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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Thursday, February 6, 2003

0935

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

Mr. Peter C. Godsoe (Chairman and Chief Executive Officer, Scotiabank)

0940

0945

0950

0955

The Chair

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

Mr. Peter C. Godsoe

Mr. Richard Harris

Mr. Peter C. Godsoe

1000

Mr. Richard Harris

The Chair

Mr. Pierre Paquette (Joliette, BQ)

Mr. Peter C. Godsoe

1005

Mr. Pierre Paquette

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. Peter C. Godsoe

1010

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Mr. Peter C. Godsoe

Mr. Bryon Wilfert

Mr. Peter C. Godsoe

1015

Mr. Bryon Wilfert

Mr. Peter C. Godsoe

The Chair

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP)

The Chair

Mr. Lorne Nystrom

Mr. Peter C. Godsoe

Mr. Lorne Nystrom

Mr. Peter C. Godsoe

Mr. Lorne Nystrom

Mr. Peter C. Godsoe

1020

Mr. Lorne Nystrom

Mr. Peter C. Godsoe

Mr. Scott Brison (Kings—Hants, PC)

Mr. Peter C. Godsoe

Mr. Lorne Nystrom

Mr. Peter C. Godsoe

The Chair

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

Mr. Peter C. Godsoe

1025

The Chair

Mr. Nick Discepola

The Chair

Mr. Nick Discepola

Mr. Peter C. Godsoe

Mr. Nick Discepola

Mr. Peter C. Godsoe

The Chair

Mr. Scott Brison

Mr. Peter C. Godsoe

Mr. Scott Brison

1030

Mr. Peter C. Godsoe

Mr. Scott Brison

Mr. Peter C. Godsoe

The Chair

Ms. Albina Guarnieri (Mississauga East, Lib.)

1035

Mr. Peter C. Godsoe

Ms. Albina Guarnieri

The Chair

Mr. Edmund Clark (President and Chief Executive Officer, TD Bank Financial Group)

1050

1055

1100

The Chair

Mr. Richard Harris

Mr. Edmund Clark

Mr. Richard Harris

1105

Mr. Edmund Clark

The Chair

Mr. Pierre Paquette

Mr. Edmund Clark

1110

Mr. Pierre Paquette

Mr. Edmund Clark

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Edmund Clark

1115

Mr. Roy Cullen

Mr. Edmund Clark

The Chair

Mr. Bryon Wilfert

1120

Mr. Edmund Clark

Mr. Bryon Wilfert

Mr. Edmund Clark

Mr. Bryon Wilfert

The Chair

Mr. Scott Brison

1125

Mr. Edmund Clark

The Chair

Mr. Nick Discepola

1130

Mr. Edmund Clark

Mr. Nick Discepola

Mr. Edmund Clark

Mr. Nick Discepola

Mr. Edmund Clark

Mr. Nick Discepola

1135

Mr. Edmund Clark

The Chair

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

Mr. Edmund Clark

1140

Ms. Sophia Leung

Mr. Edmund Clark

The Chair

Mr. Tony Comper (Chairman and Chief Executive Officer, BMO Financial Group)

1150

1155

1200

1205

The Chair

Mr. Richard Harris

Mr. Tony Comper

Mr. Richard Harris

Mr. Tony Comper

Mr. Richard Harris

1210

Mr. Tony Comper

Mr. Richard Harris

The Chair

Mr. Pierre Paquette

Mr. Tony Comper

Mr. Pierre Paquette

Mr. Tony Comper

Mr. Pierre Paquette

Mr. Tony Comper

Mr. Pierre Paquette

Mr. Tony Comper

1215

Mr. Pierre Paquette

Mr. Tony Comper

The Vice-Chair (Mr. Nick Discepola)

Mr. Roy Cullen

Mr. Tony Comper

Mr. Roy Cullen

1220

Mr. Tony Comper

Mr. Roy Cullen

Mr. Tony Comper

The Chair

Ms. Albina Guarnieri

1225

Mr. Tony Comper

Ms. Albina Guarnieri

Mr. Tony Comper

Ms. Albina Guarnieri

Mr. Tony Comper

1230

Ms. Albina Guarnieri

The Chair

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

Mr. Tony Comper

1235

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

Mr. Tony Comper

Mr. Lorne Nystrom

The Chair

Mr. Bryon Wilfert

1240

Mr. Tony Comper

Mr. Bryon Wilfert

Mr. Tony Comper

Mr. Scott Brison

1245

Mr. Tony Comper

Mr. Scott Brison

Mr. Tony Comper

Mr. Scott Brison

Mr. Tony Comper

Mr. Scott Brison

The Chair

Mr. Tony Comper

The Chair

Mr. Nick Discepola

1250

Mr. Tony Comper

Mr. Nick Discepola

Mr. Tony Comper

Mr. Nick Discepola

The Chair

Mr. Tony Comper

Mr. Nick Discepola

1255

Mr. Tony Comper

The Chair

CANADA

Standing Committee on Finance

NUMBER 040

2nd SESSION

37th PARLIAMENT

EVIDENCE

Thursday, February 6, 2003

[Recorded by Electronic Apparatus]

¿ (0935)

[English]

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

Pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers, and from the Scotiabank we're very pleased to welcome Peter Godsoe, the chairman and chief executive officer.

Sir, I'll give you the floor right now to make your introductory remarks.

Mr. Peter C. Godsoe (Chairman and Chief Executive Officer, Scotiabank): Thank you, Madam Chair, and thank you, committee members, ladies, and gentlemen. It's a pleasure to be here and to be part of the four questions of Ministers Manley and Bevilacqua and your advice on the implications of bank mergers for our country.

Let me start with the obvious. The pubic policy issue of whether bank mergers are a valid strategy has been addressed. It was a formal review, the MacKay commission, which reported in 1998, and that led to the subsequent legislation, which is the law of our country, passed in 2001. As stated by both the Prime Minister and Minister Manley, these hearings are to clarify the requirements around a public interest impact assessment, which is the third of three steps, the first two being a detailed analysis of the competition issues by the bureau and a prudential review, systemic risk, etc., by OSFI. We fully support the government's desire to have a clear, transparent, and timely process to assess the broad and legitimate public interest challenges.

Our hope is that the review process would be highly predictable as well and not focused on the political popularity of the banks, because, Madam Chair, to quote a famous philosopher, Voltaire, if you lend a man money, you have a secret enemy; if you don't lend him money, you have an open enemy. It has not changed in three centuries.

What I thought I would do this morning is focus on the four questions as posed by the ministers in their letter to you: access; choice, especially for small business; long-term growth prospects; and transition issues. All of these are legitimate issues, certainly for our clients and customers, the communities in which we operate, our own employees, and of course, our shareholders. They need to be considered carefully.

Many members here today have made it very clear that Scotiabank has to be prepared to address these issues if any mergers come forth. I might add as an aside that I don't think there are clear black-and-white answers to any of them. There never are.

On the first, access, we're really talking about low-cost accounts for the poor and needy; rural branches, which is a big issue; a branch closure regime with formal notice periods and community consultations; access for the disabled; and access through new technologies--ABM, online, and phone banking. All of these are ongoing issues, with mergers or without.

That said, in the case of any mergers--and we have in place very formal undertakings covering virtually all of these today--I think concerns can be solved by further undertakings to protect the public interest by selling branches, not closing them, making sure they're open to credit unions and other people. If local concentrations are too high, keep rural branches open. Ensure service in the poorer parts of cities with low-cost accounts, which we all have, and ABM access, etc. Again, we've heard you clearly on the point. We know it's there and we know we have to continue to address it, with or without mergers.

The second question is choice, which gets perilously close to competition theory, but I won't go there. It's for large companies, because many of them are against it, as well as small and medium-sized companies and consumers.

Taking the large first, on the corporate side, we are actually seeing a decrease in liquidity worldwide. In fact, there is a credit squeeze on energy companies in the U.S., which obviously has a massive banking system. So it's not about size or mergers. Mergers will not detract or help access to liquidity in the large companies in Canada. The reality is that Canadian banks are already too small to serve as lead banks in the very large syndicated markets, either in Canada or across the world. If we get too aggressive, both our regulators, Canadian and U.S., and rating agencies would penalize us in terms of too much size against too small capital.

Turning then to consumers and small and medium-sized businesses, very legitimate issues, and breaking it down a bit so we can get to the base problems, on the investment side--GICs, mutual funds--anyone can pick up a newspaper and see a plethora of choices. There are many, many choices on that side. It's not dominated by the banks at all, and that won't change through a merger. On that side, there is lots of choice.

The same holds true for personal lending. With Hong Kong-Shanghai Banking Corporation buying Household Finance, you have another very major competitor on that side; credit unions are active; and there are tough regional competitors in National Bank and Hong Kong-Shanghai, and of course, the caisses populaires in Quebec.

Today, as opposed to even five years ago when we discussed mergers, 25% of all mortgages are done by brokers, not by the banks. That's starting from zero. So we're getting a whole new force competing for that particular product. We see it in credit cards--MBNA, CityBank, and others. There's lots of choice.

So it comes down to core banking, day-to-day banking where I have my chequing account, and small and medium-sized businesses. On the former, we're seeing people like President's Choice Financial and ING come in and take large swatches of market share. ING itself is the fastest-growing core-banking bank in Canada, by a large shot, and President's Choice is coming up. I think you'll find other new entrants there.

I think small and medium-sized business is by far the toughest question, because we must protect access to finance. It's a key driver of our economy. You've heard from Catherine Swift and Brien Gray. I have the utmost respect for them. I try to meet with them regularly, three or four times a year, to find out how we're doing. They're good. We all buy that completely.

It is an industry that continuously reinvents itself into how it finances. It is a fact that today 50% of its finance comes from other than the five major banks. So it has moved a long way. Again, about five years ago, 50% of SME finance would have been from the banks. The question is, are we not doing our job?

Like my peers, Scotiabank is totally committed to small and medium-sized business. It's not because we're philanthropic particularly; it's because it's very good business for us. They are among our most loyal customers. They stay with you if you do a good job, and they are profitable.

We've done new products. We have a merchant bank, RoyNat, which has $2 billion, of which $200 million is venture capital. We're putting up more than $100 million in venture capital for small business every year. That's sort of the paid political advertisement, but it is a good operation.

Last year, I know, there was a perception that Catherine Swift obtained from her polling of her constituents, which is her job, that there has been a credit squeeze. Our numbers just don't show that. Since 2001 we've signed up 38% more customers, and we've had a corresponding increase in our lending of 14% year over year, which is sort of contrary to that. Nevertheless we have to deal with the perception and the reality.

¿ (0940)

Beyond this commitment, which we Scotias certainly are in, and I think all of us are in, because it's very good business for us, the financing can be managed. We can make undertakings that our loans won't drop. We can make undertakings that we will take special programs if we're falling behind, and make these undertakings through discussions with the Competition Bureau to make sure that access is broad--this is the rural, the agricultural, the small business that's broadly spread--and to support new initiatives to provide financing to what is a critical sector, not only in Canada, but this is a global problem. I don't have an easy answer to it, because it is something that will have to be negotiated.

I will turn to the fourth question, transition issues, and especially the treatment of employees. I'll come back to the international competitive question at the end, Madam Chair.

Mergers cannot be about massive job losses. Again, I'm not saying this because it's a do-good, but because it's good business. At Scotiabank, we run our business totally on a balanced scorecard for our employees, our customers, our communities, and also for our shareholders. It's the only way it makes any sense. This approach is back in vogue after a shareholder value run in the United States for 10 years, but we've never veered. We've never had a major layoff in our history of over 170 years. We're very proud of this.

We believe having a highly skilled team of motivated employees is critical to satisfied customers, which is what our whole business is about. We do not understand why employees would be loyal to their customers if the company wasn't loyal to them. So it's not about layoffs. The fact that 86% of our staff across the country believe we're the best place to work is extremely important to us.

We also know that the majority of mergers fail. They fail to produce the expected results because they don't pay attention to this. U.S. history is replete with this, as is U.K. history. I've studied 12 of them, so it is not about layoffs. It cannot be.

If we proposed a merger with another Canadian bank, it would be managed very conservatively over a three- or four-year period from that point of view. Branch consolidation takes at least three years because of the way leases work and other things. Systems integration takes two to three years. You must transition your customers very carefully and work closely with them. And, of course, your staff must feel self-confident to deal with the uncertainty, so there is the least disruption.

There will be staffing overlap. It's pretty clear you don't need two chairmen, so one of them will not become chairman. But in the branch areas and call centres, we don't see it. We see virtually all of it being dealt with through turnover and attrition, which I don't say proudly, because I wish we had less attrition. But at Scotiabank, we have a turnover of about 3,500 people per year. That's far more than any rationalization of people we would ever foresee in a merger.

Longer-term, then, mergers have to be about international competitiveness and have to be about a vision of creating jobs, not taking jobs out. They must not be about costs, but about a vision that there is some way to grow. Otherwise, I don't know why our people would ever buy into it. I wouldn't, so I wouldn't even try to convince them.

In a general sense, the Canadian financial sector has proven that mergers are manageable from this side. You've had discussions here...and you'll have Ed Clark here later on the TD-CT merger and whether it's perfect or imperfect. I think it has been well managed from the point of view of the employees and the communities.

Our own acquisition of Montreal Trust or National Trust, which was very big for those of you in Ontario, was virtually seamless. You cannot tell where a National Trust or a Scotiabank person is; they're one team today. More recently, Clarica and Sun Life faced the same public interest issues.

Similarly, branch rationalization has occurred on a very large scale in Canada from 1999 to 2002. Many, many hundreds of branches, close to a thousand, have been rationalized—not to exit rural areas, but to be more efficient. By far, most of this has been in urban areas, where you didn't need a branch on every corner and where you could put in bigger branches. It wasn't really about staff losses, but really about a more efficient delivery system.

So we've seen this, and there's been very little public outcry about it. Scotiabank alone has closed 300 branches in this time period, with very few staff losses overall.

¿ (0945)

On that note then, Madam Chair, let me turn to the minister's final question: international competitiveness and, in essence, why merge? Why should the country make this trade-off between domestic public policy and growth internationally?

That goes to the heart of our institution's overall philosophy. We firmly believe that you don't merge to get bigger in Canada. Heaven knows, we're big enough already, both in perception and in the ability to compete with the other banks. You don't merge to save costs; it's not about large layoffs. That would be wrong and it would be counterproductive. You can't afford to reduce your service levels by so doing, and your customers won't let you.

