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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, January 29, 2003

1540

The Chair (Mrs. Sue Barnes (London West, Lib.))

Dr. Robert L. Brown (As Individual)

1545

The Chair

Mr. Brian Gibson (Senior Vice President, Active Equities, Ontario Teachers' Pension Plan Board)

1550

1555

The Chair

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance)

Mr. Brian Gibson

Mr. Richard Harris

Mr. Brian Gibson

1600

Mr. Richard Harris

Dr. Robert Brown

The Chair

Mr. Mario Laframboise (Argenteuil—Papineau—Mirabel, BQ)

Dr. Robert Brown

Mr. Mario Laframboise

Dr. Robert Brown

Mr. Brian Gibson

Mr. Mario Laframboise

1605

Mr. Brian Gibson

Mr. Mario Laframboise

Mr. Brian Gibson

Mr. Mario Laframboise

Mr. Brian Gibson

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

The Chair

Mr. Roy Cullen

1610

Dr. Robert Brown

Mr. Roy Cullen

Dr. Robert Brown

Mr. Roy Cullen

Dr. Robert Brown

Mr. Roy Cullen

Dr. Robert Brown

Mr. Roy Cullen

Dr. Robert Brown

1615

Mr. Roy Cullen

Mr. Brian Gibson

Mr. Roy Cullen

Mr. Brian Gibson

Mr. Roy Cullen

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

The Chair

Dr. Robert Brown

Mr. Bryon Wilfert

1620

Dr. Robert Brown

Mr. Bryon Wilfert

Dr. Robert Brown

Mr. Bryon Wilfert

The Chair

Mr. Brian Gibson

Mr. Bryon Wilfert

The Chair

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

1625

Mr. Brian Gibson

1630

Mr. Nick Discepola

Mr. Brian Gibson

Dr. Robert Brown

Mr. Nick Discepola

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

1635

Dr. Robert Brown

Mr. Tony Valeri

Dr. Robert Brown

Mr. Brian Gibson

The Chair

Mr. James Knight (Chief Executive Officer, Federation of Canadian Municipalities)

1645

1650

The Chair

Mr. Richard Harris

The Chair

Mr. James Knight

1655

Mr. Richard Harris

Mr. James Knight

The Chair

Mr. Mario Laframboise

1700

Mr. James Knight

Mr. Mario Laframboise

Mr. James Knight

1705

The Chair

Mr. Bryon Wilfert

Mr. James Knight

1710

Mr. Bryon Wilfert

Mr. James Knight

Mr. Bryon Wilfert

Mr. James Knight

1715

The Chair

Mr. Bryon Wilfert

The Chair

Mr. Roy Cullen

Mr. James Knight

Mr. Roy Cullen

Mr. James Knight

Mr. Roy Cullen

The Chair

Mr. Nick Discepola

1720

Mr. James Knight

Mr. Nick Discepola

Mr. James Knight

Mr. Nick Discepola

Mr. James Knight

1725

Mr. Nick Discepola

Mr. James Knight

Mr. Nick Discepola

Mr. James Knight

The Chair

Mr. James Knight

The Chair

CANADA

Standing Committee on Finance

NUMBER 034

2nd SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, January 29, 2003

[Recorded by Electronic Apparatus]

¹ (1540)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Good afternoon, everyone. We're going to start with our first two witnesses: Dr. Robert Brown, who is a pension expert; and Mr. Brian Gibson, who is the senior vice-president for active equities with the Ontario Teachers' Pension Plan.

Welcome to you both, and thank you for joining us. For approximately the next hour, we'll take your evidence and then go to some questioning. Our order of the day, pursuant to Standing Order 108(2), is the continuation of the study on the public interest implications of large bank mergers. We are hoping to hear some testimony specific to that point, not to extraneous matters.

I will allow you time now to start your presentations. We'll go in the order on the agenda.

Dr. Brown, please commence.

Dr. Robert L. Brown (As Individual): Thank you very much. I'm very pleased to be here today. You'll see from my background that I'm the director of the Institute of Insurance and Pension Research at the University of Waterloo. I'm here today to provide my personal viewpoint on potential bank mergers. I believe this is a very important matter. It's not superficial, and it is not going to go away.

The banks have legitimate objectives in seeking mergers, and I would outline them as being four. In particular, one is that many processes and transactions are common to all banks and could be done more efficiently and effectively with mergers. The trend of many industries to outsource generic functions supports this as a general business view. Two, Canadian banks will grow through operations outside of Canada, but internationally our banks lack status because of their size. Having fewer and larger banks would help. Three, similarly, Canadian banks wish to satisfy the foreign needs of their customers as they develop internationally. And four, growth is good for Canada and Canadian banks. Canadian banks would prefer to be able to grow by expanding their banking activities rather than by expanding into unrelated fields. I suggest to you that these desires are real and not unreasonable and they deserve a reasoned and logical response.

On the other hand, there are legitimate concerns on the part of government and the Canadian public. One, a smaller number of banks might result in higher prices and poorer service in a monopolistic or oligopolistic market. Two, a consolidated industry might have fewer physical retail outlets, curtailing access to traditional banking services. Three, a consolidated banking industry would likely have fewer employees, leading to some unemployment. Four, the insolvency of a very large bank would be of concern to Canadians, both as taxpayers and as bank customers. And five, the government may believe it is easier to regulate a larger number of smaller banks than a smaller number of larger banks. Again, these are all valid concerns.

The question that arises is whether it is possible to allow the banks the advantages that consolidation seems to imply, while minimizing the legitimate concerns of the government and Canadians. I believe the answer is yes, and here's how I would respond.

First, in terms of the response to a fear of oligopoly or monopoly, we could permit new players to compete with our traditional banks. These could be foreign banks, but they could also be other Canadian financial institutions, such as Canadian life insurance companies or Canadian credit unions. This competition would result in lower prices and more service. As one explicit example, I think we should allow Canadian life insurance companies to have cheque-clearing privileges.

Second is the fear of a smaller number of retail outlets. I think it's time to encourage alternate service provisions such as phone, fax, and Internet, and to understand that retail outlets are very costly. I believe innovation in this area is to be preferred. In fact, I think it would be possible for Canada, with its widespread, geographically sparse population, to lead the world in alternative service delivery of financial services.

Third is the fear of insolvency. Whether there's consolidation or not, I believe Canadians deserve a higher level of scrutiny with regard to the solvency of banks. In my mind, the solution is to require an annual report for all banks from a licensed chief risk officer who would be a clearly defined professional. The chief risk officer's report would be similar to the report of the appointed actuary that is now done annually for all insurance companies. This would include scenario testing and dynamic financial analysis—and let me explain what I mean by that.

The chief risk officer would build a financial model and then bombard that model bank with financial shocks: for example, what would happen if the economy slipped into deflation; what would be the impact of the bankruptcy of a country the size of Argentina; what would happen if there were a repeat of the magnitude of September 11. These shocks would then be tested to see if the banks could survive and remain solvent, thus adding significantly to solvency protection.

I believe there are some other outstanding issues. I believe we need a set of logical principles to govern decisions around mergers and consolidations, not just banks to banks but also insurance companies to insurance companies, and then, of course, the possibility of banks and insurance companies acquiring or merging.

You're allowing insurance companies to merge, but at the moment you're reticent to allow banks to merge, and there have been public statements that banks and insurance companies cannot consider acquisition or merger. But where is the logic? Where are the principles? What underlies this? The resulting decisions then are ad hoc, and the result is confusion and stagnation.

Bank energies at the moment are focused on issues of mergers, when instead, the focus should be on providing Canadians with better service at lower cost.

I close by saying that I think the time for action has arrived.

Thank you.

¹ (1545)

The Chair: Thank you very much.

Now, Mr. Gibson, we'd like to hear from you, sir.

Mr. Brian Gibson (Senior Vice President, Active Equities, Ontario Teachers' Pension Plan Board): Thank you, Madam Chairman, honourable members, and ladies and gentlemen. Thank you for asking the Ontario Teachers' Pension Plan to address you here today.

My colleagues and I have discussed the issue of bank mergers quite extensively in our office. We're pretty focused on this issue, as investors, because the Canadian banks form such a large part of capital markets in Canada, and our investments in these banks represent a significant part of our pension fund. However, in our presentation, we try to address public policy issues as much as investor issues. We know that's what is most important to you.

