of banking institutions have met with limited success. The foreign banks that have been incorporated since 1980 have brought little competition to the retail financial services market. Recent amendments have allowed foreign bank subsidiaries to reduce their operations in Canada by becoming branches and some have done so.
Similarly, the recently established domestic stand-alone banks have not made a significant impact in the retail market. A number of the other domestic banks are operating arms of existing non-bank financial institutions, including two credit unions. This underlines the fact that the important second tier of financial institutions does not find its source in the banking sector. There are few indications that this will soon change.
Canadian central believes the cooperative financial sector has the potential to serve as the crucial second tier of financial institutions envisaged in government policy. This sector alone has the capacity to offer a significant alternative to the large banks, or the mega banks that result from a merger. We have the largest membership, retail presence, asset size, and range of products and services.
We commend the federal government for its efforts to provide the financial cooperative system with new ways to compete against commercial banks. However, we believe that the government should increase its engagement with the cooperative financial sector and build upon recent efforts to strengthen our capacity to compete. There are several actions that the federal government can undertake to meet this objective.
The government should act quickly to complete the changes that are authorized in Bill C-8 by enacting the remaining regulations under the Cooperative Credit Associations Act.
Second, the government should continue consulting with representatives of the cooperative financial system to further the development of federal cooperative bank legislation.
Third, we encourage the government to enact the legislation regulations that will enable initiatives such as the Credit Union Central of British Columbia and Credit Union Central of Ontario merger. This initiative will enhance our capacity to compete against the big banks.
Canadian central believes that these actions should proceed without delay. The competitive conditions that a large bank merger would create are already being felt in the financial services marketplace. The large banks are growing larger even without mergers, and the need for cost efficiencies and scale in the credit union system is a current, not a future need.
In addition, legislative and regulatory change of even minor dimensions requires considerable lead-time. For example, regulations are still being drafted to flesh out the amendments found in Bill C-8.
Canadian central supports mergers, including mergers of large banks as a legitimate business strategy that can offer benefits to consumers and financial institutions. Any mergers should be consistent with Canadian competition policy and meet the prudential requirements as set out by OSFI. Finally, the federal government should move quickly to foster competitive balance in the Canadian financial system by strengthening the capacity of the cooperative financial sector to offer competition to large banks. This will help ensure that Canadians have continued access and choices in regard to retail financial services.
Mr. Jonathan Guss, President and Chief Executive Officer, Credit Union Central of Ontario, Credit Union Central of Canada: Credit Union Central of Canada is part of a three-tier credit union system in Canada. Ms. DeLaurentiis represents the National central, which we call the third tier. I represent Ontario central, which is owned by 210 credit unions in Ontario. We call the first tier the credit union, the provincial centrals represent the second tier, and the third tier is the national central. It is important that you keep the three tiers in mind as I read my comments.
You have heard of the need for a stronger and more competitive second level of financial institution. Our remarks underline the fact that credit unions are the obvious candidate to provide that second tier. In essence, each credit union is a community bank with governance in and from the community.
Our system is working on a number of initiatives that will strengthen the ability of individual credit unions to compete with their large financial institution competitors; the banks.
I will focus on one specific initiative that my colleague from Canadian central referred to in her remarks, and that is the pending merger of the financial functions of Credit Union Central of Ontario with the financial functions of Credit Union Central of British Columbia. This merger creates a corporation under the Cooperative Credit Associations Act. The working name of the new corporation is Opco.
The Credit Union of Ontario is part of a three-tier system that was built from the grassroots by local credit unions that decided that they should work cooperatively with each other to create provincial centrals. In turn, provincial centrals worked cooperatively to create the national central.
We think we can do something to make it a stronger and more cohesive system. We believe it is time to start reducing our system from three tiers to two.