You don't merge to improve technology, because we can get the scale of technology already. We outsource to IBM. We outsource a lot of our technology today, telephonic and computing, as we try to keep the brains internally in the bank and outsource the processing. We've learned a lot about that, and with Symcor for imaging and IBM to manage our major data centres, we can compete with anybody.

You merge for one and only one reason, that you have a vision of growth for your company, for a company headquartered in Canada. For us at Scotia it's particularly in the U.S., in Mexico, in the Caribbean of course, where we're a dominant institution, and to a lesser extent in the Far East, where we're doing joint ventures in China and in India.

As an aside, I met with President Fox and Finance Minister Paco Gil Diaz at the World Economic Forum in Davos for about an hour last weekend. Mexico being a full NAFTA partner, we, as one of the six major banks in Mexico--and there are only six major banks in Mexico--are important now to Mexico's future. In a way, the type of debate we're having here as one of the five major banks in Canada is already there. What they want is for us to bring more capital in, to import technology and ideas, and yes, to lend to small and medium-sized businesses. I felt right at home. In other words, Mexico wants us to do what we've been doing in Canada for 170 years, and they see the big opportunities in the United States.

Could we enjoy and grow without merging? The short answer is yes. I do not think it would be at the same level or with the same success as we would have with larger scale, which would allow us to diversify risks, take advantage of opportunities, and operate on a different time plane and with a different strategy than if we were not able to partner with another Canadian bank.

This question isn't what's good for the banks, it's what's good for Canada, and we face some decisions in banking, telecommunications, and other things where we trade off ownership restrictions against productivity and ability to grow out.

I believe, and it is a belief, that strong internationally based banks--we, Scotia, have been international for 170 years, physically for 110 years--have the toughness and the ability to compete out there, to grow and to repatriate capital and earnings to Canada, and to provide careers for our best and brightest. Many of us...I spent ten years outside the country competing, loved it, and came back, and that's important.

I do not think we should stand still on merger policies. Canadian banks are strong. We have the experience and the toughness, as I said, to win in international markets. We should be allowed to evolve and grow, and that's what this debate is all about.

We are seeing financial sector consolidation globally and across Europe in particular, where the barriers have fallen. There's no protection in Holland or smaller countries. We're seeing it there and I think it's inevitable in North America. There certainly are no barriers in Mexico and no barriers in the U.S.

Will ownership restrictions be sustainable five or ten years out in Canada? I find it highly unlikely, personally. Creating artificial barriers to wall off a very competitive industry, which banking is, has never really worked, and that's what this debate is also about.

¿ (0950)

I believe we have the right public policy in place. We've passed the legislation. That debate is presumably finished. Now we're trying to determine if there are other barriers or if we should have another public policy discussion on it, because the competition and the OSFI reviews are clear.

The questions posed by the ministers have been clear almost since the MacKay report. We know them. We know there are no perfect answers to them. We would like to know how much risk is in them--have that risk clarified--and then proceed.

Thank you, Madam Chair.

¿ (0955)

The Chair: Thank you very much.

I have eight names down on my list, so we'll have one round of questioning of five minutes each. If you will be crisp with your questions, I'm sure the answers will come accordingly.

Go ahead, Mr. Harris.

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

I should centre right in on the perceived fear by people who are uncomfortable with the thought of bank mergers that they will cause a decrease in access to financial services, particularly in small and rural communities. We heard fairly clearly yesterday that they wouldn't have the same impact in urban areas.

We've had tier-two financial people here expressing that they're anxious for mergers to happen because they're ready to take advantage of opportunities. If we can believe what they say about how they're going to fill those holes if they occur, and if we can believe what you're explaining to us about the natural attrition rate and the natural branch rationalization, that fear will probably never materialize into a real threat to access to banking services.

Can you just sort of zero in on that and give us some comfort from that fear?

Mr. Peter C. Godsoe: I agree that the urban impact will be much less and there's much less fear in the perception. Having an undertaking stay open if it's the only one is entirely legitimate today. If the next bank is five or ten kilometres away, that's reasonable in a rural community.

I think it's good business to sell rather than close. We sold our non-mega Montreal through Hull branches in Quebec after 100 years, for a couple of reasons. Laurentian would give our employees a future. They could run it better than we could because they had a broader distribution, and that's what it was all about .

The credit unions and the smaller players, in a way we haven't seen in the last five years, are now all supporting mergers because they see that opportunity. Undertakings in that way, to any merging bank, with particular respect to rural, would be very easy to meet and would satisfy the perception of loss and loss of access.

Mr. Richard Harris: Thank you.

Some presenters have told us that what we're doing here simply isn't enough, that there must be more public consultation after merger proposals have been put on the table. The Competition Bureau and OSFI are sort of no-brainers--they're very clear, black and white. The last part that remains is the public interest question.

I'll ask you the same question I asked Mr. Glynn from HSBC. Do you think this committee, if we work hard, can present a reasonable public interest criteria report to the minister after we're done with these hearings that would fit in with the other two sections?

Mr. Peter C. Godsoe: As I said earlier, I don't think there are black and white answers here. I think the concerns are real. I don't think they'll disappear. In fact, I think if I come back in 10 years there will be small and medium-sized business concerns on access to credit, and rural concerns about the amount of access, no matter what the electronics. So we're going to have some grey answers and make sure there are trade-offs here.

We have been at this since 1996, when Minister Martin undertook to set up a task force. So we're sitting here seven years later and we're not much clearer. Would more hearings make it even clearer? I don't think so. I think you'll come out with a balanced report that is going to require trade-offs, which is the nature of politics. This part of the process has politics in it, quite naturally, because a lot of Canadians are concerned about it.

À (1000)

Mr. Richard Harris: Right. Thank you very much.

The Chair: Thank you very much.

[Translation]

Mr. Paquette, it is your turn now.

Mr. Pierre Paquette (Joliette, BQ): Thank you, Madame Chair.

Thank you for your presentation, which I find especially honest and very transparent. To my mind, the federal government's main responsibility as regards the Canadian banking system is to ensure that Canadians have confidence in their banking system. But the idea of a merger of Canadian banks and the creation of a Canadian mega bank that will be increasingly international in scope makes me afraid of precisely what you mentioned: the spread of international effects to our system here in Canada and Quebec.

At Scotia Bank, you had some problems with Argentina. Imagine the crisis in Argentina spreading throughout Latin America and perhaps to Mexico, where you also have major stakes. Would there be a way of ensuring that the Canadian government and the Bank of Canada wouldn't have to bear the risks linked to the international operations of a major bank that has merged? Because I am far from convinced that the role of the Bank of Canada and Canadian taxpayers, as well as Canadian consumers, is to bear the risks that a private company may take internationally. So how do we ensure a minimum degree of separation between international and national operations—and I am not saying that it is entirely possible?

I have a second question, because I know that we will not have much time. In your presentation, you say that in the short-term, there could be job cuts. I think that one of the objectives of any merger is to streamline a number of activities and that leads to job losses, which may in fact occur by way of attrition, as you mentioned. But you go on to add that a merger could lead to job creation. I want to be as optimistic as you are, but I would like you to elaborate a little more on how you arrived at that conclusion.

[English]

Mr. Peter C. Godsoe: Thank you, Monsieur Paquette.

On the international risk, if I just use our case, we had a branch in Kingston, Jamaica, before we had one in Toronto. We were in Montreal and Quebec City before we came east. In that era, there were times when our Caribbean operations were stronger than our Canadian ones. So we've dealt with this. We've been through revolutions in the Dominican Republic. We dealt with Argentina. We're balanced. The regulators here and around the world look at our risk and the countries we're in and make sure we're insulated.

Canadian banks are among the best capitalized in the world. Scotiabank would be in the top 10 in North America, and probably the world, today in terms of its equity to its risks. So that's well factored into the way they regulate us. It's not the Bank of Canada that regulates us, but the OSFI. I'm very comfortable that the savings of Canadians are not at risk at Scotiabank, which has been around internationally since 1832. That's true of our peers too.

On the job losses, I think the biggest rationalization by far will take place in systems integration, not in what you see, the branches or telephone centres. We have massive back offices today. We're really quite productive, or as productive as anybody in the world, in terms of back-office banking services. This is where a lot of the rationalization will come and will be handled mainly by attrition or by new ways of applying technology.

The growth is basically a vision; I do agree with you on this. If you aren't going out, or if you're not creating new opportunities or are effectively landlocked within one country, at some stage you will stop growing and stop creating opportunities for your people to attract back the best and the brightest to work for a winning and very multicultural institution like Scotiabank. When we recruit in the U.S. or across Canada, this is the dream we're selling to university and graduate students. We actually have more applicants for our international division than we have for our capital markets division, where the high bonuses are. People want to come because they share the dream.

À (1005)

[Translation]

Mr. Pierre Paquette: Thank you.

The Chair: Thank you very much.

[English]

Mr. Murphy, please.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chairman.

Thank you very much, Mr. Godsoe, for coming here today and for your excellent presentation.

I want to follow up on the issue raised by Mr. Harris, the question of sectoral and regional access, which I believe to be the most important consideration in these hearings. Certainly, as your summaries indicate, there have been a lot of changes in the banking industry in the last four or five years, and there'll certainly be a lot more. But one of the disturbing changes I've seen is that some banks have decided to withdraw from certain regions for strategic reasons and, more importantly, from certain sectors within regions. You've also seen it.

Much to your credit, the Bank of Nova Scotia seems to be swimming against that tide. I know in the province I come from, you have as many branches as all of your competitors combined. I know that to be the case in Newfoundland, and I think a similar situation may exist in Nova Scotia and New Brunswick. You'd know that example. As far as I'm aware, you haven't withdrawn from any sectors. So you seem to have made a strategic decision to stick with the regions and all sectors, but that's not the case with all banks. This is an issue.

Mr. Godsoe, I've had many discussions with bankers over the last number of years. You can go with an application and you ask the banker, “Do you like it?” The answer is yes. You then ask him, “Why do you like it?” The banker will say, “Well, the management's good, the cashflow's good, and there's an excellent plan and strong covenants”. You ask him, “Would you like to do the loan?” The banker responds, “Yes”. Then you ask, “Will you do the loan?”. But the answer is no. Then the banker refuses to take the application. The response is, “Well, I received a memo six months ago from Toronto that I can't make any loans in that particular sector”.

This discussion has taken place throughout Atlantic Canada, where you're from. I believe you understand the issues we're dealing with down there. It is a problem.

Sir, I have three questions. One, do you, as a bank president and as a Canadian citizen, think that sectoral and regional access ought to be a public interest consideration? Second, if so, do you believe it should form part of the criteria this committee recommends to the Minister of Finance? Third, and this is probably the most difficult aspect, if so, do you have any recommendations or suggestions on how these sectoral and regional access issues should be defined and clarified, so that, in fairness to the banks, they know exactly what they're having to deal with?

Mr. Peter C. Godsoe: Well, I can start with a simple observation. As you say, I have an Atlantic Canadian heritage, and my Cape Breton mother, who's 91, would shoot me if we were cutting off credit to her beloved island, let alone Prince Edward Island.

I've looked at these numbers expecting a question, and our rural loans and our agricultural loans are up in your sector of the country. That isn't because we're better or worse; it just happens to be that this was the number.

When I look at the famous memo from head office cutting off credit, which indeed was a fact in the late 1980s and led to a cutback in small and medium-sized business, it certainly hasn't occurred at Scotia, and from what I can tell from my competitors, it's not there.

What we have today is a system where, frankly, Toronto's not in it. Any loan up to $250,000 would have nothing to do with anybody in Toronto. It's actually centrally adjudicated, with a very complex scoring model that is even from coast to coast and should be regionally blind.

Is it fair for you, with or without mergers, to look on behalf of your constituents and your part of the world, whether you're rural or urban, whether you're west or east, for various breakdowns of bank lending, and then question the banks as to whether there are certain credit criteria that are against economic development? As long as the banks are being level-field from coast to coast, then I think they have to be free to make decisions and judgments.

I think that's fair. Processes are in place, including ongoing meetings, that are actually merger-blind. This should be an ongoing process to assure that Canada's credit system is operating to distribute credit to individuals, small businesses, agricultural and sectors--hospitality--on an equivalent basis. That's the way our system has been built, and that's how it's supposed to operate, so we should be capable of reporting on it.

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The Chair: That's all. Thank you.

Mr. Wilfert, for five minutes.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chairman.

Mr. Godsoe, thank you for coming. I found your comments quite interesting.

My first question is, would you say your thinking has changed since 1998 on the issue of mergers? If so, what led you to the conclusion you have today?

Mr. Peter C. Godsoe: Certainly in 1998 I opposed mergers. I opposed them somewhat openly. I believed the process was wrong. I believe there's a process today.

Minister Martin, at a meeting in 1996, agreed to set up a task force called the MacKay commission. It was to deal with issues such as mergers, how we distributed credit. Some saw fit to pre-empt the process and announce a merger, which caused, then, a backlash, both publicly and politically, that could have caught Scotia. We were being penalized along with it. So I felt that it was wrong.

I always maintained that mergers were a valid strategy if a process was in place. If the process said “no mergers”, then that was the end of that. So that was my real reason for opposition.

Mr. Bryon Wilfert: In terms of the process, we have elements, as you know, with regard to a public interest impact assessment, and we are looking to see how we may expand on that.

One of the issues is that I certainly want to maintain a very strong Canadian-controlled, Canadian-owned banking system, and if I have time, I'll talk about financial sovereignty. But the question I would like to ask you is this.

In the United States, for the last 20 years, they've had the Community Reinvestment Act. If my recollection serves me well, in the United States, the Toronto Dominion Bank and the Bank of Montreal have had to go through that in terms of acquisitions. One of the keys that we have heard continually is the issue of lending--my colleagues have touched on that--and lending by branches in various parts of this country. Since the CRA deals with a financial institution's detailed lending service record, branch by branch, in communities across the country, what would your view be on that as one of the public interest elements?

Mr. Peter C. Godsoe: I think it's wrong-minded, though not because the CRA doesn't serve a useful purpose for the Americans. We tried to buy a bank in California in the early seventies, and I spearheaded the task force. They have an entirely different system in that their pricing is set in any community; it's not coastal, like ours. A mortgage in a small community is higher than it is in a big centre. They have actually less competition normally in any individual area than we do, because they tend to have competition of three to one, and we are five to one, normally. That's in the bigger areas.

They had a very major issue back in the sixties, when I lived in Boston, of red-lining. The banks just would not go into the hard areas of Boston. There was one in particular that I knew well because we read cases on it. They wouldn't lend. They had to pass laws to force the banks to go in and open branches and give mortgages.