We sent a short letter yesterday. What I wanted to do is take a couple of minutes to highlight some of the key thoughts in the letter and leave as much time as possible for discussion.

I'll say right at the outset that we really believe in a strong banking sector in Canada, and we support bank mergers, but we support bank mergers only if they can be shown to meet our public policy goals and only if they can be shown to be the best way to create long-term value for investors.

As we point out in our letter, we think the debate between mergers and no mergers is far too narrow a debate. There is a range of things, aside from mergers, that the banks can be doing, and perhaps should be doing, to create value and to achieve some of their growth goals. We wanted to open the debate to make sure that we, the public, and the banks are considering all of their possible courses of actions. It's not, to us, only a “yes” or “no” to mergers.

When we talk about public policy goals, we thought that the key thing is to have universal competitive banking services in Canada, both in terms of deposit and chequing accounts and in terms of commercial loans, particularly commercial loans to smaller businesses, who have very few alternatives.

A secondary goal, we thought, is to ensure that our Canadian banks can support Canadian businesses around the world as they struggle to gain market share in foreign countries.

There is a kind of distant third goal, but actually an important long-term goal for the country, and that is, do we want our banks to be industry leaders globally? Canada doesn't have very many globally competitive successful industries. We've had some in the past that are going through difficulties now. A third possible public goal may be, do we want to ensure that this sector is vibrant and competitive on a global basis?

Now, let's talk about the pressure for bank mergers. It really has to do with banks wanting to expand, particularly into the U.S. market. If you look at the Canadian banks' Canadian operations, they're already highly profitable. The banks earn returns on capital of nearly 30% in their Canadian businesses. That business generates tremendous free cashflow. Those returns and those free cashflows are driving this desire for mergers and expansions.

Banks are in the risk-management business, but as shareholders and as Canadians, we think we want to be very careful on how banks go about their international expansion. At the end of the day, it will be the bank customers and the bank shareholders who will have to underwrite the cost of any setbacks or any problems.

The banks have been putting forward two key arguments to support mergers. One is scale economies and the other one is capital size. Let me address scale economies briefly.

At Ontario Teachers, we don't think scale is an issue in the Canadian operations. With the kind of returns the banks are earning, it's hard to imagine that they have any disadvantages.

Scale would be an issue in Canada if you were to open up the Canadian market to foreign competition. It is a more difficult goal to achieve than any of us would've imagined. The banks having their branch networks have a deposit base makes it very difficult for foreign entities to come and compete successfully in Canada. If they were to come, then scale could be an issue. We don't think it is now in the domestic operations.

We do think, though, that the scale economies we've all been hearing about are very important if the banks want to compete internationally where they don't have the scale. And there are approaches to gaining the scale.

¹ (1550)

One approach we've been hearing about is simple mergers. Well, that is one way to get the job done. It also is the way that will create the most disruption in the labour market and cause the greatest number of layoffs in the sector, at least in the short term.

But there are other things the banks could be doing. For example, they could be entering into joint venture arrangements with foreign or U.S. banks on some of their individual business lines, such as credit cards, mortgages, and so on. They could generate tremendous savings by doing that, and offer much more competitive products. The drawback with having specific partners on specific businesses, if they were foreign banks, is that Canada is sufficiently different, even from the U.S., that at the end of the day it might be hard to realize all the cost savings that theoretically they could achieve.

Another approach is to see much more creativity and much more aggressive use of partnerships among the banks in Canada. Some of the banks already participate in a joint venture where they clear cheques. Clearing cheques is clearing cheques. It doesn't differentiate one bank from another; it's just a much more efficient and cheaper way to get the job done. We're suggesting that the banks could look at doing that sort of thing in a variety of other areas, such as computer systems that support credit cards and mortgage systems, a whole variety of things where they could pool resources and get the scale that way, without having to merge the actual banks.

Those are just some thoughts we had for alternatives.

On the issue of capital size, again the issue there is simply, how big do you need to be? Banks around the world, especially in the U.S. market, have consolidated a lot in the last 10 years. Our banks, which used to be in the top 25, no longer are, not because of any lack of success on their part but because they have not gone through the consolidation that some of these U.S. entities have.

So the policy question is, do we want our banks to stay in the top ranks globally? Do we want this sector to be globally competitive? If so, is it worth the policy trade-offs here in Canada to achieve that?

Capital size can be achieved in other ways besides simple mergers. Again we've put forward a couple of ideas. One possibility, which the banks themselves are spending more time looking at now, so we won't want to take too much credit for this, is of the capital they have, they could be a lot more focused. They could be focused on more specific products globally and more specifically in geographic areas. The difficulty with the capital bases being what they are, if each of our banks tries to be in all markets and all products, their capital will not go far enough. So we're suggesting that a focus is one way to have the benefits of capital size without merging.

Another way is for banks to simply merge their foreign operations. There's nothing stopping them from doing that. If they feel they can't bid on large loan syndicates or otherwise participate in other markets, they could in theory, if they wanted to, merge their foreign operations without having to touch their domestic operations.

The banks, I'm sure, have looked at all of these alternatives. We don't want to second-guess which path is the best path. But what we're saying is, in making a decision and looking at the public policy impacts of bank mergers, let's look at the whole range of possibilities as opposed to just looking at mergers yes or no, because we think there is room for the banks and the public to accomplish a lot of these set-out goals without necessarily having mergers.

¹ (1555)

The Chair: Thank you very much.

Mr. Harris, we'll start with a six-minute round.

Hopefully we will make our questions brief and receive short answers so that we can get a valuable exchange going.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you.

I was really interested in what you both had to say. I'm glad you're here representing the Ontario Teachers' Pension Plan, because I think a lot of Canadians don't understand the critical role bank stocks play in the pension funds of millions of people and, as Mr. Brown talked about the solvency of banks that issue their shares to so many millions of Canadians, how critical it is that our banks remain strong and remain stable. As you watched your pension fund's investments through this tech disaster, the bank stocks remained very stable, and in fact they climbed on a number of occasions. Most people in the pension funds in Canada are probably happy that our banks are strong and making a lot of money these days.

So if we're looking at bank mergers from a public interest point of view, I would suggest that there's a huge public interest in our banks remaining strong, having the ability to grow and to support the investment pension funds have made in their stock, so that a curtailment of their being allowed to grow in size and strength may not serve the best public interest in relation to the investment they have through the pension funds in the bank stocks. Would you comment on that?

Mr. Brian Gibson: We agree wholly with what you're saying, but there is a subtlety I'd like to point out. When we look at our investment in bank stocks, what we're interested in is what is in the long-term best interest of the banks. Quite honestly, if we were very oriented to the short term, we would say, just have mergers, regardless of the consequences, because in the short run our bank stocks would appreciate. But that is not our objective. We want to see the banks on a course that generates good long-term value. I'm not suggesting that the banks curtail their growth plans; what we're saying is that we should all, both investors and the public, be sure the banks have aggressively and creatively looked at all their options, and if after that it seems, on balance, that the trade-offs from mergers are the best path to long-term value, we'd support mergers.

Mr. Richard Harris: Bank mergers appear to be on the agenda of all our banks, whether they're admitting it or not, and I think that the fact that this question is still outstanding, whether they can or can't, is having an adverse effect on their long-term planning. Banks, more than any other business, I think, in the country, need to be able to have good long-term planning to satisfy investors like yourselves. So looking at it from a public interest point of view, again, through return on investment for shareholders, with the growth and the profitability of our domestic banks, having the ability to plan for the long term would be a good thing for investors. It would give you a lot of comfort, would it not?

Mr. Brian Gibson: Yes. Those are also good points. It's important, as much as anything else, for the industry to have clarity, whatever your decision is on bank mergers. I'd follow Robert's recommendation: let's have the action now, let's have the decision now. From our discussions with banks, we're pretty aware that they have on the back burner other courses of action, and this uncertainty is causing some of them at least to lose ground and to potentially miss opportunities. So whichever way best suits public interest, we say, make the decision, put the clarity there. If it's mergers, banks can deal with that; if it's not mergers, they can pursue other courses of action.

