Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 30 - Evidence - October 7, 1998
OTTAWA, Wednesday, October 7, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:00 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we are here to continue our Senate hearings on The Task Force on the Future of the Financial Services Sector. We have witnesses this afternoon from three companies. We will first hear from Mr. Peter Godsoe.
Mr. Peter Godsoe, Chief Executive Officer, Bank of Nova Scotia: I welcome the opportunity to appear before your committee on financial sector reform. The challenges we face in setting a future direction for our industry are not only extremely complex but of profound importance to the economy and its functioning. As such, this committee, as has previously been the case, is in an important position to help define and establish the best policy framework. That is, a framework for the industry, for our shareholders, for our employees, for consumers, for businesses small and large, and for communities coast to coast.
Before turning to some general comments on the MacKay report, I should like to share with you some views on the industry in order to remind us what it is and how it functions. I will be general because it is a complicated document with 124 recommendations and I doubt if any of us are in a position to really understand its overall potential impact. I will also offer some thoughts on how we see the future, though it is not as clear as it was a few weeks ago. I will also have a few brief words on mergers. Why? Our dominant financial industry, and I think we all recognize it, is banking, and at the heart and soul of the economy is banks' lending, commercial lending, and lending relationships with individuals and small businesses across the country and in our communities. Mergers, unfortunately, have pre-empted virtually all debate about the future of our system, and continue to so do.
Some background, then. Our financial services industry, and specifically our key banking industry, is clearly a product, as MacKay recognizes, of enlightened public policy. We Canadians encouraged the development of a national banking system at the turn of the century. ScotiaBank was coast to coast by 1901. Contrast this with the United States, which is only now starting to create a national banking system.
We consolidated into five giants, if you will, in the 1920s. We deregulated interest rates in the 1960s after six years of study and debate and the very comprehensive Porter commission. We broke down the four pillars in the 1980s. Again, contrast this to the United States. They have been discussing legislation to break down the pillars for 15 years. If you think of speed, they are still discussing it.
We were always driven, as is the MacKay report today, by a desire to improve the quality and choice of everyday financial services. Today, and I do not think anyone would argue this, we have a winning system. It is highly efficient, very safe and stable, and extremely competitive. It is a national system with five strong players and a number of strong regionals. Canada Trust will follow us here today, and you heard National Bank last week.
It is a very technologically advanced system, certainly in terms of processes, and all major banks compete aggressively for share. This is a thriving industry. We are turning in record domestic profits. Core banking profits across our branch systems, backed by our telephone and ABM systems, range from 20 per cent plus return on equity to just under 30 per cent plus. This is not a failing industry.
That said, Mr. Chairman, I am not arguing for the status quo. ScotiaBank supports change, change that enhances competition and enhances choice, change that is in the interests of Canada. However, we believe change should be implemented only after careful, comprehensive, and transparent review processes that look at maintaining the great strengths of our system, especially our core banking system, while building and adjusting for the future.
As I said, I do not believe Canadian banks face a crisis or that foreign competition is about to overrun us. To the contrary, it is global capital markets that are in disarray. I just came back from Washington, and there are deep concerns there about the global economy and systemic risk. However, Canada's domestic financial system is safe, strong, healthy, liquid, competitive, and enjoying record profits.
With that background, Mr. Chairman, let me turn to the MacKay report and some general observations, for MacKay is a great beginning, and I congratulate Harold and his task force on a comprehensive report. We have 124 high-level and, in some cases, detailed recommendations.
We fully support the general thrust of enhancing competition, of empowering consumers through transparency and clarity of information. We also agree with many of the MacKay report recommendations on how to better serve consumers and small business -- better disclosure, plain language, expanded reporting on the SME sector, and lending statistics. Obviously we always have room to improve.
On the business side, we like the increased flexibility for financial institutions, greater scope for holding companies, joint ventures, various forms of partnerships, more progressive regulatory system, accounting, taxes and so on. This is the right policy direction. On the other hand, we need to fully understand the overall ramifications of the report. For example, we need to consider recommendations that suggest how institutions should manage certain activities and what that means for the banks; that is, what input have we given other financial institutions, and have we considered the impact on our customers?
As a businessman, Mr. Chairman, I am fundamentally wary about a large step-up in regulations or legislation. That can introduce new levels of rigidity and costs, and can also be a large barrier to entry. This would otherwise offset the gains that we should be making through higher competition.
Therefore, we need to consider how the principles of increased competition fit with any additional regulations and legislation. At a broader level, we also need to consider payment system recommendations following on the finance reports, and recommendations around the CDIC. These are very complex issues and can have an enormous impact on the safety, soundness and efficiency of the sector. Owing to this, we need to carefully study the package of proposals put forward by MacKay, and to debate the issues. Legislation, regulation and implementation are serious challenges not to be treated lightly.
In addition, the government needs to consider and identify the best balance across the parts of MacKay, which is why I believe, Mr. Chairman, that the report should be considered in its entirety. I worry about the natural propensity to cherry pick from the report without considering the whole. That is, to rush into popular legislation or regulations without understanding costs or other implications, to avoid tough business choices based on effective and targeted lobbying, and to accept whatever is proposed in return for speed and possibly mergers. At the same time, I believe we all support moving forward expeditiously, but it is far more important to get the policy framework right than it is to get it done quickly.
I strongly support a process that would see us consider and debate the government's response to the report, possibly in the form of draft legislation. This is really the standard for policy making in Canada; to ensure that we get it right in the interests of all Canadians.
It is important that we should not consider the mergers until we have decided what to do with the MacKay report. We need to get a clear sense of where we wish to go as a country in the full financial system. I cannot see irreversibly altering our system by allowing two bank mega-mergers and then sitting down to debate what the sector would look like. Up until MacKay, as I said, the proposed mergers unfortunately have monopolized much of the debate on the future of the sector. We should not let this happen again and we hope that MacKay will put this debate back on a broader ground.
Let me offer a few thoughts on the future. Ultimately this process establishing the future direction of the financial sector must, as I said earlier, maintain and build on the strengths of our current system. We have traditionally looked to history and what has made us safe and stable, and it must be about Canada and Canadians. We should not get too caught up in globalization. Greater competition and choice must be the centre of our policy and, indeed, Mr. MacKay centred on more competition and more choice.
In particular, there must be a high degree of competition in what I will call "core banking," because those are the areas that lack contestability. Areas such as mutual funds and wealth management do not lack it. In my view, it is critical that we maintain overall Canadian ownership of our industry.
Mr. Chairman, in this global crisis we are seeing that the domestic banking systems and their liquidity is banking the countries. Believe me, it is not that foreign banks -- including Scotiabank -- are going into Japan to lend.
Strong domestic competition is the best way to drive innovation and create real long-term advantages for Canadian financial institutions. Sure, our system serves the needs of Canadians effectively. In addition, the strength and toughness from high levels of domestic competition, at an institutional level, translate in the end into international competitiveness. That is why we are for policies that will increase our international competitiveness without compromising competition here in Canada, and why we are for open entry to foreign competition as long as Canadians can compete fairly. We need four to eight -- preferably more -- nationally competitive players to ensure satisfactory competition and choice. We do not need but two national champions.
If we were to have two banks, Mr. Chairman, we must consider what would happen if one of them were to stumble. We see it in Crédit Lyonnais in France, we see it in Japan, and two Swiss mega-banks had major trading losses in the last week and a half. Senior federal reserve officials in Washington told me two days ago that they are very worried by what they see as the incipient start of a credit crunch in the United States. It is already hitting big companies.
This is why the strength, liquidity and soundness of the Canadian banking system has served us so well over time, and why we should consider change very carefully. We must maintain and build on that safety and soundness, on the diversity of our financial sector, and on our banking system in particular. Ultimately we want diversification not concentration, more choice not less, and a system that functions for Canada and for Canadians.
On that note, Mr. Chairman, I have a few words on mergers. As I said, they would represent the most dramatic and irreversible change to our industry in the past 75 years. Clearly, mergers represent a valid business strategy. In-market mergers are a classic response where companies wish to increase market share and reduce costs through elimination of duplicate networks. That is clear. I have no problem with this in principle, but Scotiabank's position is that these mergers must be analyzed very thoroughly, because from our viewpoint they represent bad public policy. This is bad for competition, bad for choice, bad for consumers in small business, bad in terms of potential concentration of risk and power, and it creates a concentration that is unhealthy in a country the size of Canada.
The proposed mergers would eliminate one-third of our country's banking system as we know it. As far as I know, this has never before been done in a developed country. We would be moving to levels of concentration that are not seen anywhere else in the world. Mergers would mean that almost 70 per cent of virtually all core banking markets would be in the hands of two banks. That is, 70 per cent of everyday banking services, services that touch virtually every Canadian household: personal deposits, transaction accounts, loans, mortgages, and small and medium-sized business lending.
I agree that globalization is a major force. You cannot pick up a paper without reading about it right now. It is a major force in capital markets. Although even there, if you take Canada, our equity in distribution for many companies is local and goes through the bank-owned dealers who have about 80 per cent of the market, the local stock markets and the investment banks.
Globalization is not a factor in retail and commercial banking, however. Studies done in the U.S., Australia, and again in MacKay, have found that personal lending, personal deposit accounts, and small business lending are very local.
Technology enables us to withdraw cash, to use debit cards rather than cheques, and to use PCs and telephones to pay bills and do account inquiries, but the real relationship is still about people, communities and branches, and it is intensely local.
Do we want to create the most concentrated domestic banking system in the world just for the sake of creating two players with a greater capital base which will allow them to expand in the U.S. or in global capital markets? I do not know. We certainly do not need a bigger capital base for our Canadian operations.
The five of us, in terms of Canada, are gigantic. We are very big for this country and we have more than enough capital to create all the competition and to manage all the risks that need to be dealt with.
Mr. Chairman, we are in a period of profound global unrest and uncertainty. We need to get our financial sector right to ensure that the necessary resources are available to Canadian consumers and businesses. In this environment there will be winners and losers, and we must ensure that Canada is a winner, just as we have in the past.
We need to address the MacKay recommendations as a package because we need to address Canada's financial sector framework as a package. We need to find the right balance between business powers, safety, stability and competition and the interests of consumers, small businesses and communities. We need the government's response to MacKay -- possibly through proposed legislation, as I said earlier. We need further debate, in my view, on costs and processes in order to understand, in a very practical sense, what is being proposed. We need to define the future direction of our financial sector, keeping mergers in mind as one option. However, we cannot let mergers pre-empt the process, and we can hardly consider the future of the sector after gutting it through the irreversible changes that mergers would bring. We need to get the framework set first.
Mr. Chairman, one thing is certain. Mergers or no mergers, legislation or regulations notwithstanding, Scotiabank has been in business since 1832. We have been a national bank for most of this century -- since 1901. We intend to continue to be a national bank, serving our customers, providing good careers for our employees, achieving strong returns for our shareholders, and operating as part of Canadian communities from coast to coast. We are absolutely confident of our capacity to compete, to innovate and adjust, and to continue to play a key role as part of the Canadian economic fabric.
The Chairman: Thank you, Mr. Godsoe. Three or four times in your statement you used the phrase "core banking," which many people watching on CPAC may not understand. Could you define the term as you use it?
Mr. Godsoe: Core banking is lending to individuals and to small- and medium-sized businesses as opposed to doing capital markets and lending to great corporations. On the other side, it is core deposits, which is where you have chequing and savings accounts which can be accessed through a debit card, with ABM machines or by telephone. The U.S. Federal Reserve uses core deposits -- insured deposits -- as its one proxy for concentration because it knows that core banking is what it is all about.
The Chairman: On the other side of the coin, it does not include RRSPs, mutual funds or what the banks would call major corporate loans. It does include small business loans, however.
Mr. Godsoe: Totally and completely.
Senator Oliver: Your presentation was helpful. You made quite a few comments about mergers. I will not ask you about mergers in particular, because you are actually one of the big five who come to the table without a vested interest; that is, you are not looking to merge and change things quickly. It is because you do not have that vested interest that I want to ask you some very general philosophical questions to determine what is wrong and how it should be fixed.
A number of witnesses who have come before this committee have said that the status quo in the financial services sector today is not an option. Harold MacKay and others have said that. In other words, something must change.
The task force report said that extraordinary advances have been made in technology and knowledge to enable business people, entrepreneurs and innovators to develop new products, new services, new ways of doing things, new distribution channels, and new industry.
What do the banks and other aspects of the financial sector need to do to keep up with entrepreneurs, innovations and needs for the financial sector?
Mr. Godsoe: There are two parts to the question. For our own uses, we must out-source, joint venture, and tap into the intellectual capital that is driving these wondrous changes. We must look into the Internet, into the way we use algorithms in trading -- although that has many negatives right now in global capital markets -- and into getting better services for our customers. I think that is going on around the world.
Citibank out-sources. Cable and Wireless in Great Britain just out-sourced. Bank One in the United States just out-sourced. We will all do that, and we have good technology.
The other side of it is whether we can improve at lending and venture capital to help spawn an industry that is very important to Canada. I do not think there is a magic wand. Helping venture capital is good. I have spent a considerable amount of time in Silicon Valley because one of my children is at school there. They have a lot of venture capital firms. They also have a lot of smaller banks that lend.
We just have to work at it. Doing more work in terms of statistics at Industry Canada to see what we need and how we can do it is helpful. Tax incentives for venture capital are helpful as well in raising equity.
Senator Oliver: Aside from the part about venture capital, you can do all of the things that you mentioned now. However, this committee is really looking at new public policy and new frameworks. In order to keep Canada constant as a wonderful place to do business and as a leader in financial services, what new public policy should we be looking at as a committee?
Mr. Godsoe: I do not think that any of us have the resources, the capital, and the intellectual capital in terms of our management and the people we have in our systems department that would allow us not to compete. This is where I disagree with some of my competitors. There is absolutely no proof that scale creates economic excellence. That has been refuted in MacKay and there are many Federal Reserve studies on that.
We have very good Internet banking. Scotiabank is receiving an award in the United States for our Internet banking. There is nothing in the world better than what we have. It is as good as anything Wells Fargo has. National Bank has first-class debit card technology. I do not think we are that far behind. We are talking a lot about the sky falling in and about needing help, but we do not need help. Technologically, we are considered one of the two or three most advanced systems in the world, by any study.
Senator Oliver: With regard to regulations, I will paraphrase what you said today and then I will remind you of what two other CEOs of the big five have said. You said that as a businessman you are fundamentally wary of large step-in regulations or legislation that can introduce new levels of rigidity and so on.
Did you find that there is too much regulation and government interference in the MacKay task force report? Mr. Baillie from the TD and Mr. Flood from the CIBC said that the recommendations really mean over-regulation in the financial sector; for example, the kinds of regulation required for privacy, standards, coercive tied selling and accountability statements.
Just taking those three, do you think there is too much regulation? Is it giving too much power to OSFI and the minister?
Mr. Godsoe: On a surface read, yes. I do not think we know. The CBA is not effectively functioning now. Unfortunately, I am not asked out to dinner by the other four every night of the week.
We are a complicated industry. When you are changing 1,200 branches and putting in something, the devil is in the details and the implementation.It is at a high policy level to say implement this, that and that. What will we do when we are reporting on communities? What will we do when we are retraining our people?
We would have something like 3,500 people to retrain on any one of these steps. I do not know what it means yet. We are just starting to work through it. I think that is the danger because when you put something in regulations or legislation without thinking through the costs, without having the experts who actually manage it tell you what they think is involved, you are creating both a barrier to entry and a large cost. It is very difficult to get rid of in the long run.
My instincts are that the MacKay report, with 124 recommendations, has a little bit of something for everyone. You can read through it, pick out a paragraph, and say "this helped this" and "this helped that." We have to step back a little and ask if it is effective from the point of view of total functionality.
I worry about the cherry-picking. Politically, it would be very popular to pass a lot of legislation protecting consumers in communities, meanwhile out leaving any of the hard business judgment issues that will increase competition to the various lobbies, because they are politically unpopular. It should be looked at as a whole, however.
Senator Oliver: There is one phrase that I expected to hear from you today, and I did not hear it. It is referred to in the task force report. It deals with strategic alliances.
You spoke about joint ventures in your report, holding companies, forms of partnerships, but at no time did you say "strategic alliance." Can you tell me what you understand by that term, what it means to you, and what it might mean to the banking sector in Canada?
Mr. Godsoe: In the longer run, strategic alliances will be more along the lines of a Mercedes Benz or a Daimler Benz than a Chrysler, whether it is a takeover or a strategic alliance. Alternatively, we will see mega-institutions evolve, and we are already seeing examples of that.
As we expand out internationally, we will find ways to make strategic alliances. At Scotiabank it has been part of our planning. We can joint venture in Latin America to get a better comparative size. I do not think Canada can get big enough in this industry to be a competitor on scale, if that is the phrase one wants to use. What are we to do? Create a monopoly so we are big? I do not think that is the proper way to go.
I am a deep believer that banks are not really technological innovators. They are great users of technology. Lloyd's just outsourced much of its small business lending to a technological firm in the United States. It is in Great Britain and is an absolutely great bank, far bigger than any of the merged banks. I think we will see that.
Senator Oliver: But is the strategic alliance a way in which Scotiabank, Canada Trust or National Bank, instead of merging, might find ways growing and of doing new things in the world?
Mr. Godsoe: Absolutely. We are all talking to each other, believe me. I have talked to banks in Great Britain, Europe and the United States. We are always talking with each other. The Americans are all doing alliances, and we have them too. We have one with First Bank of Chicago where we do the cash management in Canada, and one with our Mexican bank where we have 8,500 employees and branches in Mexico. First Bank of Chicago does it in the United States. I had breakfast with its chairman two days ago in Washington, and we are talking about expanding our alliance to Chile and Argentina. They will take over Europe. That is a strategic alliance as we pass the customer around, in much the same way that airlines share codes.
The Chairman: I would like to clarify your comment on cherry-picking, Mr. Godsoe. Are you saying that it would be a mistake for government to take the politically popular stand of passing legislation governing all the issues in chapter 7 of the report, which deals with empowering consumers on privacy and coercive tied selling and a variety of other things? Is it your position that that would have an additional cost to the industry? If that is going to happen, then just as the report was designed to be a balance, should legislation also be a balance?
Mr. Godsoe: That is my point, Mr. Chairman. Politically, it is easier to take a number of these things and legislate and regulate than it is to deal with the harder issues that pit the insurance industry or the automotive industry against what they view as dominant banks.
With respect to holding companies and ministerial discretion, there is a significant amount of that in this report. There is a lot we would like to think about because our industry is not consolidated. There is a real temptation to say let us accept the MacKay report and go on with life. I do not think that will happen, unfortunately. I think we have already seen it with tied selling. Maybe it is right and maybe it is wrong.
I know for a fact that at Scotiabank, Mr. Chairman, we had two tied selling complaints last year. Both were reviewed independently and both were unfounded. In one case the loan was given a year after the RRSP, but someone who was lobbying on tied selling found this person and asked them to file a complaint. I am not sure there is a great deal of empirical evidence, but it has led to the legislation. I think we will see more of it, unfortunately. That is the fear.