That's never been the Canadian challenge. Their CRA is almost totally aimed at urban areas. Our debate here tends to be more on whether there is enough access to small and medium-sized businesses or whether there's enough access to save old and rural, which is a different thing.

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Mr. Bryon Wilfert: On the transparency aspect, would there be any problem for your bank, for example, to provide details, not on a full CRA basis, but on the lending and tracking concerns that Mr. Murphy and others have raised in terms of what we heard around this table?

Mr. Peter C. Godsoe: We certainly have the data. It depends what detail you want, and what you want out of it. We're capable of providing virtually anything you would need from a public policy point of view to assess whether credit is getting to the people who need it in the right fashion. If there are gaps and we can fill them, we should. If there are gaps that we cannot fill, for example, a public policy problem like affordable housing, which I don't think the banks can solve, I think the country has to fill them.

The Chair: We'll go now to Mr. Nystrom, followed by Mr. Discepola.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I'm really pleased to see Mr. Godsoe here.

Mr. Wilfert asked the question I was going to ask you. I remember your leading voice in the campaign against the mergers back in 1998, how we made common cause with many people across the country, and how you were not the most popular bank CEO at cocktail parties for a little while. It's very interesting how you've evolved since that time.

I don't believe everything in the media, Mr. Godsoe, but it's interesting that last fall there was a media report widely spread around the country about a proposed merger between you and the Bank of Montreal that was scuttled and rejected by the government. Shortly after that, they decided to strike this committee to clarify the issue of bank mergers.

My question is, are you the reason we are here today?

The Chair: Mr. Nystrom, we're here to look at the issue of public interest.

Mr. Godsoe, you can answer that question as you wish.

Mr. Lorne Nystrom: This is very much a public interest question. That's why I want to know if you're the one.

Mr. Peter C. Godsoe: No.

We've never really commented on that. You never believe what you read in The Globe and Mail even if you're from Toronto. I have to be careful, because the publisher is a very fine person and so is the senior editor, but I think a lot of things get taken out of context. I can honestly say that the only persons who were hurt by all of that coming out were Scotiabank employees, Bank of Montreal employees, and various politicians. It was a triple lose. I don't think one was a catalyst for the other.

What I do know is that there are ongoing discussions between us all the time, whether it's insurance company and bank or bank and bank. We wouldn't be doing our jobs if we didn't do that and consider a future that is four or five years out. I don't think there was a cause and effect here. I think there was a building of momentum. We passed legislation in 2001. I don't want to be blunt, but either retract the legislation and be finished with this debate, or clarify it and let an industry restructure within the interests of public policy, or not. That was the purpose of that legislation.

Mr. Lorne Nystrom: I had to ask you that question because you have the reputation of being forthright and direct.

Mr. Peter C. Godsoe: Wasn't I forthright and indirect?

Some hon. members: Oh, oh!

Mr. Lorne Nystrom: The Scotiabank has a track record of being very successful for a long time internationally, and if my recollection serves me correctly, you have, of all the big banks, the greatest share of your income coming from out of the country and offshore. You have already stated there's no reason to merge in terms of domestic market, and technological reasons, and efficiency reasons in the country, so why couldn't you, with the other banks, form an international consortium of some sort to make yourself bigger and take advantage of the economies of scale, and leave the domestic market as it is?

Mr. Peter C. Godsoe: You could, is an answer. We've done joint ventures in a number of places. Unfortunately, we have one in Venezuela as we speak, very interesting. We have one in Peru, one in China, so we're used to dealing with it.

It doesn't change the fact that what caused us to go out with our forefathers, going down on the ships into Cuba and Jamaica from Nova Scotia, and what caused us to grow was a culture of growth. If you go to Jamaica, Trinidad, Dominican Republic, or Mexico, you will find people speaking different languages who are very proud to be Scotiabankers. I think that's quite different from a joint venture. I'm not sure it's nearly as successful a model. I don't think it encourages a Canadian-headquartered company to strive to grow and be great, which is what attracts people to come and work for us, I hope.

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Mr. Lorne Nystrom: My last question, then, is how do you square not doing it for domestic reasons--we don't need bigger banks domestically, and yet we need them bigger on the international scale? It's like being both progressive and conservative at the same time.

Mr. Peter C. Godsoe: Well put.

Mr. Scott Brison (Kings—Hants, PC): Or “new” and “democrats”.

Some hon. members: Oh, oh!

Mr. Peter C. Godsoe: I'm not going to go there, Mr. Nystrom. I'll leave that to others.

I think you put it very well.

Mr. Lorne Nystrom: He's honing his debating skills for a certain campaign he's in.

Mr. Peter C. Godsoe: Yes, exactly. He has that Nova Scotia background so he'll debate well.

I think that's exactly what we're talking about. What we're talking about here is a large domestic industry, very successful, probably the most successful in Canada as an industry if you look at it through time. It's very important, and we're trying to say, should we wall it off? Should we stop it from a natural evolution into more of a global competitor or not? That requires the trade-offs. What we're discussing is whether or not there are trade-offs that protect the Canadian people, the legitimate public interest, and yet allow this industry to grow and thrive or, if it doesn't, to fail and somebody else can take it over within the industry. I think that's legitimate.

The Chair: Thank you.

Mr. Discepola, go ahead, sir.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Madam Chair. I'll try to be very precise in my questioning so I can get them all in.

Mr. Godsoe, I remember the Minister of Finance in Halifax saying he wanted Canada to become the northern tiger, and I think our challenge on this committee is to make sure that we do our job correctly to answer your questions of timeliness and clarity, and maybe in the worst-case scenario make it a northern kitten. But I would want to avoid making it an animal of black-and-white stripes, a zebra.

I think I'd like to concentrate on the timeliness issues. One of my biggest concerns is that if you are the largest bank... You referred to the process in 1998 as being wrong, probably because there were many other issues than just mergers and we were under the gun to answer that one immediate question, whereas now we're not under any gun and we can probably take our time. But I see that process reoccurring and I'm trying to avoid it. I'll explain.

I think there's a general consensus that maybe we could allow probably one merger in the worst-case scenario or best-case scenario, depending on which side of the fence you're on too. But I believe that if you're the largest bank, what you could risk is that you might be gun-shy because you're saying to yourself that you're already the largest and maybe you'll be rejected because you're creating an even larger bank. Or if you're the smallest, you're asking how you are going to be able to approach anybody, because nobody's going to be interested in courting you.

So I have thrown out the idea, as of last December, that maybe what we should do as a government in order to allow everybody to have a level playing field is to say that we are going to have an open window of opportunity, entertain all permutations and combinations of merger proposals, and then decide which one or two we would like to choose in order to make sure those are the best choices for Canadians ultimately and to give everyone a fair chance. I'd like to know from you if you think that is probably a fair approach. I'd like your comments.

On the question of timeliness, you have indicated.... I started this committee hearing saying that I didn't want to see a political role in this whole process. I'm backing off a little bit because I don't see how we can identify everything in terms of clarity and we might have to do something as a parliamentary committee. So I'd like to know from you, from day one to day x, when the process is ultimately rejected or approved, what is an appropriate timeline that would be amenable for you in your industry and would not allow you to be exposed too long?

Mr. Peter C. Godsoe: I'll take the last first, because I think it's relatively easy to state that the five-month time period in the legislation is fine by us. It allows the procedure to go forward, public interest impact hearings to be held, Competition Bureau, etc. We can certainly live with that.

Taking the first, I'd be very wary of it. I hear the problem of the biggest bank-- and I'm not here to make the Royal's case, feeling that maybe they would have a negative.... I don't think they do. I think where we at Scotia would come at it is that three things are overriding to us in any merger. First and foremost is that we share values on people. We've never had a major layoff. We just would not want to go there. I've spoken to 4,000 of our people since this Globe and Mail article, saying that these are our values. We're here to create growth, not to take people out. They can fire the chairman, but not the branch manager in Shelbourne or some place. That's not on.

Two, the cultures must be compatible. Some 70% of these mergers don't work because the people don't get along and they view the other person as trying to take their job. So it takes an enormous amount of execution.

Three, in Scotia's case, you have four banks that really aren't international--and I'm talking outside the U.S.--and us who are. So somebody would have to feel comfortable with things like the Caribbean and Mexico and, yes, the types of accidents that happen, as we faced in Argentina. So that would be overriding to us as opposed to a government saying that this one makes more sense than that one.

I also happen to believe that ultimately you will see bank and insurance mergers, which is in regulation. But basically there's no real public policy negative in allowing a bank and an insurance company to merge and create a larger Canadian competitor.

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The Chair: Thank you very much to you both.

Mr. Nick Discepola: But I don't think you've answered my question.

The Chair: Did you have any further answer?

Mr. Nick Discepola: My direct question was, should we just leave a window of opportunity of a finite period of time to allow all mergers to be put on the table and then we'll decide the best one or two? Or should we just let it be first come, first served?

Mr. Peter C. Godsoe: I think you have to let the CEOs and the boards do what they do; otherwise you're in effect saying that you have a one-year period where anything can happen. The uncertainty and the deviant behaviour you get I don't think is good. I don't know of any place it's ever done.

Mr. Nick Discepola: The same thing will occur as in 1998, where we will be reacting to a situation?

Mr. Peter C. Godsoe: I think that will happen and I think the process is very clear, and the risks to anybody merging are clear too.

The Chair: Thank you very much.

Mr. Brison, five minutes, followed by Ms. Guarnieri.

Mr. Scott Brison: Thank you, Madam Chair, and thank you, Mr. Godsoe, for appearing before us today.

You said earlier today that you believe there's a process today and that there is clarity today. Why is it that we have not seen bank merger proposals proceed and come to fruition in Canada with this clarity and this process you're describing?

Mr. Peter C. Godsoe: I think the various banks--and there will be differences amongst them--saw political risks that were very large around the public interest impact assessment. I personally always thought it was clear what the problems were and the challenges are. I think the rural and small business lending and access are real problems for which you can't get an absolute answer saying that this is 100%. So anybody proposing a merger would have to be creative and come up with solutions.

I think, though, that the scars left from 1998 left an overhang in the political arena in the perception of the banks to cause them to be very cautious. I think these hearings--and I congratulate Minister Manley--are not going to come out with absolute answers. But what they are doing is at least airing it to say, here, we have a process, and if you want to take advantage of it, you do it. If you get turned down, it will be for a good reason.

Mr. Scott Brison: With OSFI looking after the prudential side of it, and with the Competition Bureau looking after the competitive side, those are very rigorous public impact review processes in and of themselves. Canadians, 9 million to 10 million of them, directly or indirectly own bank shares. Shouldn't there be a public impact review process protecting shareholder value and allowing Canadian banks to build shareholder value by legitimate merger processes?

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Mr. Peter C. Godsoe: I thank you for the friendly nature of the question. There is no question that our public interest impact assessment is unusual in the western world in that the Competition Bureau and the OSFI regulatory spheres cover a great deal of ground.

Having said that, all politics are local. We Canadians, given the background that we've had post-1998, or you can go back to the late 1980s with service charges, put this in. I think it's quite liveable, personally. I don't think it's overly intrusive.

Mr. Scott Brison: But, respectfully, your presentation represents part of the problem, because you describe a trade-off between domestic public policy and international scale. Isn't there a trade-off between domestic public policy and lack of international scale? For instance, Canadians are better served by having large international-scale banks with head offices in Toronto, as opposed to being served by large international banks whose head offices are in Zurich, or London, or New York.

I mentioned the shareholder value, but I don't believe in this notion of a trade-off. I think you can have large international-scale, Canadian-owned head offices of banks here in Canada. That can be in the interests of Canadians.

I have one question. We have Clarica and Sun Life merged, we have consolidation, and there's a financial sector merger without political implications at all, and in fact there are very similar factors in terms of competition and issues affecting Canadians and their communities. Why is it that these mergers go ahead without almost any political discussion? And just hypothetically, if two Canadian banks were in merger discussions this summer, and if the finance minister was aware and gave his quiet approval, and the Prime Minister found out in October and said no, because of his retirement schedule, why is the retirement schedule of the Prime Minister relevant to Canadian bank mergers but not relevant to mergers in other areas of the Canadian financial services sector?

Mr. Peter C. Godsoe: I can't help you on the latter, because I have no knowledge whatsoever that it was or wasn't true. I truly don't. I just read the same things you read in the newspaper.

In terms of the Clarica-Sun Life merger, what I do feel is that we Canadians picked an arbitrary number of $5 billion and said, for instance, Scotiabank can merge with National Trust; it's under $5 billion and that's okay. Above that you can't do it. Then we put in the public interest impact.

In answer to your broad question, I tend to agree philosophically that, yes, we have these tests. I will say, in fairness, that whether it's the U.S. or the European Union, there is a political factor in any major merger that has such visibility within their countries. To merge two banks in Scandinavia is very hard. The French are merging, as we go through these hearings, for their own purposes. It's very political. There's a lot of talk about access to branches. You could almost be home when you're reading the French newspapers.

I think we're doing it and getting to where we are the Canadian way. It's just taking a long time.

The Chair: Thank you very much.

We will go to the final five minutes with Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you, Mr. Godsoe, for your remarks and for clearing away some of the debris from our discussions over the last four years on this issue.

In your remarks you admit that mergers are driven by a need for scale and not because of cost savings on technology or much else. Last time around in the general debate, we really went on a very unhealthy tangent looking for these cost savings. They seemed hard to find, and it was quite a treasure hunt. So I want to thank you for opening a new debate of the value of scale to Canadian banks.

You say in your remarks that banks are already too small to serve as lead banks in syndicated leading markets in North America and elsewhere. Perhaps you could tell us whether a merger of two of Canada's banks would actually generate a lead bank. Quantify the benefits to Canadians in dollars, market position, and access to clients. In essence, what would it be worth to establish a lead bank, as you describe?

I'm going to get my second question in very quickly, because I know the clock is ticking.

Would it be fair to say that Canadian banks are actually losing international business because their growth is being stunted by government?

I took a quick look at your website and I came across a rather curious heading this morning, a description of your U.S. operations. It's called “The Continental Dream”. I've heard of the American dream, and we've even heard that the Canadian dream was not complete some 10 years ago, but I'd love to hear what Scotiabank's continental dream is really about.

We heard earlier that you have operations in Mexico, some 400 branches. We heard that you had 200 branches in the Caribbean. I understand the need for banks in warm climates, coming from a cold climate, but you mentioned earlier that you attempted to buy a California bank. Your competitors have branches or have linked up with banks in the States. What I'm getting at is, is it that Scotiabank never bought a U.S. bank because it always assumed that eventually it would merge with another bank that already had a presence?