It is important to recognize that while Opco would merge two centrals, it is driven by and for credit unions. On November 23, we had special general meetings in both provinces, and our members voted 98 per cent in Ontario, and 99 per cent in British Columbia, in favour of proceeding with the merger. Clearly, they are seeking a stronger and more cohesive system and they believe it is necessary to meet the competitive challenges of this constantly changing market.
The impetus behind what we are doing is understandable. We are experiencing a transformation of our industry with shrinking margins, aggressive competition, mono line offerings, new entrants, new products, new technologies and high costs. Credit unions are face more challenges than ever before.
As the central service supplier, it is the role of Ontario and British Columbia centrals to assist our member credit unions. We must design new ways to deliver products more effectively in order to give them greater value.
The development of Opco is an ambitious, national, restructuring initiative, and it is founded on the need to reshape our system for the future. The MacKay task force supported the strengthening of existing credit unions and caisses populaires. The task force recognized that some of the second tier institutions were well positioned to compete with the chartered banks.
Bill C-8 also refers to a second tier of financial institutions having a place in the Canadian economy and provides a platform for Opco. Bill C-8 allows local credit unions to create and own their own national entity rather than having to do it through the provincial centrals.
While credit unions will remain inextricably connected to their communities, Opco will give them the indirect capacity to cooperate beyond their traditional provincial boundaries. Over time we will eliminate a tier of our system but, as I mentioned, we will need additional changes to the act and regulations to achieve our objective.
On its first day Opco will become a $5 billion central banking facility with $300-million capital. It will serve over 250 credit unions in two provinces that have $35 billion of assets. In turn, they will provide financial services to over 3 million Canadians. Opco will serve as the back room for over 60 per cent of Canada's credit union business.
In addition to financial clout, Opco will ensure that credit unions will continue to play a vital role and enhanced role in local communities. Opco will serve as an engine of community and economic development.
Every deposit in a credit union is reinvested in the community. While our competitors consolidate, close their branch doors, and move into the global market, our doors will remain open.
The strategic rationale for the merger is to position the new organization to reduce credit union costs and to increase our speed-to-market with new products. This will give credit unions an enhanced ability to realize market opportunities. It will also allow us to improve our credit ratings and give our system an active and strong presence in the financial markets.
While our long-term vision goes beyond the borders of B.C. and Ontario, Opco will be able to serve any other provincial credit union system across the country when that system and its central choose to join. We plan to de-layer and streamline our network. It is a shared national vision to have two tiers instead of one.
What do we need from the federal government? While Bill C-8 allows for the creation of Opco, there are other legislative tacks and regulatory provisions that must be in place in order for us to complete the merger. It is critical that the federal government enact these provisions in a timely fashion to allow Opco to be operational. Additional legislative provisions need to be enacted and government approvals obtained from Ontario and British Columbia.
Our two centrals have hammered out their agreements. Our shareholders have voted overwhelmingly in favour of the merger and federal officials have been positive and constructive in helping us design the rules that will help us to finalize the merger.
The federal and provincial legislative amendments are the only barrier to Opco being a reality. We look forward to the federal government's speedy action and hope you will encourage the government to move quickly.
Senator Kelleher: We always like to hear from you people because we feel you provide us with another tier that will offer competition to the schedule A banks.
Ms. DeLaurentiis, on the last page of your brief, page 4, second last paragraph, you say:
Any mergers should be consistent with Canadian competition policy and meet the prudential requirements as set out by OSFI.
However, there is a third condition, and that is, it must meet the public interest. We have been asked to define "public interest.'' Since the federal government passed that job off on us, I will do the same to you. What does the term "public interest'' mean to you?
I encourage all three of you to provide us with an answer to that question.
Ms. DeLaurentiis: That is one of the key questions. We have to look at it from our members' point of view. Our members tell us that access, convenience, range of products, and competitive pricing are all very important to them. There is a basket of items that go into defining what is the public interest. However, from our perspective, and the key reason why we are here is to tell that you we can certainly help to meet those needs. We can meet the public interest.