Senator Joyal: We have been afforded an important opportunity to have a discussion. Most Canadians do not have the opportunity to see the CEOs of the five larger banks debating issues. Those who are privileged to be shareholders attend annual meetings, and those who are members of private business clubs pay their dues and listen to you or your colleagues at the other big banks.
There is something new in the approach that we have today. You mentioned the overall changes to the system in the 1920s, the 1960s and then the 1980s. In all those instances when there were major reforms to the system or changes in the system, the five banks agreed. There was a consensus among them.
On the merger issue, as you know and as the public knows -- and the public is listening to us today -- there are two different views of the system. One view bases conclusions on the fact that the Canadian market is open to foreign capital and all sorts of new technologies. Fidelity and American Express are competing here. I would use the example of the government having rented its credit card contract to American Express instead of Visa or MasterCard. This is a sign that the banking system in Canada is threatened by foreign capital, be it the U.S. or another country.
On the issue of mutual funds, companies such as Fidelity are here. In fact, day by day they are eating away at the base of the Canadian system.
On the other hand, you are here today. We have heard as well from the representative of the National Bank, and you have a totally different reading. Average Canadians trust the banking system as they trust their doctors. They believe that it is sound, and that the system is still credible and reliable through this world turbulence. Thank God it is so in Canada. Thanks to you, too, and to everyone else involved in this industry for your sound management. How can you reconcile those two fundamental views when the government will have to decide if it is black or white? There seems to be no middle ground but if there is, it appears that it will be at the expense of over-regulation of the industry.
Mr. Godsoe: It is a pleasure to answer your question, senator. It is about facts. You have a vision of the future that we will lose everything to monolines.
If you read the strategies of the banks involved, you will see that one interesting thing about all the mergers in the United States is that there is no mention of the word "monoline." They read "increased market share"; "expanding into different states"; and "taking costs out."
When I came back to this country after school, there was an American Express credit card. There was a Citibank in retail banking. Household Finance was in existence. When I was an undergraduate, I even got a loan from them to help finance my way through university. The car companies were here. We have had monolines here for 40 years. They are not new. We have been competing with them quite effectively.
I would put that down to the fact that there is a new wave of monolines coming in credit cards. We Canadian banks control virtually the whole credit card industry. Thus, there will be a few losses of share. Yes, American Express and Citibank won a government contract. What they do not say is that National Bank won the other half of that contract and has a bigger piece of the government's business than Citibank and American Express. What they do not say, clearly, is that someone like Scotia makes much more money in New York than Citibank will ever make in Canada. It seems to me that it may be a little fairer for them to compete up here.
The area of mutual funds is one that really puzzles me. I say that because we Canadian banks were not allowed, legally, into mutual funds until 1987. Fidelity has been a mutual fund company since 1946. It is the biggest in the world. The other one that is mentioned, Templeton, has been a mutual fund company in this country since 1954.
The Canadian banks came along in 1987. Now, the Royal is number two, something which I am not happy to admit. Scotia is number 15; but we will get better, we truly will. Some 13 of the 15 top mutual fund companies in this country are Canadian, not American. Are the two that are here not allowed to take a little market share?
The Canadian banks have close to 30 per cent of the mutual fund industry already. What is not said is that we have far more of the distribution because we own the dealers. What is also not said is that most of our mutual fund sales come out of our branches. Of course deposits have gone down a tiny bit. That is because we have switched customers into mutual funds. It will be interesting to see if deposits do not go back up with this bear stock market that we are in and mutual funds go down. We're very good at that. This is not bad for an industry that went from a standing start -- because, legislatively, it was not allowed in -- up to 30 per cent of the market.
I think we overstate these threats. We are paid to adjust. We are paid to compete. We are paid to innovate.
Five years ago, Microsoft was not in the Internet. All of a sudden, we are all in it. Change is here. We are paid to adjust. I find it remarkable that the Americans have not changed their system, legislatively, for 15 years, but nobody is saying it is out of business and it cannot adjust. It does.
Senator Joyal: The other argument we hear relates to the fact that there is a trend now to merge and, if you do not merge, then you will be discarded as an unimportant player because you are not following that trend. How do you address that issue? I am sure you are familiar with the mergers that have taken place in the U.S. with Bank One, Travelers, and others which might come down the road. How would you respond to the argument that we should merge to do business today?
Mr. Godsoe: As I said, I think mergers are a good business strategy. I think everyone in the U.S. except Travelers-Citi was driven by domestic considerations. They do not have a national system. It did not create overall concentration.
As you know, senator, the U.S. has drawn a line in the sand. No bank can have more than 10 per cent of insured deposits. The new Bank of America, I think, is at 8.3 per cent. They will not change that legislation. They drew that line in the sand because they will not tolerate the concentration.
Canada is in the interesting position of being the first developed system that is hitting a concentration issue. It is having to make a public policy trade-off. Do I want national champions, big, big merged banks with dominant market share? As you know, because you visited these countries, the Dutch would not allow this. They have four major systems. Everyone keeps saying that there are two, but they forget Fortis, RaboBank, ABN-AMRO and ING. They have four very major players in one very small country.
The Brits would not allow this; the Americans would not allow it; and three weeks ago, the Australians reaffirmed until they could assess it. We also must assess it. Is it good for Canada? Does it increase choice? Does it create too much of a concentration of power? I think these are legitimate questions of public policy which, indeed, should be asked.
Senator Angus: I thought my friend Senator Joyal was headed in a certain direction, but he stopped short of where I thought he was going. I will pick up on where I think he was going.
Having made the trip here from Toronto on a rainy day, I think you should take full advantage of the forum. We keep hearing, Mr. Godsoe, that you may be tasting sour grapes and that you have changed your tune. In your eloquent opening statement your clearly stated your point of view. However, it is alleged that this was not your tune a year or so ago. I thought you might welcome an opportunity to set the record straight.
Mr. Godsoe: Thank you, senator. I will say one thing: I now have more nicknames than I ever had when I was in grade school. I have been called a "lonely banker," an "ugly date," along with many other things. However, I have not been a hypocrite. I happened to go back and look at exactly what we wrote to Harold MacKay. Unfortunately, I do not have it with me now.
I said then that I am for competition; I am for opening up the system and looking at the ownership rules, which I think would be key but which I do not think will happen; and that I am for allowing mergers of equals within that framework.
What is not said is that in the next paragraph I said that these are very deep matters of public policy. I said this in October of 1997. I said that, if we moved rapidly on this, we would probably lose two of our major banks. Guess what is proposed? Losing two of our major banks. This would create levels of concentration. This would create employment concerns that would have to be seriously discussed. I am paraphrasing but, that is what I said in my letter to MacKay. I have not changed my tune. I am still saying that there are very deep public policy concerns that must be considered.
Clearly, if you have mergers behind "no change in ownership," it is the same as concentrating all your manufacturing behind a tariff wall. Are we Canadians prepared to have our banks and our insurance companies bought by foreign companies? I do not think so. I do not think that is in the MacKay report. Now we face an enormous concentration behind a barrier, which is what I said back in the fall of 1997.
Senator Angus: Mr. Godsoe, I just want to know exactly where you are coming from. I do not want to use that "H" word that you use; and I certainly do not have that in my spirit in questioning you. However, what is said expressly is that, on the one hand, he was doing a dance and trying to organize his own merger of big and big and that did not work out and so now he is taking a run at these other ones and in a very negative kind of way. I suspect it is not that simple, which is why I wanted you to have this opportunity to respond.
Mr. Godsoe: It is never that simple. I must have spoken to 50 people over the past five years about mergers, alliances and joint ventures. As a chief executive, I am paid to go to my board and present various alternatives, possibilities and opportunities in what we all know is a rapidly changing world. No one knows what I said to my board, but from the very beginning I have consistently said that mergers in Canada would be a high-risk issue because of the levels of concentration.
We already have one of the three most concentrated banking systems in the world. We do not have a solid secondary banking system. We all know that because, under public policy, we have been encouraged to buy everything. Occasionally, when we have tried to create a secondary system, it has gone under like it did in Western Canada. That is a high-risk strategy and it creates high politics.
Senator Joyal raised another spectre about which I am terribly concerned -- namely, that when you get concentrations of power and market, governments invariably move to re-regulate them, to counter-balance them, or to create government-subsidized institutions to stimulate the competition that has disappeared. I do not think it is particularly good for Scotiabank or its shareholders to be caught in that trap. History is replete with that kind of thing. We would have the highest concentration in the world.
Would I talk to anyone to see what they are thinking about? Of course I would. I am paid to be in the information flow.
Senator Angus: We have heard from many people on the MacKay report and in other connections as well. In our travels on the comparative study, one of the things we heard in England was that, while Canada may be good and bad in many areas, one thing we do have is a very fine banking system. It was suggested that it would not be too wise to mess with it.
I take it that it is also your view that we have a pretty good banking system here. It has worked well and it has served Canadians well. If we are to make some changes, it should be only done after profound, mature and careful deliberations. Is that not right?
Mr. Godsoe: That is absolutely right. I am not arguing to maintain the status quo, because I do think that we are evolving. Still, it would be a dramatic change to lose one-third of the banking system. Who can tell me what the competitive elements or the outcome of that will be five years out?
Merging is a pre-emptive strike that, in some ways, is saying, "We fear the future, and that something will happen. If you do not let me merge, I might have to shrink my bank." We do not know. One thing the global capital markets is teaching us is that none of us have omniscient wisdom. A year ago global capital markets were the second coming. They were the best thing to ever happen. Today, there is serious reconsideration about that.
We have operations in Indonesia, Malaysia and Thailand. I have been to all these places. It is a tragedy there. The financial sector is knocking out the real economy and creating starvation and ethnic riots. We must rethink parts of it. It was not perfect.
What I am saying is that we must go forward building on strengths -- not out of fear of weaknesses in the future.
Senator Angus: You think our system is quite good, subject to keeping up with the times?
Mr. Godsoe: That is self-evident. It is not just me who thinks so; it is also the world economic forum and the Wallace commission in Australia. This comes as a result of your visits to these other places, because you are the one group that has gone out and looked at other systems.
I would be quite happy if you all had an account in the United States. You could then talk about the quality of Canadian service or the ability to cash a cheque or use a debit card coast to coast without a hold being placed on that money. It is a pretty good system. The Americans are studying our whole payment system and feel that they would be lucky to have it in 10 years.
Senator Angus: We heard from Mr. Conacher the other day. We listened to him rant against the Royal Bank, the Canadian Imperial Bank of Commerce, the TD Bank, the Bank of Nova Scotia and the National Bank as well. His argument was that you folks in the banks are very bad. I thought you might have a general statement or a comment as to what you may not agree with there.
Mr. Godsoe: I do not know Mr. Conacher personally, but I do know that his great passion is to set up a consumer advocacy system that would funded by the banks, as exists with the utilities in the United States. It is quite unusual.
Criticism is healthy. It is part of the functioning of our system. I am not sure I agree with much that he says, because he is trying to create a problem and then provide a solution. I do not think we are as bad as he makes us out to be. Having said that, there are areas that we can improve upon.
Senator Kenny: At the beginning of your remarks, you spoke about process. It sounded like you were talking about the MacKay recommendations plus something more. Would you like to elaborate on what you see as a reasonable process, and on what sort of time-frame makes sense?
Mr. Godsoe: There is a real role here for Finance Canada to propose an integrated set of recommendations or legislation. There is a great deal of possibility in MacKay. After we hear from the department, we can then have the debate and see what we have. I do not know whether that would occur later this year after your report and the report of the House of Commons committee, or whether it would happen in the new year.
When I was younger I was sent to Ottawa to report on the Porter commission and to watch the debate over the legislation. It was an interesting time because we had changes in finance ministers and other sorts of things.
The fact that we have some people saying that we should take MacKay and put the whole thing through <#0107> although we have done absolutely no detailed study of its impact -- is very dangerous. There is an equal danger of cherry picking. That is why I would like to see what the government's response will be. Will it be to pick one piece and leave all the others out so that we can at least debate that? Alternatively, will it be to look at the whole thing, which was the purpose of setting up the MacKay committee? In the end, the department and the government must propose the legislation and the changes that are to come.
Senator Kenny: On cherry picking, I did not follow the exchange you had with the chairman. Are you saying that it is all or none?
Mr. Godsoe: Not at all, senator. I think it is rather easy, in a disjointed system, to pick one or two things and do them while deferring others, even though the original intent was to look at the entire system. Already the testimony in front of your committee is, for lack of a better word, breaking down along partisan lines. There is not much change from the debates of the early 1990s on auto leasing, insurance, or access to payments. The big change has been mergers.
The Chairman: To be clear, you are not using "partisan" in a political sense.
Mr. Godsoe: No; not in a political sense.
Senator Kenny: On page 3 of your remarks, you commented about the future of the industry being based on competition and choice, and said that that must be the centre of the policy framework. You also said that there must be a high degree of competition in core banking. Would you care to elaborate for the committee on what policies you think would cause that to happen?
Mr. Godsoe: On the small business side, in this country we probably have as much concentration as you can find virtually anywhere in the world.
Having said that, at least you have five national players, a strong player in the Banque Nationale, a good player in Hong Kong and Shanghai, and a very good, solid player in Canada Trust. That is not very much.
We must worry about what will happen if we remove two major players. Small business needs credit, and banks are still the basic providers of credit. Sure, we are into wealth management, mutual funds, and investment banking. We have changed a great deal in the past ten years, and that seems to be forgotten. We have evolved massively into very large universal banks. That is what we are within our own country. We are much more universal than the Americans in all ways.
We must ensure that that function within the economy is maintained, because it is the core of the economy. If we lose it, if we have credit crunch, and if we have banks leaving credit, who will fill that void? Wells Fargo from a telephone centre in the United States?
Every country of which I am aware focuses on small business lending, personal lending, and core deposits. They do not have one hint of worry about mutual funds. We have 1,000 mutual funds, and there is significant choice in mutual funds. It is not about that.
Senator Kenny: Perhaps I should ask the question differently.
What advice do you have for this committee in terms of public policy changes to achieve the goal that you laid out here?
Mr. Godsoe: The goal of encouraging a secondary system is admirable. I should like to know the cost benefits, however. How much will we subsidize the national credit union movement? Is it feasible? What about tax holidays for entrepreneurs setting up banks? When you look at the numbers of new banks set up in the United States compared to the number in Canada, it is two different worlds. Should we do it? Our experience in Western Canada in the 1970s was not particularly positive. Therefore, you must look at these things. They must be analyzed.
The goal is admirable, and it can be achieved. The Americans are still net-adding branches because of the new creation; they are not net-subtracting branches. When I go to Palo Alto I am always struck by the fact that they have five or six small community banks, but they all are absolutely spectacular and high-tech. They know the owners and entrepreneurs, and they are old-fashioned. They bank the person, whereas one of the complaints we get is that we are becoming detached from our communities.
You are on the right path. I just want to ensure that we understand the ramifications and the costs.
Senator Kenny: Later in your remarks, you said we needed four to eight nationally competitive players to ensure satisfactory competition. Do we have that now? If not, what policies do we need to have it?
Mr. Godsoe: We have the makings of it. You are demutualizing the life companies and giving them a holiday. Certainly two or three of them are big enough to compete. I do not think they will go into banking, but I think they can start to compete in wealth management. Ultimately, they could go down, or you could see cross-section mergers with people in banking which would not be anti-competitive. No one underestimates Power Financial and how big it is as a major player in this country.
You will get start-ups. Newcourt is one that is quoted in the report. However, you must always be careful. As we know, Newcourt needs a strong banking system behind it right now, not because it is in trouble but because there was a liquidity crunch on it last week even though it is strong and healthy. We have the makings right here. We just need to encourage them to compete.
Senator Meighen: I should like to go back to a subject that Senator Angus raised with another witness earlier in our hearings, and one to which you alluded. That is, MacKay's proposals seem to have some success in opening up the financial system and providing the flexibility that everyone wants, but at the same time they seem to add a layer of regulation that we did not have. That, as you and I well know, can cut both ways. I would like you to give me your assessment of how he struck a balance, or to what extent he struck an acceptable balance.
I then wonder if you could give me a brief comment on one of MacKay's recommendations, specifically No. 39 at page 202. I will read it to you:
The Government should have the power, to be used only in exceptional cases, to approve the acquisition of a large widely held Canadian financial institution by a foreign purchaser, free from the impact of the widely-held rules. Any such transaction would be subject to...
-- among other things, the public interest review process. I have heard that referred to as the Scotia clause, but I am sure you have an answer to that.
This does give the minister an extraordinary power to approve the take-over of a widely held Canadian financial institution by a foreign purchaser, free from the rules MacKay sets out in the first part of the report.
Mr. Godsoe: I find that it is a very voluminous report, although it is not as big as Porter's. The devil is in the details. We have 124 recommendations. I do not think anyone truly knows what they all mean.
When I first read it, I thought it had one section written by one person, another set of sections written by another group of people, and that everything has not been meshed together because the report is trying to strike a balance. The task force said here is an X section and a Y section, and this is from this group and that is from that group. That is why I think we must look at it. I am always wary. This is not a criticism of MacKay at all.
I met with the task force twice. The first time was on the subject of a seven-page paper on a very broad view of the industry, and it lasted for an hour and a half. The second time was for an hour just on mergers. Therefore, we have had no input on the practical side of it. I worry about that, because it is hard to retrain your people and reprogram your computers. There are a few things we might know about the practical side that might be useful here to add to the debate.
On the second part, my own view is that the Australians started this by saying one of our major four banks could be bought from outside the country. In some ways, you could almost argue that is healthier than what is going on here. If one of the banks were to be bought, and someone said, "Keep your head office in Toronto, and keep your branch systems there," you would not have this problem of losing one-third of your banking system.
On the other hand, it would be highly dangerous in terms of public policy to leave that discretion with the Finance Minister. You know what could happen. Someone would make a bid at a very high take-over price. Bay Street would say, "We have heard this one before. You cannot possibly turn this down. It is against the markets, or it is anti-business." That would put extraordinary pressure on them, and we must look for other solutions.
Senator Meighen: I have the feeling personally -- and I think some others may as well -- that much as I would enjoy doing your job, I do not think it is appropriate for me to do so, nor am I competent to do so. You, as you said, are hired to run the bank, and other CEOs and chairmen are hired to run their banks. As a legislator, I do not think that I should be trying to second guess them.
It occurred to me that you could take the broadest possible stroke on all this, as long as the competition issues to which you referred are dealt with satisfactorily, and as long as we can deal with the "too big to fail" question. We have a competition tribunal whose sole purpose, as far as I know, is to deal with those questions. I would appreciate your comments as to whether you and the others are already too big to fail, or whether you feel that we will only cross that threshold if, as, and when one or both of these mergers are permitted.
Once those questions are satisfied, why should I, as a legislator, tell the CEO of a bank whether he or she should enter into a strategic alliance, a sale, a merger or whatever? Those seem to be the two critical public interest questions, but there may be others. If you can point me in the right direction, I would be grateful.