º (1600)

Mr. Richard Harris: Mr. Brown, I appreciated your comments that whether or not the banks get into a merger situation, the rationalization of branches is going to continue, because of the huge proliferation of electronic banking through whatever means. I wish I had the figure--maybe you know it--but apparently, just in the last couple of years there has been another huge surge in the use of electronic banking. Do you know what that recent large increase was?

Dr. Robert Brown: I don't have the statistics. I would say though that this is something we should not fear. I think the percentage of Canadians who would be unable to complete financial transactions through alternate means is decreasing rapidly.

I believe this is a challenge that can be turned into an opportunity. Canada led the world for a number of years in telecommunications because we had to be able to communicate over vast distances with a sparse population. Now we have to be able to bank over vast distances with a sparse population.

But that's a huge opportunity. We can come up with methodologies that would then be marketable around the world.

[Translation]

The Chair: Mr. Laframboise, please begin. You have six minutes.

Mr. Mario Laframboise (Argenteuil—Papineau—Mirabel, BQ): Thank you, Madam Chair.

My first question is to both of you. If a bank merger took place without any protective measures, if we let banks fulfill their insatiable desire to merge for purely economic reasons, how many banks do you believe would be left in Canada in the short-term and in the long-term?

[English]

Dr. Robert Brown: I will start. I think there can be as many banks in Canada as you will allow there to be. I think you perhaps have a picture that we start with the banks we have today and that number gets smaller, but in fact, why can't we have new banks? Why can't credit unions be given banking privileges, and why can't insurance companies be given banking privileges?

[Translation]

Mr. Mario Laframboise: I can understand you would want that, but that is not what the banks want. The banks will not want insurance companies penetrating their market. They want to merge, nothing more. If banks were simply to merge, then in your view, how many banks would be left in Canada in the short-term, since they would merge quickly, and in the long-term?

[English]

Dr. Robert Brown: Well, I've attempted to answer that. Perhaps I could turn it over to Brian, because I have no further answer.

Mr. Brian Gibson: I'll try to follow up.

We think in the short run there will be three banks, and in the long run there will three banks with the possibility of a few niche players in specialty areas. The real difficulty for new entrants is the fact that our banks have the branch network, they have the customers, they have the deposits, they have the chequing accounts. It is very difficult for new entrants to compete with that except in very specialized areas.

[Translation]

Mr. Mario Laframboise: The problem lies with services and the competitiveness of those services, which affect the well-being of Quebecers and Canadians. When we see the monopolies and the oligopolies that are being created, and the sky-high profits of oil companies, we get the impression that banks are insatiable. All they want to do is make their board of directors and shareholders happy. They are not there to worry about the average Canadian or the average Quebecer, and that is what worries me. This is why Canada has taken measures to prevent bank mergers.

I am happy to hear you suggest other ways to increase bank capital; you suggested that one way would be to combine forces, to work together and combine international operations. That is what I believe you said in your brief, Mr. Gibson. Could banks take that approach? They seem to be having difficulty developing their international operations. Perhaps several of them could combine their international operations, creating a new corporate image that would help them penetrate international markets.

º (1605)

[English]

Mr. Brian Gibson: I will try to tackle that. You raise a good question, because the bigger the banks get, the more remote the head office will be from the communities in Canada that they serve. I think that's the risk you're referring to where the communities might feel they don't have the input or don't have the service they would expect.

In the United States they have community banking laws where if banks do business in the city, or a state, or a region, they have to be able to show that they are also making loans in those areas, that they're supporting small and medium-sized businesses, and if they don't do that, they are open to lawsuits. There have been some cases even with our Royal Bank. It purchased a bank in Atlanta. It wasn't the Royal Bank's doing, but previously that bank had not met some of its community obligations and there was a lawsuit, which was settled at the bank's expense.

So I think one good way to address your issue is to look at the idea of community banking laws as a way to give small businesses and individuals a way to pursue banks that are not providing what they expect them to provide.

[Translation]

Mr. Mario Laframboise: Well, you seem to be saying that they could combined their international operations and develop that way. Why don't they suggest that approach themselves? In your view, why are they not doing that now?

[English]

Mr. Brian Gibson: I don't follow the question, sir.

[Translation]

Mr. Mario Laframboise: Mr. Gibson, in your brief you said that banks could combine their international operations and develop in that way. In your view, why are they not doing that now?

[English]

Mr. Brian Gibson: I think the main reason they don't do it now is the same reason they're not doing more joint ventures within Canada. Each of these banks likes to control their own destiny. They like to control all aspects of their business, even the areas that we view as being a non-core, not critical to the customer.

In terms of international consortiums, we could envision two Canadian banks, for example, combining their foreign businesses to make it a large strong business, or one of our banks could combine their foreign operations with those of a foreign bank and achieve the same ends. The trick is, how do you regulate that from a solvency and a capital adequacy point of view? If the partners are in the U.S., it's probably not insurmountable, because our bank regulators have a long history of working with the U.S. bank regulators and you could probably accommodate proper supervision. The complication, which I admit is a real one, is if these consortiums are in other countries, it will raise the issue of how do you regulate that aspect of the Canadian bank, because Canada is guaranteeing deposits here in Canada.

The Chair: Thank you very much.

Mr. Cullen, please go ahead.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair, and thank you, Mr. Brown and Mr. Gibson.

Are we going to have a second round, Madam Chair?

The Chair: No. We have another set of witnesses.

Mr. Roy Cullen: I see. All right.

Maybe I'll start with Mr. Brown. In your brief you talk about the need for logical principles to govern decisions around matters such as bank mergers. In fact, Bill C-8, which was I think the financial services sector restructuring legislation last year, set out a number of principles, including the need for OSFI to look at the prudential matters, for the Competition Bureau to look at competition, and then for this committee and the Senate banking committee to look at the questions around the public interest. And that's what we're about, to better define what this committee sees as the public interest test. The Senate has done some work in this area as well.

If this committee finishes this work, is there anything still needed?

º (1610)

Dr. Robert Brown: I am speaking a bit more broadly. I am aware of those principles, but what I see as inconsistent is that within the financial service sector, there's nothing happening from the federal level that seems to want to stop mergers of insurance companies, but there do seem to be barriers to mergers of other financial institutions, either banks and insurance companies, or banks and banks. And I don't see the logic behind how that is evolving.

So it was a broader-based proposition than just bank mergers.

Mr. Roy Cullen: Okay, but with respect to bank mergers, once we finish our work, that should do it.

Dr. Robert Brown: I'm certainly hoping, regardless of the outcome, that the concept of the chief risk officer is brought to bear. That should happen whether there's consolidation or not. That is a principle I would promote most heartily.

Mr. Roy Cullen: In your brief you talk about insurance companies having cheque-clearing privileges. My understanding is that the legislation now gives insurance companies and investment dealers access to the Canada payment system. Is that not correct?

Dr. Robert Brown: They have access through the banking system. They don't have the ability to be independent in their cheque-clearing privileges.

Mr. Roy Cullen: We could spend a lot of time on that, but I'm sure that's done for prudential and consistency reasons.

On the question of banks and insurance companies, would you make any distinction between, let's say, a big bank merging with a big insurance company--and in Canada they are Sun Life, Manulife--and a big bank merging with a Clarica or a Canada Life? Do you see any difference there, or should it all be open?

Dr. Robert Brown: It either has to all be open or there have to be principles to explain why it isn't. If you enunciate the principles, the results will follow.

Mr. Roy Cullen: Okay.

In your brief you say, “A consolidated banking industry will likely have fewer physical retail outlets”. What would happen if, say, two major Canadian banks came forward with a proposal to merge and they indicated that they had agreement in principle for another tier-two bank to pick up all the redundant branches the Competition Bureau would say have to be divested? Would it deal with that concern, do you think?

Dr. Robert Brown: It would. It's a concern we may be focusing on too much. I believe that Canadians will be able to be serviced financially, that there are alternatives. I would also point out that there was a lot of fear in another sector, air transportation, when one company seemed to have a monopoly. We're very rapidly heading back to the level of competition we had 10 years ago. If there's a void, it will be filled.

º (1615)

Mr. Roy Cullen: Thank you for your succinct answers.

