Last October 24, I received a letter from the minister of finance, John Manley, and the secretary of state (International Financial Institutions), Maurizio Bevilacqua, requesting that the Senate Committee on Banking, Trade and Commerce review the guidelines gov- erning the merger review process for large banks in Canada with a view to providing greater clarity to stakeholders.

Stakeholders include not only banks, their shareholders and suppliers, but large and small business borrowers con- cerned about access to credit, and millions of Canadians concerned about the quality of service. The question of mergers of large Canadian banks is one of those debates in which both sides present strong and closely reasoned argu- ments. The banks make a strong case for economies of scale and critical mass as essential to be competitive in the glob- alized market of financial services. Business, especially small and mid-sized business, wants guarantees that capital is available to them. Consumer advocates are understandably concerned about branch closings as a result of mergers at the retail bank level.

There is no shortage of informed views on the issue of large bank mergers, as the Senate Banking Committee was reminded during five days of intensive hearings in late November and early December 2002. At these hearings, the Senate Banking Committee heard from a broad cross-sec- tion of stakeholders, including representatives of the Competition Bureau and the Department of Finance; chair- men and representatives from the Big Six Canadian banks, as well as smaller banks, credit unions, and foreign banks; public interest groups, retail and consumer interest groups; academics; and others.

The overriding theme of the evidence presented to the Committee confirmed my prior view that mergers among large banks in Canada are not only good for the pub- lic interest in Canada, but are, in fact, necessary to ensure the continuing relevance of Canadian banks in Canada as well as worldwide. The committee’s conclusions and rec- ommendations were bipartisan and unanimous, with Conservative sena- tors joining Liberals in the consensus.

The specific areas of public inter- est that we considered during these hearings were:

  • Access of Canadians in all regions to convenient and quality financial services;

  • Choice among financial services providers and the availability of financing for businesses, especially small businesses, and Canadians;

  • Creation of long-term growth prospects for Canada through more effective Canadian-based internationally competitive insti- tutions; and

  • Transitional issues, including treatment of employees as a result of any mergers.

Additionally, in the broader public policy context, the importance of maintaining a competitive financial services industry in Canada must be taken into account.

In the Senate Banking Committee’s unanimous report, tabled in the Senate on December 12, we stated that we were in favour of large bank mergers that meet the requirements of the Competition Bureau and the Office of the Superintendent of Financial Institutions (OSFI). After considering the evidence given with regard to the areas of public policy listed above, it appears that enhancing long-term growth prospects for Canada, through allowing one or two large bank merg- ers, will benefit all aspects of the public interest. But steps must be taken, in approving large bank mergers, to ensure that Canadians, especially in rural areas, and small Canadian busi- nesses have access to quality financial services. I believe these interests are protected by the Competition Bureau review of a proposed merger and its requirements of the merging parties as well as the recommendations in the Senate Banking Committee Report, if implemented.

The view of the large banks was that mergers are necessary for them to compete in a rapidly growing global environment. We were told by RBC Financial Group President Gordon Nixon that a merger, if implemented with the proper public interest consid- erations: ”œhas the potential to build strong, viable, competitive businesses with the ability to make the strategic investments necessary for Canada’s future growth and productivity, while at the same time ensuring that Canadians continue to have access to competitive financial services”.

Additionally, the banks gave evi- dence, as Scotiabank Chairman Peter Godsoe put it, that they are ”œalready too small to serve as lead banks in the syndicated lending markets in North America and elsewhere.” And as CIBC Chairman John Hunkin noted: ”œLarger global institutions, such as the US commercial banks with global invest- ment banking capabilities, are often better able to meet [the needs of grow- ing Canadian companies] since small- er Canadian banks will reach maxi- mum risk exposure levels more quick- ly relative to their capital bases.”

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These concerns were supported by the view of some academics that appeared before the Senate Banking Committee during its hearings.