Mr. Godsoe: I agree with you completely. That is what I have been saying. It is a fine strategy, but the public policy issues you have raised were always there. With regard to "too big to fail," if one of the five of us went under, could the other four, the government, insurance companies, et cetera, subdivide it and, as we have done since 1920, work this out without costing the taxpayer one cent? Probably not. The Swiss are already putting up a separate group to watch over their two mega-banks because of the problems they could create.
I agree with you that the competitive aspects are very straightforward. Before you debate losing one-third of your banking system, you at least want some learned input as to what the outcomes might be, because that is a massive restructuring. MacKay has a lot of advice as to how we should manage, and I quite agree with it.
As a chairman, I often make policy and people come to me saying, "You are living at 60,000 feet in an airplane. You do not really understand what is going on in the branch," or "You do not understand how you have to train the people or how your systems people must reprogram that whole thing so that everything works from coast to coast." If I am at 60,000 feet, I have a feeling that a committee that writes a report might be at 100,000 feet. We have to get the two together and ensure that it is practical and in the self-interests of us all. I agree with you completely.
Senator Meighen: You were a bit pessimistic in your assessment of our history of encouraging second- and third-tier banking in Canada. In our travels abroad we were struck by the fact that these different levels exist in Holland, Switzerland and the U.K. It seems to me that they are the ones who deal with what you referred to, at least to a large extent, as core banking. They make the small- and medium-sized business loans, they lend the mortgage money, they lend money to buy a car or to put a small addition on a house.
Is there anything in MacKay to give you any encouragement that he is on to something that will enable us to build and foster a second- and third-tier system to compete in the core business? This could be through life insurance and mutual fund companies having access to the payments system, or through credit unions being able to expand across provincial boundaries, et cetera. Is there anything there that might lead you to predict a rosier future in this area?
Mr. Godsoe: In a single word, no. You and Senator Kenny have touched on a point. I truly believe that the goal is admirable. In your travels you have seen that we are almost unique in the world in not having a secondary system. I do not think we totally discard history. I think we must go back and ask why this has not happened and what we need to do.
Clearly, building on the credit unions is one option. VanCity in British Columbia is a very tough competitor; there is no question about it. They are focused and well managed. Should there be more of that? Can we encourage private banks?
We need to know why it has not worked in Canada. Are we too dominant, and do we therefore drive them out through pricing and comparative advantage of scale? I do not know. As you know, we have all looked at scale and you can actually make an argument that a $5 billion or $10 billion bank can have the necessary scale to compete with a $200 billion bank today.
I would have liked to have seen a little more research on that. When I looked at the papers, I could not find an answer. I think you are asking the right question. I am not criticizing MacKay, but before we put money behind this we had better ensure that it has a good chance of success.
Senator Meighen: Is it not possible that if two of these big five trees became one tree there might be a little more sunlight getting down to the forest floor, thereby allowing some of these institutions to spring up?
Mr. Godsoe: If all five became one, there might be a lot of sunlight on the forest floor.
Senator Kroft: As you said, the devil is in the details. However, to the contrary, the politics that will drive some of these decisions is in the big questions. I should like to refer to a couple of those and get your reaction to them.
I guess that when the other four guys are at dinner they say, "We are not big enough. We have to be bigger if we are to compete internationally." I know you are not saying that, but help us understand the limitations caused by the size of Canadian banks. I will put you in the position of having to argue that. Conversely, why do you not feel you have limitations caused by size? Are your customers or shareholders suffering because of absence of scale? I am trying to test the validity of that proposition.
Mr. Godsoe: I think they have a valid strategy and they make good arguments. I worked and competed in New York. It was abundantly clear that we were not going to be as big as Citi or Chase back in those years, so we took a very focused strategy.
I look today at Canada, whether it is the banks or the telephone companies. You cannot make Bell big enough to compete with the AT&Ts of the world, if that is going to be your strategy, and I am very wary of national champions.
If it happens industrially, the company can go bankrupt and you can reconfigure it. If it happens that a bank gets in trouble, the country suffers. That is what we are seeing in Japan, so I am wary of it, and I think you want to have more than two horses in a race.
In my view, the only really global business is capital markets. It might be healthy or it might not be healthy. I personally believe that you must be in New York or London, just as the Swiss are. They are not in Zurich running the global capital markets. I think it will come down to a maximum of five to ten players. I do not necessarily believe that Canada must be one of them. The British are quoted as not being in it, but that is because each of the British banks -- all of which are much larger than the Canadian banks -- made deliberate business decisions not to be in that because they could make more money. Lloyds does not like the business. Hong Kong and Shanghai only want 5 per cent of their global income from that source. It was a strategic decision.
Retail banking, as I said, is still local, so if you want to buy a retail bank in the U.S., you have to be pretty large. They have higher price-earnings ratios than us and there are some very big banks down there. Scotia tends to be going one way, BMO another, and TD yet another. TD has become the third largest discount broker in the world, not because they are big but because they are well managed and focused. We will have to pick our niches. I do not think we can take on the world through size. We are not a big enough country. We would pay a terrible price by bulking up at home for the idea of a national champion abroad. I question it from a public policy point of view.
Senator Kroft: We are focusing on the banks. What about the customers of the banks? Is there any way in which Canadian industry or Canadian business is disadvantaged by not having larger Canadian banks to advance their enterprises?
Mr. Godsoe: I do not believe so. From one or two banks I have heard the wish that their bank were big enough to be able to do a project in a certain country. In point of fact, we do most of these through syndications. Scotiabank is in 53 countries, so we are on the ground in many places and can support big as well as small- and medium-sized business. Eighty-two per cent of our exports are with the United States, where many of our smaller businesses go, and they know how to get across there and do well.
In other countries, much like the National Bank, you can use correspondent banking. I think it sounds nice, but I do not think it is realistic.
Senator Angus: I have a follow-up to Senator Kroft's question about Canadians being disadvantaged by the fact that we do not have a national champion. We asked this question in the U.K. and in Europe. The example is the mining sector. All the other big players, such as Chase and J.P. Morgan, are good, but if Canadian mining interests wish to go to these markets, they do not know much about mining and it is highly risky; whereas if we had a Canadian player sophisticated in the mining field, it would be different. That is the argument given to us. Do you have a comment on that? Is that a valid argument?
Mr. Godsoe: Scotia owns Scotia Makada. We bought Makada Goldsmith from Standard Charter last year. We are probably number two in precious metals trading in the world, and we are one of the top three in base metals. The Toronto Stock Exchange represents 40 per cent of the issues. We all have mining engineers. You have three Canadian companies going into Peru, and you have three Canadian banks as part of the eight-bank syndicate that will make that happen. Incidentally, Scotiabank has a local bank in Peru.
We are deeply into mining. We think we are globally competitive. All my life I have been competing with Chase and doing project loans in various countries, such as Chile and Peru. I do not think that is valid.
Senator Tkachuk: I am from the Prairies, and we are extremely concerned about competition in the market-place. A sparse population makes it difficult for branch banking to exist, to give competition in small communities. We have heard a number of arguments used by the banks that wish to merge. Globalization is one you have touched on. You also touched on the need to invest in new technology. The other one I have heard a lot about is that if you do not allow the banks to merge, they will be niche players. I think you used the word "shrinking." What exactly do they mean by that?
Mr. Godsoe: I read that. I am not sure that pertains to all of those banks.
Canadian banks are universal. We are not mono-lines. We tend to use our various product bases and our data mining to try to get a full customer. We do much better if we can sell two or three products to you, senator, than just one. That is where we are heading. This is the scope-against-scale argument. That applies in small communities. That has been our bread and butter and still is.
What has really happened is that a lot of the processing is disappearing, so you use a debit card instead of a cheque. That is terrific. You use the telephone to get your balance. Guess what? Even my mother is phoning to get her balance each week. In the old days she would wait for the statement a month later. We get a lot of balance inquiries, which is fantastic, but it is not changing the relationship. That is our great defence.
Face the facts. Foreign penetration of our banking market is about the lowest in the western world. It is under 10 per cent. They are not doing very well. We are massive within our own country. I think you will find that when any of us start to lose a bit of market share, our boards will start to question us, and guess what? We go back and start competing. We stop closing branches. We try to get more marketing people. We all have floating sales services we want to expand.
We look at our market share in each province and in subdivisions of each province. We break that down by 29 regions in our bank, and we can actually look at our market share branch by branch. "Are you losing business to X, Y or Z? Why? Why don't you fight back?"
Senator Tkachuk: I believe that if two national banks merge, they will do it to save money. They will slash costs and close branches. Why would you have two branches in a small town? This is all about making money. I do not know that for sure, but my instincts tell me that.
The other argument I hear is that even if there is no merger, a lot of branches will still close because of what is happening and what will happen with electronics and technology. Is that what is going to happen? Is this something we should we thinking about? How do we service these outposts? In the Prairies we all live in an outpost, except for Winnipeg, perhaps, which is maybe an outpost in Canada. We have that problem. Is it going to happen anyway? Will we see that?
Mr. Godsoe: I think the death of the branch is akin to Mark Twain saying that his death was vastly overstated when he read his obituary in the newspaper. Most of the top retail banks in the world, such as Lloyds, would agree with that. Are we going to rationalize? Are we using technology to take costs down? Can Scotiabank gain 10 per cent efficiency over the next two, three or four years without merging? Of course. We are paid to do that. However, we get most of our new sales, and we have most of our great relationships, with branches. Two-thirds of all our customers still think of us and the relationship as a branch. Sure, 80 per cent or 85 per cent of transactions move electronically, but that is what they are, transactions.
You will find that the U.S. has added branches. We have different strategies. One bank closed 260 branches in the last five years. The two smallest banks, TD and Scotia, were about even. We only closed a few branches. We will do things differently. I think credit unions will come in. I think we will find there will be a lot of branches 10 or 20 years from now.
Senator Tkachuk: On the issue of competition and getting more start-up players in the banking business, we visited the Americans at the Federal Reserve. I think there is a reluctance for foreigners to come into Canada because they think banking is local. You said it, and I think that is true. Despite our reluctance to say that we have a particular national identity, we do. We understand it but no one else does.
One of the ideas we did talk about was branch banking. In other words, the Minot State Bank might have a lot in common with Estevan, Regina, and Esterhazy. The Scotiabank manager who works out of Esterhazy might find it easy to be transplanted into Minot and run a branch there. Correct me if I am wrong, but I asked how this could be done, and was told, by treaty. If we had a treaty we could do this. I think we can do this, and he thought we could do this. I am asking if you think this could be done.
Mr. Godsoe: It is slightly more difficult because there are different consumer laws and different currency. They create barriers to entry.
California went through two major bank mergers, and five years later the market shares are still there. Why did New Mexico banks or other banks not enter the market using the same currency?
Most of us have gone the other way. We had a branch in Seattle and one in Portland. We found them very difficult to run as an outreach of our British Columbia operation.
It is interesting, senator, that we actually got to Winnipeg by coming up from Minneapolis and Chicago. They had railroads across the border at the turn of the century and we were still paddling canoes. That is how Scotiabank got into the middle west, but it was not transferable. I think there are big barriers to entry into retail banking, very big.
Senator Tkachuk: Then there will be a concern.
Mr. Godsoe: Yes.
Senator Tkachuk: No matter how much we talk about getting other people involved in our banking system and providing competition, it has not worked. I think it will be a really difficult process. We have to depend on our own industry here in Canada.
Mr. Godsoe: I agree completely.
Senator Stewart: I have two quite different questions. Both Senators Joyal and Kroft raised questions about the nature of the competition outside Canada with which the Canadian banks have to cope. Now here you are and it is four to one and you are the one. Why are the other four so totally wrong? One consideration is that they believe we should have national flag carriers. The other is that the competition from U.S. financial organizations of one kind or another is a threat to the Canadian banking system.
I was wondering if there is something in the background. You say that now you do not get invited to dinner. Now go back beyond the time when you split with the other four on the merger question. Were you getting invited to dinner then?
Has the nature of the business done by your bank differed so considerably from the business done by the other four that, in a sense, you were the odd man out? I have the impression that the Bank of Nova Scotia has been in foreign countries for a long, long time. I just wonder if the others have or are they still captivated by the allure of all these green-back countries?
Mr. Godsoe: We all have a history of being outside Canada. Scotia was in Jamaica before it was in Toronto. The Royal, which also started out of Halifax, and Scotia, were both in Cuba before the turn of the century. The Royal had big operations in Argentina. We went different ways. Scotia is continuing to expand. We are in the middle; but it is a similar strategy to Hong Kong and Shanghai. We are trying to do banking in higher growth, less-developed countries. Others say, "I am only a North American bank." I do not know. That is fine. Others are technical, such as the TD. Three of us have quite large operations in New York. The Commerce, the TD and ourselves tend to have larger operations in New York than the Royal. We all went different ways, Senator Stewart.
Senator Stewart: Why did you not get a marriage proposal; and if you did, why did you turn it down?
Mr. Godsoe: We have been looking at this for five years, senator. We always thought it had a low probability of success from a public policy point of view, which we pointed out in our letter to Harold MacKay. Investment bankers go around with books on concentrated banking systems that they use as a proxy for trying to obtain some merger business. Long ago, they said it is not going to happen in Canada. They said it cannot happen any more in Holland; and it cannot go on in Scandinavia. They have these books which show that we are at the top. I must say, far from being lonely, they are all visiting me now because they view us as the one with flexibility.
However, that is not what it is about. I think it is about Canada and concentration. I have a deep fear that we will re-regulate. One amazing fact, senator, is that our market shares in these core banking products have not changed for 40 years. The Royal is first, followed by the Commerce, the Bank of Montreal, Scotia, and the TD. Arguably, there has been some brilliant leadership at some of them. I fail to understand it. It has not moved. It is very difficult to move it.
My fear is that market shares will not move and the government will react by re-regulating. It is dangerous.
Senator Stewart: It is not the ability to compete internationally on a worldwide scale, or something like it, that worries you?
Mr. Godsoe: This is all about Canada. These are mergers in Canada by Canadian banks.
Senator Stewart: Then you are also rejecting the argument put forward by the other four banks that the penetration from the United States of many kinds of financial institutions poses a very serious danger to Canadian-owned financial institutions.
Mr. Godsoe: I am not alone. You had Léon Courville of the National Bank, and following me you will have Ed Clark from Canada Trust. I worry more about Canada Trust and National Bank as top competitors, along with the five. I do not lie awake at night worrying about MBNA. If you look at the strategy reports within the banks, you will find we were all looking at each other and our market shares up until quite recently.
Senator Stewart: So you have rejected both their arguments.
Mr. Godsoe: I think they will force us to sharpen up in certain areas, such as wealth management and credit cards.
Senator Stewart: I have a different type of question. You mentioned there seemed to be an inclination behind the construction of the MacKay report to have something for everyone. I think that is a quotation.
Earlier, Mr. Chairman, you will remember that I raised a question concerning the accountability to communities section of the MacKay report, which starts at page 168.
I referred to this earlier as the compulsory annual boast. The local banks describ all their philanthropy. There is investment in community development. There is support of community activities, such as the Highland Games in Antigonish. There is participation of employees in community service.
I still am not convinced. I think this is as I say. It is compulsory window dressing or sugar coating, introduced here to justify a move toward concentration. I think it will not work. I want your opinion. Who will pay for the participation of employees in community service? Will your local managers say, "You can have the job, but remember you have to put in six hours a week"? Who will pay for those six hours? Who will pay for the philanthropy? Is it not your banking customers?
Mr. Godsoe: Always. We are a shareholder-owned company. I read that too, senator, and outside of the Highland Games in Antigonish, which definitely will get support, I was not sure. This is where I think we need more study.
What was the MacKay committee's intention? Are they telling us to redistribute our money from hospitals and research and universities into communities? I do not know.
I treat our own employees as individuals. I encourage them to get involved in their communities, in politics, in philanthropy if they want, but they work for the bank. You do not order them to support something or how to support it. I had a lot of questions on that. What was his intent? Did I see it as a counterbalance to mergers? Not particularly. I think they clearly took mergers as one option. I think the research paper on mergers was not really pro merger.
Senator Stewart: I did not use the word "merger," I said "concentration."
Mr. Godsoe: I saw it as a feeling that the banks were declining in public popularity, which is clear. We have seen that over the years. It is not unique to Canada. We are still above dog-catchers and politicians, but little else. I saw it as maybe helping us communicate better with our communities. However, I was not quite sure whether it was very practical. If it turns into sort of an Internet boast of how much money we have given and how wonderful we are, then it is not very deep and it is not very useful. I am sure the committee was very well intentioned and had some good rationale. I did not understand it totally.
Senator Callbeck: Continuing with that community access statement, I read it too. The recommendation is very general, but I agree with having some kind of statement that contains core information so that you can compare one institution with another. For example, at the end of a year, I would like to know how much each institution invested in Prince Edward Island, particularly in small business. I would like to have it broken down as to how much went into tourism in my province.
I would also like to know about donations to my province. A lot of dollars come out of that province in the way of bank profits. I would like to know how much is going back in. I found this recommendation very general. Do you feel that if this recommendation is implemented, it should be a standard approach so that you can compare one institution with the other? Who should develop it? Should it be the regulator? When it is developed, who should market it?
Mr. Godsoe: I have two concerns. As a former premier of P.E.I, I can see that you would like to know what is happening. There are a lot of committees in here. It is stated that annually the chief executive, or whomever, shall go before a committee on this or on that, with a lot of data. My experience with that is that it does not change much, except it turns into an exercise where someone points out that the service charges are too high. Someone else says, "Maybe they are. We should discuss it. You have not done enough here." You then say, "I am not sure. Is that what it is supposed to be? Does it create real change? What are we trying to address? What are we trying to accomplish?"
For many years, our country was built on a certain type of universality. One of those aspects was a national banking system that charges the same for a mortgage in Prince Edward Island as it does in Yellowknife and in the centre of Montreal. We have done that. The Americans do not have that. It is entirely different pricing. We have a system where you can deposit money in Vancouver and get cash in Prince Edward Island -- the same day. The Americans cannot do that; most other countries cannot.
We must be very careful that we do not start to segment this. There is a natural inclination to say, "I only had three branches there. This is all I owe to that community." That is all I am saying. I would like to know a lot more about what it is trying to accomplish, because I found it very general also.
Senator Callbeck: You must be convinced about the usefulness of it?
Mr. Godsoe: I think that is what we all want. If it is making a better system, better communities and better competition, that is fine. Let us make sure we understand what it is. I do not know. We have not had a discussion with the MacKay committee saying, "Here is what our intent is. Here is how we see it being implemented. Here are the outcomes we expect." That is all I am saying
Senator Callbeck: I want to ask about access to banking services by low-income Canadians. If you look at the task force report, there are statistics here that indicate there is a problem. There are recommendations on that. In February of 1997, the banks and the federal government recognized it as a problem and set out policies or procedures to try to correct it. My understanding is that this approach has not worked. What steps has Scotiabank taken and what steps do you intend to take?
Mr. Godsoe: I think the report was fair. It has not worked as well as it should have because the mystery shopping goes on and people are still having access difficulties. The idea of electronic crediting of accounts is very important, but I do not see it being accomplished until after we get through year 2000 problems, both in government and in the banks.