I will go now to Mr. Gibson. You said mergers should be given the green light if they meet certain policy goals and if they add shareholder value. On policy goals, I think you mentioned competition, access to services and products, supporting Canadian multinationals in bulking up, and also the competitive banking sector. It's often the case that a merger proposal meets some of those criteria, but not all.

Let me give you a hypothetical example. If it had met the criteria of adding shareholder value, bulking up to serve Canadian multinationals, and creating a more competitive banking sector, but it didn't meet the test of providing customer service or consumer choice, do you have any kind of weighting? Would you say, it meets three of them, it doesn't meet one, but three to one is a good thing?

Mr. Brian Gibson: I love hypothetical questions, because they're difficult to answer.

You'd really want to look at the details of the specific merger. One of the ironies in Canada is that even though our banks make a lot of money in their Canadian business, they also are extremely efficient. They provide, relative to other developed countries, high-quality services relatively inexpensively. All of us who've travelled to other countries can appreciate the difference. A marginal impact on what is already a high quality of service delivery would not, to us, be sufficient to offset other advantages in that example you gave.

Mr. Roy Cullen: Thank you.

Do you see any exceptions to the scale issue? For example, the banks make the case--and there are some who are sympathetic, myself included--that on credit cards there is a scale issue. You wouldn't buy that, is that right?

Mr. Brian Gibson: There is a scale issue there. It's not in the Canadian market, as it's currently set, because the banks don't have any scale advantages against each other. They would be at a disadvantage if they were suddenly competing with very large U.S credit card issuers. These issuers have tried to attack the Canadian market, but it has been hard for them to do so, mainly because our market is so different and because those issuers didn't have other services to offer.

Mr. Roy Cullen: Thank you.

The Chair: Thank you very much.

Mr. Wilfert.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chairman, and I thank our witnesses for coming.

The issue of weighing the public interest seems to centre on concerns about competition. Both of you have talked about new entrants. In fact, new entrants have entered the market in different ways and have not been picked up. Some of them have been more successful than others, some have left the country. Whereas our banks have bricks and mortar, a lot of these banks are virtual banking operations, which may or may not put our banks at a disadvantage. We are already encouraging, under Bill C-8, new banks in this country. An example would be Pacific Western, which went from a trust company to a bank. Maybe some of these have been slow entrants, but the legislation does allow for them.

How, in your view, is the public interest served by mergers when in fact we have these concerns that there is going to be less competition and less service to small business? That was an issue we had before us yesterday. How are communities going to be served? We went through a process a number of years ago when the post office rationalized and changed their method of operation, and a lot of small postal outlets, which are more than just postal outlets for a lot of small communities, vanished.

Do you think the banks that may propose a merger should do a risk analysis up front? And what elements of that risk analysis should be presented in order for the various bodies to evaluate whether or not mergers--because mergers are, in theory, permitted, obviously--should be okayed?

The Chair: Dr. Brown.

Dr. Robert Brown: Okay, I'll start.

I think focusing on the word competition is not going to be as successful as focusing on service and price: the ultimate goal is service and price, not whether I need to have competition among existing institutions to get there. So set your goal on service and price, and keep pushing toward that goal. If you decide the existence of retail branches in small communities is an overpowering concern, that will lead you to different outcomes. You mentioned the post office. If you believe banks should fill that role, I think you will have to rule against mergers. But I don't have the same fear. I believe the marketplace will fill a void, and if there is a void, in a short period of time those customers will be served and those prices will be brought under control. That's my belief.

Mr. Bryon Wilfert: In the case of the oil companies, where you have a lack of competition in certain markets--e.g., in Atlantic Canada, or in certain areas where the void has not been filled--you have a very different situation with pricing. You don't have competition, you don't have improved service, and you certainly don't have improved pricing. Could the same thing not occur in this case?

º (1620)

Dr. Robert Brown: I think it's a possibility, but I believe you have the ability to control that and to mitigate the consequences of the results you wish to have. I honestly do believe you can get to full service at low price if you set the principles in place with that as your goal.

Mr. Bryon Wilfert: Are there specific principles you might suggest to the committee, not necessarily now, that you think would be very useful for this litmus test?

Dr. Robert Brown: I'd certainly be willing to work on that for you.

Mr. Bryon Wilfert: Thank you.

The Chair: Mr. Gibson, did you want to add something?

Mr. Brian Gibson: I'll add a couple of points to what Robert has said. I think you put your finger on the key issue of bricks and mortar. In the studies we've looked at, even though you can have virtual banks and provide electronic services, it still seems that the customers need to know there's a physical branch where they can go and talk to somebody face to face, for example to get a loan or if they have a problem.

The challenge in a merger scenario would be that the competition board would need to make very, very sure that a lot of the branches affected would end up in the hands of another player, and somebody gave that example earlier. Right now there's nothing stopping banks from closing branches and rationalizing; that's what they've been doing. The approval process for mergers is a good opportunity to make sure that rather than close redundant branches, a third party has the opportunity to come in to fill the void, and maybe fill it faster than if we waited for it to happen in its own natural timeframe.

The other comment I'd make on your question is that when you talk about mergers and weighing the benefits, you have to be very careful, because half the corporate mergers end in failure. They start out with the best of intentions, with certain goals for cost savings or whatever, and they end in failure because of cultural clashes, system differences, and what have you. I would just caution you to discount a little bit the benefits of a merger if you're giving up on another public policy area, because the mergers themselves may not be successful, at least not right away.

Mr. Bryon Wilfert: I would certainly concur with your last comment. One of the things we have to look at is how we can get this third party or second tier to develop. You can't regulate that; you can't force it. But clearly, if you don't have a second tier to fall back on, I think, from a public interest perspective, there will be concerns. There were concerns in 1998, and it's something I would certainly want to have more discussion on.

Also, Madam Chairman, in regard to bricks and mortar, you do get two different cultures. The TD Bank and Canada Trust are good examples of different cultures. Canada Trust has an emphasis on service, particularly the teller at the counter, longer hours, etc. From what I understand--and when they come before us I'll be more than happy to ask these questions--they seem to have resolved some of those problems.

As an elected official, what I hear from people is that for all the telephoning, the Internet, and all those wonderful ways to deal with banking, people still want, as they did with the post office, to deal with individuals. I personally like to deal with individuals, maybe because I'm in politics and that's the nature of the business.

So we can't discount one in favour of the other. If you're trying to look at a balance, I'm concerned about how we develop the second tier. I think it is important.

By the way, Mr. Gibson, as a former teacher in the province of Ontario, you're doing a great job in managing my money. I hope you continue to do so.

The Chair: And with that, we'll move on.

Mr. Discepola, please go ahead, for six minutes.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

I'd like to follow up on some of your recommendations. I think I'm getting mixed signals from both of you. You both stated that you are in favour of bank mergers, but under certain conditions. I believe it was Mr. Gibson who gave some examples under...in other words, that the banks should exhaust all avenues of joint collaboration--if I can paraphrase what you said--before allowing mergers to go through. But in some of the examples you gave, I don't see how.

For example, you said pool your foreign operations. That would be quite difficult. If you're bidding on a loan, for example, and you need the security of a joint presentation, then I could see that happening, because you each put up a portion of the amount you want to give and you assume equally in the risk, which is probably easy to quantify. But when you talk about melding operations together, and when you're competitors at the same time, I don't know if it can happen, other than maybe in the traditional bank clearing system. So if you have any ideas to that end, I would like you to give us the benefit of your experience.

I don't know; I am concerned with competition. In answer to Mr. Laframboise's question, you said that hypothetically--and I have been told that as a politician, I shouldn't answer hypothetical questions, but I love answering them too, which gets me into a lot of trouble--you would probably see three banks. So is there that much less competition if five go to three? I think if the NHL were to contract to six teams, you'd probably have less competition, but better quality.

I wonder if the committee should make a restriction that no more than two mergers be approved. I'd like your feedback on that. I wonder also, in order to encourage competition, what your position is, if you have one, on reviewing the foreign ownership rules. Should we allow more foreign ownership of tier-two banks, or even tier-one?

º (1625)

Mr. Brian Gibson: I think I got at least three questions there, and I'll try to very quickly address them.

In terms of international competition, the competition isn't Canadian banks against each other so much as Canadian banks against primarily U.S. and some large foreign banks. If you look at the U.S. experience, our banks have generally been participating to a large extent in similar loan syndicates. Our banks are viewed in the U.S. as Canadian banks, and the Americans don't distinguish too much between them.