Mr. Guss: Ms. DeLaurentiis hit on it when she talked about serving customers. We call them members, but it is serving customers. Every market research study shows that our customers choose us based on convenience. The biggest driver of choice is convenience. However, convenience is defined differently for every market segment. While we do an outstanding job in the domestic retail market, we are not a player in the major corporate market. We are good in the small, medium-sized enterprise market, but when it comes to the corporate market we have Canadians who want to operate globally. The fact that the banks have global aspirations is not inherently evil and the fact that the banks need a certain size to play that role is quite reasonable.
We know that our strength is the retail domestic market and the small business market, so to me the public interest is making sure that all those different market segments and needs are well served. We have to redefine convenience.
Mr. David Phillips, Vice-President, General Counsel and Corporate Secretary, Credit Union Central of Canada: One of the issues we want to factor into the public interest equation is competitive balance. We have tried to suggest ways in which competitive balance can be addressed through the important changes that can take place through the merger of CUCBC and the Credit Union Central of Ontario.
Senator Kelleher: Mr. Guss, you remarked that there are certain things the government has to do before you proceed.
At the time this legislation was going through, many of us were looking to the credit unions as the great white hope, if you will. However, we are a little disappointed in how long it has taken you to get to where you are today.
You seem to suggest that you were not as fast off the mark as you would like to have been and you feel that the federal government has not come along quite as quickly as they should with the legislation and regulations that you need. Is that correct?
Mr. Guss: Yes. I want to be fair to everyone. The federal government, the Senate committee and the House committee were very friendly to us in the round that led to C-8. However, there is nothing like trying to do a deal under a piece of legislation, to teach you what you actually need. While making the deal we have discovered that there are items that we did not anticipate. You have to remember that we have a complex, democratic system. When we start to move down the democratic road, we move slowly. However, when we make a decision we have the commitment of our members and member institutions.
When Bill C-8 was designed, we were looking at a merger of all the centrals at once. It simply became too complicated in a small "p'' political sense for eight or nine centrals across the country to combine all their operations at once. The steps we are taking now are an attempt to get there in digestible bites. I should apologize for the delay in our coming forward with what we want. The government was good at anticipating our needs during the Bill C-8 process. The changes we need now you could not have been anticipated without us. They are mainly housekeeping requirements to allow us to take the next step forward.
I am not blaming anyone, and certainly not the Department of Finance, which has worked with us positively and constructively to design the changes we are currently looking for.
Senator Kelleher: I have a supplemental. Is the federal government aware of your problems and concerns?
Mr. Guss: Yes.
Senator Kelleher: Do you think this will be forthcoming?
Mr. Guss: We need to give some encouragement to the legislative arm of government to move quickly for us. In other words, we have now figured out what we need. We have defined it. We have, as I said, worked with finance constructively to design it. Now, we need parliament to move quickly. We have set the closing date for our deal at June 30. It has taken a long time for us to reach this stage. We have been talking to finance for quite some time and now we would like to see the legislative arm work quickly to deliver what we need. We hope that June is a reasonable time frame.
Senator Kelleher: Where can members of this committee find out exactly what it is you are looking for?
Mr. Guss: Mr. Phillips will be happy to address that right now or we are prepared to send you a brief run-down of the five or six legislative changes that we need.
Senator Kelleher: Perhaps you could send those proposed legislative changes to us.
Mr. Guss: We would be happy to do that.
Senator Kroft: If your June 30 deal comes together, when could we expect the national Credit Union Central to merge?
Ms. DeLaurentiis: Several years ago, there was a national entity effort. We refer to that as "the big bang'', and it was just too much for us to deal with at that time. Beside the B.C/Ontario merger, there are several other interesting initiatives on the table. The Prairie Provinces are creating an IT company. At the national level, we are aggregating all of the training and education components and putting them into a national learning organization. We are taking the distribution arms of several of our wealth management and insurance affiliates and merging them. These activities are slated to come to fruition in 2003. The final image is to create a two tier national organization. It will take a little longer to do that, but that is where we are headed.