So it's a very simple question, whether your continental dream really is predicated on a merger with one of the banks that already has a U.S. operation.

À (1035)

Mr. Peter C. Godsoe: I'll take the first question, on the ability to be large enough to be a major player in global syndicates or capital markets in New York.

I think, at best, we can be a middle player. Even combined, we're not of the size. You need the scale to diversify your risk. The rating agencies have been very clear that the Canadian banks are mid-sized and they cannot take extra risks. So we have to be careful. I think it would give more substance to Canadian capital markets in terms of going against the Goldman Saks and the Morgan Stanleys and the CityBanks for the bigger companies in our own country.

Where I really believe scale comes in is ultimately competing head-on with the Americans in personal and commercial banking. The Bank of Montreal, with Harris, has a wonderful legacy from 1984. Royal has bought Centura.

We at Scotia have looked at 50 different alternatives. We have two that we could move on, but we would move much bigger and faster if we could merge, because our strategy, the continental strategy, is that we're already dominant in the Caribbean, with 7,000 employees and almost $300 million Canadian in earnings last year. It's a big company in the Caribbean. We're probably the biggest.

In Mexico, we expect next year to make over a quarter of a billion dollars Canadian, maybe $300 million, with 7,000 employees; and in Canada, as you know, we are quite large. Ultimately we have to have some competitive presence in the U.S., because Mexico, the Caribbean, and Canada are intrinsically interlinked there.

Hong Kong-Shanghai--they're a terrific competitor--is already advertising itself to our customers as the only true NAFTA bank. They say maybe CityBank, but definitely us. They don't name any other Canadian bank. We'd like to keep them honest, and grow.

Ms. Albina Guarnieri: Thank you very much.

The Chair: Well, thank you for your candour and for sharing your continental dream. On behalf of all the committee members here, Mr. Godsoe, I would like to say that we very much appreciated your taking the time to be here and answer our questions.

We will suspend now for a couple of minutes to set up our next witness.

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The Chair: We'll recommence our hearings this morning: pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers.

We're very pleased to have with us Mr. Edmund Clark from the TD Bank Financial Group, who is its president and chief executive officer.

Welcome to our committee, Mr. Clark, and please commence as soon as you are ready.

Mr. Edmund Clark (President and Chief Executive Officer, TD Bank Financial Group): Thank you very much, Madam Chair, and thank you for inviting me to offer my views on the public interest impact assessment process of bank merger approvals on which Mr. Manley has sought your advice.

Before I make my official comments, I would like to take a moment to thank the chair for the way she handled our unfortunate mishap last week. As I indicated to you, Dan Marinangeli's remarks were inappropriate and were not bank policy. He and I apologize for any offence he may have caused.

You've all had an opportunity to review my submission of November 25 to the Senate finance committee, so I will not take up your time by repeating it in detail.

In his referral to you, Minister Manley specifically suggested you consider the public interest implications of large bank mergers related to access, choice, adjustment or transition issues, and the creation of more effective Canadian-based, internationally competitive institutions. As the Senate report states, the industry consensus was that you should avoid duplicate regulation and limit the public interest assessment process to areas not covered by other agencies in existing legislation.

The issues of access, choice, and the adjustments and transitions resulting from a large bank merger are already regulated either by a number of agencies such as the Competition Bureau, OSFI, and the Financial Consumer Agency of Canada or through existing legislation such as labour laws and human rights legislation. In addition, all the banks have signed memoranda of understanding as to how they will provide low-cost accounts.

As it was made clear to the Senate committee, these issues are not solely the concern of government and its regulatory agencies. As members of a service industry in a market that is highly competitive for both customers and top-rate employees, all the banks are conscious that sensitivity towards issues of public interest is only good business. TD's acquisition of Canada Trust is an example of this principle in action, and I will return to that in a moment.

In addition, the Senate report recommends that you ensure appropriate sequencing of the review stages. Place the public interest assessment as a final check after Competition Bureau and OSFI reviews.

But here I would point out--and I want to come back to this--that to make this a productive process, we have to have certainty that the government is genuinely prepared to consider mergers. We need this before the process can begin.

A third recommendation of the report is to make the public review process short. Be clear about the timeframe for hearings so the inevitable uncertainty experienced by employees, customers, and shareholders is limited as much as possible.

As you deliberate on the minister's referral, I recognize that you need to balance national interests with your concern for the service your constituents can expect if mergers are approved. Can we have mergers and at the same time increase customer benefits? I believe we can. While the banks are far from perfect, we are all trying to build strong franchises, and it is good business to be sensitive to the needs of our customers and our employees.

As an example, let me come back to the TD-Canada Trust experience, for I believe it shows that mergers can be customer-centric and at the same time protect the interests of employees and the communities where we operate. In merging Canada Trust with TD's retail arm, we knew that the merger would have little value if we did not keep our customers. Customer loyalty is a product of a number of different elements: how customers are treated, how employees are treated, and how the bank behaves in the community. Thus, our planning for the merger was about more than cost savings; it was about building a better bank, measured by customer satisfaction and employee satisfaction, as well as improved financial results.

It was from that perspective rather than because of any government or regulatory guidelines that we made commitments to our customers, our employees, and to the London community, our largest employment centre outside Toronto. Our overriding principle was that we would put customers first in all our decision-making. We pledged that we would treat them with respect and communicate with them about changes in a timely fashion.

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To employees we committed to the same principles of respect and timely communication, and we addressed their big concern about jobs by providing an 18-month compensation guarantee for all employees affected by the merger. Unfortunately, it is impossible to merge two large companies without experiencing job loss. We extended the branch consolidation period over three years to make this transition as smooth and manageable as possible for both our employees and our customers.

In London, where our presence has a significant impact on the local economy, we committed to maintaining existing employment levels--which we have done. We worked with local MPs and benefited particularly from the advice of Sue Barnes, chair of this committee. This ensured that we set appropriate expectations and kept politicians informed about the issues that would affect their constituents.

In addition, we regularly sought customers' and employees' opinions throughout the integration period to ensure that we understood their issues and could make adjustments as we moved through our merger schedule region by region.

I will not claim that the merger went perfectly, but our focus on customers, employees, and the communities we served ensured that we maintained our customer base and ended the integration with basically the same net market share. Our customer satisfaction index today is higher than the average of the two institutions before the merger. I believe that is a remarkable achievement.

An area of particular concern to this committee is bank service to small businesses. There's certainly room for improvement. Small business banking is an area to which all banks are firmly committed. Competition among the banks for this segment is fierce. Small business is the backbone of the Canadian economy. For the TD Bank it is an important area of business growth and we are investing to build our share of this market. In fact, we have continued to build our small and medium-sized business franchise despite the merger.

We opened 143 new small business service wickets in our branches, provided new small business training for our financial advisers, and improved our electronic and web banking services so that small business customers now have 24/7 transaction convenience. Our electronic services were ranked top in the industry survey.

But the market is the ultimate determinant of who is best in this business, and it is no accident that we have gained more than 100 basis points of market share in small business credit each year since the merger. We also rank first in overall customer satisfaction of the big five banks.

We are the leader in third-party agricultural lending, providing service through community farm supply outlets in rural areas where we don't have branches. Our cash management service to mid-sized companies is also ranked first in the industry.

Interestingly, when you review the steps we took throughout the merger, we considered every one of the applicable issues that Minister Manley has asked you to define in the public interest impact assessment.

While you are right to be concerned about the impact of mergers, the answer is not more rules--in fact, the fewer the better. I would urge you to be wary of adding more specific regulation when each merger situation will have its own unique set of characteristics. In TD's merger with Canada Trust, for example, I doubt that the particular sensitivities of London would have been captured by any prescribed PIIA.

You may also find in your deliberations that some issues are more complex than they first appear. For example, a merger proposal that does not involve many divestures of branches may appear to have a strong selling point in minimizing disruption. However, without divestures there's no opportunity for another player to step up and offer new competition.

At this point, let me step back for a moment and recap where I think we are in the process of clearing up the ambiguity surrounding large bank mergers. We already know what the Competition Bureau, OSFI, and current legislation require us to do. The Senate hearings laid out some ground rules for the public assessment process, and this committee will presumably identify the areas that the Competition Bureau, OSFI, FCAC, and existing legislation do not already cover so we will have a clear statement of what should be addressed in a short public interest impact assessment at the end of a merger approval process. If you articulate that clearly, it will be extremely helpful.

But having done all this, does it mean that a merger proposal offered today that meets all those tests would be approved? I suspect not. We have to recognize that despite the safeguards of OSFI, the Competition Bureau, and the PIIA, our politicians and many of the public are still fundamentally hesitant about large bank mergers. Why should that be the case?

Let's go back to why banks want mergers. The issue is no longer about merging to protect our retail franchises; Canada has among the best in the world. Nor are there many advocates for trying to achieve scale or stay large international wholesale players. The issue is that we see the financial services industry consolidating globally.

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We are afraid that if we can't achieve the bulk we need to make larger acquisitions in the United States, we would not be able to compete in any significant way outside our borders. There is a general unease that if American banks all consolidate, our current strong competitive position will be eroded.

But the fundamental issue is, are we as a country prepared to accept more consolidation so that our banks can compete effectively in the United States and become national champions? Are there any other ways to allow Canadian institutions to create North American champions, based in Canada, that would require less restructuring? These are the public policy issues the government needs to settle.

If you are convinced that the benefits of restructuring outweigh the costs, then make it a fair and transparent process. Don't let it be a first-past-the-post process. It would not be acceptable to let just one proposal through. We cannot politicize the restructuring of such a major industry.

But we should also be clear as to the consequence of a fair and open system. As soon as the door is open for merger applications, there won't just be one proposal; there will be two or three, at a minimum. That will mean a significant restructuring. Because we have jammed up the process, everybody will feel obliged to move at the same time.

If the government is willing to accept significant restructuring, then we need it to tell us that it is genuinely open for business. It needs to define the broad parameters for approval, and it needs to give us notice that the game will be opened up so that we have time to develop the combinations that interest our shareholders, while at the same time meeting the government's parameters. This will also allow the Competition Bureau and OSFI to make decisions based on having all the cards on the table at the same time.

As you deliberate on this issue, let me suggest that you do so in the context of the whole financial services industry. I understand that you may not see the issue of large bank and large life insurance company mergers as a focus of these hearings; however, the issue is not going to go away. It would be timely and helpful if, instead of focusing only on the five major banks, you were to broaden your scope to encompass the five major banks and the two widely held life insurance companies. If we make the set larger in this way, there's a greater possibility of creating a solution that is acceptable to the government and your constituents.

If you do widen the set, I would urge you to settle the issue of selling insurance in bank branches and set out an appropriate timeframe. From a business point of view, we need to know if a merger with a life insurance company can be undertaken to create synergies or if its only potential is to create the bulk required to make international acquisitions. However, please don't widen the set to include those now not subject to review. Companies who can currently sell or buy without a review should continue to be exempt.

While we're discussing unresolved issues, we should also acknowledge that we have not yet dealt with the issue of foreign ownership of banks. We have a completely open policy on foreign competitors in our markets, but are we prepared to have domestic players bought by foreign companies? We need clarity on the role the government sees for foreign players in the future. However, I believe it would be unfair to open up the market now. Why would we let players from jurisdictions where they are permitted to bulk up come in and buy Canadian institutions that have been stopped from growing to comparable size? In my view, the logical order would be to resolve the domestic merger issues first, to allow our own financial institutions to gain in size where they can compete against larger foreign institutions that have already had the bulk to compete internationally, and then to open the door to foreign entrants.

Á (1100)

It is evident that with or without greater clarity on the public interest impact process, there are still underlying issues that the government needs to address. I can understand that you may not be ready to address these issues tomorrow, but to avoid a situation where we're constantly running to the minister to ask how he likes this or that idea, I would ask you to pressure the government to give us a date by which it will be ready. If for political or policy reasons, the government can't do it now, give us a firm timeline when it can. I believe this would be in the best interests of all stakeholders, our customers, our employees, our shareholders, and your constituents.

Thank you.

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

We'll now go to rounds of questioners.

Mr. Harris, five minutes.

Mr. Richard Harris: Thank you very much.

Thank you, Mr. Clark. Has the marketplace in Canada stalled as far as growth for our banks is concerned? If it has, is this of course the reason you're looking outside of Canada? Banks have been doing business outside of Canada for so many years. Is this the reason why banks looked out there in the first place? In your opinion, has the market stalled as far as potential growth in Canada is concerned, given the way banks operate currently?

Mr. Edmund Clark: That's a good question. I would say no. Indeed, I was just talking to some of my counterparts in the U.S. last week. They were clearly saying that, given the strength of the Canadian economy and what's going on in our retail side, we have faster-growing indigenous banks in Canada than they do in the United States.

I think one of the differences in flavour you're hearing today from what you perhaps did in 1998 is that the Canadian banks are not saying, if we don't have bank mergers, we're going to be flat on our backs and get wiped out. I don't think that's what we're saying at all, because I think we have very strong banks. They're performing well, serving their customers, and growing. They're obviously producing nice, growing profits and are successful enterprises.

I think there is unease because we are sitting on top of North America here in Canada and can see what's going on in the U.S. We know that ten years from now the U.S. will have consolidated its financial services industry. So the policy question Canadians are faced with is, do we want Canadian institutions to participate in that U.S. consolidation, and how actively do we want them to do this?

Is the only way to get consolidation to have only a few banks, or are there other ways we can get access to U.S. capital markets to allow us to grow in the U.S.? I think that's the issue here, which is a more ambiguous issue than, I'd say, the previous presentations made, which was, are we going to get wiped out if we don't have mergers? I don't think the Canadian banking system is at risk if there are no mergers.

Mr. Richard Harris: Okay.

I want to focus now on access for small business, meaning borrowings of under $250,000. I understand there is a pretty set formula in the computers when applications are made under this figure. It's a far cry from the years when I was in business, when you actually had someone you could go to talk to and discuss your loan with.

I don't exactly know for how long, but over the past few years a small business credit card seems to have begun to emerge, much the same as the cards the government uses for its purchasing. Given the fact these smaller loans of $50,000 to $75,000 or $100,000 are moved rapidly from being a line of credit to a different thing, do you see the use of small business credit cards for purchases taking over what we know as a traditional line of credit? Is this going to be expanding, where small business really won't need to see a banker; everything will be done by computer, and they'll just keep feeding stuff into a preset formula, expanding their credit line on the credit card? It would be like a low interest or competitive interest rate loan.