The idea of an account that is affordable but not discriminatory is important. In other words, because someone wants this type of account, they should not feel that only a poor person can have it. It means that is it important to have debit card access to a cash machine. We have a template that is remarkably similar to what was in New York state but, for competition reasons, we cannot all talk together. We must get better at encouraging people to come into our banks.
I had a child who worked in this area with street children for one year. The first thing she had to do was teach them how to use a bank so that they would feel comfortable coming into a bank. They were very uncomfortable going in there. We know from other countries that that is an enormous barrier. Poor people feel uncomfortable going into banks. They do not know who to ask or what to do. There are good suggestions there. What I did not like was the attitude, "Fix it up now or legislate it." It is not that simple. Let us work together and get this problem solved, because we have all the tools and we should be better at it.
Senator Callbeck: My last question concerns tied selling. We have heard a lot of concerns expressed at the hearings about tied selling by the banks. In this report, they refer to a study where 16 per cent of the people who were surveyed felt they had been subjected to it. The bank ombudsman has only received one complaint in three years. You mentioned today that last year your bank had two complaints, but they were unfounded.
How do you explain this? Are those figures from the survey incorrect? Are people not complaining? What is the problem there?
Mr. Godsoe: I have neither seen the survey nor read it personally. The question is: If the bank gives you a loan, should you look at another product? Their people are trained to try to cross sell. They are absolutely forbidden to do tied selling. At the heart of this is credit. I do not like asking for a loan. It is much more comfortable to come in with the money and ask for an investment. The perception does not surprise me. The reality is that there has been little shown to be true. We cannot find empirical evidence to back that up. Do we have to do a better job at communicating? Tied selling became a rather high-profile political debate last year, so it does not surprise me that the average Canadian feels that there is a tied-selling problem there; we just cannot find it empirically in the real world. It does not matter because we now have legislation. We will abide by the legislation. I do not think it will change how the Bank of Nova Scotia operates one iota. All our people are trained. They all have brochures and we are absolutely certain that our staff know tied selling is absolutely prohibited.
Senator Callbeck: Do you feel that the legislation that was proclaimed a couple of weeks ago is tough enough? The consumers association that felt that it needed to be strengthened.
Mr. Godsoe: I feel it is tough enough. Legislation tends to be a very crude instrument. You will come back in 10 years and the same legislation will be there, whereas we prefer to work with this. We could then go back and fix it if it has not been fixed.
The Chairman: Thank you very much for being with us. I realize that we went considerably past the time we told you that you would be finished, but my colleagues had a number of questions that they wanted you to address. Thank you for coming here this afternoon.
Senators, our next witness is Mr. Ed Clark, the president and chief executive officer of Canada Trust. If I am right, Mr. Clark, this is your first appearance before our committee. We are delighted to have you with us.
We have had the opportunity to read your opening statement. Given the desire of this committee to ask you a number of questions, if it is possible for you to make all of the points in the opening statement without necessarily reading it in its entirety, that would be helpful.
Mr. Ed Clark, Chief Executive Officer, Canada Trust: With me today is Greta Wemekamp, who is responsible for all our government relationships and who knows a great deal more about these topics than I.
I included a short section in our brief on what Canada Trust is, because often we are the forgotten actor here. I thought I would try to place us. Essentially, we are a mid-sized retail bank that I think has done reasonably well in the last few years and does represent the major alternative left in Canada to the banking system.
We would like to make a few comments on the MacKay report. One general comment is on the thrust of the report towards regulation. We have a fear that not only the MacKay report in itself, but the likely government response to merger activity, is to respond to that activity by saying, "Well, if we are going to have over-concentration, why not match it with over-regulation, and we will protect the consumer that way."
We believe quite strongly that history has taught us that it is competition, not regulation, which historically has kept prices low and provided consumers with choice. We should always keep in mind that regulation fundamentally favours large enterprises over small. It reduces competition because it ultimately hurts the smaller player providing the competition to the large player. In the long run, in my view, it hurts rather than benefits the consumer.
We have a great fear that the net result of all this discussion will be another crushing burden of regulation, making Canada Trust less capable of being the alternative to the banks -- the exact opposite of what people were trying to do.
When we look at the ownership rules, we understand the MacKay report is saying, in general, that they would like to have these organizations widely held while setting out categories for different categories. If you are to be a long-standing, large player, you should be widely held. They then stop and say, "But two of the key players who actually provide the competition and innovation in the market are not widely held. What are we to do?"
The Chairman: You and Power Corporation, and Great-West Life.
Mr. Clark: Great-West Life is under the Power Corporation umbrella.
Therefore, they grandfather them. Experience makes you worry when you try to translate this into legislation. When you try to have general legislation that prevents new players that are not widely held from coming in, but grandfathers others, the devil is in the detail, as the previous speaker said. In the end, you do not provide the degree of certainty about the ownership rules that allows the actors to continue in place.
As I think everyone is aware, investors do not like uncertainty. They leave markets where there is uncertainty. We have a fear that we will not get the kind of grandfathering that would allow Canada Trust and Power to stay in the game.
The insurance area is obviously controversial, and our position is that MacKay seems to have come up with a reasonable idea. I can understand why the National Bank, given the market in which they are operating, regards this as a very important area, because essentially their main competitor is able to sell insurance in the branches. Similarly, we are the only major, non-bank financial institution that is not able to access its customer base. If we left federal jurisdiction, we would be able to do so. That seems to be an unusual regime to impose on us.
We think that it is reasonable to say, "Well, here are two institutions. Why not let them try it out and actually assess the impact on the consumer and on the industry and see whether this works and whether you can indeed enforce tied-selling rules."
Since I assumed I would be asked questions on the bank mergers, I thought I might as well write my response. If you do not mind, I will actually read some of my text, because we are now into areas where people seem to need to be very precise.
We like the focus of the MacKay report, which says this is ultimately an issue of protecting the retail consumer, the domestic consumer. By that, I mean the retail and small-business consumer. That is the focus of the Canada Trust organization. We are a pure retail financial institution with a focus on small business also. We are, in fact, concerned, however, about the bank mergers.
Will we end up with a regime that does preserve choice and competition? Where we may differ with some people is that we believe there are forces of consolidation that are definitely sweeping this industry. We believe that some consolidation is probably inevitable in Canada and is probably in the public interest if you want to preserve strong Canadian institutions.
We have taken a position that we have no objection, in principle, to Canadian firms participating in that consolidation trend, provided, and this is obviously an important proviso, that the mergers do not significantly reduce domestic competition.
We believe that conditions could be imposed on the merger proposals that would allow the proponents to pursue their chosen strategies while at the same time preserving adequate levels of competition and choice in Canada.
The MacKay report looks at the possible competitors. The report seeks to foster credit unions and small institutions. They clearly are a source of competition in places like Quebec or in the Lower Mainland of British Columbia. In time, it is conceivable that some of them could become significant national competitors. However, the reality is that they face real challenges, not only of scale and the scope of their product offerings, but in evolving their structures to enable them to overcome the challenges that all of us face in the business world.
As a non-bank, we obviously wish them well. However, we think it is unrealistic for policy-makers to assume that these institutions will be significant competitors to the banks in all regions in the near future.
Foreign banks are mentioned as a great help for competitive balance in the domestic system. We do not believe they represent a real competitive threat to the heart of retail banking, the core banking demand account business where the banks' dominance is greatest.
People who were working on the Bank Act in 1980 continuously said, if we open this system up, the foreign investors will come. The reality is they have not come yet. There is scant evidence that they have a degree of commitment and staying power that would allow us, from a public policy point of view, to base decisions about the structure of the domestic financial services industry on the assumption that they will now come.
Apart from the Hong Kong Bank of Canada, no foreign bank has any significant presence in the Canadian domestic retail market. The greatest impact from foreign competitors will be in certain product areas such as credit cards, mutual funds and, we believe, selected areas of small business.
MBNA, Capital One, Wells Fargo, ING and others are focusing on discrete product lines through direct mail and telephone solicitations. None of these institutions has shown any intention of establishing a real presence here through a branch system.
We strongly believe that branches are important. We disagree completely with the assumption by come commentators that electronic and other distribution channels are eclipsing branches. This is not our experience and is not the trend in the industry. We should know. Canada Trust has proportionately more telephone banking and more Internet banking by a significant margin than any bank in Canada. We based our strategy on seeing how far we could push this so we would know whether branches matter or not -- and they do.
Virtually all new customer relationships originate through branches. In our experience, electronic banking complements branch transactions. You may be interested to know one simple fact: The customers who currently use our Internet banking system indeed visit our branches more frequently than customers who do not use Internet banking.
The proponents of the mergers assert that foreign competition is real and important. It is, and we at Canada Trust are taking it seriously. However, this is quite different from saying that the foreign competitors now entering Canada are now, or soon will be, so substantial and permanent that we should make public policy decisions around them.
Given all these factors, we think the prudent course for policy-makers in assessing the impact of the proposed mergers is to look at the existing players. They should particularly look at the players who have sufficient operating experience, capital strength, and synergy potential to be effective sources of competition nationally.
What is our suggested framework for approving the mergers? The mega-bank proposals would eliminate two national competitors. Both are significantly larger than the remaining competitors in the market except for the Bank of Nova Scotia.
If customers walk out of a mega-bank branch because they have been turned down for a loan or because they are dissatisfied, we believe that they should not suffer such a significant reduction in competitive choice of national financial institutions. This means that public policy, to the extent practical, should try to replace the lost competitors, given the importance of these institutions to the competitive structure today.
We also believe that the institutions that remain after consolidation should, again to the extent practical, be balanced in size.
Having identified the players in the policy objective, how can the government achieve it in the event the mergers proceed? We think one condition should be that the merged banks divest of a significant portion of their customers and their related assets and liabilities, so that neither of them will have excessive market dominance in any of their main products. The assets to which we refer are: Retail banking customer relationships -- that is to say, whole relationships, not individual products or physical premises -- and credit cards and brokerage in properly defined local and national markets.
Doubts have been raised about the effectiveness of such divestitures. Will the customers consent? Will they gravitate or be pulled back to the old bank? This technique has been widely used in the United States for some time. No one knows how it will work in Canada.
We have given considerable thought to this issue and we would be willing to participate as a buyer on terms and conditions that we believe will mitigate these legitimate concerns. We believe there will be others who will also be interested.
Exactly how much market share the merged banks should have in a fully competitive market is an area of considerable discussion. The Competition Bureau guidelines are 65 per cent and 35 per cent. These tests are the first screen and it is up to the Competition Bureau to look at local markets and make a decision as to whether or not the test should be higher or lower. A research paper prepared for the MacKay task force suggests that the Competition Bureau could seek a 25 per cent ceiling on the merged banks' market share in certain markets, as was done in the Imperial Oil and Texaco merger.
Assuming that such divestitures are commercially feasible, what would they have to look like to mitigate the merger's impact on competition and choice? We believe that the divestitures should be substantial, focusing not only on the market share left with the merger proponents, but also on the size and scope of the buyer after the transaction.
The divestitures will not achieve their policy objective unless the post-transaction buyer is of such a size and scope relative to the merged banks that it can compete effectively and provide consumers and small business with real choice.
If the government is concerned about excessive concentration resulting from the bank mergers, it should seek a structural remedy, such as divestitures, rather than seek to regulate price and other terms of business, thereby imposing costs on all competitors.
We understand and support the desire to protect the consumer. However, we cannot be expected to freeze or cut prices if we cannot in share the merger benefits. The only way to lower prices is to ensure effective competition.
The more conditions such as price reductions are imposed as part of the merger approval process, the greater must be the divestiture of the assets of the merger partners to even out the playing field. A balance needs to be created between the consolidated and non-consolidated companies to prevent massive market dominance by the two merged banks. However, if the government wishes to impose conditions such as employment guarantees, community reinvestment requirements, or small-business loan guarantees, we believe they should only be imposed on the merging companies, not on the whole industry. We believe there is an important distinction between conditions and general policy.
In summary, the MacKay report is a well-researched and well-written document. We have a number of concerns, particularly that the risks of over-concentration will be permitted, and an attempt will be made to mitigate its effect through over-regulation. We have suggested some alternatives that would permit consolidations to continue, yet would support a healthy and competitive banking market and meet the MacKay report's goal of creating competition and choice that will benefit consumers. Thank you.
Senator Kroft: Welcome, Mr. Clark. My first problem is trying to understand what you are. I do not know whether you are an anachronistic part of the past that somehow keeps going, or a vision of the future. I refer to the whole corporate you. Some of the things you have talked about address that.
I am interested that you are here, like your predecessor in that chair, unafraid of foreign competition. That does not seem to be a major part of your thinking.
I want to draw attention to a few things that I think are unique. On the question of what you are, on page 2 you say, "We are the only exclusively retail bank in Canada," and on page 5 you describe yourself as a non-bank. I am trying to get down to the basics of what you are. Are you page 2 or page 5?
Mr. Clark: Legally, we are not allowed to describe ourselves as a bank. The Bank Act prohibits that. We are clearly a retail bank to the ordinary person, but to the lawyer, we are the only non-bank in existence.
With regard to foreign competition, we think that foreigners are very significant competition in the products with which they are choosing to enter Canada. In the United States, unlike Canada, there was a long period in which the universal banks did not become as universal as the banks in Canada and they lost market share in selected products to mono-lines -- credit cards and mutual funds. Those are world-scale institutions. MBNA or Capital One are about the same size as we are, except they are in a single product called credit cards. They are using their infrastructure to come across the border at a very low marginal cost, raid the Canadian market and pick off 10 per cent or 15 per cent of the credit card business. That clearly impacts us immediately. We were business partners with Capita One. We understand them extremely well.
I do not say we are not afraid of what Capital One will do to the credit card business in Canada, but we must understand the importance of the credit card business and the mutual fund business in the total banking business. The bulk of the profits in the banking business are still in the core banking chequing account, and that is still a branch-oriented business. The only reason we have a 15 per cent rate of return in retail banking and the other retail banks have a 25 per cent rate of return is that they have a much larger share of that core banking because they have 1,500 branches and we have 400 branches.
Senator Kroft: That takes me to my next question on the issue of branches. You probably have a perspective on what is happening with branches, and perhaps what will happen in the future, that is quite different from that of almost anyone else we have heard. I think I have fallen into the idea that branches are a disappearing species and that many things that are happening are being forced on the system because they are no longer a feasible part of the financial system. You have certainly made a strong point. Is there anything further you would like to add to that?
Mr. Clark: If you had asked this five years ago, I probably would have echoed conventional wisdom at that time, which was that direct banking, electronic banking, was going to overtake branch banking. I would say that today, among the more sophisticated analysts in the business, that is regarded as a view that was wrong five years ago. We have learned, painfully, how wrong it is. It has not reached the point where the average person on the street is reading about it in the newspaper, but the industry has changed its view, as have we. We thought that we could go into direct banking, compete with the five major banks, and take market share without extending our branch network. As I said, we have a substantially higher proportion of our customer base in telephone banking and Internet banking than any of those. We have put huge resources in that area and found that it was not true. In fact, people originate their relationship in the branch. Electronic banking has allowed the large banks to tie the customer even more to them and they are even harder to extract. We got into telephone banking and 18 months later the Royal Bank builds exactly the same telephone banking centre as we have. There is nothing about the technology which is proprietary. They can duplicate that. When we try to steal a Royal Bank customer, they say, "Not only would I have to leave my branch, but all my bill payments are being done over the phone. I already have my web site set up with the Royal Bank relationship." As a result of direct electronic banking, it is even harder to move customers today than it was before. The industry dynamics have changed greatly from what originally people thought they would be.
Senator Kroft: Therefore, it is a fundamental industry issue and, although you are obviously not averse to it, you are not suggesting that the sale of insurance or other expanded services through the branches is necessary to preserve the survival of those branches.
Mr. Clark: I do not believe so. I think that whether or not you sell insurance through the branches is entirely a question of whether or not you believe it is in the interests of the consumer. It is not in the interests of the banking system.
Senator Kenny: On this point, we have seen a terrific growth in direct selling of insurance over the last decade at the expense of folks who, in effect, operated branches. How do you square those two?
Mr. Clark: That is a very good question because we happen to own Meloche Monnex, which is in the top three of the direct property and casualty insurance companies. It is growing twice as fast as the traditional companies that are using individual agents. There is an example of where face to face is losing ground to the direct bank approach. I am not saying that in our own system, where people do transactions and where they originate business is not moving from the branches to other areas. Indeed, it is. There is no question that it is. We believe that we are going to sell a significant amount of lending business over the phone.
The issue is how to get the customer in the first place. In our experience, if you ask consumers, they will say they choose their bank based on proximity to home or work. I do not know why that is not the case in auto or home insurance, but it is clear that today people choose to have their basic, core banking account through the branches.
Another example is Schwab in the United States. Seventy per cent of Schwab new accounts are opened in the branches rather than over the phone. Schwab found they could not extend across the United States without building a branch system across the country.
Senator Kroft: Your divestiture proposal is an interesting one. Do you see a full audience of buyers out there for these components? I am trying to understand the market-place.
Mr. Clark: I think it is a limited market-place if you take our framework. It is not a matter of whether they can sell off a couple of branches here and a couple of branches there, because I do not think that will achieve the public policy purpose. I think the fundamental dilemma that we have as a nation is that there are two principles. All the people you have had in front of you are intelligent people who understand their business. Yet, they have clearly different views. Then, you ask: Why do they come to different views? It is because there is one principle that says we ought to preserve competition because that is the only way to protect the consumer. The other principle says: We understand there are economies of scale and there is consolidation going on in financial services. Thus, right now, people are saying that you either have to choose one principle or the other. Either sacrifice competition in order for me to survive, to get my consolidation, or you say you don't care about consolidation, it is not worth giving up competition.
We are saying: Is there any place where the two intersect, where you would be comfortable? I think the core of the issue is that you are losing two large national players. We have lost competitors in the market-place. Royal Trust, National Trust, and Montreal Trust went out of the market-place and fundamentally, no one fundamentally. All those companies are significantly smaller than the two companies we are talking about taking out of the market-place. To take the Bank of Montreal and the Toronto Dominion Bank out of this market-place is a significant reduction in choice. What we are saying is, in the end, if you want to do that because of principle one, then you have to ask who could replace them. The truth is that there are a limited number of players who have the capital, the management structure, and the capacity to replace them. We are obviously one of them, as is Hong Kong Bank, National Bank, and Power Corporation. You start to run out of names after you go through those.
If you want to approve the mergers, then we are saying that you have to say, "We will only do that if there are enough divestitures from the merging partners to the actors remaining that we restore the competitors we are losing." That is the only way to protect the consumer.
Senator Oliver: After hearing your consolidation proposal, I wonder why in the world anyone would want to think about merging, because you would not have them left with very much. You would take away their customers, their credit cards, and their brokerage. Yet, at the end, you want them to be the same size. What is left?
Mr. Clark: Part of the issue here depends on whether you take what they have said literally or whether you infer that they mean something else. They started this debate by saying that they wanted to go international, to be large enough to compete on a global scale in global business, which is really the capital markets business. If you said that, I could say: Why not take everything but the retail side of the Bank of Montreal and you can get all those things? You can have your operations in Mexico and you can be large.
