Canada needs a bank merger review process that properly addresses the public interest, advances the country’s prosperity and ensures our nation’s future financial sovereignty. We also need a process that is clear, efficient and timely, and public policy that creates some consistency between government and industry objectives.

The alternative is a situation that hurts Canada’s financial services industry in ways that are not in the public interest. A poor review process is not only disruptive to employees, clients and investors””including more than one in two adult Canadians who own bank stocks””it restricts the ability of our financial services companies to make investment decisions and maximize their potential.

Without a clear, transparent and predictable process, the likelihood of formal merger proposals being tabled and approved is remote and, if mergers are proposed, they run the risk of being embroiled in a politically charged process. This would not be in anyone’s interest, and is not conducive to the establishment of good public policy.

Our public interest process would be more productive if it had a clear mandate, did not duplicate issues being examined by OSFI and the Competition Bureau, and took into account existing federal guidelines that banks must already satisfy around key areas of public interest. It must also advance the debate beyond a simple re-examination of old concerns, to one that actually addresses how merger aspirants deal with public interest issues.

If the government’s public interest criteria have clearly captured the key areas of concern, and if banks have properly addressed them in their Public Interest Impact Assessment, the parliamentary committees, on behalf of the public interest, could review the assessment of the merging parties, and call upon the banks, the Competition Bureau, OSFI and the Department of Finance to testify as necessary. In other words, if the public interest criteria and policy objectives are clear, then the parliamentary process can focus on ensuring that mergers are in compliance with those criteria.

Broadly speaking, the public interest assessment should revolve around three key areas.

First, mergers should be examined in terms of their long-term impact on Canada’s future prosperity and standard of living. Opening the door to bank mergers will, in my view, result in significant consolidation and re-organization in financial services, impacting not only the big Canadian banks, but also smaller institutions, foreign banks and other non-bank financial companies. This will impact the ability of our banks to compete globally and the ability of other financial institutions to compete domestically.

There is abundant evidence that consolidation within the financial services industry can be strategically good for our country. It provides a greater opportunity to develop national champions capable of competing in a global marketplace. While size is only one measure of success, if you look at the world’s largest financial institutions as measured by market value, most have grown through acquisition and domestic consolidation.

Our country needs internationally competitive industries””they generate the capital and jobs to support ongoing economic vitality; they generate higher incomes and pensions for Canadians; and they generate additional tax revenues. Global companies with Canadian head offices are critical to maintaining a level of investment and innovation that keeps bright young people in Canada and generates the overall employment creation that every country needs.  

We do not have enough worldclass companies, and the trend has been going in the wrong direction. According to recent data from UBS Warburg, Canada has just one company in the top 200 worldwide and ranks well behind a variety of smaller economies, such as Hong Kong with two, Spain with four, the Netherlands with five, Australia and Italy with six each, and Switzerland with seven. On a per capita basis, Canada ranks last, in 15th place, behind countries like Belgium, Norway and Finland.

Mergers would help Canada’s financial sector build efficiency and profitability, which is good for shareholders, clients, our international standing and our reputation as sound and stable business partners. Economies of scale and scope generate greater efficiency and lower unit costs.

This is supported by a number of academic studies that clearly show Canadian banks would realize cost savings from further increases in their size through consolidation. There are no guarantees of success, but we should be creating an environment that both encourages Canadian businesses and provides them with the opportunity to aim for greater heights.

Not only would consolidation create opportunities for our large banks, it would result in new competition and investment in the sector providing opportunities for smaller Canadian banks, foreign banks and other Canadian financial institutions. Both previous testimony and the market activities of other financial companies besides the major banks support this view. In addition, as a small bank in the United States, RBC can attest to the fact that upper-end consolidation provides significant opportunity to acquire branches and customers.

Second, mergers need to be considered in the context of Canada’s financial sovereignty. As a country, we need to decide whether it’s important to control our own financial sector, and what public policy would best achieve that goal.

Since the mid-1990s, there has been more than $3.4 trillion of financial services consolidation worldwide, with more than $1.1 trillion of that taking place in the United States. Notwithstanding the goal of several Canadian banks to expand their retail banking operations into the United States, as well as the industry’s strong competitive position, our scale and market valuations have restricted our ability to actively participate in this consolidation. There is every reason to believe that this trend toward global consolidation will continue, further marginalizing Canadian banks in both a North American and global context, thereby making future expansion and international acquisitions even more challenging.

We need to ask whether it’s better for Canadians to control fewer but stronger banks that have the scale, efficiency, and capital to keep Canada competitive in global financial markets. I appreciate that this is a difficult issue at the local constituency level where the tangible benefits of Canadian banks investing and growing in foreign markets are less evident; however, it is a critical consideration in determining longterm public policy governing our financial services industry. Strong Canadian-based companies, regardless of where in the world they operate, are essential to the long-term economic competitiveness of our country.