The real challenge for our banks to be successful is not to compete with each other, which they don't do to a huge extent in the United States, but to compete with the large players in that market. That's where we think there's some value in at least looking seriously at the idea of combining their non-Canadian operations, at least in certain markets. In the U.S., for example, instead of having two trading desks they could have one office to deal with loans, or things like that. That would make the two banks together much more able to compete with U.S. banks for value-added business.

I think your second question was on whether we should talk about having two mergers. Going back to some of the comments Dr. Brown made, the key is what happens to service availability after one, two, or three mergers. It's hard to say that two is okay but maybe three isn't. It really depends on the nature of the mergers and what the Competition Bureau deems has to be done with the bricks and mortar.

If the mergers occur with no divestiture of any branches, service provision in local communities may drop fairly fast. The banks will try to find other ways to provide them, maybe with the post office example of having a kiosk in a Shopper's Drug Mart, or something like that. But there won't be full bank service.

I talked to Mr. Laframboise about having three banks because if you look at the position of our five largest banks right now, it's fairly obvious that in a merger world, two of them would have to merge, and that's where I got the number three. Whether that's the optimal number really depends on how the competition issues get addressed by the Competition Bureau.

The last comment was on foreign ownership. That's really a tricky one. On the one hand, the public policy interest is to control the banking sector because it's so vital to our economy. That's why we in Canada have always made sure we had a strong banking sector.

There is room for foreign capital, but the issue in Canada isn't that our banks don't have enough capital to compete in Canada; it's whether they have enough capital to compete somewhere else. So rather than allowing a foreigner to own a Canadian bank, for example, perhaps the answer is for a Canadian bank to join together with the foreign bank as it relates to foreign operations, and not interfere with ownership levels in Canada.

º (1630)

Mr. Nick Discepola: On the question of service availability, I think you concurred that in the urban centres right now there might be one bank on one corner, another bank right across the street, and another branch nearby. So if there were a merger, adequate service would still be provided. But my concern is with the rural communities.

From a Quebec perspective, I think the Mouvement des caisses Desjardins would be only too glad to see banks merge, because they would take up the slack and service that niche market better than the banks are probably doing right now.

Do you think that would hold throughout rural Canada, or would we be dreaming in technicolor to think branch closures wouldn't force reduced levels of services in rural communities in Canada?

Mr. Brian Gibson: If I can, I'll defer this question to Dr. Brown because he's more of an expert on it than I am.

Dr. Robert Brown: Well, I don't know that anybody is expert in predicting, but I think we're starting to focus on what I think is the key to the solution here.

We're sticking too closely to the traditional sense of the bank, and that is an institution that operates internationally and commercially, and has retail customers. But what about a new model where there are three institutions--a layer of institutions that operate internationally; a layer of financial institutions that operate commercially; and a layer that specializes in consumer retail?

I think your example in the province of Quebec is exactly right. If you facilitate the process, if your traditional big banks leave, there will be other financial institutions that will step in to replace them in the smaller communities. Out west it might be credit unions or co-ops. Cooperatives could do this if you aid and abet.

So I think there's too much focus on talking about the kind of institution we now know. It doesn't have to be that kind of institution.

Mr. Nick Discepola: Could I give you another homework assignment, then? In response to Mr. Wilfert's question, perhaps you could give us suggestions on how we could help credit unions, in your experience.

The Chair: Thank you very much. And if you would like to forward that response to the clerk of the committee, it would be circulated to all members.

Now, the final questioner, Mr. Valeri, please.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair. I'll be very brief.

This is sort of déja vu, going back to 1998, talking about bank mergers, and yet I feel compelled to just put on the record once again that I think this government has said that bank mergers are a valid business strategy. So I don't think it's an issue of suggesting whether mergers are a strategy to be pursued. I think everybody is open to the strategy. It's a matter of meeting some of the tests. This committee has been mandated to look at the third component of the merger review process.

Certainly, the merits of OSFI and the Competition Bureau are quite clear--prudentiality and competition in markets. Pass those tests; then I think it's fair to say most people have suggested that it becomes rather cloudy. What are the actual tests? In competition, it's market concentration. In prudentiality, they do their tests. It's numbers.

How do you help us clarify that third component? What are the things we should be looking for? How do you define the public interest? Do we need a third component? Should we have this component or should we just discard this component? Are we not serving the public interest through OSFI and the Competition Bureau already? What are some of the things not being served that government absolutely needs to have addressed? That's the issue this committee really needs to focus on. And quite frankly, that's the issue banks and others that believe that mergers are a valid business strategy need to come to grips with. They do and we do.

I certainly do not see a lot of benefit in having what I think is an extremely important sector in our economy constantly focused on goalposts that are moving, or grounds that are shifting. Talk about shareholder value; that's what these people should be focused on.

So we have to clarify this, and we're asking you to help us. Perhaps you would speak specifically to that third sector of the merger review process. What is it we should be looking at, and should we have that stage or that aspect?

º (1635)

Dr. Robert Brown: I have a comment, very quickly, and if you wish to follow up in writing, please do.

You're right. You were here in 1998, you're now here in 2003. If you continue to not be specific, to not give a very specific answer, you will be here in 2008, and perhaps Brian and I will be back in 2008, answering these questions.

I would suggest that you not focus on the word “competition” and you not focus on the number of institutions; focus on how you get low-priced good service and solvency. And there are many ways to get there other than the traditional six or seven three-tiered institutions.

That's my position.

Mr. Tony Valeri: Do we need to pursue the public interest component of the merger review process, or do we just allow OSFI to deal with the prudential nature of the transaction and the Competition Bureau essentially to say that there's no over-concentration in certain markets, and allow them to come up with best price, best service? What about the public interest component? Do we need it?

Dr. Robert Brown: Yes, I do think there is a component that Canadians are asking you to represent them in that regard. But I think we all tend to focus on the existing models to the detriment of not throwing open the window and allowing ourselves to dream about models that don't exist but that could be, and might in fact prove to be, the solution.

Mr. Brian Gibson: I think there's an extremely important role for public policy, and the reason for this is that banks, as we all know, are an unusual business. Yes, they have their business issues to deal with, but the proper functioning of that banking system is critical to the working of the Canadian economy. This is why I think what you call the third leg of review should really be the first leg. Public policy interest has to be the overreaching focus, because if the decisions taken put our banking industry down the wrong path, the whole economy will suffer. It would be very, very difficult to recover from this.

So I strongly believe the public policy work you're doing is the most critical aspect. The other aspects are more business decisions, which people can make and argue about. So I would pursue this.

In the interest of time, I'll give you just one example of a critical thing you may want to look at in terms of what you would be concerned about with mergers. It has to do with the availability of commercial loans to small and medium-sized businesses in Canada.

If you look at the late 1990s, our banks were very aggressive in making U.S. energy and telecommunications loans. We've all read about the loan losses that resulted. Now, that's not the end of the world on its own, because banks are in the business of managing risk and making loans. But the problem in Canada has been that, in reaction to these loan losses occurring elsewhere, our banks tightened up lending standards across the board. If any of you have constituents or know people who run small and medium-sized businesses, they can tell you that it's been almost impossible in the past two years to have any kind of a rational discussion with a Canadian bank about a bank loan. And it's not these Canadian businesses that created these loan losses.

So this is one example of something you could focus on. If you are asking what has to be part of a merger, I would say you have to be very concerned that the availability of credit in Canada is not jeopardized by losses happening somewhere else.

The Chair: Thank you very much.

On behalf of all the committee members, I'd like to thank you for giving us today a somewhat different perspective on this issue. This is what we're trying to accomplish over this series of meetings.

I'm going to suspend for a minute so that we can thank you properly and bring our next witnesses up.

º (1639)

º (1643)

The Chair: Ladies and gentlemen, we'll recommence our hearings this afternoon. We're still pursuant to Standing Order 108(2), the study on the public interest implications of large bank mergers.

We have as a witness today, from the Federation of Canadian Municipalities, James Knight, chief executive officer. He is joined by policy analyst, Susan Welke, of the FCM.