If you take a look at the income, the domestic retail side of the Bank of Montreal, you will see that is about one-half their income. No one is objecting to their having that one-half of the Bank of Montreal.
In the case of the TD, the non-domestic retail side is 60 per cent. No one is objecting to the CIBC having control of Waterhouse in the United States. It is a very attractive prize to get hold of. There is a lot that is left to them.
The issue then is the remaining 40 per cent -- or the 50 per cent in the case of the Bank of Montreal. How much of that would they have to divest in order to build up the other players, so that you would be satisfied that you are left now with a structure that is about as competitive as the structure which existed before? I think it is a business decision. The Competition Bureau will have to determine that.
I believe that there is a place where the institution would say, "I still get most of what I had. In the case of the Royal Bank, I get 50 per cent right away. If I get any of that retail side, I end up significantly bigger than when I started." In the case of the CIBC, as I say, you get 60 per cent of the TD, and then I will get some of that retail side but I will not keep it all.
Senator Oliver: I heard what you said about the credit unions not really being ultimately competent to be good competition for the banks. I am wondering if, implicit in that conclusion, you are saying, therefore, that if competition is that important to us in Canada, maybe we should look somewhere else. You have mentioned that there are not that many other players. There is Power Corporation, the Hongkong Bank, and so on. However, the Hongkong Bank does have retail branches out west. Should we not be looking at bringing in more foreign banks like Hongkong Bank, Deutschebank and others, giving them the opportunity to have retail branches and let them be the real competition for you and the other banks?
Mr. Clark: I think we should encourage the foreigners to come in in any way we can, as long as they come in on the same level playing field as the rest of us. The reality is, that is the playing field they have today.
Senator Oliver: You are not widely held and you have been grandfathered by MacKay.
Mr. Clark: There is nothing preventing Citibank from coming into Canada today. It already has retail branches. Today, Citibank has fewer retail branches in Canada than they did 10 years ago. Citibank is really the only case of an international retail bank, and they have not chosen to expand in Canada. You have to confront the issue of why not? It is not because they lack economies of scale. It is not because they do not know how to play the retail business in other countries. Yet they do not come to Canada.
I think we have the illusion that if we just ask them they will come. We have been asking them for 20 years and they have not come. In fact, they have withdrawn in the last 20 years and not entered Canada. Why is that? Because what we have is a highly competitive market. The margins are thinner here. The ROEs are lower. God bless them, they are my competitors, but they are darned good at the business they do. It is a tough business in which to survive.
We are the only trust company that has survived the last 10 years. Everyone else has been bought by these five banks.
Why would you as a foreigner go into a market-place in which your competitors have dominant market share and have succeeded in putting all the domestic competitors out of business except for us? Why enter a market-place with lower rates of return than those which you can earn in your home, at much thinner margins, in order to offer the consumer a better-value package? They will not come. That is why I do not think it is reasonable to expect that they will offer the competitive alternative.
Senator Oliver: You spent a lot of time talking about mergers. One of the things the MacKay task force talked about was strategic alliances. I asked Peter Godsoe about that. Could you first define what a strategic alliance means to you in the banking business? Let us know whether or not, in your mind, this is a reasonable alternative to mergers.
Mr. Clark: I guess there are all sorts of strategic alliances where people join together either to merge their back rooms or merge research or to work together, but keep their independence as organizations. I have to say I am sceptical of them. There are not a lot of examples around the world where they survive on a long-standing basis. There are tensions when two parties have different economic ownership and therefore interests. Generally, after the strategic alliance, they merge or break apart because, ultimately, organizations have different economic goals. I do not believe that it is an answer to the problem.
Senator Oliver: Do you think that in the MacKay task force report there was an over-abundance of new proposed regulations and much too much discretion left to "the minister"?
Mr. Clark: Yes. When the mergers were first proposed, I gave a speech at my annual meeting and said, "I do not care how this debate comes out, but my greatest fear is that it will lead to a new layer of regulation." Every one of these ideas sound good, but the net effect is that the Royal Bank hires 20 more bureaucrats to look after them, I have to hire 20 more bureaucrats, but the Royal Bank earns five times as much as I do. It will not hurt them to hire 20 more bureaucrats as much as it hurts me to hire 20 more bureaucrats.
We lived in the United States. We operated a retail bank, called a thrift. In the United States, we lived with this legislation. I do not believe the consumer is better off. I just believe that it creates a lot of jobs for bureaucrats and makes the system less efficient.
Senator Joyal: I would like to thank you for your presentation, Mr. Clark, because it does a lot to help Canadians understand the overall changes that we must consider in the very near future -- especially if we look back at the announcement that was made in January. The Royal Bank and the Bank of Montreal announced their intention to merge, which was followed by a similar announcement by TD and the CIBC. At that time, those two proposals were made on the basis that, in order to be able to compete globally and to face foreign competition, the banks needed merger consolidation initiatives in Canada. That was the way to save the Canadian system. It was almost a question of take it or leave it; do it or die. It was presented that way.
We feel that it is an option. It is not the only option, but it is a valid option that has some merit. It has some implications, but there are other options. It is no longer the only way to go. A cost will be involved. As you said -- and the CEOs involved in those two merger proposals have said the same thing -- certain conditions are expected. There can be two types of conditions. First, there can be an overload of government regulations, which is one option that you and the previous CEO mentioned. There is a concern among the members of this committee about adding certain aspects to the regulations. That will mean more bureaucracy, and so on, which will result in a greater responsibility for all the institutions involved in the monitoring of banking activities.
You have an alternative proposal. You say, "Allow the merger but give us the capacity to become the third bank in that system because there might be a fourth or a fifth bank." Mr. Godsoe seems to favour a different approach. He says that we need more competition, not less. If we accept your proposal, we would eliminate two and replace three with seven. We are just playing with numbers. We will not have more players. On page 4 of Mr. Godsoe's brief, he said that "we need four to eight or more nationally competitive players to ensure satisfactory competition and choice. We do not need but two national champions or only three national champions."
You are saying that, we will agree with the merger, provided you give us the capacity to replace the one that will no longer exist. Would it not be preferable to deal with the ownership rule first? The merging on the market of other strong competitors could then be permitted, based on what happened when the government allowed the concentration of the other activities within the banks. Would it not be wiser to allow the competition before we decide to go ahead with the merger? Is that not a more sound strategy?
Mr. Clark: That is an excellent articulation of the issue. I am not here to choose what the right course of action is. This is one of those topics where, if it was so simple, then it would be easy. It is not simple. People could legitimately choose either of those models.
The debate is not about whether we should allow these mergers to go ahead as proposed. Frankly, that will not happen. There would never be approval for that degree of concentration. I do not think there is any hope that they could get it through the Competition Bureau. It is only by fundamentally restructuring the deals that you would ever contemplate doing them, but this is a legitimate alternative. The answer may also not be to let them proceed and let the system see whether or not there will be more competitors, as you have outlined.
Over the last 10 years, we have had a steady stream of consolidations in the industry. Mr. Godsoe did not say, "I should not buy National Trust because I believe in a world of more competitors rather than less competitors. I should not buy Montreal Trust for the same reason." He bought them. There has been this consolidation. We know that more than anyone. We are the small fish swimming around in this pond. We know how tough the struggle is to be large enough to survive. We face the issue of economies of scale every single day that I go into the office. It is the reality of the business in which we operate. It would be ridiculous for us to say that there are no issues here. There are pressures for consolidation. I think you will see further consolidation in the life insurance business also. You are seeing it in the property and casualty business.
Eventually, the Government of Canada must decide how many competitors they want, the degree of balance they want, and the groupings around which they want to create it. At the end of the day, we will have a set of universal banks. I think Canadians would be better protected if there were more rather than less -- I do not disagree with that -- and if they were more balanced in size rather than two tiers of large ones and small ones. That would result in tremendous pressure for the smaller ones to join together to get the same economies of scale that the larger ones have.
Senator Angus: I should like to ask a couple of preliminary questions on the ownership line and who you are. You opened it up on the first page of your brief. Senator Kroft also caught the apparent contradiction between pages 2 and 5.
You do not say who you are in terms of ownership. Rightly or wrongly, I think that you are foreign owned because of your relationship with BAT. Could you explain that for us? That is to say, are you part of a big, international financial group? BAT has apparently sold off some of their financial services to Zurich, but you are a bigger player than you would like us to believe, are you not? I would like to get the full story.
Mr. Clark: That would be an interesting scenario, in that I have already said that the foreigners have not come, and then you discover that I am a foreigner.
Imasco owns 97 or 98 per cent of us. We are almost wholly owned by Imasco. In turn, Imasco is owned in the 40 to 42-per-cent range by BAT. Some time ago, it was ruled that Imasco is not foreign controlled. The Government of Canada made that ruling on the grounds that there are no directors from BAT on the Imasco board. BAT has taken the position that this is an ownership position but not a control position. Relative to Imasco and to us, there are only three directors from Imasco on our board, which has 24 or 25 members. Imasco has, again, entered into arrangements with the Government of Canada that they will not interfere in the management of Canada Trust. In terms of who runs Canada Trust, Canada Trust is very much a Canadian-controlled organization.
Senator Angus: You never have anything to do with BAT at all?
Mr. Clark: No.
Senator Angus: You do not have meetings with them?
Mr. Clark: In my seven years, I have seen them once or twice -- maybe three times. They come over and say, "What do you actually do over here"? There has been no attempt to bring the two organizations together at all.
Senator Angus: It is interesting, and perhaps the proof of the pudding is in the eating. When the announcement was made and the coverage of the merger between Zurich and the BAT was ventilated last year, I remember reading that this would result in BAT getting rid of its financial services business except for Canada Trust.
Is it fair to conclude from that, that in a sense, Canada Trust is not part of BAT's financial services business?
Mr. Clark: Absolutely, quite clearly. They have told the market-place in Britain that they are out of the financial services business. From their point of view, they are out of the financial services. They have no operating company in the financial services business. Imasco is not an operating company of BAT; it is an economic investment. They have no managerial control over Imasco. They were able to satisfy the market. The whole point of their de-merger was to convince the market that they had got out of the financial services business.
Senator Angus: However, the fact remains that you are 98-odd per cent owned by a company which is 40-odd per cent owned by BAT.
Mr. Clark: That is right.
Senator Angus: You mentioned there has been a lot of consolidation. You say here you are the last remaining major loan and trust company left in Canada. Why did that happen?
From listening to your evidence, you seem to be in a preferred and enviable position. You are operating under a different statute. You have different regulatory provisions. You are a kind of niche player here, and you are able to give this very fascinating presentation today. It has me wondering how I could get that 98 per cent away from Imasco.
Mr. Clark: I was going to offer you a banking card.
Go back and look at the nature of the dilemma of the trust companies in Canada. While we operate under different legislation, most of the effect of that is just to add more regulatory burden. It is neither a positive nor a negative in terms of powers. However, it is irritating, because we must file with more authorities since we operate under, in effect, both federal and provincial regulations.
Senator Angus: You do not seem to get tarred with that brush to which I referred earlier. You can sail along, saying, "We are not one of those big, bad banks."
Mr. Clark: Absolutely. I think it is partly legitimate, but the banks would certainly say we also exploit it to the maximum.
We have been 100 per cent focused on the individual consumer. That is the heart. That is all the business we have. Because we have that focus, we have had to build our franchise on better customer service. I have never seen a survey that does not show that Canada Trust customers get better service than they do at the banks. The only way we can survive as an institution is to provide the consumers with better service.
Senator Angus: Without merging.
Mr. Clark: Yes.
The business dilemma that the trust companies have had is that they were essentially GIC and mortgage companies. Those are thin-margin, not very profitable businesses. It is a tough business in which to make money. We did not have the chequing account business of Canadian consumers. Traditionally, people banked with the banks and got their mortgages and GICs with their trust companies because the trust companies offered better rates and friendlier service for those products.
In the 1980s, the banks woke up to the fact that the retail business was a better business than the corporate business. Even today, if you look at the bank statements, they earn a 25 per cent ROE in the retail banking business and a 15 per cent ROE overall. By arithmetic, you know what must be happening in the other business. The retail banking business is an excellent business to be in. In the 1980s, the banks said, "We are going to have more of those things, thank you very much." They moved into the retail banking business and said to all the trust companies, "You will not undercut us in price. We will match your prices all the way down." They became more customer friendly. They were probably not as customer friendly as the trust companies had traditionally been, but they clearly adapted their structures to become more competitive in retail banking. They poured money into technology so they could provide a better service.
The result was that those trust companies then faced huge problems economically. Their profits dropped because they did not have the profitable chequing account business, which is where the money is being made, and they in fact were now in even tighter margins in the GIC and mortgage business.
We survived for two reasons. One reason is that we were already more like a bank, so we already had a core of customers who regarded us as their bank rather than just a place to buy mortgages and GICs, but also because we transformed ourselves. Today, if you ask our customer base, "Who is your primary bank," 42 per cent of them will say, "Canada Trust is my primary financial institution." That is the same average as the banks. The same number would say the Toronto Dominion Bank is their bank. We transformed ourselves into a retail bank. We said, "We will need to look like these guys if we are to survive, because we cannot survive on the economics that we have." We have done that, and it has allowed us to get to where we are. However, it is a constant struggle, given the relative economic advantages that they have.
Senator Angus: That is the explanation for the incredible consolidation within the trust companies.
Mr. Clark: Yes.
The Chairman: Is that also the explanation for the fact that you got out of commercial banking entirely and are now strictly in personal banking?
Mr. Clark: That is right. We could see that this battle around retail banking was about to become ferocious, and we said we would not be in any service in which we could not be a significant player. We exited every business in which we did not see ourselves as able to be competitive.
The Chairman: To that extent, you took a niche marketing strategy, and the niche you went after was individual consumer banking.
Mr. Clark: That is right.
Senator Angus: The MacKay report deals with structures. They advocate a more flexible approach to structures. They then address the subsidiary and parent model and the holding company model. I think you are aware that we, in our travels earlier this year, were down in the U.S. and saw the controversy that is raging down there between different regulatory agencies and their attitudes towards the holding company model. It has become a bit of a subject of interest for us. I wonder if we could have your comments on that.
Mr. Clark: This is one of those debates where people come at it because they hope that the people will not understand fully what the issue is. We have a holding company model. I think the fundamental issue is, will you let holding companies do things that you would not let the regulated entity do? If the answer to that is no, there will not be a lot of advantage in having a holding company.
Senator Oliver: To raise money in the capital markets.
Mr. Clark: If you go back over the history, that is exactly what the regulator does not want to see happen. That was the Royal Trust problem. That was the Standard Trust problem. They, in fact, borrowed against the equity that was sitting in the underlying regulated entity. We have entered into an agreement with OSFI that says we will ensure that our holding company meets the same capital tests as the regulated entity. The reality is that having a holding company is not such a huge advantage to us.
Senator Angus: When you say "holding company," in your case, you are not referring to Imasco. You are referring to CT Holdings or whatever it is called.
Mr. Clark: CT Financial Services actually holds the interests of Canada Trust.
Senator Angus: It is unregulated.
Mr. Clark: It is an unregulated entity, but because of the concerns the regulator -- legitimately -- has about what are you going to do with this and why do you want it, as soon as you answer that question and say, "I want to do things that I cannot do down below in the regulated entity," they say, "Well why would I want you to do things that you cannot do down below with a regulated entity"?
Therefore, with CTFS, we actually publish what our BIS capital is for CTFS as well as for the regulated entity.
As Mr. Palmer put it in one of his speeches, by the time the banks see what in fact he will ask them to do with their holding company, they may not want it when they get it.
I am not sure that this is a debate that will go on. If someone thinks it is useful, let them have it. As long as they enter into the same kind of arrangements we have, then I think it does not really matter.
Senator Angus: Just so that I understand that, you are saying that the holding company model, as used as an example by MacKay, would not be that attractive if that holding company itself were regulated and subject to all kinds of additional regulation.
Mr. Clark: That is right. I am saying that if people see some corporate advantage in it, I do not have any trouble with that, but I think they will find that it has less advantage than they think because the regulator will legitimately ensure that the whole structure is sound.
Senator Stewart: I have quite a different kind of question. I am interested in the spread of your operation across Canada. How many offices or branches do you have in Canada?
Mr. Clark: We have 424 retail branches.
Senator Stewart: How many of these are in Atlantic Canada?
Mr. Clark: Probably 30 or 40, but I will come back to that number.
Senator Stewart: Do you provide personal banking services in Atlantic Canada comparable to those you provide throughout the rest of the country?
Mr. Clark: No. If you are asking what our market share is in Atlantic Canada relative to the rest of the country, we would have a smaller market share in Atlantic Canada, Quebec, Manitoba and Saskatchewan than we have in Alberta, British Columbia, and Ontario.
In everything we do, we say "focus, focus, focus," so we would be much stronger players in Halifax than in Nova Scotia as a whole. We are in Halifax, Bedford, Lunenburg, and Sydney, but we are not everywhere. For example, we tried to go into Wolfville and were not successful. We are basically in two cities in New Brunswick, in St. John's, Newfoundland, and in Charlottetown, P.E.I. We concentrate our focus in an area in order to be economic.
Senator Stewart: That is fair enough. So your argument that in the area of personal banking you provide an alternative to the chartered banks is truer for some parts of the country than for other parts?
Mr. Clark: Absolutely. To put it more strongly than you have, in terms of income, we are half the size of the Bank of Montreal, the TD, or the Bank of Nova Scotia. Without us buying a significant amount of assets, we absolutely would not replace the loss of the Bank of Montreal or the Toronto Dominion Bank nationally as far as the Canadian consumer is concerned.
Senator Stewart: But that would be even more true in the case of Atlantic Canada?
Mr. Clark: That is correct. In order to replace the competitors, we would have to acquire significant numbers of branches in Atlantic Canada. We are prepared to do that, but, without that, there will be a significant loss of competition in Atlantic Canada.
Senator Meighen: That would create a real challenge in terms of raising the capital, would it not?
Mr. Clark: We are a very conservatively run institution. Today we have in excess of $1 billion of common equity above regulatory requirements, so we are the best capitalized financial institution in Canada by a significant measure. In addition, our parent has indicated to us that, if divestitures are available, they are prepared to invest significant sums of money into us to that end.
Senator Meighen: Finally, it seems that an argument could be made that you are an answer to a regulator's prayer. If there were only more Canada Trusts, this core banking question and the whole problem of retail banking, which might suffer if mergers went through, could be satisfied. You have given us a very interesting suggestion for one approach, that being divestiture.
Rather than taking away from some -- which I am not suggesting is wrong, because if there is no competition you have to do something about it -- can you think of anything to create an atmosphere and a condition whereby other little Canada Trusts might start up? For example, you alluded to the fact that as a trust company, you have considerably more of a regulatory burden than do your competitors. If the regulatory issue were eased, that might assist in the establishment of more Canada Trust-type institutions. Is there anything else that comes to your mind that would assist?