Senator Kroft: I understand that it is an incremental process and presumably, momentum will build as you get some of the roadblocks out of the way. I am a great believer in the adage that "a little knowledge is a dangerous thing.'' I come from Manitoba where I have seen the effectiveness of the credit union movement and so I think I have an understanding of how they work.
Should we try to think of this new credit union as another bank? How off the mark are we if we consider it as another small national bank?
Mr. Guss: We are putting the centrals together. It is the second tier and eventually, hopefully, they will combine with Canadian Central. The credit unions will remain rooted in their communities and that is important to keep in mind. Their great strength is their connection to the community. We are not headed toward one big co-op bank with the credit unions as the branches.
Senator Kroft: What does national central do?
Mr. Guss: National central is the backroom for credit unions. We provide: the clearing of cheques, the liquidity as a central banker, and their connections to Interac and all the national and international electronic networks. We own a major percentage of two insurance companies; we own a trust company; and we own many wealth management companies, including Ethical Funds Inc. Ms. DeLaurentiis is the Chair of the Prudential Group, which includes Ethical Funds Inc.
Senator Kroft: I would like to come back to credit. Could you explain the process to establish credit?
Mr. Guss: Are you talking about the credit from us to our credit union members?
Senator Kroft: Yes.
Mr. Guss: First, every credit union has a line of credit from its central. We ensure that they have the cash they need to meet the requirements of their individual members.
We also have a mechanism through the Bank of Canada. Credit Union Central of Canada is called a group clearer in the CPA, Canadian Payments Association, and as such we have a line of credit from the bank.
Senator Kroft: Is that where your capacity is to supply liquidity?
Mr. Guss: That is correct.
Senator Kroft: It is a pass-through capacity from the Bank of Canada. Are you a raiser of capital of funds?
Mr. Guss: We raise capital on our own. We have the power to take deposits from our members, and we also have the power to leverage that.
Through the mechanism of the Bank of Canada, we settle with the other financial institutions. Not many institutions can come to the table and say they have a line of credit from the Bank of Canada.
We settle for all the credit unions that are members of our system through the Bank of Canada account. Our account is worth hundreds of millions of dollars. That is how we supply our credit unions with liquidity on a daily basis.
Senator Kroft: A Credit Union Central would not issue paper of its own directly to the public?
Mr. Guss: We have a bond rating. Ontario central has a commercial paper rating, and we can issue paper, but we have never had to.
B.C. Central has an R1 mid-rating that is at the same level as most of the provinces. They have an active program of issuing paper to raise funds for the credit unions at lower rates.
Opco would expect to get the same rating, which means we will have available for credit unions funding at a lower cost that they can turn around and lend to small businesses or their individual members.
Senator Kroft: What are the growth expectations? There are not any obvious limits or ceilings that you are bumping into in terms of your capacity to provide the liquidity through the system. You have the credit rating. You can issue the paper. You have the Bank of Canada relationship, and, of course, the deposits that come into the system at the grassroots.
Mr. Guss: That is correct.
Senator Oliver: You have spent a fair deal of time discussing competitive balance. The Competition Bureau will deal with competitive balance and other items such as safety and soundness will be covered by OSFI.
What we need from you is a definition of the "public interest,'' and items that ought to be included in a public interest test.
If two of our big banks were to merge would you be in a position to pick up some of the branches in Atlantic Canada and Ontario? Would you have the capital or the interest? Is part of your national plan to help build a second tier to give competition to the banks?
Ms. DeLaurentiis: Yes. In the last two years, we have picked up 72 branches from the banks.
Senator Oliver: Was the Bank of Montreal was one of them?
Ms. DeLaurentiis: Bank of Montreal and Bank of Nova Scotia. The interest is definitely there. Clearly, a business case would have to be made. We would have to be convinced that for whichever branch was up for sale, the terms were fair. We would want to ensure, for example, that there was not a creaming off of the best customers and that kind of thing.