Á (1105)

Mr. Edmund Clark: In general, I think what you're describing is all of us having moved to use the capabilities we developed in our personal banking platform, to really make those available to small business by dramatically reducing the costs of serving small business, allowing us to be much more aggressive in growing our small business lending. We certainly are giving the small business person the same electronic and credit access.

As for your specific question, in general I think the industry is going to move to where all of these credit cards and lines of credit merge into a single product, which is a kind of universal credit product you can access in any way convenient to you. I think we're going to get better and better at serving small business, because we have very good platforms to serve the retail people and are now adapting these platforms to really make them available for the small business person. If you're a doctor, lawyer, or accountant running a small business, the differences between these two platforms are not that great to you. So you really want to have simple systems available for the retail customer.

[Translation]

The Chair: Please proceed, Mr. Paquette.

Mr. Pierre Paquette: Thank you, Madame Chair.

Thank you for your presentation Mr. Clark. In your brief and in your presentation you say that the merger between TD and Canada Trust was not problem-free. You admit it yourself.

Yesterday, during testimony before the committee, we heard from a group that is extremely critical of the effects of this merger. There is an entire document attempting to show us that services had deteriorated and that fees had gone up as a result of the merger. I would like to know, from your point of view, what the main difficulties with the merger were and what you would do differently from what you did to avoid these kinds of problems.

[English]

Mr. Edmund Clark: I could take up all of your hearings in answering that question. It's a good question.

I'd say the most difficult issues we had were all around making sure that, as we merged our operational centres, we fully understood.... When you merge two operational centres, both of which work well in the business they're in, and then you put these different centres together, everyone has their own way of solving the same operational problem. We didn't really understand the granularity in which these differences could ultimately come back and not produce as smooth a process for our customers.

So when you put two large organizations together, you have to accept the fact that you're not going to do things in the first round. Half of your employees are going to be learning brand new systems and processes. So it's as if you have a huge number of your employees starting a brand-new job, in effect, and having to learn everything from scratch. This means they're not going to do as good customer service as they would ordinarily do.

So from a practical point of view, I think the main lesson we took was to do or to advance even more administrative training than we did—which you have to have. To allow for backups, we carried a significantly larger number of employees through the merger than one would have thought we had to. But we'd probably do even more of that if we were doing it again.

On the other hand, you can't lose track of the fact that every single year we took a hundred basis points of market share from our competition in the small business sector. So it's hard to argue that the service was so terrible. Why then were people moving from the other banks to us even while we were in the middle of a merger and they were not? Our customer satisfaction level, as I said today, is higher than it was at the start of the merger.

So I don't want to exaggerate the things that went wrong, but there are lots of things that go wrong. I don't think you can put a merger together without having things go wrong.

Á (1110)

[Translation]

Mr. Pierre Paquette: You say that proposed bank mergers should not be a “first past the post” process. Even the senators who were very much in favour of bank mergers said, perhaps not in their report, but incidentally, that the Canadian market could cope with one bank merger. They did not foresee two major mergers. In this context, I would like to hear you expand on your impressions of this expression "first past the post". Do you mean that the entire process must take into account all projects that would be submitted at the same time to determine which is the most promising economically speaking or in terms of public interest, or do you mean that the government must look at the possibility of there being more than one major merger, perhaps two or even three? I would like you to clarify the expression you used.

[English]

Mr. Edmund Clark: I think you've gone to the heart of the issue. I think it is unrealistic to think you're going to open this process up and only see one proposal. In fact, if you read the newspapers, you've already seen two, and I would suspect you'd see at least another one after that.

We politicized the restructuring of this industry. Whether that's a good thing or a bad thing and who is responsible for it I think is a different issue. But we are where we are.

The reality is that the industry doesn't believe it can be restructured without first getting the government's approval as to where it's going. The moment the government says, “We are open for business”, you had better be ready, because you're going to be open for business and people are going to come up here and say, “We're all going to try our proposals.” None of us can afford to stand by here and let one proposal go through, then have the window close and hear someone say, “That's it.” We'll say, “There's a political window to get these deals done. We'd better all get our deals up at the same time.” So you're going to get lots of deals at the same time.

I think you have two choices here from a public policy point of view. You can either say that's fine—and that's why I say you should probably widen the set as wide as you can, to have as many players in the game as you can; it will be more restructuring, but you'd probably like the different combinations better—or the government had better come to a view, and I'm not an advocate of this because it's a pretty dirigiste approach, in which it's saying, “I have a view about how I want this industry restructured and I'm going to set out broad policy parameters of what proposals would be acceptable to me.”

But in the situation as it is now, if the government says at the end of these hearings, “Come forth; give us proposals”, you're going to get proposals, because I don't think anyone in the industry has any choice.

The Chair: Merci.

We'll go now to Mr. Cullen for five minutes.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair. Thank you, Mr. Clark.

I'd like to pursue this notion. I can understand that for banks to have merger discussions is a lengthy and a costly process, so you're looking for some clarity. If I heard you correctly, in addition to the normal process, what you would like to see at the front end is, let's say, the finance minister—because I think the finance minister has the mandate and the authority—saying, “Yes, we're prepared to entertain some consolidation in the industry.” Presumably that would be subject to meeting the OSFI requirements, the Competition Bureau requirements, and the public interest test that this committee and the Senate committee would come up with.

I think you're right, we would see a whole number of consolidation proposals, and I wanted to ask you the question: do you think the concentration of economic power is a real issue, or do you think if you meet the Competition Bureau requirements, the OSFI requirements, the public interest test that we and the Senate committee come up with, then basically, subject to those issues, it's a done deal? Or is there this elusive concentration of economic power issue that's still hanging around?

Mr. Edmund Clark: You're probably better able to tell me whether you think it's hanging around the public domain.

Do I think it's a legitimate issue? Yes, I think it's a legitimate issue. I'm not sure I'm so worried about the concentration of economic power. I certainly don't feel as if I have a lot of economic power, so maybe I'm not sensitive enough.

The issue Mr. Godsoe raised in 1998, betting fewer people rather than more people, I thought was a legitimate issue at the time. I think this is the balancing act that Canadians have—and they have it not just in financial services; I think we're going to face this issue across the nation in each of the sectors that we have—that given certain constraints in the capital markets, if we want to play, we're competing against people in the U.S. who are in general bigger than us and have access to a capital market that's ten times the size of ours. Naturally there's an argument in which we say, “If I want to compete against them in buying something, I should try to get to as big a size as I can.” But obviously that means we're going to have a tenth of the number of large firms they have, if the arithmetic worked.

So I think it is a Canadian dilemma: how many big players do you want? That's why I think, in general, widening the set to have as many different options as possible in which you can get big is probably a good thing as a way of solving that problem. But as I said in my remarks, you'd have to know what the ground rules are with the insurance companies if you did that, and whether or not you're also prepared to produce some industrial logic in those things.

Á (1115)

Mr. Roy Cullen: The last time there were two proposal requests, and of course, OSFI and the Competition Bureau looked at them at the same time. I can't remember exactly, but OSFI did raise some prudential concerns, and the Competition Bureau raised process.

I think this time around astute banks would have found the partners before they came to the public interest criteria. In fact, what we've heard from HSBC and the credit unions is that it could actually create more competition in some of these regional markets, because they might, I suspect, sharpen their pencils if they were new in that region.

But it seems to me that...if you have three or four merger proposals, aren't you going to, even on the technical side, run into some problems with OSFI or even the Competition Bureau?

Mr. Edmund Clark: I guess what I'd say is that what heightened this, the reason you're going to get this all at the same time, is that the Competition Bureau said they would look at proposals in the context of the marketplace today. But you have to recognize that if you came a year from now, they would take into account the changes that had occurred.

Obviously, from our point of view, you'd better get your thing in today, not wait a year from now, because it may be that they'll say, “Well, now too much concentration has already occurred. We can't let you through, even though, if you had been the first one there, you could have gone through.”

We have ourselves in a position where I think you have to accept that if you open this up, you have to open it up totally. I don't see any way around that.

The Chair: That's it.

Mr. Wilfert.

Mr. Bryon Wilfert: Thank you very much, Madam Chairman, and thank you, Mr. Clark.

Mr. Clark, I'm a product of mergers myself. I started 40 years ago or so with Canada Permanent. We wound up with Canada Trust. Now I'm dealing with TD-Canada Trust.

I realize the dust hasn't settled quite yet, but I would certainly appreciate and I'm sure the committee would appreciate any material you could provide in terms of an impact assessment that this TD-Canada Trust merger has had. It's the largest merger we've had, and we can at least look at it in terms of the impact on the public. Certainly anything you could provide would be much appreciated.

I would point out to you that I believe in a strong Canadian banking system. I almost was ready to applaud one of your comments, but unfortunately you went a little further than I would have liked. That's the issue of financial sovereignty. I think the 20-30 rule is excellent, given the scale of banking in this country and given our population. I don't want to see that changed, and I think we've already had that discussion.

In terms of the Community Reinvestment Act--I've asked this of a number of people--you're familiar with this because you've gone through it in the United States. There's not much about the American financial system that I'm enamoured with, but I am interested in your comments on your experience with that process in the United States, particularly given the small business loan issues we have heard here from SMEs on a continuing basis.

Finally, in terms of the process, we are charged by the minister at this juncture with dealing with the public interest, period. The wider issue of the banks, life insurance companies, etc., may be a very valid issue--and I think it is--but I would suggest it's outside the scope of what we should be dealing with, at least at the present time.

I would conclude that I agree with you on a clear process, and once it's done, you have to either pass the litmus test or you don't.

Thank you.

Á (1120)

Mr. Edmund Clark: We've thought about how to give a kind of report card back to the nation on how the Canada Trust merger went. All the way through the merger we took out full-page ads and we tried to tell people what we were doing. So we took it upon ourselves, as I indicated in my remarks, to fulfill everything I think the government would have wanted us to do if we had been subject to a public policy review. If you can think of some way of reporting out, we'd be delighted to do that.

As to small business and the CRA, I'll declare myself: this Americanization of the Canadian way of doing business is not a good thing for Canadians. So I'm not in favour of the Americanization of the Canadian process. At Canada Trust we owned a bank in the United States. Today at TD we own Waterhouse, and it has a bank in the United States. My whole experience with the CRA is that it's ultimately extremely negative for the very people who I think the advocates of it are trying to help, because it produces a typical reaction, which is that you tell me what the rules are, I will meet the rules, and I will not do one thing beyond the rules. My experience in the U.S. has taught me that people don't have a sense of moral responsibility to the communities they serve, because the government has taken that moral responsibility and said, “I'm going to give you a bureaucratic set of rules, and as long you meet them, you can tick off moral responsibility.”

I don't object to the fact that politicians say to me that we are in a privileged position in Canada and we have obligations to our community as a result of that. We had those discussions relative to the London community. We sat down and tried to understand what those issues were and I think we met them. We didn't have a law that said we had to maintain employment. We didn't come to a contractual agreement. We just did the right thing in the London community.

As I said, we've had a remarkable performance in the small business area. I'm determined that we are going to continue to take market share from our competitors and grow our small business area and just outperform them. I think that's a better way to do it.

Mr. Bryon Wilfert: On the tracking of lending and servicing, though, all the banks, I'm sure, could provide that to satisfy some of those concerns, however.

Mr. Edmund Clark: Sorry, in what sense are you...?

Mr. Bryon Wilfert: It's the issue, which has been raised by some colleagues in the past, of the rate of approval for some loans in certain areas and the impact that has had.

In terms of Canada Trust, I know that you had expectations. Certain things have developed. From the evidence you can provide from your customers--I myself being one of them--and your staff, advising us what your objectives were and how you met them would be helpful, I think, in terms of an evaluation.

Thank you.

The Chair: Thank you.

We'll go to Mr. Brison now.

Mr. Scott Brison: Thank you, Madam Chair.

You've listed some of the current public impact review processes that exist--OSFI, Competition Bureau, financial consumer agency, labour laws, and human rights legislation. Without a politically charged public impact review process, those are pretty tough to get through, in and of themselves.

Finally, there's a finance minister who has the power to make a decision, yes or no, on any proposed merger. He can basically tell you whether or not the government is interested in hearing merger proposals or whether you should all just forget about it until after the next federal election or the end of the Liberal leadership race. What's really missing here is not a public impact review process but the political will or courage to make a decision and face an electorate based on that.

In this committee, the Liberal government is asking you to effectively create public demand across Canada so there will be protesters out on the front lawn of Parliament Hill saying to let the banks merge, and that will never happen. The politicians are asking banks to create this brush fire of demand across Canada so Canadians will protest in front of MPs' offices to allow their banks to merge, and that will never happen. Wouldn't you be better served by a finance minister and a government that simply said yes or no, and you worked with that finance minister and government to help make the case to them so they could make the case to the people who elected them?

In the late 1980s, during a period of tremendous deregulation by the Progressive Conservative government, some controversial decisions were made that have proven to be correct, whether they were on free trade or the deregulation of financial services. At the end of the day they made a decision, you went on with your lives, and the 10 million Canadians who owned bank shares went on with more prosperous futures.

So isn't the real problem lack of political leadership and courage to do the right thing?

Á (1125)

Mr. Edmund Clark: I'll find my way, since we evidently haven't shown great skill in answering these questions in a way that doesn't produce headlines.

If I can remove the political commentary--recognizing what your job is and what my job is--what the industry doesn't like most is uncertainty. That's the thing that stops the industry--when it doesn't know how to work. I think the industry is here in a much more muted form to basically say, look, we're not going to collapse if you don't allow mergers. We think the world we operate in is consolidating. We want you to take that into account. We think it would be good for Canada to have some national champions, but if you say you don't want the consolidation risks, that's fine. We want to know the ground rules.

We don't want the finance minister to finally say yes; we want the finance minister to say yes first. We want the finance minister to stand up and say whether or not the government is open to bank mergers or bank and life insurance company mergers. We don't want to go through a five-month process while the government makes up its mind on the fundamental issue of whether or not it wants to see significant restructure in the industry.

This has been a helpful process because there has been some tidying up of the process and airing of the debate, which I think is good. We're asking the committee to go back to the government and say, “I think we know the mechanics now of this process. That's been a good outcome of this, but now tell us where you stand from a public policy point of view.”

If you can't tell us now, just say you can't tell us now. Stop having people run around putting proposals together, getting on airplanes, flying up to Ottawa, and saying, “If you didn't like that one, would you like this one? Can I get this one by you?” That's not a very good way to run the country.

The Chair: Thank you very much.