Mr. Clark: That is a question I should probably take away and think about rather than giving an off-the-cuff answer. We would caution you that it is a long journey. I guess that is what I am saying on the credit unions. I think the credit unions are terrific. They are obviously our soul mates, so we are naturally compatible with them, but they have a long journey before they will ever become a Canada Trust, and we have a long journey before we will be considered a national alternative to the TD or the Bank of Montreal.
The reality is that you do not want to make changes now with the hope that in five or 10 years a competitor will emerge to rebalance the system. Your problem is how to provide a competitive atmosphere in the next five years. We are saying that you have to look at the actors that exist. They are, essentially, ourselves, the Hongkong Bank, Power Corporation, and National Bank. Those are probably the only four actors that have both the financial and managerial capability to expand their networks nationally.
Senator Meighen: I would be grateful if you would think about that because you are known to have an inventive brain. Think along the lines of CDIC and whether a different insurance regime would be palatable.
Mr. Clark: The difficulty is that everything government does tends to work in the opposite direction, tends to make life more difficult for the smaller players. Perhaps if we made a list of all the things that are unequal between small and large, we could make it easier. We are considered tiny in Canada. We have $2.5 billion in common equity, and that is a tiny corporation in this game. It is tough to find people with that kind of money, and that is just the player stakes to get into the game.
Senator Kelleher: You have offered us an intriguing alternative when you ask who will be the competition if they merge. As an alternative, you seem to be suggesting divestiture. I think this is the first time this committee has heard anyone broach this divestiture suggestion, so I am intrigued to hear more about it.
In the last paragraph on page 6 of your brief, you say that doubts have been raised about the effectiveness of this. You indicate that this technique has been widely used in the United States for some time but no one knows how it will work here in Canada. I do not think that in any of our travels, Mr. Chairman, anyone has really discussed this with us and I am intrigued that this has been used in the States. Could you just enlarge upon that and give us some examples of how this has worked or has not worked?
Mr. Clark: Perhaps what I could do, in terms of the actual details, is send you something that lists the cases in the United States. However, I will go to the extreme. I suspect there has not been a merger in the banking system in the United States that has not involved this. So it is absolutely typical in every merger, that the trust department comes in and says, "Okay. What are you doing? You have excess concentration in this market. What branches are you selling and to whom are you selling"? Indeed, in the United States they have forced banks to sell them to -- from the banks' point of view -- their worst competitor. They are very concerned that they do not let the banks choose whom they wish to sell to, to make sure that the assets do not go to weak parties, but that, in fact, they go to strong parties.
Senator Kelleher: We would appreciate receiving some literature such as that.
Could you give us an overview? Has this been effective?
Mr. Clark: It has been quite effective as a technique. We will give you a brief on the whole notion of effective competition and how it has been used.
Mr. Godsoe has said publicly, "I am not interested in buying branches, so I am not interested in divestitures." Partly, he is not interested because he already is a national player. He is a significant alternative to the TD and to the Bank of Montreal.
Senator Kelleher: Are you suggesting the five of you whom you have named would probably be interested in such a move as that?
Mr. Clark: We are very interested. We have said, on a number of occasions, we are happy to be buyers of assets and we would be significant buyers of assets. We will buy what they are prepared or forced to divest.
The fundamental issue I wish you to understand -- and Mr. Godsoe also has reservations about the technique -- is that what makes it slightly different here in Canada than in the United States is it has never been done on the scale that we are talking about. It has never been done in the context of such a concentrated industry. We do have the most concentrated industry in the world already. The concern people have is that if you were to sell Bank of Montreal branches to us, the Bank of Montreal might say, "Why not stay home with us and not go to Canada Trust." Then there is a risk, from our point of view, obviously, that we buy some branches and simply end up with costs and no customers. What we are talking about is a transfer of the whole relationship to us.
We think there are techniques to solve that problem. We think you could enter into commercial arrangements that would solve that problem. If you do not solve that problem, you will not achieve your competitive goal, which is to ensure that a significant amount of market share is transferred from the Royal Bank or Bank of Montreal to us.
Therefore, we believe that it can be done and we would be happy to provide the committee with the materials to that effect.
Senator Kelleher: Senator Oliver asked about alternative sources of competition, and you discussed the foreign banks and the credit unions. One of the things that intrigued all of us in our travels, particularly in the United States when we spoke to people in Washington and New York, was the so-called community bank concept they have where they are just small, local banks -- local in every sense of the word. They have a small capitalization, there are some tax advantages, and they do not have the same onerous regulations that other banks have. Do you think there is any possibility of a so-called Canadianized version of community banking that one should take a serious look at to provide some competition? I presume you are familiar with the concept.
Mr. Clark: I am. In some sense, we owned one of them in the United States. The institution we owned was First Federal, which was very much a community bank, with $7 billion in assets, very much locally based. We have had real experience with that.
It is certainly worth taking a look at. The co-ops are an exciting alternative to do that. What we are saying is that, realistically, in the next four or five years, they will not replace the Bank of Montreal and the Toronto Dominion Bank if they exit the market. You can step back and say this is not all about the bank mergers, this is about the financial system as a whole. That is what MacKay originally set out to look at, and if you ask the question as to whether Canada would be better off if it had three Canada Trusts instead of one, I would say, absolutely. I did not build Canada Trust. Canada Trust was built over 125 years by greater leaders than I. Has Canada Trust been good for Canada? Absolutely, because it is that kind of local, consumer-oriented bank that says what matters first is the customer. If we could find ways to encourage more Canada Trusts, that would be terrific.
The Chairman: In your ownership section, you make the statement that you worry that translating the policy into legislation could be difficult. Why do you say that? The policy as described in the report seems to be quite simple and straightforward. What worries you about it?
Mr. Clark: What is interesting is when I asked each of the actors involved what they think about the grandfathering clause, what I get is quite different interpretations than even what MacKay says now. So we do not get from each of the people succinct answers: "Yes, we know exactly what it means. Relax. Do not worry about it." We get, "Oh, it means this rather than that."
It was not clear, but my own experience is if you say that my fundamental public policy position is that I would like everyone to be widely held and anyone new coming into the system must be widely held. Now I want to have these two actors grandfathered in in a way that actually preserves their economic rights. It does not preserve their economic rights if you say, "Well, as long as you are owned by Imasco you do not have to be widely held, but if you try to sell it, you have to be widely held." Imasco will say, "You just destroyed my economic value."
The Chairman: Because you have destroyed the control premium.
Mr. Clark: Exactly. My experience is that when you get down to drafting, it is extremely difficult because you have a fundamental clash of principles. That is what worries us. You then move around and you are not succinct, and as soon as you are not succinct, then the shareholders say, "We should get out of here because in the end we are not wanted."
The Chairman: On insurance retailing, you suggested essentially that National Bank, because its main competitor is Movement Desjardins, which is allowed to retail insurance, and you, because you are a trust company, should be permitted the same. If you had not opted to take a federal charter, if you had taken provincial charters, in most provinces you would be able to retail insurance. So you are essentially suggesting that we proceed effectively with two pilot projects, try it for a two-to-three-year period, before making a decision as to whether or not the banks ought to be allowed in.
If you had that option, from a business standpoint, would you go into life insurance or property and casualty or both?
Mr. Clark: We would probably go into both because we happen to have capabilities. We have our own life insurance company today so we are selling life insurance to our customers, but not through the branches. We have a property and casualty insurance business, and we are also selling that to our customers, but not through our branches.
I would say that this is one of the cases where the insurance industry is more worried about our entry than we are enthusiastic about its possibilities. One of the problems that we all face is overloading our branch system.
There are only so many products you can offer through a sales outlet before you start to get negative productivity.
That is why it is not clear to me why it will be as devastating to the insurance industry as they think.
The Chairman: When you say the insurance industry, are you treating the property and casualty and the life insurance industries equally, or do you think there would be a different consequence for the two different pieces?
Mr. Clark: I will give you an educated guess. I think it will be less consequential for the life insurance industry, perhaps, than for the property and casualty industry. Life insurance is fundamentally a wealth management business. The reality is that the banks are losing market share to face-to-face forces in the wealth management business. They are not gaining market share.
It is not clear to me that putting life insurance in the branches would be as devastating. Property and casualty tends to be more a product bought and not sold. It is more of a commodity product, which is why it is sold over the direct bank more easily. It could well be more devastating to property and casualty than to life insurance.
That is an educated guess, and even my own staff people might well disagree with me.
The Chairman: You stated concerns about excessive new regulation, as did Mr. Godsoe, who said that we should not cherry-pick the easy and politically popular pieces, such as added consumer regulation, but that we should look at the whole package. In a different way, you made essentially the same point.
Another witness made the following argument to us with respect to the proposal on transparency and openness, coercive tied selling and privacy. The argument was that all of the proposals in the MacKay report in the area of consumer regulations are already in the industry's self-regulation system. Therefore, moving them from self-regulation to legislation should not cost anyone anything because they are simply doing by law what they have already said they are doing under their self-regulatory system.
How do I balance that with the notion expressed by you and the previous witness today that this consumer regulation is a burden that should not be put on companies unless one is also going to open up some of the competitive possibilities?
Mr. Clark: We are trying to make two points. One is that we want you to at least ask yourself the question: Would I be doing this if the mergers were going ahead or not? If the answer is that you are only doing this because of the mergers, then there should only be conditions on the merging partners, not on the rest of the industry. That is because no one else is getting the benefit of the mergers.
Our first point is that a distinction should be made between what should be the conditions of the mergers, and general public policy. Would we still say, "No. I would still want to do this even if there were no mergers going on in Canada." We are worried that the merger discussion has created an atmosphere in which people are pushing for something under the second scenario, that is really being driven by their concerns on the first.
As to your second point, we have lived in both worlds because we have operated in the United States where you have the legalistic regime. We operate in Canada where we have the good-citizen regime. We had independent boards in the U.S. with whom we would meet jointly. The Americans would say, "It is clear to us that the legal system produces poorer results for the consumer than the good corporate citizen system." That is because once you create an atmosphere in an organization that says do what you do in order to comply with the law, then what people do not realize is that what happens in the United States is, the reverse comes true. It then becomes, do not do anything else that does not comply with the law because we already have this regulatory burden. Thus, you meet your legal test literally, and you take away from corporate executives any moral responsibility to do the right thing. The state has said it will look after making the moral decisions. It will give you a set of very thick regulations.
In a sense, we were appalled to see how the industry operated. People did not step back and ask: What is the spirit of the legislation; what do they want us to do? We were the number one rated financial institution in the United States in terms of community reinvestment. Why? Because we took a Canadian attitude in the United States, rather than an American attitude, to community reinvestment. Our board was astounded that we took that view. They said, "Why would you do it? It is not required by law and you should only do what is required by law."
I think it will set the country back and you will take me off the hook, as a business leader, for any moral responsibility about how I run my business.
The Chairman: I am sympathetic to the view that we should not cherry-pick. Let me ask you a question about opening up the payments system. It seems to me that that is one item that you could cherry-pick, have no impact on anything else, and still meet your criteria. Some of us have argued for several years that opening up the payments system has absolutely nothing to do with the merger question.
Am I right in assuming that opening up the payments system to other financial institutions would be something that one could cherry-pick because it is the right public policy?
Mr. Clark: We have been on public record as saying that we are in favour of opening up the payments system, provided that the actors who enter that system meet the same burdens that those in that system carry. Therefore, as long as they do that, then I say, let everyone join. What you cannot do is say that they get to cherry-pick the payments system. They do not have to have the capital, they do not have to have the prudence test, but they get to access the system and we, in a sense, have to stand and guarantee them. If they meet the same tests as we do, I would open it up.
The Chairman: They would pay the same transaction costs as you, is that right?
Mr. Clark: That is right.
The Chairman: Do they have to pay an entry fee as well to take into account the costs that have been invested in building the network, et cetera?
Mr. Clark: We are now negotiating as opposed to setting principles. I think they are interesting issues. How do you get them in; and for those of us who have borne the costs, what is fair compensation? I do not think you should use the issue of compensation to prevent them from coming into the system.
The Chairman: Mr. Clark, thank you for coming. That was a fascinating presentation.
Our final witnesses today are from GE Capital Canada and the Canadian Finance & Leasing Association.
From GE Capital Canada, we have Michael Davies and Bob Weese, both of whom have appeared before this committee in the past. From the Canadian Finance & Leasing Association, we have David Powell and Tom Simmons.
I will ask GE Capital Canada and then the Canadian Finance & Leasing Association to present their briefs, after which we will turn to questions.
Mr. Robert D. Weese, Vice-President, Government and External Relations, GE Canada: Mr. Chairman, without taking too much of the committee's time, I want to tell you briefly about GE Capital. GE Capital is one of 11 main businesses of the General Electric Company, along with lighting, motors, power systems and some others that you will know.
General Electric Company is one of the largest, most successful companies in the world, with global revenues last year of $91 billion U.S. and global income of $8.2 billion U.S. GE has been established in Canada for well over 100 years. The total company had revenues in Canada last year of $4.2 billion Canadian.
GE Capital, on whose behalf we are talking to you today, is headquartered in Stamford, Connecticut. It now represents about 40 per cent of the total revenues and net earnings of GE. GE Capital last year had global revenues of $40 billion U.S. and earnings of $3.3 billion.
GE Capital is a diversified financial services company with a triple-A credit rating. It provides a wide range of specialized financing and leasing services to businesses. Those services are organized in 28 separate business divisions, grouped into five major segments. Those segments are equipment management, mid-market financing, specialty insurance, consumer services and specialized financing.
GE Capital Canada is a wholly owned affiliate of GE Capital. Of the 28 global divisions of GE Capital, 16 are now active in Canada, and they include equipment financing, GE Capital information technology solutions, and GE Capital mortgage insurance, which bought MICC a few years ago and which is now the private-sector competitor to CMHC in the mortgage insurance business, fleet services, auto leasing, commercial real estate and others. I invite you to look at pages 6 to 14 in the corporate brochure for a description of GE Capital's businesses in Canada.
GE Capital has 2,600 employees in offices across Canada, revenues last year of $1.9 billion Canadian and assets of $6 billion Canadian. Compared to the assets of the major banks in Canada, we are a relatively small, though we think significant, player.
Our capital is sourced not from retail deposits, but from sophisticated lenders through Eurobonds and commercial paper in denominations over $100,000 backed by GE Capital and its triple-A credit rating. Some GE Capital businesses compete with banks but most do not. For many of our businesses in Canada, the major competitor is Newcourt Credit.
Over the last several years, GE Capital has taken a great interest in the deliberations that have been going on in Canada with respect to the future of financial institutions and with respect to the Bank Act. We made representations a few years ago to this committee and to the house finance committee on changes to the Bank Act, which resulted in the amendments which became effective in 1997 and which were included in Bill C-82. We were and are very supportive of those 1997 amendments which, for us, removed significant impediments to our effective and efficient operation in Canada by eliminating the need for ministerial consent each time we established a new business, moved assets from one subsidiary to another, or acquired new assets in a line of business for which we already had approval to operate in Canada.
The government, in accepting those kinds of amendments to the Bank Act, really accepted our position that we are not a bank. We had been caught up in the very broad definition of banking in the Bank Act and had been subjected to some of the requirements of the Bank Act.
We are not a bank. We are not regulated as a bank in the U.S. We do not accept deposits. We are not covered by deposit insurance. We do not expose the government to risk, and we do not take part in the payments system. We are not a bank and there is no public policy rationale for regulation once approval has been granted to enter the Canadian market. That is essentially the rationale behind those technical amendments to the Bank Act that became effective in 1997.
For us as a foreign "near bank," those 1997 amendments effectively meant the removal of an unnecessary regulatory burden, the only effect of which had been to increase our costs and make it more difficult for us to provide Canadian businesses with the financing they need to grow and operate.
We have been pleased more recently to submit views to the MacKay task force. We took part recently in a session of the House of Commons finance committee. We are delighted to be here today, and we will be meeting the house committee later this month.
We are here, Mr. Chairman, to applaud the work of the task force and to support its general approach and its key recommendations. We believe that Mr. MacKay and his colleagues have done a careful and thorough piece of work and have produced a report which is sensible, balanced and pointed in the right direction.
We support the MacKay view that consumers and businesses will be best served and the services will be provided in the most efficient way by a financial services sector which is maximally competitive and minimally regulated. Use regulation only for prudential purposes to ensure safety and soundness of the financial system, and only to the extent necessary to protect unsophisticated depositors and policy holders and to limit government exposure to risk. Otherwise, allow competitive market forces to operate freely, subject only to the laws of general application governing market behaviour by business.
Let banks, if they wish, extend the services they can offer to their customers, but be sure to remove all impediments to other providers of financial services, domestic and foreign, that can offer alternatives to Canadian consumers and businesses. In our case, those 1997 amendments to the Bank Act have made it significantly easier for us to provide financing services to Canadian businesses.
In particular, we applaud the MacKay task force's recognition of the enormous changes taking place in the financial services sector in Canada and around the world because of technology and globalization, the need for Canadian policy, legislation and regulation to adapt to new realities, the need to ensure a competitive market environment to achieve efficiencies and to maximize consumer choice, and the need to remove impediments to the start-up or entry and successful operation in Canada of a broad range of service providers that offer services which are competitive to or complementary to the banks.
We applaud all of the following items: the proposed removal of the blanket ban on bank mergers; proposals to make it easier for foreign banks to operate in Canada and to provide services to Canadians; the proposed relaxation of the 10-per-cent ownership rule; the proposed removal of the withholding of taxes to encourage non-resident lenders; the recommended elimination or reduction of capital taxes -- though on this point we worry a little bit about potential discrimination between existing and new financial institutions.
We are pleased with the opening up of the payments system, though GE Capital itself currently has no interest in participating in it; the streamlining of approval processes by OSFI and government; and the making of a distinction between foreign lenders and foreign deposit takers with rules appropriate to each.
Mr. Chairman, in summary, we believe we are seeing now in the financial services sector the same challenges, pressures and opportunities that GE and other companies have seen in other parts of the economy as they have adapted to globalization and technology. Recognizing the special responsibility of governments for the health of the financial services sector and the role of prudential regulation to protect unsophisticated depositors and policy holders, we believe that the vision of the task force is broadly right: to abandon the model of a regulated and protected national market and to seek greater efficiency, competitiveness and wider choice for Canadians and Canadian business through a more open, flexible and globally competitive financial services sector.
Mr. Tom Simmons, Chairman, Canadian Finance and Leasing Association: Mr. Chairman, I wish to thank the committee for this opportunity to present views on the MacKay report.
I am the chairman of CFLA and work with Newcourt Credit. I am accompanied today by David Powell, the president of our association. We have prepared a written submission for the committee which summarizes our thoughts. Given the diverse views and interests of our members, the position presented in the submission is not the unanimous view of the CFLA membership; rather, it reflects a convergence of views among the majority of its members.
The written submission is in two parts. The first part presents comments on the final report of the task force; the second part is appendix A, where the CFLA submission to the MacKay task force is reproduced. The CFLA vision for the future of the Canadian financial services sector remains unchanged from last year. Our view of the final report of the task force is based on the principles put forward by CFLA last year.