Welcome to you both. I'm going to allow you, Mr. Knight, to do an oral presentation. I understand you've provided the translator some notes, which will be distributed, and that you've asked to make this oral presentation now.

Mr. James Knight (Chief Executive Officer, Federation of Canadian Municipalities): Thank you very much, Madam Chair.

I always enjoy your committee, because it's so heavily populated with friends and associates of the Federation of Canadian Municipalities. We have, of course, a former president, Bryon Wilfert, member from Oak Ridges; Mario Laframboise, who was the president of the Union des municipalités du Québec quite recently; and Mr. Discepola, who was a mayor in the Montreal area. I always feel at home and among friends when I come here. I think our knowledge of one another will help you understand the situation we face as we try to reach an understanding on this among our members.

FCM, which has represented municipal interests here in Ottawa since 1901, has 1,050 municipal governments and municipal associations as members. That's a range from our largest cities to our small villages and towns and remote and northern communities. In fact, I can tell you that every municipality in the Yukon, for example, is a member of FCM, as is every big city. It's quite a range, and the perspective of these different communities on the issue of bank mergers is naturally going to be quite different.

Our large cities are seized with the opportunity of expanding services into the international marketplace. They think banking services are one of the offerings Canada can bring forward, and are frankly enthusiastic about the prospect of mergers that they believe will inevitably improve our competitive position. I believe some of our large cities will present briefs, or are hoping to present briefs, to your committee making these points. But small communities have quite a different...well, then, I'll speak for them, if they're not coming. We have spoken with them, at least, and I must have misunderstood their messages.

Our small communities, of course, are basically concerned about three things. They're concerned about the need for competition in a sector. Mergers lead to the prospect that a community currently served by two companies would, in due course, be served by only one. It would remove competition, putting them at the mercy of the local bank manager, who may be a great guy or woman or may not be. They have some anxiety about that.

They also are concerned that, in a circumstance where banks derive more profitability from their international undertakings, they may in fact lose interest in serving small communities altogether. In our world today, banking services are essential, frankly, to our daily lives and to the conduct of business in Canada.

Of course, the final concern is employment in small communities. When branches close, there is less employment. Every institution that a small community loses leads to cascading effects, the erosion of confidence, and ultimately the loss of viability for the community.

We need to bridge this gap effectively. We need to find ways to meet both needs. We need to support Canadian businesses to seize international opportunities. Our lifestyle, quality of life, and gross domestic product are enhanced when that happens. We also need to be conscious that Canada is more than big cities. There are countless small communities out there that contribute to the viability and the economy of our country.

We were impressed by the arguments of the CFIB, the Canadian Federation of Independent Business. They did make a strong point about the need for competition. They did make a strong point that competition is already fairly weak in the country.

I think we, along with them, would look toward measures in the exercise of mergers that would protect these interests. We have some quite specific suggestions on how this can be managed.

First of all, we think that the Competition Bureau has an important role to play. The measures for proposed mergers should be considered by that institution and that institution should satisfy itself that competition is being maintained.

º (1645)

We should also think of ways to encourage and foster alternative types of financial institutions that might serve small communities well. There are credit unions and related institutions that could be an alternative to large banks in small communities.

Our board had some quite specific suggestions. These suggestions arise out of the perception, and I think it's reality, that large banks in this country enjoy a tax treatment and support from institutions at all levels that make them very profitable and competitive. In this respect it is reasonable that we should impose conditions on them to ensure that their services are delivered broadly across the country. It's rather a social contract notion. They are among our most profitable institutions. It is reasonable that we should expect them to deliver services broadly across the country.

We must ensure absolutely that rural and northern residents continue to have reasonable access to competitive banking services when branches are closed. We could conceive of a minimum service standard for traditional markets that are currently being served, and we could require that these service centres be maintained. We could develop programs that assist communities in developing their own banking services where they don't currently exist, such as credit unions, as I mentioned. We could proactively encourage the creation of these institutions. We could train consumers in small and remote communities in alternative forms of banking. We could be proactive in bringing them skills in dealing with remote banking and alternative delivery modes. We would hope that the banks themselves would be encouraged to have mobile managers who could move from community to community, particularly to support the interests of the small business community. I think as we go forward we should monitor carefully service provision to these communities to ensure that it is not eroded to the point that the community is compromised.

Madam Chair, we think we can achieve both ends. We can meet the interests of these institutions that believe they will be more competitive on the international stage through merging, but we also underline that it is possible to protect the viability of small communities and the essential financial services they must have.

That is our broad notion. We commend to you these thoughts and would welcome your questions.

º (1650)

The Chair: Thank you very much, Mr. Knight.

Before I go to the first round of questions, I'd just like to say that it was interesting to me that when you talked about employment loss, you talked about the small communities, whereas when I think of large bank mergers, I'm thinking more of downtown Toronto and what that could mean to a community like that. So I don't think it's just the small ones.

Go ahead, Mr. Harris.

Mr. Richard Harris: Thank you, Madam Chair.

Welcome, Mr. Knight and Ms. Welke. I appreciate your comments. My riding of Prince George--Bulkley Valley is made up of pretty well one urban centre being Prince George, and then east Valemount, McBride, and then west out to Burns Lake, and Houston. I think there are about eleven smaller communities in my riding, all on the one highway.

I did quite an extensive riding tour in January in preparation for these hearings. Although it wasn't a scientific survey, I did main street in every town and I asked people, what's more important to you in your town, competition in banking or competition in food stores? Overwhelmingly, the answer was, we want more places and more competition in our food, in buying food.

For example, the town of Houston, B.C. has a credit union and one major food store. I asked perhaps 20 or 30 people in the town--there are only 1,500 people in the town, so it's a pretty good representation--if you had a choice, what would you have, another bank or another food store? The response was, no question, we'd have another supermarket.

Although I do understand the concern about the banks rationalizing branches in rural communities, and it is a valid concern, it was interesting to hear the comments I got in my rural communities about the relative importance between banks or another place to buy food with maybe better prices. So while the fears are real, maybe they're not quite as big, given a choice.

I don't really have any questions, I just wanted to share that with you and see if you had any comments on this observation.

The Chair: Mr. Knight.

Mr. James Knight: My comment would be quite a simple one, and it is to say that the Canadian Federation of Independent Business, with which we cooperate and share a great deal of information, does have a unique capacity to get reaction from small business. They have a very large number of members who are constantly asked questions.

On this matter, from the small business community at least, they've had a traditional concern and they did get a strong answer. Certainly that strong answer has been reinforced by some of the local mayors whom we have spoken to.

It probably varies from community to community, and a small community in your area with a credit union may be very well served and that may in fact influence their reaction. We've heard a different reaction in many communities as well.

º (1655)

Mr. Richard Harris: I guess I do have a question after all. You brought up the CFIB, and I do recognize the concern that small business has. I thought about this yesterday after CFIB was here. Given the way banks do business these days, they operate on a pretty firm risk management formula, I suppose you could call it, which I understand came from the U.S. and was sold to our Canadian banks.

Given the fact that, say, in a town there could be a branch of all our five major banks, all using the same formula, and assuming that if another three banks, or four banks, or five banks came to town, that they would find for their benefit that this formula was a good one and they purchased that risk management formula as well, I'm not so sure whether adding another five or six banks using the same formula would really have a benefit to these small and medium-sized businesses finding new ways to get money. Because wouldn't they all be subject to the same assessment? It boils down to their credit rating and their viability, their ability to repay the loans.

Would more banks, more competition, necessarily be better, or would less competition through mergers necessarily be any worse off if the formula remains the same?

Mr. James Knight: While I share your view that there's a great similarity across the industry, there are differences, and differences of opportunity at different times. Different banks do offer different products at different times depending on the nature of their own obligations. There are times when individual banks may choose not to enter the real estate sector. I've experienced this, as a lender myself, in the commercial sense.

These institutions do offer some variety of service and different opportunities at different times. I think it is important to have those options. Though if a particular bank has decided that their commercial real estate portfolio is too full and they don't want to invest in any more commercial mortgages, then perhaps another bank isn't quite at the same position and has some room in that sector.

I suppose if they all used exactly the same risk management formula and applied it similarly, they'd all have the same level of profitability. Of course, they don't. Some are more successful than others.

[Translation]

The Chair: Please go ahead, Mr. Laframboise.