We'll go to Mr. Discepola.

Mr. Nick Discepola: Thank you. My questioning falls right in line. I'm glad to see that either I agree with you or you agree with some of the things I've been putting forth.

I couldn't agree with you more that probably the terms of reference the minister gave us are too restrictive. I said to Mr. Godsoe when he left, “I hope this is the last time I see you,” because I don't want to see the banks back here in three or four years' time saying they want to now restructure the whole of financial services and they want to merge with other financial institutions.

I've been looking at cross-mergers, but I always get turned back by people saying this committee can't study that subject. Maybe we should make a first recommendation to the minister that we want new terms of reference from him.

I agree with you also on the first-past-the-post issue. I couldn't agree with you more, because I think it creates an unlevel playing field among the different-sized banks. Probably it's much better public policy and much better for Canadians if we can look at all the alternatives possible and choose the one that's best in our determination.

I'd like to ask you very specific questions. On the public interest impact, you say you would like to see a short period after OSFI and after the Competition Bureau. I agree totally. What should that short period be? How long should it be?

Á (1130)

Mr. Edmund Clark: Without being disrespectful, I think if you asked the industry, they'd like it to be zero days if they could get away with it. But as it's involved in these discussions, I think it really is a check to proceeding to ask, in all this set of legislation, have we missed something—such as, maybe, the London community employment number—that wouldn't have been picked up by the OSFI and the Competition Bureau and the FCAC and all these different rules? Is there something? There could be a two-week review, or some short period, to say that just before we give the final blessing to this, we want to make sure we've not missed some local issue that wouldn't have been picked up in the broad legislation that governs this.

Mr. Nick Discepola: On the same line of questioning, then, if we're going to say we're open for business and we will entertain multiple merger proposals on the table, what kind of window should we feasibly allow the banks to start their negotiating, to look at different cost structures, and to come up with a sound proposal for us to analyze?

Mr. Edmund Clark: I don't know that I can be specific, but I think that certainly, given the confusion, you're going to need to give three to six months and say, “At the end of this period we're going to be open for business; now start your discussions, and you know we'll accept them as long as you're within these parameters.”

Mr. Nick Discepola: On the Canada Trust example, I'm wondering if it's really relevant. In the Canada Trust case you had to assume you'd continue with a combined network. You mentioned yourself that you ended up with the same net market share, that your employees received 18 months severance, etc.

Under the proposed remedies for divestitures, you're not going to be able to keep your employees, you're not going to be able to keep your clients, and you're not going to be able to keep your market share. Does that bother you?

Mr. Edmund Clark: Yes, and I'm neutered. Again, that is an example of a parameter the government could state. To state the obvious fact, there are some of us who have very large market share, and if we do a merger with one of our counterparts, then we're going to have to shed a significant number of branches and employees. That would be one kind of merger.

The advantage of that kind of merger would be that we would have to shed it to someone, and you've had people come up here and say, “We're buyers of that,” and so you would create new competitors.

There are other merger combinations where they would say, no, our advantage is that we don't have to shed any market share, and therefore there'll be no branches sold. The advantage of that is less disruption for them and their employees and their customers. The disadvantage is that they don't bring a new competitor in. All they do is eliminate a competitor as part of the process.

Those are the kinds of public policy issues where you would say to the government, “Well, be sure you have thought your way through those; make sure you understand the different combinations that are there and that you'll be comfortable with any of those combinations.”

I don't come with a bias for one or the other. I recognize, given where we are, we have relatively limited opportunities to do things that won't involve divestiture of branches and employees, and that's emotionally a very difficult thing to do.

Mr. Nick Discepola: I'll ask a very quick question.

One of the barriers to entry that was brought forth yesterday involved the ATMs and the distribution network around them, and the excessive service fees. Could you see a policy invoked where, if we allowed mergers, we would say there should be no cross-bank ATM fees, so that we could allow other smaller competitors to use that distribution system, as they refer to it?

Á (1135)

Mr. Edmund Clark: You could do that, but you would have significant consequences that you probably wouldn't like.

For some time now, the banks essentially have not put in the surcharges, which I know people are sensitive to, and as a result of that and because of the economics of ATMs, they stopped expanding their ATM networks. So you had the growth of the private, independent networks, which were charging and therefore could make the economics work.

Obviously, if we have to essentially gift our networks to our competition, which is what we'd do if we opened it up for free, we're going to invest less in the ATM network. So the consequences will be, if I don't make any money on this part of the business, if I'm losing money every ATM, then why would I significantly invest in it?

So it's not obvious that the public would be well served by that.

The Chair: Thank you very much, both of you.

Ms. Leung, please, the final five minutes.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you Madam Chair.

Mr. Clark, I enjoyed your very interesting presentation.

Following your own merger, I understand you must have gone through a lot of restructuring and many changes. As a long-time customer of your bank, I'm very interested to know, what is your future objective, your goal for how you're going to improve for the public interest?

Second, I also understand you raised a question of mergers with life insurance companies. As you remember, this committee has not been much in favour of the banks' involvement with insurance companies. So how would you see that as being beneficial to the public?

Mr. Edmund Clark: On the first issue...again, I'll have to restrain myself, because this is my passion. As you're aware, I was the CEO at Canada Trust. We tried to carve out a place for ourselves in the marketplace and we actually produced a better experience for the customer. We continue today under TD Canada Trust to call our customers every single day, so I know every single day whether or not we did that yesterday, in all the places in which we touch our customers.

We have a very simple mission, which is that in the next few years I would like to be able to go anywhere in Canada and have all consumers, whether they bank with us or not, agree that when you walk into a TD Canada Trust branch, go onto the telephone, or deal as a small-business man, you can feel the difference. You can actually say, this is a different experience when we deal with these people; they are much more customer centred.

So we preach this in the organization. My bonus is directly driven from customer satisfaction. Ask how many of my competitors have their bonus directly driven from customer satisfaction. Everybody in the organization gets paid off in customer satisfaction.

We have a plan. The reality is that we only built a bank in putting the two companies together, we haven't built the better bank that I want to build. But we are determined in the next few years to build that bank so that everybody, when they touch it, says it feels different.

I should be clear, I'm not advocating necessarily that you allow insurance companies to buy banks or banks to buy large insurance companies. I'm merely saying two things.

One is that you can't duck the issue. I mean, we can't have a proposal floating around that one big insurance company is going to buy a bank, and then tell me that I can't buy a bank. That's a ridiculous situation to say we're going to protect two players and say they can buy the banks, but I can't buy them and I can't buy the banks.

So you're not going to duck the insurance issue here; they are very large and successful financial institutions. They do offer you another way out of this conundrum of wanting to be large when we don't want to have fewer banks. One of the answers is to have banks and insurance companies go together, and then you don't eliminate a bank. So they are an alternative, and if you're looking for alternative ways to allow financial institutions to get larger while you're still maintaining five large banks, that's an opportunity.

As far as insurance in the branches is concerned, I frankly have never understood why the political process says let's favour producers and oppose the customers, because you have many more customers who vote for you than you have producers. But it's always been thus in Canada. You can lower the cost of insurance if you let us sell insurance, but you don't want to lower the cost of insurance if you want to help out the insurance companies. You're the ones who make the political judgments.

Á (1140)

Ms. Sophia Leung: I think we have a lot of concern about competition and being accessible.

Does your bank intend to expand by making acquisitions, etc.?

Mr. Edmund Clark: Yes, we would like to, like all our counterparts. We have Waterhouse in the United States, which already has 160 branches there. We're operating a financial services company in the United States, and we're a successful operator. We would like to look at buying regional banks that go alongside Waterhouse and grow that franchise. We think that would be good for Canadians. We now take calls from Waterhouse in the London call centre, so we've created employment in London by expanding into the United States.

That's what we'd all like to do. But there's a barrier we have to deal with, and you have to understand why the banks worry about this issue. When we try to buy something in the United States, if we use our shares, the American institutions that own the shares of the company we buy are required to sell those shares, and they all flow back to Canada. So we can't access the capital markets in the U.S. to buy those companies. If I compete with Wells Fargo to buy the same regional bank, Wells Fargo can use its shares to buy it, but effectively I have to buy back all those shares, because they'll all flow back onto the Canadian market.

That's the essence of the issue that's driving this merger debate, how we can find ways to either get big enough, if that's not a big problem to us, or have access to the U.S. capital markets so that we can grow in the United States.

The Chair: Thank you very much, Ms. Leung.

Thank you, Mr. Clark.

On behalf of all of my colleagues around the table, we very much appreciated the time and effort you put forward to come here and to answer our questions. You can be assured that this committee will work hard in our resolution of this issue.

I will suspend now for five minutes. I would again ask the media to clear the room and to hold interviews outside of the room.

We will recommence in five minutes.

Á (1143)

Á (1148)

The Chair: Good morning, and welcome, everyone. We will continue, pursuant to Standing Order 108(2), the study on the public interest implications of large bank mergers.

From the BMO Financial Group, Tony Comper, chairman and chief executive officer, welcome, sir. You have with you, I understand, Karen Maidment, who is the executive vice-president and chief financial officer; and Tim O'Neill, the executive vice-president and chief economist of BMO. Welcome to all of you.

Mr. Comper, please go ahead, sir, when you're ready.

[Translation]

Mr. Tony Comper (Chairman and Chief Executive Officer, BMO Financial Group): Thank you very much Madame Chair, for giving me the opportunity to share my views on issues that are of the utmost importance for my bank, my industry and Canada.

Since it appears that I will be the last representative of my industry to speak to the issue of mergers and public interest, at least before this committee, I will attempt to make some comments that will contribute concretely to your work.

[English]

I stand before the committee as someone who unreservedly agrees that the people of Canada indeed have an interest in any merger proposal involving our national banks and that any such proposal must address this interest. At the BMO Financial Group we recognize that if we were to be involved in a merger we would have an implicit duty to ensure that the impact on our people, our customers, and our communities was as positive as we could make it. Given the kind of business we are in, where reputation counts for so much, addressing the public interest is simply being prudent.

I'm pleased to assist you in any way I can in framing a definition of public interest that spells out with precision the public interest requirements in the event of a merger. I've arranged my comments to reflect the order set out by the Hon. John Manley and the Hon. Maurizio Bevilacqua, starting with access and continuing through choice, competition, and growth, and finally, transitional accommodations.

On the matter of access, we believe that, partly as result of expectations that we ourselves have worked hard to create, Canadians now feel that they have a right of access to a full-service bank branch offering reliable, high-quality products and services. This seems especially true in rural communities. Accordingly, we believe that it is in the public interest for would-be merging banks to state their plans for continuing to serve the rural communities one or the other is already serving. If we happen to be one of these banks, we would be prepared to commit to keeping a branch presence in these communities for a reasonable period of time, which we would define as at least three years. As with every other aspect of the case that I make for bank mergers here today, I'd like to point out that a much larger and more robust Canadian bank would logically be better able to maintain rural branches.

On the matter of choice, we're in complete agreement with the principle that personal and small business banking customers should continue to have access to a variety of financial service providers, as well as a healthy range of credit options. Consequently, we believe that merging banks should be prepared to set down the role that personal and small business banking will play in the business mix of the new bank, and make very clear what the impact will be on credit availability.

As financial results last year once again drove home to banks all over North America, personal and small business customers continue to be the backbone of our industry, so the already fierce competition in this marketplace if only going to get fiercer. On my own organization's behalf, let me state that however things turn out on the merger front, we promise to maintain our longstanding commitment to serve and support Canada's small business community. Specifically, I would guarantee that no matter what, we would allocate at least the same proportion of overall capital to this sector as the BMO Financial Group does today.

In support of this commitment, let me draw your attention to BMO's strong track record for reaching out to small business with helpful lending programs during economic downturns. By consistently keeping the credit tap on through bad times as well as good, we have more than doubled our small business lending market share since the recession of the early 1990s. While BMO is the fifth largest bank, measured by assets, we are second only to Canada's largest bank in this marketplace and are relentlessly closing in on our goal to be the leader in providing credit to small business. I'd be delighted to discuss our small business initiatives further if the honourable members are interested.

As for competition and growth, let me say that I fall in line with the sizable majority of Canadians who, when polled, say they appreciate the presence of a strong, healthy, and home-grown financial services industry in this country, and that they want to keep it that way. Whatever other reasons they may have, among the most prominent is the importance of Canada being and remaining a head office country and all that implies: high-quality head office jobs, high-qualify spin-off jobs, new opportunities for suppliers, and a host of other salutary ripple effects.

The polls also confirm, not surprisingly to me, that a majority of Canadians would be pleased to see Canadian companies grow and succeed abroad, including, of course, the United States. Furthermore, research by the BMO economics department indicates that business relationships between Canada and the U.S., already the world's most compatible partners, are continuing to expand and deepen. Based upon our own and a large body of other research, we believe that future success for an increasing number of Canadian firms and industries will lie not only on Canada but also throughout the North American economic space. It's reasonable to project that future living standards for Canadians will be highly dependent on the ability of companies in all sectors of our economy to compete and grow transnationally, just as we are doing.

Á (1150)

At BMO Financial Group our vision is to become a leading Canadian-headquartered Canada-U.S. bank. Our growth strategy is to invest in our core Canadian operations--that's our enduring major strength--while expanding selectively and substantially in high-growth U.S. markets. Just by way of example, last year 39% of our net income came from the U.S., where we're actively expanding our retail and wealth management presence--and let me be clear, we'll be forging ahead with or without a merger.

Already the BMO Financial Group is at the forefront of the drive by Canada's banks to operate successfully in the United States. In our case, with more than $75 billion in average U.S. assets, we have the highest U.S. asset base of any Canadian financial institution. Having gained considerable traction as a transnational over the past few years during a very difficult time for our industry, we are well positioned for further growth as conditions improve.

For BMO, a merger would be one way of increasing capital strength to execute our strategy more rapidly and effectively. If the government defines the public interest in a manner that in our view makes a merger viable, we will only consider partnerships that will accelerate progress towards our existing strategic goals. We believe that a carefully devised and executed merger would make the new Canadian bank and the whole Canadian financial services industry even more competitive internationally, which in turn would mean keeping even more high-quality jobs at home.

Despite what presents itself as a win-win situation all round, we at BMO recognize that it would be in our interest as well as the public's to tell the people of Canada how the expansion plans of the new bank would affect investment in Canadian operations and to commit to maintaining principal head-office activities and the high-value jobs associated with them right here in Canada. What I'm saying very much for the record is that any merger of Canadian banks should include spelled-out commitments to the Canadian people on matters of access, choice, competition, and growth plans.