However, the interest is there. The record is there as well, and the capital is there.
Senator Oliver: One of the other things that they look at in terms of the public interest is what will happen to some employees who may be displaced during a transition. Would you be prepared to keep some of the employees?
Ms. DeLaurentiis: That would be part of the business case. In the last number of years we have had a number of credit union mergers and the number of employees has increased, not decreased. The number of locations or branches, has increased, not decreased.
We are finding that as we expand, we pick up more business. It sort of feeds on itself. We no not see a general decrease. The question of whether there is a cultural fit between a credit union and a bank would have to be taken into consideration. To illustrate, the merger trend tends to increase the number of branches or locations and increase the number of staff.
Senator Oliver: One of the other things that people have suggested looking at in terms of a public interest test on a merger of two big banks is whether there would be capital available for small business. You have total assets of $64 billion. If you were to pick up branches in Atlantic Canada, would you be in a position to make more working capital available to small businesses?
The Bank of Nova Scotia and the Royal Bank are moving out of Atlantic Canada and it is harder for small business to get capital. Would you be prepared to step in and make capital available in the event of a merger?
Ms. DeLaurentiis: When we look at the Statistics Canada data, it shows us that the credit union system, including the Desjardins, is providing 38 per cent of authorizations under $50,000 and 26 per cent of authorizations up to $250,000.
Senator Oliver: In Canada?
Ms. DeLaurentiis: In Canada. Proportionately the credit union system is carrying more weight than other financial institutions. Enhancing and improving the position of credit unions with respect to commercial lending is a priority for Canadian central.
We know that we have to improve and increase the expertise available within credit unions. Traditionally, they have been focused more on the consumer retail market. We have an initiative to expand the number of commercial lending courses that are available to improve that expertise. We are looking at some of the legislative and regulatory issues. For example, we want to look at whether harmonization of rules with respect to commercial lending is important.
The B.C./Ontario merger is important because it will allow credit unions to pool their capital and to establish syndications. When we talk about "syndications,'' we are not talking in the realm that the banks talk about syndication. We are talking about much smaller numbers.
We want to look at whether there are some regulatory restrictions. We are told there are, and we want to identify and focus on them. We want to sort through those issues in order to position credit unions to lend to the small and medium sized business.
Senator Oliver: Your position on those three points is quite encouraging.
Senator Setlakwe: You assume that the bank mergers will result in decreased activity in regional and local banks and that you will pick up where they leave off. Am I correct?
Ms. DeLaurentiis: Yes, as long as we can make a business case.
Senator Setlakwe: You think that you could fill the void?
Ms. DeLaurentiis: We think that we can, yes.
Senator Setlakwe: You are not contemplating that other institutions, such as foreign banks will also try to fill the void?
Ms. DeLaurentiis: The statistics show that foreign banks are not interested in rural areas. They are not interested in community business. We do not think that they would change that policy.
Senator Setlakwe: Mr. Guss, you said that you would want to cater to small and medium enterprises, up to a point and that there is a limit to the amount of credit you would want to extend to them. What happens to a small or medium enterprise that grows to be too big for you?
Mr. Guss: We have syndication programs. We think that the creation of our merged entity will help credit unions service that market more effectively. Right now, a credit union may have a lending limit of $1 million or $2 million. It may be serving a company that is starting to grow and becoming successful. It could be in Sault Ste. Marie or Thunder Bay.
The point is that right now, in Ontario, Central is running a syndication program with its credit union. When a credit union needs more funding for a loan that is growing, we will step in and bring other credit unions to the table and put the syndicate together. It will grow to $4 million or $6 million. If we had a capital base, as we will in Opco, of $300 million instead of $100 million, then those loans will be easier to make or we will be able to make more of them.