Mr. Mario Laframboise: Thank you, Madam Chair.

First of all, thank you for appearing before this committee. It is extremely important for municipalities to be represented through the Federation of Canadian Municipalities on an issue as important as that of bank mergers. You have focused on two points: competitiveness and employment. Cities are corporate citizens and very important in this country, as much in the area of job creation as in the services they deliver. When you say that there is a need to be competitive and to provide services, you know exactly what you are talking about.

The bank issue is quite simple. We are seeing a desire to create virtual banks, with the objective of growing and growing. Perhaps one day there will be almost no banks left, and the ones that remain will provide only virtual services. Obviously, there would be no employees any longer, there would be no on-site customer services, no municipal taxes to pay—they have already begun going that route—no more branch offices and no more overheads. That is the goal. The goal is to make shareholders happy. So therein lies the problem posed by bank mergers: banks want to growth and growth, develop internationally, lend to multinationals, and stop lending on-site to SMEs.

I believe that municipalities have to tell the government to stop this. Do we want to contribute to the disappearance of services in every municipality? One day, would the municipalities themselves disappear? That's the problem. As far as I know, Canada's banking sector is still making money, and there are still opportunities. Witnesses told us just now that if banks really wanted to penetrate international markets, they could work with other banks and combine their international operations, lend on foreign markets and increase their capital.

You are quite right in telling us to be cautious when we discuss these issues. If there is no competition left, there will be neither services or jobs left in municipalities. That is what will happen. As I understand it, Mr. Knight, this is your message, and I would like to hear your comments on my remarks. Thank you.

» (1700)

[English]

Mr. James Knight: Thank you very much for that.

I'm not sure the analysis we bring can cover the issue of electronic banking and virtual banking. I don't know if we could tell you whether that will be accelerated or not accelerated by bank mergers. I think, to some extent, that is another subject.

With respect to the cities that we have consulted, I must say that they are sympathetic, particularly the cities that house the headquarters of banks. We've been told by them that they are sympathetic towards the merger prospects because it will help them establish themselves as an international financial centre. Some of our cities have those aspirations.

The need for competition is particularly acute when you would end up with only one branch in a small community. I think we have to focus on that problem. We have to encourage alternative service delivery mechanisms, the encouragement of credit unions, for example, or urge other banks to enter the market that was vacated by one of the merged banks.

We see this from our polling and from the understanding of our members. We're not concerned particularly about the large centres. They perceive an advantage. It is protection of competition in the small communities that is very much the emphasis. I think it will require special measures in the legislation, or whatever mechanism is adopted, to allow mergers to go forward, if they do.

[Translation]

Mr. Mario Laframboise: Well, because populations are becoming so concentrated we are now seeing quite significant communities being described as small. But these small communities are sometimes towns in remote regions that nonetheless have very significant human resources potential, or population. They can also be quite large administrative regions. In my view, we cannot just take into account the three largest cities in Canada, or even the 6, 7 or 10 largest cities. What you are calling small communities are still somewhat significant.

[English]

Mr. James Knight: Typically, mid-sized Canadian cities do have a number of financial institutions present. In smaller and remote cities, say with populations of 10,000 to 20,000--as you say, significant places--they will typically have more than one and normally several options for consumers. Coming from a small town myself, I know that community is quite well served by a number of institutions, both domestic and in one case an international institution.

We have not learned from our members that there is a preoccupation about mergers in those mid-sized communities. We have not heard that. We have heard concern from the small and remote communities whose populations may be from a few hundred to 2,000 or 3,000. That's the focus of our concern. Preserving competition, even preserving service at that level, is a major need, in our opinion.

» (1705)

The Chair: Merci.

Next is Mr. Wilfert, followed by Mr. Cullen and Mr. Discepola.

Mr. Bryon Wilfert: Thank you, Madam Chairman. It's a pleasure to see Mr. Knight again.

If I might say to you, Jim, I said to the last participants who were here that this issue reminded me very much of the debate we had with the FCM in the early 1990s regarding the closure of rural post offices.

I would certainly concur with your remarks regarding the issue of rural and remote communities. For cities, towns, and villages, I think, if I can be so bold as to say, that is really the issue in terms of competition For major cities it's not going to be an issue. In the greater Toronto area, obviously, it's the second-largest employer. The idea of consolidation is very important, and putting them on the major international stage is something that Toronto and others have talked about.

How do we deal with competition in rural communities when you eliminate them? Remember that the post offices that were eliminated were not just post offices, they were centres for social activity. They distinguished that the community was in fact a community. It had some presence. Somehow, when the Government of Canada post office wasn't there, it made an impact.

We talked about the issue of second-tier or third-party entrants, which has been a problem. A vacuum may be created. I'm not sure what work FCM has done in this regard or how you promote that. Clearly, there's a problem for communities where the local businesses rely on that personal contact, much more so in a smaller community, and the impact it has in terms of people having access. We hear about people whose cheques are deposited who used to go to the post office for certain things, and now they have to go farther away. There is the issue of electronic banking, etc.

But this committee is seized with how the public interest would be served if bank mergers moved ahead and how it would impact small communities. My question to you has to do with the legislative or policy changes the government may be able to look at it to ensure some kind of special provisions, if you will, for rural or remote communities. I look at the problem in Atlantic Canada with the oil industry and the lack of competition. My concern is that we may wind up with a similar situation, particularly in communities of the type that I know well from my days in the north and in the rural areas of Canada. It is very much, in my view, from what you've said an urban/rural schism.

Could you comment on anything you think this committee might recommend, even from a legislative standpoint, to address the very valid concerns those communities have?

Mr. James Knight: Thank you very much for that excellent question.

I'm glad to have the opportunity to repeat our concept, because perhaps I can make it more pointed. I think I did say that the banks enjoy a very privileged place as Canadian institutions. They have a favourable tax and regulatory environment, which allows them to be extremely profitable, and that's good.

If we concur with their desire to merge, then we should recognize that there will be domestic consequences and we should require that these institutions, as part of their social contract and obligation, continue to meet those needs.

When a particular bank has been operating in traditional markets, there should be a requirement that this traditional market continue to be served. This is a situation in which two institutions may become one. I mentioned the possibility of losing interest in these communities because the international marketplace is more competitive. Our sense is that there is a social obligation and it should be a requirement for these institutions to serve a traditional market.

I don't know exactly how you frame that in legislation. I think you'd need the Department of Justice to sort through it.

We also suggest that there is every opportunity, in our opinion, to stimulate alternate types of banking institutions. Local credit unions--they were mentioned by the member from the Prince George area--are viable, ongoing, and very community-sensitive institutions. We could use more of them in Canada.

It was the case not that long ago that every small town had three or four bank branches. That will not be the case in the future, no matter what happens. So the option of stimulating the creation of credit unions in whatever way it can be done, either through a tax framework, an educational framework, or an exchange of best practices among different parts of the country, should be looked at.

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Mr. Bryon Wilfert: I have just two quick questions, Madam Chairman.

Has the FCM considered creating, through your remote and rural caucus, a task force to provide specific recommendations in regard to how this affects communities, as was done in the postal situation in the early nineties?

Mr. James Knight: Not at this time.

Mr. Bryon Wilfert: Okay.

Secondly, in terms of the impact on rural and remote communities, the difficulty is that those communities have an existing problem. We have that problem even in urban areas in terms of the vacuum about the issue of a second tier, or third-party entrants. We talked before about some new parties that came into Canada. Some of them stayed, some of them didn't. But some of them also had very selective servicing, not the full servicing that some of these communities clearly would need.

To me, that would be an issue I would think the FCM, through your remote and rural caucus, may also want to examine in terms of how you could encourage that. Are there incentives that would be needed for those communities? What do we do? Because clearly there is already a perception--this country being 80% urbanized--that there is a loss.

When you talk about the social contract, it reminds me of Jean-Jacques Rousseau's social contract of 1756, I believe, where you talk about the governed and the governors. I am for very strong Canadian-owned banks, but at the same time, what kind of framework do you believe should be in this social contract, similar to what Rousseau talked about, in terms of there being certain leaps of faith that we have?

What is it you think the banking industry could do to alleviate many of the issues your members have addressed, particularly in terms of services?