The final report of the task force is an important and positive advance in the debate on the future of the financial services sector in Canada. We applaud a number of the observations of the task force in particular. We agree that government regulation should be used to the minimum required to achieve public policy objectives. Disclosure and competitive marketplace should be the favoured means to regulate market forces.
That said, we acknowledge the need for prudential safety and soundness regulation to protect the unsophisticated public, minimize systemic risk and reduce government exposure and for market conduct oversight. We also agree that niche financial players are important for assuring competition and choice in the financial services sector of the future.
The recommendations encouraging the entrants of new domestic and foreign providers of financial services, whether or not they may take the form of banks, are critical to the government achieving its goals for financial services framework reform. In this context, I could not let pass without comment that the MacKay report is the first formal government report which has recognized the significance to the financial economy of the asset-based financing equipment and vehicle leasing industry.
The task force reports that in 1996 total assets in our industry were about $50 billion. By way of comparison, the total assets of the property and casualty insurance industry were reported to be $53.3 billion. For CFLA, this represents an important milestone in the evolution of awareness of our industry. We also think it is important that the task force recognize the value of global capital to the Canadian economy.
The acknowledgement of non-Canadian capital in enhancing competition and competitiveness is part of the key to increasing the number and diversity of providers of financial services in the domestic marketplace. While the Canadian economy is able to generate a significant amount of investment capital, the capital needs of our growing economy cannot be satisfied domestically. Foreign-owned capital providers are essential to assure customer choice in Canada. Many CFLA members fall into this category.
Mr. David Powell, President, Canadian Finance and Leasing Association: The task force sees its recommendations creating a public policy framework within which Canada and Canadians can benefit from a healthy, dynamic, innovative and competitive financial services sector. This is an objective we wholeheartedly endorse. The big question is how do we get there from here? This is where we inject a note of caution and I must say I have been struck by the presentations of the two previous witnesses, because we seem to have a congruence of views on a number of these points.
As policy makers seek to implement the task force recommendations, and as we turn from theory to practice, we are concerned about the risks of putting in place a framework that will actually shift the financial services sector away from choice and toward further concentration.
Our use of the word "choice" in the title of our brief to the task force was deliberate. The CFLA vision for the financial services system turns on the concept of choice and that is choice for both the consumer and the business customer of financial services.
For us, the key message is that for the first time in modern history, if governments can resist overly interfering, the forces of change are shifting the advantage from the provider to the customer of financial services. The critical catalyst to realizing this shift in advantage is an assurance of customer choice.
In evaluating the true extent of customer choice, however, factors which diminish choice must also be considered alongside those that enhance choice. Issues such as competition, concentration, efficiency, innovation and regulation are merely means to an end, and that end is customer choice.
As we argued in our submission to the task force, a decade or more of deregulation in the financial services sector has seen chartered banks emerge with more powers, market strengths and advantages relative to the other players. What have been the consequences for customers?
By way of example, and Mr. Clark alluded to this in his comments, we, too, compared trust company interest rate spreads on residential mortgages between 1984 and 1995, and also compared the higher cost of auto loans offered through bank branches to bank-funded dealer auto loans. Our review of this area showed that banks were higher priced providers of financial services and, contrary to often accepted assumptions, bank participation in different customer markets did not result in cost advantages being passed on to customers.
Concentration and related market abuse issues are ongoing, fundamental concerns, and apprehensions underlying these issues are not simply academic, but very far reaching in our society, touching consumers as well as all levels of business. There is a widespread unease with the notion of having a small group of financial institutions dominate the financial services sector.
The current concentration in financial services is a legacy of a century of deliberate federal policy. Going forward, then, the challenge for policy makers is transforming a system which has traditionally fostered corporate concentration in financial services to one that assures efficient competition and effectively guards against market concentration and abuses.
The past pattern is clear: Will the future be any different? All things being equal, the banks will come out on top.
How do we get there from here? Will vehicle leasing, for example, merely be the next sector to experience the same result? Today banks are already the largest funders of the leasing industry in general and the auto leasing industry in particular. While we can hope, with the task force, that new domestic and foreign entrants will add to customer choice, the ability of governments to make that happen is unproven.
We share the comments of Mr. Godsoe and Mr. Clark when we say that the risk is the unintended result of the piecemeal implementation of discreet blocks of changes. Cherry picking and bank charges are structures in isolation and there will be more concentration and less choice. Our concern is how we address these issues.
Mr. Simmons: It is essential to ensure that effective means exist to prevent concentration and accompanying market abuses from occurring.
On the one hand, it is necessary to demonstrate that we can generate new domestic and foreign entrants and that they are present in the marketplace in sufficient numbers to compete with and balance the advantages of the major established financial institutions to ensure that there are plenty of providers from which to choose.
On the other hand, there is a perception that the current structure and rules designed to police and prevent concentration and concentrated abuses are inadequate. In several places in the final report, the task force alludes to the need to find appropriate solutions or to allow time for existing players to adjust. What is clear is that much work remains to be done to find and implement solutions to the challenges of concentration and the potential for related market abuses.
The point of departure in creating the basic public policy framework of the future is the assurance that realistic rules, accessible and effective recourses and enforceable protections are in place to ensure timely redress before we continue to tinker with the system.
We can all agree with the task force that the objective is to develop the public policy framework within which Canada and Canadians can benefit from a healthy, dynamic, innovative and competitive financial services sector. We submit that the first priority should be a framework which prevents market concentration and market abuses that will undermine customer choice.
We do not see how policy makers can tinker with reallocating powers such as vehicle leasing or allowing the restructuring of financial institutions until we are certain that we will not relive our experiences of the recent past. To further concentrate financial services market share in the hands of a small group of providers is not in the public interest. A reduction in providers in any sector of financial services is inimical to CFLA's vision of the future and of financial services in Canada.
The Chairman: I was intrigued by your laudatory evaluation of the MacKay report and all the positive things you had to say about it. Since your whole thrust is that the report is helpful because its recommendations would increase competition in the sector, let us suppose that all the things about MacKay that you like were put into effect. How would that affect your corporate business strategy in Canada? In other words, would you actually become a player in a bunch of other services? If so, which ones?
You talk about the removal of proposals to make it easier for foreign banks to operate in Canada, the relaxation of the 10-per-cent rule, and so on. All of that is interesting but may be absolutely irrelevant in terms of achieving the public policy objective of increasing competition if, in fact, changing those rules does not lead to a change in your business strategy.
What would happen if we changed the rules?
Mr. Weese: We are not much inhibited right now. With the 1997 amendments, our ability to operate and to grow in Canada, and to provide services to Canadian businesses, was significantly enhanced. There are other GE Capital businesses that are not yet in Canada.
The Chairman: Can you give us information on that?
Mr. Weese: Approximately 16 of the 28 capital businesses are now in Canada. Over the last three or four years, that number has grown a fair bit. Mortgage insurance entered three or four years ago and structured and project finance is now in Canada.
Mr. Roman Oryschuk, President and CEO, GE Capital Canada, Equipment Financing: The mortgage business is not in Canada. We do provide residential mortgage insurance, however. We do not do any residential mortgages in Canada.
The Chairman: Why?
Mr. Oryschuk: We are probably not interested because of the economics of the marketplace here. You must understand the way our businesses operate. We are the opposite of many financial institutions. We are 28 different businesses. Each one has a general manager who, typically, is responsible for the operations of a specific niche. Mine is equipment financing. Mortgage business would be another. Each one of these general managers determines how they go to market, what kind of people, what systems, what technology, what compensation plans and what specifically makes our services offering interesting to the marketplace.
The Chairman: Are you talking about a worldwide general manager or are you talking about a Canadian general manager?
Mr. Oryschuk: No, a worldwide manager. I am the Canadian general manager of one of the businesses.
The Chairman: But a worldwide general manager decides the game plan?
Mr. Oryschuk: Absolutely. He or she decides in which countries the game should be played, looks at the economics -- that is, the competitive environment -- and determines whether we can be a significant contributor to the marketplace where we would operate.
Over the last five years, GE Capital has by choice become a far more significant player in this marketplace in several segments. Over time, we have determined which segments appear to have the best promise for us to be successful. Success comes because we offer something that is substantially different from what other financial services companies would offer.
For example, our company is in car leasing, but our car leasing in Canada focuses on two specific areas. We lease cars to corporations, but we lease cars with a bundle of services. In other words, we participate in the procurement and selection of the cars and in the management of the fleet of cars. When I refer to "management of the fleet of cars," I am talking about things like fuel, maintenance, running reports on usage, being able to help the company with a decision as to when to replace those cars and then disposing of the cars and redoing the cycle all over again.
The second segment in which we are active in car leasing or financing in Canada is on the retail side. Our participation has been through manufacturers and dealers, not through direct contact with customers.
The Chairman: Is it fair for me to draw the following conclusions? There are 28 businesses. Of that number, 16 are in Canada; therefore, 12 are not. Those 12 are not here because the law says they cannot be here; there is a regulatory environment that makes it impossible. Furthermore, they are not here because you have concluded that you cannot make as much money here in those businesses as you could make using the same amount of resources elsewhere in the world. Is that a reasonable conclusion?
Mr. Oryschuk: It could be a conclusion. I am afraid to answer that because the best person to answer that question would be the general manager of the businesses. I would say that we would not be involved in certain niches. We have certain specialty products such as insurance that we would have made a special agreement not to enter.
Mr. Davies, is there something in a regulatory framework that prevents us from entering the insurance business?
Mr. Michael N. Davies, Vice-President and General Counsel, GE Canada: Some of our insurance businesses in GE Capital in the United States are looking at the potential of the Canadian marketplace, but I do not think there is any special regulation in Canada that precludes us from entering that market.
The Chairman: That leads me to conclude that, from the point of view of GE Capital, the MacKay task force is, in a sense, irrelevant. We thought you would have been one of the companies to enter the Canadian marketplace if we changed public policy in order to increase competition.
I am not being critical; it is a business decision on your part. That you would not enter the marketplace and therefore not be one of the players to increase competition does not mean that changing public policy, as outlined by MacKay, would not increase competition. Other players would come in, but you would not be one of them. Is that a reasonable conclusion?
You are already in the businesses here that you want. None of the businesses that are not here are businesses that you necessarily would want to be in anyway.
Mr. Davies: I would not suggest that the current GE Capital situation in Canada is necessarily static. We are in 16 businesses today; a few years ago it was 12 businesses. We are continuing to look at expansion and growth in Canada.
You are correct that, with the changes which took place in the Bank Act about 18 months ago, there is no regulatory burden which restricts unreasonably our ability to expand in Canada in accordance with our normal business plan. We are not a bank per se, so matters pertaining to branch banking or foreign banks coming into Canada have no impact on us.
The recommendations in the MacKay task force report do not specifically influence what we wish to do as a company. However, since we are a major player and a financial services provider within the Canadian environment, and since we have been here before, we thought it appropriate for us to come before you and comment.
Senator Tkachuk: The MacKay task force report has recommended that banks be in the automobile leasing business. The chairman of the Royal Bank considers that a financial service. When you are leasing cars, which are always leased at a fairly high residual value at the end, are you in the car business or are you in the financial service business?
Mr. Oryschuk: I will volunteer an answer to this question. I must add that this is not a sector of business in which I personally endeavour. Mr. Simmons will probably want to answer the question as well.
Much of what GE Capital does pertains to equipment management. Often we consider financial services to be a combination of a financial service and other services which are tied into it, particularly on the corporate side. On the consumer side, in our line of business we typically do it through dealers and manufacturers. For instance, we will take residual positions on cars. In other words, we will, to some degree, anticipate what those cars will be worth in the future when they come back from the lease transaction.
Senator Tkachuk: You must do that to be competitive.
Mr. Oryschuk: Absolutely.
At the moment, as you may know, many lessors in the industry have incorrectly assumed what those values would be. There is an element of risk there. It is very important that the people who manage these businesses clearly understand the assets which are subject to the transactions.
That same theory applies in my business. We lease a good deal of equipment, and many of our credit decisions are predicated upon our understanding of the equipment, its use, and what its value will be during the term of the lease as well as at the termination of the transaction. We then equate financial assets and relate them to the value of those pieces of equipment. That allows us to make a far more flexible credit decision, because we do not look at the balance sheet as much as at the customer at that point. We look at the customer's ability to meet the payments required under the transaction and we compare those payments to the cash flows which are to be generated by the business. That gives us an edge, if you will, but it puts a significant onus on us to understand the equipment or assets that we finance.
Mr. Simmons: Mr. Oryschuk commenced by saying that the leasing of vehicles is tantamount to a financial service, but it is more of an asset management service. These are two distinct services.
Senator Tkachuk: When you lease an office space, you have a building manager who ensures that you are cleaning the place and not wrecking it. When you lease a car, you have to change the oil and do all that stuff.
Mr. Simmons: Consider the owner of the vehicle. Whether you are a fleet lessor or a retail lessor, whether you are a dealer or an independent, you must be concerned. You are the owner of that vehicle. You are subject to problems. You must do annual insurance follow-up. In the province of Ontario, if someone is caught driving a vehicle with a suspended license, the vehicle is impounded no matter who owns it. If the vehicle is leased the owner must get involved in reclaiming it.
Senator Tkachuk: You get the parking ticket, too.
Mr. Simmons: You get recall campaigns from the manufacturers. You must notify all your lessees to bring their cars in to be fixed. You have PPSA registration, but I guess you would have that in a loan in any event.
You are also in constant contact with the customer within the appropriate time for cycling that vehicle, whether it be two years, three years, 27 months, or 30 months. In an asset management service you try to fit the proper asset with the customer, whether it be a commercial vehicle, a pick-up truck or a cube van. You counsel the customer regarding his needs. It is a life-cycle management service, which I think is what Mr. Oryschuk described.
Retail leasing is almost like a long-term rental contract. Rather than renting the car for three months from Hertz, you rent it for two years, or whatever period of time, from the dealer. There are many leases that go 26 months or 27 months, and then they are extended a few months because there are fewer kilometres on the car than anticipated.
Senator Tkachuk: I am asking these questions not from the point of view of whether a bank or anyone else should be in the leasing business but from the point of view of risk. In other words, the banks have our deposits, and we prevent them from going into many businesses because of risk. I am trying to get a good fix on this.
Somehow, they have convinced us that the financial service business is one business. The transportation business is not automobiles and planes and ships. They have convinced us that, because there is a financial service, there are not several products out there, and they can do them all well.
I want you to tell me about the risk of the business, because business has been good and profits are high right now, but it is not always that way.
Mr. Oryschuk: On that theme, I think I can illustrate how we look at these situations differently at GE Capital. One of the 28 businesses is called GE Capital Aviation Services. The only thing the people in that organization do is lease commercial aircraft. We tend to perceive those specific assets as separate businesses which each require specialized knowledge, specialized people, and specialized go-to-market strategies. That fundamental recipe is what has created our success.
That is one example of a business not located in Canada. However, I would venture to say that it is a very global business, and we probably do have customers in Canada who would fall into that category. In such a global business, a substantial amount of knowledge is required to be an effective and prudent financier.
Incidentally, in that business, we do take positions on aircraft at the order level, and we take positions at the end of the lease transactions. We take a risk on the value of aircraft and on our ability to place them throughout the world during their useful lives.
Mr. Simmons: If I may add to that, with respect to vehicle leasing, there is residual risk, as you pointed out, and you must set up a residual. As all of us know, from time to time the factories subsidize residuals or use an inflated residual value to get a greater share of the retail market. That is why they capture a high percentage of the leasing market.
Anyone in the business, though, must set realistic residuals. You can buy residual value insurance, but no insurance companies want to pay any claims on your residual value insurance. Therefore, even if you negotiate a very attractive residual value policy, you still have residual risk relative to deductibles or relative to excess wear and tear on that vehicle. An insurance company will insure a given vehicle in perfect shape with a given odometer reading, and you do not find consistently such an animal in the business.
Senator Joyal: You have been rather successful in the last 10 years in making available in Canada a new range of products. In your brochure, you list a certain number of services that you offer in Canada. You will remember that one of our previous witnesses mentioned that the competition for which you are pleading, in terms of banking institutions as such, has been reduced in the last 10 years rather than increased. When changes were made to the Bank Act to allow foreign banks to enter the Canadian market, we all expected that they would take a sizeable share of the market. After 10 years or so of activity, their share of the market has not increased. In fact there are fewer foreign banks active in the Canadian market now than previously.
The MacKay report pleads for additional competition. You are telling us that the market is now segmented into various products, that there is international competition essentially on a niche basis, and that we should not expect that foreign banks will be coming here and competing on the same basis as Canadian banks.
Is it your opinion that today we must approach those issues on different grounds if we want to maintain competition and that the points MacKay makes in terms of banking institutions are accurate in terms economic reality?
Mr. Weese: In terms of financing for Canadian businesses, over the last several years we have seen the growth of a wide range of alternatives, many of which have been provided by foreign-based companies like GE Capital, and Canadian divested companies, too. So in terms of financing for business, there has been the growth of new products, new companies, increased competition and increased alternatives, and I think that has worked very well.
I do not purport to be an expert on retail banking, consumer banking, and I cannot tell you why consumer banking has not provided the same range of alternatives and the same competitive environment that business financing has seen. There may be issues to do with foreign branching. I know there is a view that the Canadian domestic banking market-place is highly protected and highly regulated, with many barriers to entry. I do not purport to be an expert, but that is a common view, and it is not easy for foreign banks to come in here and provide a wide range of consumer services.
On the business financing side, I think we have been relatively successful with the growth of alternatives.
Mr. Oryschuk: There are a couple of significant factors that have helped GE Capital grow as it has in Canada. One is our ability to acquire companies. Part of our growth has clearly come from acquisitions of specific businesses we have made in this country that were in the niches in which we wanted to be.
As an example, one of the early acquisitions of GE Capital in the 1980s was International Harvester Finance. A subsequent acquisition was that of the National Bank leasing company organization. That is part of the recipe.
Another part of the recipe is that we have been able to transfer certain of our customer relationships in the United States into Canada. A third aspect is transferring a product that is successful in the United States into the Canadian market-place.
Acquisitions are a way of coming into the market-place, but they are not sufficient on their own. The recipe was to keep major organizations together and to continue to grow by expanding the product line and the services and by making the teams that were acquired more aggressive. That allowed those businesses to continue to grow in the Canadian market-place. Perhaps some of the foreign banks have not adopted that recipe.
Mr. Powell: GE Capital is an important and valued member of our association, but we have acquired about 30 new members in the last 12 months, most of which are American-based companies coming into the Canadian market-place. Yes, most of them have a business focus initially -- and I think the real challenge is looking at the consumer retail market, as Bob Weese said -- but part of the problem that we have experienced is that we do not have enough information about what is actually going on on the ground.
We appeared before this committee six weeks ago on the Small Business Loans Act. At that time, we mentioned a study that we had done with the Conference Board of Canada on small-business lending that indicated that conventional means of tracking what was happening was showing only 50 per cent of the activity. The other 50 per cent is off our radar screen.