If Opco is operating across the country, then, surely, it will also be able to fill that kind of a niche or a need in Nova Scotia. Right now, Saskatchewan central, for example, does a wonderful job in the Saskatchewan market. They are servicing small businesses and fairly large businesses. If we come together with one capital base, they will be able to increase the size of the loans they make, or their number.
We think our merger will definitely give us the capital to allow stronger syndications to pick up the kind of challenge or demand that you are describing.
Senator Setlakwe: I assume you will not expand into Quebec and compete with the caisses populaires. Will you be able to extend loans equivalent to those that Quebec offers?
Ms. DeLaurentiis: The caisses in Quebec have 35 or 40 per cent of the commercial market. We do not have anywhere near that.
Senator Setlakwe: I am talking about individual loan limits.
Ms. DeLaurentiis: I am not sure I can answer that, but I will get you an answer.
Senator Meighen: The banks have said that one of the advantages of mergers is that it clears the ground for people such as you to come in, pick up the branches and offer the local service that is so much in demand.
What will happen if the ministers do not approve the bank mergers and we find ourselves in the same situation we have been in for some time? Is the best way for you to enter new markets to pick up bank branches?
Mr. Guss: We have been growing by leaps and bounds for many years. In Ontario, which has probably been our weakest market, we grew over 9 per cent a year for the last five years. During that time we bought only two bank branches. We were able to grow without taking over bank branches.
Ms. DeLaurentiis and Canadian central run a planning session for all credit unions every spring. They have identified as one of four major initiatives a thrust into commercial small and medium sized business lending. We are prepared to enter that market.
When we go out to look for business, especially outside the major centres, we find excellent business potential. We can have high underwriting standards, and make all the loans we need to make to fill our portfolio. The banks simply are not as competitive outside the major cities. That is either because they do not want to be or they do not have the people out there to do it.
Outside Toronto and Vancouver, our market growth will be terrific, whether the banks merge and abandon communities or whether they stay. We will operate effectively and continue to grow even if there are no bank mergers.
Senator Meighen: That is encouraging to hear. Your statistic of 9 per cent per year is a good growth rate.
Generally speaking, can you make commercial, corporate and individual loans? Can you sell insurance? Can you make car lease loans?
Ms. DeLaurentiis: We can do everything that the banks can do and in some cases, we can do more than the banks. For example, several credit unions see car leasing as an important niche market for them.
With regard to the retailing of insurance, B.C. is in a unique position in that it can own insurance agencies and sell insurance products, although, it must do so in a segregated premises, and not in the branch.
There is a big interest on the part of credit unions to be able to retail insurance in the branch because it will provide a broader suite of products.
In the rest of Canada, credit unions are not allowed to own a majority ownership of insurance agencies, so they have not got into the business. It is not the right model for them.
The credit unions can provide essentially the same range of products that you get from a bank.
Senator Meighen: Without any accusation levelled at you of cross-selling, I am sure.
Ms. DeLaurentiis: There is networking and cross-selling. It is the tied selling that we would not do. Cross-selling is a good thing, right?
Senator Meighen: You do not run into that problem of tied selling? An example of tied selling would be: "I will give you the loan as long as you also buy the insurance.''
Ms. DeLaurentiis: No. Creditor Life is the more popular product that has been around for a while. The level of disclosure and the kind of requirements to which all financial services are now subject is that the individual, the customer and the member must sign. There is no negative optioning. We certainly have not heard any complaints about it.
Senator Meighen: Finally, Ms. DeLaurentiis, on page 3, you state that the federal government:
2. Continue consulting with representatives of the cooperative financial system to further the development of federal cooperative bank legislation;
Would that end up being supplementary to or in replacement of provincial legislation?
Ms. DeLaurentiis: It would be supplementary to it. Credit unions are very much provincially regulated. I do not think the federal government has the appetite to get into a battle to realign who regulates credit unions. This is really a supplementary solution. It is not for every credit union. We do not see a cooperative bank being the institution that a credit union gravitates to. There may be a dozen who are very interested who want to operate across the country for various business reasons. We think it is a good alternative to have available.
