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Committee proceeding on the possibility of the merger of Canadian Banks
Banking, Trade and Commerce
Wednesday, October 7, 1998
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.
Wednesday, October 7, 1998
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.
Wednesday, October 7, 1998
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.