Wendy Dobson of the Rotman School of Management at the University of Toronto, stated, ”œMergers seem to be necessary given the ever-larger sizes of banks’ customers, customers’ need for global reach, and appetites for debt.” In looking at large banks in Canada, she pointed out that the ”œ average asset size of the top ten banks in the world is between three and four times the size of the largest Canadian bank.” In my view, this means that no matter how large our banks may be perceived to be by Canadians, they are not large by inter- national standards, which, in the cur- rent global economy, is the relevant test.

Further, as BMO Financial Group Chairman Tony Comper observed: ”œIt is critically important to the Canadian economy to have world-class Canadian-headquartered banks.” This is an important point. Throughout my own business career, I was associated with two Canadian companies, Seagram and Cadillac Fairview, that were world champions. Only about two percent of Seagram’s sales were in Canada, but its global headquarters always remained in Montreal, to the immense benefit of the community. Cadillac Fairview, from its modest Canadian origins, became one of the largest real estate companies in North America, headquartered in Toronto. They were both proud and eminently successful Canadian trademarks.

In my view, if Canadian banks are not able to grow and compete in an international market, they will quickly become unable to serve Canadian corporations in their global transactions and will become irrele- vant within the next ten years. In order to protect the Canadian finan- cial services sector, we must allow our Canadian banks to grow, compete with, and fend off, if necessary, foreign competition for control of the sector.

Allowing our large banks in Canada to get larger through mergers will allow them to compete in the international marketplace. One goal that we as Canadians should sup- port is to see our banks as exporters of financial services. For example, James McIntosh, an economist at Concordia University, referred to the insurance industry in Canada, which has been able to show increasing returns to scale as a result of growing larger, and noted that they ”œare exporters of financial services and the jobs that are associat- ed with head offices that have [high] pay, high prestige and high quality stay in Canada.” Allowing our banks to become exporters of financial serv- ices and supporting a head office cul- ture here in Canada with the presti- gious and specialized jobs that go with it is, indeed, a sensible way to proceed. It is for this reason, among others, that I firmly believe that bank mergers are necessary in Canada and that Canadians stand only to gain from allowing them to proceed.

This view was shared by credit unions, smaller banks and foreign banks, who gave evidence that an important consideration with respect to large bank mergers is ensuring, as CS Co-op President Gary Seveny put it, ”œthat Canadian financial institutions have sufficient size and scale to compete in an increasingly North American, and indeed global, market for financial services.”

Particularly, this group of financial services providers sees potential for growth through mergers of large banks and the closure of branches that would likely be ordered as part of the Competition Bureau review. In order to ensure continued access to banking services for Canadians following one or two mergers of large banks, it is nec- essary to support new banks and, pos- sibly, convert the large credit unions into community or regional banks. Smaller banks, such as Canadian Western Bank and Laurentian, credit unions and foreign banks gave evi- dence before the Committee that they see a residual benefit of bank mergers in the potential to, as Canadian Western President Larry Pollock put it, ”œacquire the excess branches and the business in them” as well as the staff. This has the ability to increase compe- tition and choice in the financial serv- ices sector, which can only benefit Canadians and Canadian businesses.

Finally, the system for reviewing bank mergers in Canada is more restrictive than mergers in any other industry. Wendy Dobson made a very pertinent point when she reminded us that it ”œis the banks that must compete in the complex international market- place. It is they, not policy-makers, who should decide their business strategies.” In order to allow large Canadian banks to compete globally we must assure that they are not unduly burdened. It is especially important that large Canadian banks are not restricted more so than their competitors in other developed countries. That’s a matter of simple common sense, and a level playing field in a global industry. In the US, for example, all of the top 25 banks as measured by market capitalization in 1990, have since been sold or been involved in large mergers.

I am convinced, by the evidence before the Senate Banking Committee, that mergers of large banks in Canada are necessary and, additionally, that they will benefit all Canadians, partic- ularly through increased skilled jobs in Canada and increased competition in the financial services sector.


This article was prepared with assistance from Kelly J. Bourassa, barrister and solicitor, policy advisor to Senator Kolber in Ottawa.

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