Senator Meighen: Who will regulate the new entity when B.C. and Ontario Centrals get together?
Mr. Guss: The provincial centrals are incorporated under provincial law, but five of us are already regulated under federal law, so we already have a relationship with OSFI. The new organization will be incorporated and regulated under federal law. We are becoming a pure bred instead of a hybrid institution.
The provinces will want to have a window on our operations because we will be providing liquidity as described before. It will be important that we share information with the provincial regulators.
Senator Tkachuk: Will you be recognized as a bank once your two centrals have merged? Will OSFI recognize you as a bank?
Mr. Guss: Philosophically, they will see us as bank, but no. Technically speaking, we have our own legislation called the Cooperative Credit Associations Act. We will become the first credit union to be incorporated under that act that reads like the Bank Act.
Senator Tkachuk: How will it work if Saskatchewan wants to join?
Mr. Guss: We believe that the changes we are asking for now will open it up for others to come in. I do not want to make any promises, but my view is that with finance and OSFI, we have been methodical in identifying the changes we need. We believe we have identified all of them. You never know what another province will ask for when it is ready to come in. It is possible we will have other requests in the future.
Senator Tkachuk: I know that the members a credit union own the credit union. How does it work when you buy five branches and you do not have a membership? Who owns the branches in the meantime? How does that work? Does Credit Union Central buy the branches? I know that you claim to be a grassroots movement.
Mr. Guss: It is a question suitable to our very decentralized system. We have distributed decision-making.
Senator Tkachuk: You have to whip up the grassroots.
Mr. Guss: The grassroots are interested, and it has worked differently in each province. In a couple of provinces, central did make the purchase and held it in an overnight transaction, and then resold to the individual credit unions.
In Ontario when one of our credit unions wanted to buy a couple of branches, we worked with them. However, they made the purchase directly because it was only two branches. It depends on the size and the province, and the provincial laws.
In the Prairies and B.C. where they did the biggest purchase, in Alberta, Central purchased them, held them for a moment, and then distributed them to the credit unions.
Senator Tkachuk: What happens when you get to a town that is served by one bank or two and one of them will be merged out? Who would buy that particular branch? Do you and the local people work that out?
Mr. Guss: The local people have to be involved. In a case where the central is doing an overnight transaction, they would not buy a local branch unless a nearby credit union said that it could supply management, take the employees and manage it as a branch. The central would never directly own and manage a retail financial institution or retail branch.
Senator Hervieux-Payette: I am curious to know how you sold your merger deal. What was the reaction of your members? How were you allowed to close some of your operations?
Would you inform us about the process and how the decision was made?
Mr. Guss: Let me be anecdotal. How did we sell it? I know every town in Ontario like the back of my hand. My colleague in British Columbia knows British Columbia like the back of his hand. My colleagues in all the provinces travel a great deal and visit the credit unions wherever they are and work with them. It is a complex and sophisticated transaction. We are in a very demanding business.
Our decision-making system is democratic. We must talk with our members because they are the people who sit on the boards of the credit unions.
You say that our system moves slowly, but it is democratic and we have worked very hard to build our support. It has taken us two years to achieve this level of support. I am very proud of the hard work we have done.
Ms. DeLaurentiis: A large part of the background work was selling a vision of greater efficiency, cooperation, the ability to grow, and to serve a larger market. Fundamentally, the individual credit unions were ready to take on that challenge and recognize that in order to do so, they needed to take the step at a national level to bring their operations together.
The other important point to keep in mind is that as British Columbia and Ontario mergers, we are talking about one entity that represents 60 per cent of the market share. It is a huge accomplishment.
The Chairman: Thank you for being with us. We wish you success, and we hope the government gives you fast action. If they do not, come back, and we will try to help.
The committee continued in camera.