There are many who believe that foreign take-over restrictions on our big banks should be lifted, and others who argue that they will eventually be eliminated as a future trade negotiations. In result of my opinion, the best defense of Canadian financial sovereignty is an environment that facilitates stronger, Canadian-controlled banks that are less vulnerable to foreign takeover if, as and when existing restrictions are removed. Restricting growth and consolidation only serves to disadvantage our Canadian financial institutions as markets globalize.

Third, mergers should be reviewed on the basis of access to service, choice among financial service providers, transitional issues such as impact on employment, and improvements to service.

Bank mergers need to be carefully managed. There are concerns relating to implementation, short-term job dislocation, head office reductions, service disruption, small business and impact on our communities. These are real issues; however, these concerns can be managed in ways that serve the public interest as well as deliver the long-term benefit of strengthening the Canadian financial services industry.

For example, banks might pledge to keep redundancies to a specific percentage of the combined workforce for an initial period, to use attrition to deal with a percentage of displaced employees and to provide outplacement counseling for those who leave. Banks could give undertakings to move carefully with integration, perhaps freezing branch closures for a specific timeframe or providing longer notice periods. Establishing a requirement to distribute or sell a percentage of branches could be a means of ensuring compliance with competition criteria and choice among providers.

There has been much discussion about the impact of bank mergers on the access Canadians have to financial services and the availability of credit. This is especially true for smalland mediumsized businesses because of the critical role banks play in helping them to grow and enabling some to become market and industry leaders.

It was in the interest of addressing this issue that RBC Financial Group worked with Canadian Manufacturers and Exporters, and the Canadian Federation of Independent Business to study how Canada can help its smalland medium-sized business enterprises prosper and grow.

The study shows that loan availability and competitive pricing in Canada is strong and that entrepreneurs are accessing a wide variety of financial providers including domestic banks, foreign banks, credit unions, leasing companies, crown corporations, life insurers, trust companies, mortgage companies and credit card companies. In fact, the domestic banks have just 50 percent of the small business debt financing market.

While mergers would reduce the number of domestic banks serving small business, it would also widen the scope for other providers”” including foreign banks””to enter the market or to expand their existing market share. For example, National Bank, HSBC, credit unions and others have already confirmed their interest in buying bank branches and acquiring a greater share of the small business market.

While the availability of credit will always be a lightning rod for criticism, it is ranked well down the list of barriers to growth, behind such issues as management skills, the availability of skilled labour, and venture capital. In terms of access, Canada’s banks have a solid track record of finding new ways to serve clients with special needs, such as people with disabilities, lowincome Canadians and those in rural areas. We are committed to these initiatives, and in some cases we are obliged under federal guidelines to provide them, which means a merger proposal would do nothing to diminish this access.

Over the past few years, banks have demonstrated significant flexibility in serving clients at times and locations that are convenient for them. Mobile sales forces, Internet banking, telephone banking and banking machines help provide service to clients who might find coming to a branch less convenient. In fact, almost 95 percent of transactions now occur outside our branch network where we have invested and will continue to invest in alternative distribution channels.

However, we also know that despite the dramatic increase in alternative banking channels, 70 percent of our clients still visit our branches at least once every three months for advice, to handle more complex transactions or to resolve issues.

We understand that branch access is important to Canadians, and believe this access would be maintained under Competition Bureau and public interest guidelines that could require merging banks to sell a minimum number of branches as going concerns, thus ensuring choice is maintained in most communities. As the Senate Committee noted in its report, “Properly regulated mergers can enhance competition.”

In summary, we recognize that issues around access, service, employment and credit must be key considerations in any merger initiative. Our industry’s track record is strong, however; I don’t believe that anyone in the industry would be against a constructive discussion of additional remedies to deal with these issues in the face of consolidation.

Undertakings should not prevent banks from realizing the efficiencies and cost savings available to them from consolidation, and they should recognize the competitiveness and quality of our current system. However, the undertakings should require banks to outline how they will mitigate key public interest concerns, particularly during the early stages of a merger when stakeholders need time to adjust.

The time has come to provide Canada’s financial services industry with clear direction on the government’s policy and expectations with respect to bank mergers and the restructuring of the financial services landscape. We need a process that is more predictable and more transparent than it is today, and public policy that aligns the interests of government and the industry.

From a prudential standpoint, we do not believe that an open-ended process in which there is no ability for the industry to predict the outcome is in the public interest. Nor is it in the public interest for transactions to be approved or turned down in “one-off” deals that don’t anticipate the need for the industry to restructure and enhance its global competitiveness.

The government has acknowledged that mergers are a legitimate business strategy for banks. However, the merger review process can have the effect of discouraging banks from pursuing this strategy. In fact, merger proposals can be rejected on the basis of public interest concerns before they are formally submitted and fully reviewed.

This discrepancy between policy and process needs to be addressed. Canada’s financial services industry needs to know on what basis the government is prepared to accept mergers, and that the public impact review process will be applied equally to all merger proposals.

This article is adapted from a presentation to the House of Commons Finance Committee hearings on large bank mergers and the public interest.