If I may turn now to transitional accommodations, BMO would be only too pleased to specify exactly what actions we would take to accommodate the needs and interests of customers, employees, and the wider community over any transition period. This is something, I would submit, my bank and my industry have already learned.

We have a deep appreciation for the special kind of relationships we have with Canadians and for their expectation that we treat them with fairness, openness, trust, and respect. We feel we owe them an explanation of how a merger would affect their lives. We believe, for example, that it's in the public interest for merging banks to clearly outline the impact their proposal would have on pricing, products, and service levels.

Based on first-hand knowledge, I would submit that these and other key issues are more easily solved than they may appear. As some of the honourable members may be aware, when the Competition Bureau ordered TD and Canada Trust to divest a certain number of branches when they merged three years ago, BMO acquired 12 of them, mostly in southwestern Ontario. Conscious of the importance of getting it right with our new customers and making a great first impression, we moved quickly and decisively. On the day scheduled for account conversion, for instance, we were able to switch direct deposits and automated payments to customers' new accounts without their having to worry about a thing. We also set up a special call centre to address any questions or concerns our new clients might have, and we laid out a clear commitment to not close branches, change branch hours, reduce services, or alter pricing until the end of the transition period.

How did it work out from a customer perspective? Well, what I can tell you is that on our service quality index our new customers at the acquired branches rank us slightly ahead of the national average. While I would not presume to minimize the impact a merger might have on any individual employee, I do want to remind the honourable members that Canada's banks are very highly regarded for their human resource practices. Consequently, BMO would be happy to explain exactly how we would make use of natural attrition along with retraining and redeployment to mitigate job losses in those cases of overlap and duplication. We would be prepared to publish the principles we would follow in putting together severance packages.

If you look at how we approached the employee situation at the branches we acquired from TD Canada Trust, you'll see that we maintained existing salaries, benefits, seniority, and pensions and that in addition we created personalized learning plans for each of our new colleagues.

Á (1155)

How did this work from an employee perspective? Well, let's put it this way. Of the 186 employees of former competitors who joined us, 180 stayed with us, and as the service quality index shows, they're doing a great job of getting it right with our customers. It seems like a good point to make it clear that any merger we at BMO might consider would be in support of a growth strategy, not to eliminate jobs. There likely would be some job losses in the short term, but they would be to build a stronger organization that would be able to hire even more people and offer even better jobs. Accordingly, we'd be willing to publish job growth projections for the new bank.

I've already covered much of what I believe merging banks should provide to their communities in order to maintain current levels of access and choice. These challenges can and would be solved by selling off any surplus branches identified by the Competition Bureau to competitors with smaller Canadian branch networks, a fairly crowded field these days as this committee's hearings have already borne witness to. Speaking as one with recent experience in precisely this area, I can tell you the outcomes were positive for all concerned, employees, customers, and communities.

In 2000 and 2001 we sold 84 of our branches to quality competitors, credit unions in B.C., Alberta, Saskatchewan, and Manitoba, and the National Bank in Quebec. The result--and I think a valuable model for mergers--is that customers kept their bank and their familiar relationships with employees, who kept their jobs. The direct and indirect benefits to those communities seem self-evident, but let's not forget what branch sales can mean for smaller competitors looking to build their retail networks.

By the way, the fact that our smaller competitors now include such global colossi as HSBC and ING doesn't faze us in the least. In fact, we welcome the competition, which provides more choice for customers and more pressure for us to work harder and smarter to earn their business.

I think it's again worth noting that thanks in large part to the technological revolution our industry helped create and continues to fuel through major investments in technology, financial services customers have never had a vaster field of suppliers to choose from. Nor has there ever been a vaster array of products and services, most of them no farther away than the telephone, website, or the banking machine.

Since our founding in 1817, BMO Financial Group has continually adapted to major changes in economic, competitive, and political conditions. We have undergone no fewer than nine major amalgamations with other Canadian banks plus several more amalgamations in recent decades as we incorporated brokerage and trust services into our business mix. Now, as the consolidation of the banking industry gains force and business relationships in the North American economic space expand in size, scope, and complexity, we stand ready for the next era of change.

Our background paper provides more detailed historical, national, and international perspectives on how carefully planned and managed mergers should and can be in the public interest. It makes a number of specific recommendations BMO Financial Group would happily commit to in any merger proposal.

To summarize, we believe it's in the public interest for merging banks to outline their plans for continuing to serve rural communities, including a commitment to retain a branch presence for a reasonable length of time, perhaps three years; to spell out how the merger would affect customers with respect to pricing, products, and services; to undertake to sell any surplus branches identified by the Competition Bureau to financial institutions with smaller Canadian branch networks, such as credit unions and regional and foreign banks; to outline the role of personal and small business banking and the new bank's business mix and the impact on availability of credit; to explain how international expansion plans will affect investment in their Canadian franchise and commit to maintaining principal head office activities, along with the associated high-value jobs, in Canada; to specify how they will make use of attrition, retraining, and redeployment to mitigate job losses in cases where there is some short-term overlap or duplication; and to detail the number of the positions that will be lost in the short term and the principles under which severance packages would be made available and provide projections for longer-term employment growth resulting from the transaction.

In addition, Madam Chair, I would ask your indulgence as I make two suggestions on the merger review process itself. I would recommend that parliamentary committees have the benefit of reports from the Competition Bureau and the Office of the Superintendent of Financial Institutions prior to considering a merger proposal and that the review be conducted expeditiously so as to minimize uncertainty for employees, customers, and shareholders.

Â (1200)

I truly believe that the overwhelming majority of Canadians understand and appreciate that Canada's banks, while clearly capable of improvement, are among the best in the world and that we have played and will continue to play a vital role in job creation and economic growth. We look to this committee to take the crucial next step to ensure that Canada's home-grown banks continue to compete effectively at home and abroad. By providing a clear definition of the public interest, this committee will enable us to seize new opportunities, secure in the knowledge that our business decisions are subject to clear rules, applied fairly and expeditiously.

I thank you once again for this opportunity to share my thoughts and to start addressing your questions. Thank you.

Â (1205)

The Chair: Thank you very much.

We'll start with Mr. Harris, please, for five minutes.

Mr. Richard Harris: Thank you, Madam Chair.

Mr. Comper, thank you for your very direct presentation. You've picked out and addressed a lot of the things we've had questions about over the past several days of hearings.

From a personal point of view, I'm getting quite comfortable with the solutions surrounding the possible rationalization of branches, particularly in rural areas, and the issue of who is going to fill the void resulting from it. We heard from the credit unions and the second-tier players, who are actually looking quite eagerly to a merger exercise happening. So I'm getting quite comfortable with the responses we've heard on this.

I guess the area of small businesses is still a concern to me. These are the start-up opportunities of mom-and-pop operations needing a credit line of $25,000 or $50,000. From a bank's point of view, I know this is probably small potatoes, but the smaller businesses and credit lines up to $250,000 still form a very important part of our economy. I know the aggressive emphasis BMO has placed on getting some of the small and medium-sized business market.

I guess the question I have is that, notwithstanding this charge you're making to become the leader in small business lending, if you were to merge with, say—well, I can't pick the Royal Bank, because they have an equally aggressive small business plan—another bank bigger than you that doesn't have the same vision of the SME market that you do, how can we be assured that the vision you have could be sold successfully to your new partner so that it would continue?

Mr. Tony Comper: That is an excellent question, Mr. Harris. Let me just say that the first point I make to all of our employees is that mergers are not strategy. At best, they're tactical initiatives that would help you execute your strategy even faster than you could before—mostly because you'd have more capital. In our case, very clearly this means expansion into the U.S.

So we don't need a merger to be successful, but it would help us grow faster, particularly outside of our domestic marketplace. But many mergers don't work. As we consider our business alternatives, including mergers as one possibility, one of the important ingredients to expedite that strategy is looking for someone who shares our view of what the business mix is and what it should look like. This is a very important ingredient, because I believe that most of the major mergers you have seen, not so much in this country but outside this country, that have not worked have failed because they lacked a shared vision and cultural compatibility. So that would have to be an important ingredient for us in any proposal we would come forward with.

Mr. Richard Harris: Okay, I appreciate that. I knew you would have an answer, but I just wanted it to be reinforced for the benefit of this exercise.

Mr. Tony Comper: By the way, to supplement that if I could, we got to what we are in small business by considering every single customer as important. So there's no such thing as a customer who isn't important. We built our book by doing it one customer at a time, so there's no customer who is unimportant.

Mr. Richard Harris: I appreciate that.

You state several times that you're willing to publish and make available different ways of mitigating the impact of a possible merger. When you say that, are you speaking of it as part of a merger proposal package once you knew the guidelines? Or is it maybe something you'd be willing to share with us prior to our arriving at a public interest report for the minister?

Â (1210)

Mr. Tony Comper: It would be difficult to do that. It would be incorporated as part of our public interest impact assessment, but until there were a specific case in point, Mr. Harris, it would be very difficult to do that.

Mr. Richard Harris: I know you don't want to share any business secrets, but for example, you say: “outline their plans for continuing to serve rural communities, including a commitment to retain a branch....” Would that be clearly spelled out in a merger proposal, as would a lot of the other points--

Mr. Tony Comper: Yes, it would.

Mr. Richard Harris: All right, thank you very much. Time flies in this business, thank you.

[Translation]

The Chair: Mr. Paquette, you have five minutes.

Mr. Pierre Paquette: Thank you, Madame Chair.

First of all, I would like to ask a short question. It's about a bet I made. I would like to know what the “O” in BMO means.

[English]

Mr. Tony Comper: In fact, it's the stock exchange symbol on the Toronto, Montreal, and New York stock exchanges. So it's the call signal for the Bank of Montreal.

[Translation]

Mr. Pierre Paquette: Thank you. I am afraid that I have just lost my bet.

You say in your document:

...a much larger and robust Canadian bank would logically be better able to maintain rural branches.

I seriously doubt that. In fact, all of the bankers who have appeared here have admitted, very transparently—and I congratulate them on that—that if they wanted to proceed with the merger, it would be first and foremost to free-up funds in order to proceed with acquisitions elsewhere.

So we are on a playing field that is more continental or international in nature. In that context, nothing guarantees that a Canadian mega bank will be interested in rural communities or poor neighbourhoods. Moreover, the Bank of Montreal, the National Bank, and other banks are already giving up on some neighbourhoods and regions. For example, look at the east side of Montreal, where there are virtually no bank branches, but where there are Caisses populaires.

In short, how can you say that a much larger Canadian bank would logically be better able to serve rural communities? You are also undoubtedly talking about the entire community.

[English]

Mr. Tony Comper: Let me just take a case that I was thinking about. Say there were two banks proposing to merge in a community, and each had a branch. The branches were economically okay, but there wasn't much growth. If the banks made individual decisions, they might each decide that those branches were not economically viable and that it might be a smarter choice to close those branches, given that the population had diminished or was stable, etc. But if you had those two banks merging, you could now have one larger branch that might have completely different economic characteristics. So you could make a case that you could preserve the local branch presence in that one community, as opposed to closing down two marginally attractive branch operations.

[Translation]

Mr. Pierre Paquette: You talk about commitment; but several people have already pointed out that if some banks are to merge, commitments should be made about access to a variety of services.

One provision of the Act already enables the Minister of Finance to negotiate low-cost accounts with banks. I would like to know if the Bank of Montreal and BMO have entered into discussions with the Department of Finance on this provision of the Act that was adopted in June 2001.

[English]

Mr. Tony Comper: Are you referring to the existing memorandum of understanding we have agreed with the government to provide...?

Mr. Pierre Paquette: Yes.

Mr. Tony Comper: We've already signed that agreement, which is in place.

[Translation]

Mr. Pierre Paquette: But what has that actually happened as regards your accounts? What types of accounts correspond to this notion of low-cost accounts?

[English]

Mr. Tony Comper: They are basic operating accounts, and individuals have access to them. They provide for an agreed-upon low service charge rate, on a monthly basis, and a certain number of transactions are available to all the people who apply for it.

Â (1215)

[Translation]

Mr. Pierre Paquette: I have one last question.

We all know that if the government were to consider bank mergers, there would probably be two or three proposals on the table. How do you see the process unfolding in that context? Should the government take into account all the projects that are on the table and choose the best one in terms of economic considerations, or in terms of the public interest?

There is also the possibility that two proposals may be accepted. However, even senators, who are very much in favour of bank mergers, said that one merger would be possible, but that a second would be unlikely. In short, in these circumstances, what process should be used to choose the best or the two best merger proposals?

[English]

Mr. Tony Comper: It's somewhat speculative, and I don't think there's any kind of right number. But the government has laid out the process, and I think, frankly, the process should be followed for anyone who wants to come forward with a proposal, and it should pass the tests of safety and soundness as adjudicated by OSFI. Does it diminish competition? That's the job of the Competition Bureau and the Competition Act. Does it meet the public interest test? That's what this committee and the Senate committee are in the business of defining.

So anyone who wants to come forward with a proposal should have to pass those hurdles and pass those tests, and the government will then decide on its merits, being informed by the advice of this committee, among others.

[Translation]

The Vice-Chair (Mr. Nick Discepola): I would now ask Mr. Cullen to proceed with his questions. You have five minutes.

[English]

Mr. Roy Cullen: Thank you, Mr. Chairman; and thank you, Mr. Comper.

First of all, I'd like to congratulate Mr. O'Neill, the new president of the National Association for Business Economics, the first Canadian and the first non-American. I think Canadians should be proud of that.

Mr. Comper, in approaching bank mergers, we heard from Mr. Clark just before you, and I think the scenario he described was that the government, the Minister of Finance with presumably the backing of the Prime Minister, or whatever kind of governance model was in place, would say we're open in principle to some consolidation, subject to OSFI, the Competition Bureau, and the public interest tests enunciated by this committee and the Senate committee. I don't know; it's conceivable that they might say they have an appetite for maybe one, two, or three, or maybe no limit. I'm not sure, but let's say that was defined by the government at the time.

Another scenario would be that banks would come forward and certainly meet certain minimum tests that would be set out by this committee, but there would be, in a sense, a competition of ideas. In other words, because of the bulking up domestically, two banks merging would be able to offer, in terms of the domestic customers, better products, better services, and maybe more access, because they have to deal with another company to pick up the branches--at least that's dealt with--and then, in terms of small business lending, maybe new products, new opportunities because of the bulking up.

In other words, I know, when I was in management consulting, we would always bid. There would be certain baseline minimal requirements. You have to meet those tests. But to win the project, we would sell it on the basis of making it more attractive to the client.