Mr. James Knight: I think I outlined the comments our rural group offered about the banks, and I'll go through the specific recommendations.

The banks should be mandated to continue to deliver reasonable access to competitive banking services where they are currently providing it. This is not a retrospective. This is not a question of how to recover lost ground but a question of what happens if banks merge; what should be the requirement? There's been no effort, as I say, to look retrospectively. It's a future-oriented set of recommendations.

So there should be a minimum service standard for rural and northern areas. There should be a program--and I mention options here--to assist communities in establishing new banking services, such as credit unions. This is a big opportunity.

There should be training for customers in telebanking and remote banking. We're encouraging the banks to provide that training.

Encourage the banks to be creative, of course, in service delivery. There are experiments and successes with mobile managers, who move from community to community serving the small business sector. That could be pursued.

Going forward, an eye should be kept on the situation, because banking has become virtually an essential service in this country. You can't have business without banking. You can't carry on your livelihood as an individual without banking. This is an essential service, so we should monitor the delivery of these services, going forward, and make corrections as necessary in the future.

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The Chair: Thank you.

You're finished, Mr. Wilfert.

Mr. Cullen will now start.

Mr. Bryon Wilfert: Madam Chairman, if we could get those comments in writing, I think it would be helpful to the committee.

Mr. James Knight: We'll leave them behind.

The Chair: We'll have the transcript of our hearing today.

Mr. Bryon Wilfert: But there may be something added from your committee.

Mr. James Knight: Yes, thanks, Bryon.

The Chair: Go ahead, Mr. Cullen.

Mr. Roy Cullen: Thank you, Madam Chair, Mr. Knight, and Ms. Welke.

I think the challenge of this committee is to keep our eyes focused on the terms of reference--that is, to come up at the end with a set of tests or public interest criteria that this committee will use to assess whether or not a bank merger is in the public interest. So when witnesses come forward and talk about whether mergers are good or bad, although I can't speak for my colleagues, I know I for one try to translate that into calculus, into how that translates into a public interest test. So those witnesses who do that for me make it a little easier. It's not that I'm mentally lazy, but I think that's useful.

I'd like to put a hypothetical question to you so I can get a better handle on a public interest question I'd like to put to you. We sort of touched on it in terms of the question of rural and urban. It's often argued that in the big cities it's not so important to have many branches, because people use virtual banking. I live in a big city and never go to my branch. I go to the banking machine or do Internet banking or what have you. You sort of alluded to that as well, that it's more important for the remote or rural areas.

Let's say two major banks in Canada came forward with a merger proposal and said, look, as far as the urban branches...and let's say that was defined in a way that made sense; I'm not going to get into that debate. So let's say they differentiated reasonably between urban and rural, and said, “For the urban branches we'll be called upon to divest, we'll just let them go, but for the rural and remote areas we have an agreement in principle with another tier-two bank that they're going to buy them from us.”

If that were the case, do you think that would meet the public interest test?

Mr. James Knight: One would need to see the fine print, but if that could be assured, I don't see why we would have a concern. Our concern is that an essential service continue to be provided, and if it can be provided in an alternate way by an alternate institution, I think that would meet a test.

Mr. Roy Cullen: With respect to the large urban areas, I think what you're saying by inference is that it wouldn't be a big deal if some of the branches in the urban areas just closed. Would that be a fair statement?

Mr. James Knight: I think Mr. Laframboise identified a mid-range group. There'll be some grey in here, but in general we are not preoccupied with the changing form of banking in large cities. No one has raised this with us or expressed a concern. The only feedback we've had from our large cities is that they see an economic opportunity for Canada. They want to ensure we take advantage of that while protecting the interests of Canadian communities, broadly the smaller and rural ones.

Mr. Roy Cullen: Thank you.

The Chair: Okay. We'll go to Mr. Discepola

Mr. Nick Discepola: I'd like to pursue the question from two perspectives. One is on the need for competition. I think if we could get our head around how we could foster competition, it would solve a very big problem.

In your presentation, you alluded to the fact that you seem confident enough in the Competition Bureau's ability to be able to address it. I don't want to put words in your mouth here. Am I correct in saying that or do you still have reservations?

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Mr. James Knight: I only said that this is something that institution should consider. I didn't certify that their work would be of any particular quality. I really don't have knowledge of that. But it seems evident that if there is such an institution within the federal framework, this is a good opportunity to deploy that talent.

Mr. Nick Discepola: One of the concerns I had, after having heard the Competition Bureau earlier on in our testimony, was that I think they are going to be compelled to look at the merger process on a first-come, first-served basis. It means if bank A and bank B decide to put their proposal forth first, they will have to address that in its entirety before considering a second merger.

Do you have any views as to whether we should allow a window of opportunity for all merger proposals to come and then have the Competition Bureau look at what's in the best interest?

Should we make recommendations as to limiting the maximum number of mergers that can occur? There are five major players. Should there only be a maximum of three?

Maybe I'll let you answer and I'll come back with another question.

Mr. James Knight: They may possibly be able to do some research and policy analysis even before any particular mergers are considered. I mean, the implications would be relatively clear from various scenarios, which they may be able to study a priori.

It is our understanding, I should have said earlier, that we do not promote mergers to the point where there is only one bank. There is a range of options here. We could have two large banks merge. We could have them all merge. We could have two others merge. The number of remaining institutions is an important question.

Our working assumption here is that we would probably have two successive mergers, which was the previous scenario. Going beyond that, I think we would have to be very careful in how many mergers are appropriate. The Competition Bureau's advice there could be quite strategic.

Mr. Nick Discepola: The question of competition in the rural communities, though, is a different kettle of fish. You've given us excellent ideas on how to perhaps foster competition through other sources, such as credit unions and helping them, etc.

I believe if there's going to be branch closures, I wouldn't be too concerned, even in rural areas. I don't believe there are many rural areas where they're serviced by more than one or two major banks. If that was the case, as long as the presence of one of them was guaranteed, then I think we would probably accept it, from my perspective anyway.

It doesn't address your concern about continuing, and using Mr. Harris' example, to foster competition even at the local community level. I don't think you can.

I was very interested in one of your proposals. I'd like you to elaborate on and enhance it. I think it might be able to answer the more poignant question, which is to make sure that we guarantee a certain level of service, even to the communities that are a bit further away than the rural areas. Your concept of a minimum service centre intrigues me.

Could you identify for us what the service would entail? Does it stop at cheque cashing, deposit taking, and bill payment? Do you have any suggestions as to whether we should legislate a minimum level of service in a minimal accessible account to all strata of the economic society of our country?

You answered, to Mr. Cullen's question, that, as long as service is provided, you don't care by whom it's provided. I'm wondering if we could look at the rural post offices, for example, being franchisees of the major banks by doing the deposit taking and cashing a cheque. I mean, they have money already and deposit-taking, for example. Do you have any ideas on that end?

I'm more interested in knowing what minimum levels of service and what types of service we should insist upon in the rural community.

Mr. James Knight: I think it will vary with the geographical circumstances of the community. A community in the distant north, with no other options within reasonable distance, would require a reasonable portfolio of services, whereas a small community with neighbours 20 or 30 miles away may get along with services supporting the needs of individuals.

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Mr. Nick Discepola: What about your other suggestion, which was mobile managers? If, for example, I have a small business loan of $10,000 or $15,000 to improve in a northern community, why couldn't the manager go up there on one day, listen to all these applications, and make the decision back in a larger community?

Mr. James Knight: We think that's a great idea, but there is a difference between services to small businesses and services to individuals, which are daily and essential all the time. Business relationships with banks are somewhat more intermittent, and it is more acceptable to travel some reasonable distance for that service, or indeed, the bank could come to town from time to time.

Mr. Nick Discepola: We did that in my community, as a matter of fact. There's a veterans hospital, and the bank would come in every Thursday and cash the cheques for the veterans. So they can do certain things like that.

Anyway, thank you for your input.

Mr. James Knight: Thank you.

The Chair: I want to thank you both for joining us today. It was a way of getting the input of urban, rural, and northern communities from a source that deals with them all the time. So thank you very much for giving us your perspective today.

Mr. James Knight: We thank you for the invitation.

The Chair: We are adjourned until tomorrow. Thank you, ladies and gentlemen.