Last week at our annual meeting in Quebec City, I spoke to one of our members from Vancouver. They are a small, aggressive firm and are looking for acquisitions, so they asked some students to do a survey looking for companies with the word "leasing" in their name in the 15 biggest markets in Canada. They were to look only for equipment leasing companies and those with under $100 million in assets. They initially did a search through the telephone directories in the 15 biggest markets. They came up with 232 companies, no more than 10 of which were members of our association.
They then did a telephone survey of those companies, asking what their business was and what their assets were, et cetera. The conclusion of the survey was that these companies had an average portfolio of between $10 million and $40 million, but the total asset was about $4.5 billion. These are companies that are completely off the radar screen. No one knows they exist, but they are active and they are financing Canadians and Canadian businesses. Forty per cent of their seed funding comes from private investors and over 50 per cent comes from banks.
There are people out there who are developing new ways to offer financing products that we just do not know about.
Senator Meighen: On the last page of your brief, you say that the point of departure in creating the basic public policy framework of the future is the assurance that realistic rules, successful and effective recourses, and enforceable protection are in place to ensure timely redress before we continue tinkering with the system.
I wanted to know exactly what you were getting at there and how you saw these rules being put in place and by whom.
Does that refer to what the MacKay task force mentioned when they talked about, for example, coercive tied selling and said that that problem must be settled before we go further? I wonder whether that is what you had in mind. Also, you are mindful, I am sure, of what Mr. Clark, the previous witness, said in terms of self-regulation as opposed to government regulation and the increasing burden of filling out forms and complying with a myriad of regulations. Are you referring here to industry standards or to government-imposed rules?
Mr. Powell: I do not have any hard-and-fast prescriptions as to whether it should be government or industry. There have been attempts to start moving in the direction of establishing some codes of conduct and some means of redress. I know that some of you around the table are lawyers. If you have ever had to deal with the Competition Bureau on a problem with a small company, you know that the basic advice to your customer is usually, "Look, by the time you get the letter of acknowledgement, you may be out of business, so we have to look for other remedies." The remedies that do exist are not perceived to be particularly effective.
The history of the regulation of financial services in Canada, as we point out, has led to the concentration that we know today. The government makes the decision that, for good public policy reasons, it is going to step in and regulate certain aspects of financial services, such as with the prudential rules, to ensure that there are certain core financial institutions that will play an essential role in our economy. Certain advantages and disadvantages flow from that regulation. Then you must recognize that somehow we have to correct the imbalance created by the intervention in the market-place. Whether it is regulation by government or by the industry, we are open to discussing that. However, there are real problems, not just with coercive tied selling, but with things such as the use of data and personal information, which the task force alludes to and says we must solve.
Then there are issues of conflicts of interest. They say we must solve that. We do not see a whole lot of prescriptions. All we see is a list, and they say, "We are sure we can somehow resolve these things." Our concern about the piecemeal, cherry-picking approach was that we would move forward on a number of the attractive and sexy issues and not look at the whole picture. We say, "Well, are we going to end up with what we are really looking for or are we going to end up with more concentration?" For the last decade and a half, every step in deregulation has, in our view, led to more concentration, not less, in financial services.
Senator Meighen: By inference, therefore, the consumer has suffered?
Mr. Powell: One of the things that bothers me a little bit about the task force report is that when they use the word "consumer," I do not know whether they mean the individual consumer or the consumer of financial services. They talk about small business as a separate category, but one of our preoccupations is not just the individual consumer but also the small and medium-sized businesses as consumers of financial services.
Underlying this, and what seems to unite most of our members, is the concern that the size of the banks means that they have a built-in advantage whenever they are allowed to move into any new sector. Based on our research, when you look at, for example, the trust company rates of interest-- and Mr. Clark, as I said, alluded to that earlier -- versus the bank rate of interest for residential mortgages, you can see the line. In our brief, you can see the chart that shows that as the banks moved in to take over the trust companies, what ended up happening was that the residential mortgage rates rose to the level of the banks and did not come down to the level of the trust companies that had been taken over.
Our concern is that past evidence seems to suggest that every time we do allow the banks into a major area without the proper precautions, we know what will happen.
Senator Meighen: Does that mean that if GE Leasing goes along buying more business, it will cost the consumer more, and we should do something about preventing GE from acquiring more business?
Mr. Powell: If you look at the scale of involvement of any of our members, I do not think that it comes anywhere near that size. The whole industry is $50 billion.
Senator Meighen: And what is GE?
Mr. Powell: Approximately $6 billion in assets.
We do not see ourselves as replacing banks. We see ourselves as alternatives for people who will have to have banks as well.
Mr. Simmons: The concentration issue was emphasized by Mr. Clark. He mentioned Citibank pulling out of the retail business. I was with Citibank back in 1983-84, and we did focus groups with consumers to see how we could add branches, move into the business, to compete successfully with the Schedule A banks.
Interestingly enough, one of the general comments that came back was that the average consumers felt safe with the Schedule A banks. They perceived them to be just like utilities, but more importantly, indistinguishable from the federal government. That gives an example of how the concentration issue is prevalent in the minds of both the consumers and small business. I think that explains for you why it will take much longer than the MacKay report anticipates for these alternative financial service providers to arrive, whether they come from the United States, Europe, or wherever, or whether they grow organically in Canada.
Mr. Weese: One of the dilemmas for the government and this committee in dealing with the recommendations in the MacKay report, is the extent to which you can rely on competitive market forces to handle some of the potential problems that will arise through size, or the extent to which you must regulate to deal with those problems.
We had a fascinating discussion in one of our meetings with the MacKay group. They were asking us questions about small-business financing. The trend of the discussion was going along these lines: What kind of regulations would we need to ensure that banks or financial institutions were providing financing to small business? Our response to that tended to be: If there is a need for small-business financing, and if there are no barriers to entry, you do not have to worry about that. Someone will move in to provide that service.
I think that is a real dilemma -- how you cope with some of these issues.
Senator Oliver: One of the things that the banks have said repeatedly to us and to others about you is that you can carry on all kinds of activities without regulation because you have been declared not to be a bank. They cannot do those things, and that it is a tremendous disadvantage to them because the field is not level.
I notice that many of the things in your list of capital services are bank-type things, like commercial financing and mortgage financing and so on. You are doing bank-type things. Do you not think it fair that perhaps you should be regulated like banks so that the field is fairer?
Mr. Weese: No. Nor do we have any problem with the deregulation of banks insofar as you can deregulate and still provide some protection for depositors.
Mr. Davies: If I can comment on that, this question of a level playing field has come up perviously, before the House Finance Committee and before this committee when we were appearing a couple of years ago. I cannot help but think that it is sometimes tongue-in-cheek when the banks raise this argument. It is more directed to their having less regulation. I have never heard them suggest that we should be regulated. The regulation that generally applies to banks, and which they complain about, is the regulation that arises because they take deposits and are subject to deposit insurance. Those depositors, and the government, need protection, and most of the regulation relates to protection of depositors. We are subject to the same regulation, if we are in insurance, as banks are in carrying on an insurance business, or in mortgage insurance, et cetera. However, our argument has always been that those of us who do not take deposits and therefore do not put any strain or risk on the deposit insurance, and thus on the Canadian taxpayer, should not be subject to -- and there is no public policy reason for us or for Newcourt to be subject to -- regulation that is there to protect depositors and to protect the taxpayer.
Senator Oliver: Newcourt Credit is having to go into a $500 million line to pay off debts because of a liquidity problem.
Mr. Davies: Shareholders invest in Newcourt and put the money in. They assume the risk. Joe Blow depositor is not investing his life savings with the bank and looking to the government to provide some sort of protection on what the banks do with those savings.
Newcourt does not take investments. We do not. We deal with sophisticated investors. Those investors know that what they invest in may go down or may go up. They are prepared to take that risk They do not need government protection because they are sophisticated investors, in our case putting out more than $100,000.
We do not feel there is a level playing field argument in that respect at all because the banks enjoy low-cost deposits. We heard today from some of the previous witnesses as to how remunerative and how successful the retail deposit-taking business is to the one remaining trust company, and the banks, because of that protection and the regulation that goes along with it.
Mr. Powell: One of the issues that you might want to think about is that if you think you should extend regulation to our industry or any other, the flip side of that is reflected in what Mr. Simmons was saying. If you decide that you will regulate and the government will decide how to regulate the industry, what is good and what is bad, you are also then on the hook if something goes wrong. If a company finds itself in financial difficulty, what will you do then as the government? People will say, "What was the regulator doing? Were they asleep at the switch? Who should bear the responsibility?"
The Chairman: That was the argument put to us by the governor of the central Bank of New Zealand in terms of arguing why he moved out of excessive regulation -- deregulated substantially -- and replaced it by more public disclosure.
Senator Angus: Mr. Powell, you mentioned your membership list. Are the members all in the same business? What are the characteristics of your membership?
Mr. Powell: We have two categories of membership. You will see law firms and accounting firms.
Senator Angus: Do they pay the same membership fee?
Mr. Powell: No, they do not.
Mr. Simmons: I would say that of the 170 members we have, probably 135 are in the active leasing business. The balance are in providing various services, such as insurance, software, and consulting.
Those in the active leasing business vary from the manufacturer's captives, who are there to help finance the products of the manufacturer's parent, such as IBM leasing or GMAC, to the independents like GE and Newcourt. That is the membership.
Senator Angus: It is probably an oversimplification, but one group among you is happy with the MacKay report. You do not have any criticisms. You have had nice, stimulating discussions with the task force. You folks have had a negative reaction -- understandably, I think. You did submit a very substantial brief and you appeared before the task force, but you obviously did not convince them of your point of view. Why do you think that is? Do you think they were just paying lip-service by having you there and that they had a set agenda?
Mr. Powell: I do not think so.
Mr. Simmons: There are a couple of perspectives. There is the sense that most of the captives, particularly in the automobile leasing industry -- GMAC, Ford, Chrysler Credit, and Toyota Credit -- should be able to compete with the banks. They refer continuously to the U.S. market. That is a danger sometimes, comparing apples with oranges. The leasing market is much stronger in Canada in the consumer business, but I think there are a number of reasons for that. We cannot deduct our mortgage interest. There are many home equity loans in the United States where people can deduct their interest on the mortgage, so they buy a car that way. The leasing is not as strong.
In Canada we have upfront taxes, such as the PST and GST. There are many reasons why the market is strong.
There is the overriding feeling in the MacKay report that the captives are very strong. However, we must keep in mind that the captives are there to support their dealers. They are in one, and only one, business -- the car leasing business. They support their dealers.
About 39 per cent of automotive dealers are leasing. They say that only 45 of them do 200 cars or more; the rest do an average of 25 cars, which is not very much. To explain that a bit, 25 car leases for the average dealer in this country is a lot of cars. That represents about $700,000 or more in sales and about $25,000 gross profit. That is not bad for a small-business man, but the report tends to trivialize it.
I do not know how they came to their recommendations. I read the Desrochers report. Desrochers is a big supporter of our industry. We feel the conflict of interest issue is still the biggest issue. We want our independent lessors, members of the associations, and dealers to be very strong in leasing. We think leasing is very important, and I think it is done better in this country. There are very few dealer-lessors in the United States. You can draw various conclusions. The captives have about 43 per cent of the market and the banks have about 35 per cent of the indirect market. It has pushed dealers out of the business. We think the dealers and the independent lessors are very strong.
You mentioned the student group. There are about 2,400 leasing businesses in this country. If the average one is only 25 cars, so be it. They are servicing 25 people or small businesses in their community. I think we should encourage that. Why do we want the banks to take that business?
Mr. Powell: I do not want to leave you with a mistaken impression. We see many good and positive things in the MacKay task force report. The question of aiming for minimal regulation is extremely important.
The role of global capital is important. In some quarters, people react and say, "Many of your members are foreign owned, and is that not a bad thing"? As a Canadian, I look at that and say, wait a minute. When we started catching beavers in the St. Lawrence, it was because foreign capital was there to help it happen. It is an integral part of the economy of this country and we should not dismiss it.
There are a number of important factors, but we were concerned as a smaller niche player trying to develop in Canada. What united most of our membership, whether on the vehicle side or the equipment side, was the big banks in Canada. We have heard from several witnesses today that we have the most concentrated banking system in the world. The big banks in Canada are the 300-pound gorillas. Yes, we can compete with them, but we have to be careful that the rules do not end up being so distorted that we cannot compete with them as effectively as we feel we should be able to.
GE Capital will speak for itself. I think in many ways it is an exceptional member of our association, and I do not think it necessarily has the same degree of concern that most of our members do about this situation.
Mr. Weese: Perhaps I could just respond to that point. GE Capital is a business that thrives on competition and we have done well by competing. We welcome competition. In principle, we do not object if other competitors arise or banks get into business lines that will make them our competitors. That is fine. We thrive. We think that is good for the economy, good for efficiency, and good for consumer choice.
There is a slightly different flavour in our two presentations. We have tended to focus more on the philosophy and approach of the MacKay report, which we think is basically right. These folks are colleagues who have focused more on some of the implementation issues and introduced some cautions which, frankly, we understand and we share. It is not that we dismiss all of those.
With respect to auto leasing, many small auto dealer-lessors get their funds from the banks. They are in a particularly unique situation if they find themselves competing directly in retail auto leasing against the banks from whom they get their financing. We obviously do not get our money from the banks, we get our money in commercial markets, so we do not share that particular preoccupation. That partly explains some of the concerns that you are hearing today from the association.
Mr. Simmons: It is not just the dealers. Many of our members are independent leasing companies who operate from 1,000 vehicles to 20,000 vehicles, et cetera. Most of their money comes from the banks.
Mr. Weese: That is a particular problem being expressed, which we understand.
Mr. Powell: On the financing end of the transaction, as Mr. Oryschuk has explained, in fleet leasing we generally provide a complete package of services, not just financing, and therefore it is a different sort of arrangement than the banks would likely get into. Therefore, we do not have the same concerns as other smaller organizations that are into the dealers that are doing the financing themselves.
As you mentioned, Senator Kirby, the way we do business and our freedom to do it, is not necessarily impacted in the same way as others. We are not disagreeing with the points they make, but it does not impact on us the same way.
Senator Angus: Mr. Powell, your group would adhere to the same views expressed here last Thursday by Mr. Hugh Williams, of the Canadian Automobile Dealers Association?
Mr. Powell: I do not know. I have not heard his views.
Senator Angus: They were very much against the report, very vociferous about how it will affect these people who lease 25 cars a year.
Mr. Powell: We are not against the report by any means. What is particularly useful in the report is it is seems to pull together much of the information that has been floating around and puts it in one place on the table for public discussion.
I would not say that we are against the report. We find it a positive, constructive, and important contribution. We do not believe they have a particular axe to grind, if that is what you are suggesting.
Senator Angus: No, I only wished to know why you were not able to get your points reflected in the report.
Mr. Powell: Unfortunately, you must ask the members of the committee.
Senator Stewart: As you know, Mr. Chairman, those who get involved in politics or government soon learn that there is a distinction between the good reasons stated at the front of the platform and the real reasons.
As I recall, When the banks started to talk about merger, the emphasis was on the need for Canadian national champions. Then, as the financial situation in certain parts of the world began to deteriorate badly, the water getting either too hot or too cold, the argument seemed to shift to the following: We need to be bigger, more cost-effective, in order to compete effectively with certain foreign financial services coming into Canada.
In a sense -- not deliberately of course <#0107> you seem to partly support the second argument. You are talking about a large number of the GE lines that are now available in Canada, and you seem to imply that you would like to increase those lines. That is fair enough.
My question is: Does the competition that companies such as yours introduce in Canada, competition to the banks, does that competition constitute a real threat to the banks, sufficient to justify their merger proposal?
I believe your answer will be obvious. I wish to go behind the obvious answer to the real reasons.
Senator Tkachuk: What is the obvious answer?
Senator Stewart: What are the real reasons why you think that you do not pose a genuine, serious threat to the major Canadian banks?
For example, is it that certain aspects of the business that you do are so sophisticated -- for example, in heavy equipment -- that the banks are not likely to become serious competition, so that you are filling a niche which they are not competent to fill? I assume that there are other real reasons. What they are I wish to know.
Mr. Oryschuk: That is a tough question. I do not know where to start. I would say that in many fields, we seem to be competitors, but we are not because we take a different approach. Obviously, if you look at it in a very generic sense, we do end up being competition for them.
Let me use some examples to illustrate what we do and describe some of the questions that I have asked some of our smaller and medium-sized companies. We are very involved in the logging industry in the west. We finance many logging operators. I recall a visit in Kamloops with a logging operator with whom we have done a certain amount of business over the years, a very successful business person. I asked this person why he did business with us. He told me there were a couple of reasons, including the fact that we stuck with him through the good times and the bad times. We understood his business, we understood the equipment. He also stated that if he went to his banker and explained that a piece of equipment he wished to acquire was used to harvest ginseng, the banker would believe him. He would not know the difference.
Another example is that this conversation could take place on a mountain. There could be winter conditions. A typical banker does not go and see a customer in those type of conditions, nor does he spend time trying to understand an operation.
I am telling you that we are taking our service package to a different level. From that point of view, I do not believe the mergers will change anything. Our way of doing business is substantially different. The only way changes will occur is if the organizations you are referring to change the way they do business, not whether they merge or not.
Senator Stewart: What you are saying is -- and you are saying it almost bluntly -- the mergers will not change anything. In other words, the second argument, which I mentioned at the beginning, is a fake argument. Perhaps they believe it. Yet it is inaccurate. That is what it amounts to.
Mr. Oryschuk: Perhaps. We are not in their shoes in terms of determining their strategies. What we see happening throughout the world is there are behemoth financial institutions developing and we must compete against them. There are a number of things happening in financial services, not only here in Canada but all over the world. We look at them and we say, in the Jack Welsh kind of way, this is our new reality. We will not stand in the way. We will not block any of these things from happening.
What you hear from us in terms of commentary is not self-serving. We are saying, this is what is happening in the bigger marke-place and we are quite willing to live with the competition. We are quite willing to live with more competition.
Let us not assume that we are the only ones with this recipe. There are people in the Canadian Finance and Leasing Association who are following similar recipes. That competition occurs every day.
The Chairman: May I summarize that answer in one sentence? I believe what you just said is this: Your value proposition for your customers is a combination of price and service. You believe that you can beat the heck out of the banks on service, and you are not worried that they can come up with a value proposition equal to yours.
Mr. Oryschuk: I would hope that would be our recipe. We spend a great deal of time trying to do that.
The Chairman: The examples you used, and your comments on size, make it seem reasonable for us to draw that conclusion.
Mr. Oryschuk: May I just enhance that with another GE reciprocal thing? We are now spending all of our days talking about six sigma quality, and the underpinning of that is delivering to our customers, flawless execution on what is critical to them. We spend a great deal of time trying to understand what is critical to our customers and then we try to deliver flawlessly, time and again, what they are looking for. We are not there yet, but Jack Welsh has given us to the year 2000 to get there.
Mr. Weese: Mr. Chairman, I leave it to you to assess to what extent that is inconsistent with or different from what the banks have said.
The Chairman: Senators, we are adjourned until nine o'clock tomorrow morning.
The committee adjourned.