What is a preferable approach, to just set minimum thresholds so that everyone knows that if you meet those minimum requirements, then subject to the government's appetite for consolidation, that would go, or that there would be a competition of which proposals would do the most for Canadian consumers?

Mr. Tony Comper: I think the former would be the preferable approach. I don't think it should be based on picking proposals because they have the optics of looking better, or something of that nature. Frankly, I think the job of the government and of this committee is to lay out the groundwork to provide some clarity around what the expectations of the government are with respect to meeting the public interest test.

So my own preference would be for setting out a certain set of rules, and if you pass the rules, then the government can decide on the merits of the proposals.

Mr. Roy Cullen: Okay, thank you.

When Doug Peters was here the other day, he made the point that once a merger is done, it's done, and it's hard to back up. So in terms of undertakings that a bank or two banks might make as to closures, the way they treat employees, any new products, or whatever, how does the government ensure that those undertakings will be realized?

Â (1220)

Mr. Tony Comper: It's a good point, Mr. Cullen. I think what I would point out to you there is that I would take instruction from the findings and the recommendations of the MacKay task force in 1998, where Mr. MacKay and his colleagues fairly clearly spelled out the concept of enforceability. We would be supportive of those rules as laid out in the MacKay task force.

Mr. Roy Cullen: Okay.

What we've heard from the HSBC and the credit unions is that in fact there might be more competition in some of these areas, where the Competition Bureau would say you have to divest, and so you'd have new players, and that might create more competition. I think you've said you'd welcome that competition.

You've acquired some of the branches from the TD-Canada Trust merger--

Mr. Tony Comper: Correct.

Mr. Roy Cullen: --and also, the credit unions took some of your branches.

Mr. Tony Comper: Right.

Mr. Roy Cullen: How have you found that experience? You talked briefly about it, but maybe you could expand on the kinds of competitive issues or competitive realities following those sorts of transactions.

Mr. Tony Comper: The circumstances were in fact somewhat different in the case of the branches we divested versus the ones we acquired. On the branches we acquired from TD Canada Trust, 10 of the 12 were in southwestern Ontario, mostly around the Kitchener area. For a whole series of historical reasons our distribution in that area was somewhat weaker than our competition's, therefore it was very attractive for us to acquire the ten branches and the client base that went along with them. That has improved our competitive position.

As I mentioned in my comments, we measure our client satisfaction scores, and our former competitors who are now our colleagues are doing a very good job of getting it right with our clients in this area. So that experience improved our ability to compete in that marketplace.

TD and Canada Trust weren't exactly overjoyed that they had to divest themselves of those branches, because they were pretty attractive. That's a very attractive and fast-growing part of the country, as you know. I think the competition has seen the impact of our increasing the competition in that area. It's a very competitive marketplace.

In the case of the branches we divested--and it speaks to the point of maintaining service in the local areas--we were also not particularly anxious to divest of those branches, frankly, but they were relatively slower-growth areas in our network. But they were attractive from the perspective of the credit unions and the National Bank in Quebec that bought those branches, because they didn't have distribution in those areas.

So the experience was that we kept the branch in the local community, we kept all the employees, and we kept access to service. The credit unions were happy; we got our resources and were able to deploy them in what, from our perspective, were faster-growing areas, and things of that nature. So everybody won on that experience, I think. That was certainly the feedback we got from the municipal and provincial politicians.

The Chair: Thank you.

We'll go to Ms. Guarnieri.

Ms. Albina Guarnieri: Thank you, Madam Chair.

I'd like to thank you for being one of the first representatives of the major banks to suggest merger requirements that might begin to satisfy some of the concerns we've heard over the years by so many presenters. Until now, we've basically seen benefits to the banks and potential risks to businesses and other consumers. So it's encouraging to finally see someone addressing these issues head-on.

In your opening remarks you referred to an issue we've heard about frequently from Catherine Swift and the Canadian Federation of Independent Business. She presented evidence, when she appeared before us, that loans and credit lines to small businesses with authorized loan limits of $200,000 or less had flatlined over a decade, while loans to larger companies had grown more than 30% in terms of capital.

Today, if I understood you correctly, you offered a guarantee that no matter what, you would allocate at least the same proportion of overall capital to small businesses as BMO Financial Group does today. Are you really saying that without a merger, loans to businesses needing $200,000 or less are likely to remain stagnant, but with a merger such loans might actually increase by keeping pace with larger loans?

Correct me if I'm wrong, but it sounds as if you're offering not the status quo but a significant improvement over time for small businesses. Is that a correct assessment?

Â (1225)

Mr. Tony Comper: That's a correct assessment. Let me just add a little bit of a qualifier to that, though. I'm just not familiar with Ms. Swift's data. That doesn't jive with our own numbers. In fact, we've seen a fairly significant growth in our outstandings to small business, as indicated by our growth and market share.

I'd like to underscore that banking for small businesses is good business. It's very attractive business. So for 15 years now we've been really focusing on growing that particular segment of the business. It will continue to be attractive for us, and if we were involved in any prospective merger, the merger partner would have to find it equally attractive. It's good business.

I can assure you that the government doesn't have to make us do anything to lend to small businesses. It's very attractive business and will continue to be so. In fact, our outstandings in the lower end have also increased year by year over that period of time you mentioned.

Ms. Albina Guarnieri: Thank you for providing some clarity and, hopefully, some opportunity for small business.

You know that one of the compelling possibilities of these hearings is that we might find a way that the mergers could actually broaden benefits to the public, including small businesses, rural communities, and aboriginal communities. What we've seen in the past, and what there seems to be widespread support for in the public, is that it's far better for the government to compel banks or other companies to deal with social or structural problems in our economy than to set up larger bureaucracies.

An example of that is the issue of mortgages on native reserves. Traditionally, the government has failed to really do anything to permit people to use their houses as collateral for loans and mortgages, and as a result, development has been very slow in that area. I understand that your bank, for instance, has a program that targets this particular problem. Perhaps you would like to tell us something about it and consider whether the expansion of that program should be one of the concessions you might want to offer for a merger deal.

Mr. Tony Comper: Thank you for the question. It's actually quite interesting, because it's a classic example of what I characterize as the law of unintended consequences. As you said, the Indian Act precludes taking collateral or mortgage security on houses on reserves. As a result, no one will finance them.

To address that problem, about a dozen years ago our colleague Ron Jamieson started working with first nations across the country. It took us a couple of years. It wasn't easy, but we managed to develop a technique, without government guarantee, to lend on-reserve and to finance the construction of housing. I won't get into all the nuts and bolts of how it works. We now have that program operating in 14 of the first nations locations across the country. It's a bit complex compared to the normal mortgage lending kind of process, but it works very well. It has served, I think, a legitimate need on the first nations properties where we're located.

Ms. Albina Guarnieri: Mr. Godsoe provided us with some insights into his continental dream. Perhaps you would like to share some of your insights and future plans for your bank.

Mr. Tony Comper: We're indeed fortunate that one of my predecessors had the vision to see that growth for Canadian banks was going to be important, particularly in the continental U.S., as we go through the consolidation. That has given us the position where we're already larger in the U.S. than all the other Canadian banks, and we're continuing to build on that.

The thrust of the strategy really has two prongs. You can't be successful outside your domestic market unless you're very strong in your domestic market. So we'll always continue to invest in that core franchise of the BMO Financial Group in Canada. However, selective but substantial growth in the U.S. is where we're going, because there's such fragmentation in the banking industry in the United States that growth by acquisition, as well as organic growth, is a more attractive proposition, and we need the capital resources to do it.

As we look ahead, we can see that the Canadian and U.S. economies are integrating at a blinding pace. My colleague Tim has just done a very interesting piece of research on the integration of the North American economies.

By the way, it's a good thing for Canada. You'd be amazed at how many Canadian companies are competing successfully in the U.S. In fact, foreign direct investment by Canadians in the United States is almost at the same quantum as U.S. foreign direct investment in Canada, which is a surprising number when you normally expect the ten-to-one rule to apply. So Canadians are doing very well.

If that happens, we believe that the future will be for the Canadian banks to become transnational players, having significant footprints on both sides of the Canada-U.S. border, serving Canadian clients, American clients, Canadian clients who are participating in the U.S., and American clients who are participating in Canada.

That's our vision as to where it's going. That's where BMO Financial Group aspires to be. In fact, we're already there. We'll continue to grow at a faster pace, but we're disadvantaged to the Americans, who have a more expensive currency and are able to grow by acquisition.

Sorry, Madam Chair, you can tell I get excited.

The Chair: Thank you very much.

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Ms. Albina Guarnieri: I would ask, then, if we could prevail on them to make some of that research available.

The Chair: The package containing the integration manual is being circulated today.

I have four more questioners on my list. If that's fine with you, Mr. Comper, we'll allow all four to ask their questions.

Mr. Tony Comper: Absolutely.

The Chair: Go ahead, Mr. Nystrom.

Mr. Lorne Nystrom: I have a couple of questions.

First of all, welcome to the committee.

Mr. Tony Comper: Thank you.

Mr. Lorne Nystrom: My question really is on the role of our committee in the future, and democratic accountability.

We had the Senate banking committee recommend that we perhaps do not need the House of Commons committee to look at a specific future proposal of a merger of a bank. Your colleague Mr. Nixon, of the Royal Bank, agreed with that, and so did Mr. Raymond de la Banque nationale. Peter Godsoe didn't agree with that. He suggested we might need the finance committee to look at the public impact of a possible future merger.

Where do you stand on that issue in terms of whether or not we need the finance committee to look at a possible merger in the future? To me, democratic accountability is extremely important. We represent people across this country.

Mr. Tony Comper: I think that's a moot point, because the Minister of Finance has asked the finance committee to opine on the public interest.

One, I think that's important, and two, I think it's the charge he has given to the committee. I agree with that totally. So I absolutely support your view that there is a role for this committee on that interest.

Mr. Lorne Nystrom: I'm glad you agree with us and agree with Mr. Godsoe.

There's a Standard & Poor's report that was out about a year ago, and they're talking about the bank merger situation, talking about all the layoffs that might occur if there's a bank merger. They say in part here, and I'm quoting here from them:

In addition to the government's fears of undue concentration in the Canadian banking market, massive layoffs as a result of bank mergers would result in political suicide.

How would you persuade a government to commit political suicide? Mr. Discepola is a very difficult guy to convince, and how would you convince him if you have tens of thousands, or just thousands and thousands, of layoffs from bank mergers? How do you persuade any government that they're going to be properly accountable for those layoffs? That's a real concern amongst the public.

Mr. Tony Comper: Of course, that's what I tried to address in our presentation, which is that the issue of job losses should be spelled out. That's one of the things I would, with respect, suggest that the committee might want to specify as one of the key elements of the public interest.

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Mr. Lorne Nystrom: Your bank of course bought the Harris Bank a number of years ago in the United States. The same Standard & Poor's report I'm looking at here said that the Harris Bank has been a stable operation for the Bank of Montreal, but it's not really a dynamic performer for the Bank of Montreal.

Now, how would a merger help this in terms of making it more dynamic?

Mr. Tony Comper: To start with, I don't accept the premise that it hasn't been dynamic.

In 1978, the Harris Bank had one branch in downtown Chicago. By the way, every single bank in Illinois had one branch; that was the law. Talk about the law of unintended consequences: now it has 145 branches and a million retail customers.

So we've transformed it from basically a downtown wholesale branch into a retail and commercial branch, in a market--this is the greater Chicago area; “Chicagoland” is what they call it--that has a GDP 40% of the gross domestic product of Canada, the city of Chicago. This is a very attractive marketplace, and as I said, we have tripled the size of the bank in the last few years in particular, and are growing it, and we're growing it at a very rapid pace.

But the fact of the matter is that if we had twice the capital we have right now.... In U.S. dollars our capital is about $13 billion, our market capitalization. We're up against banks in our marketplace that are growing by acquisition. They have significantly higher market capitalizations, and they have a U.S. dollar, which is worth significantly more than the Canadian dollar. So we're competitively disadvantaged to pursue not the organic growth strategy but the growth by further acquisition.

We're doing them. We've done 10 acquisitions in the last couple of years, all in the United States, but it's a much more expensive proposition for a Canadian bank with the market capitalization the way all of us have to pursue it. We can't go toe to toe with the likes of Bank of America, or Wachovia, or--

Mr. Lorne Nystrom: Maybe I'll ask the question in a different way, since you've done so well in terms of what's happened with that particular example. You obviously disagree with Standard & Poor's, but you've done very well.

Supposing the bank merger that was proposed back in 1998 would have occurred between you and the Royal. What would be the script of this book, written in terms of how much more dynamic the Harris Bank would be in the United States? You would have had the merger of the two big banks four years ago. How much better would it have been? You've done very well. It's very dynamic. Would it be super-dynamic, or how much bigger would it have been? Can you write that chapter for us?

Mr. Tony Comper: It's hard to speculate precisely, but we would be considerably larger. The combined assets would be considerably larger than they are today.

Mr. Lorne Nystrom: Yes, I know they would be larger, but do you have any idea how many more branches there would be here, or how much bigger it would be, or how many more people it would employ, or how much bigger the bottom line would be for this new merged bank? Can you be a bit more precise on that?

Mr. Tony Comper: It's hard to, Mr. Nystrom. It's really speculative, and it would be hard for me to do that.

Mr. Lorne Nystrom: So this is really a leap into the unknown. It's your best judgment, it's not a precise science.

Mr. Tony Comper: Let me go back and just take a page out of history. What's going on in the U.S. financial services industry, in the consolidation phase that's going on right now, is that there were 14,000 banks 10 years ago and there are 8,000 now. So we're seeing a wave of consolidation.

Looking back at Canadian history, that's exactly what happened in Canada from 1890 to 1920. We had not 14,000 banks, but an awful lot more than we have today. We went through a wave of consolidation. By the way, there was as much political angst at the time as there is today over the issue of bank mergers. So this was not a walk in the park.

The result, though, is that Canada has one of the finest banking systems in the world. So there were economic and social policy considerations around consolidation. The Government of Canada facilitated and allowed that to happen, and we wound up with a very strong banking system.

But you can't stand still. You must continue to grow, and if you're going to continue to contribute to the economic growth and prosperity of Canada, you have to continue to grow. Mergers are one way of doing it.

Mr. Lorne Nystrom: Thank you very much. And the reason for angst is that you do have a licence to print money. That's why people are concerned.

The Chair: Thank you very much, Mr. Comper. Now we'll go to Mr. Wilfert, followed by Mr. Brison, followed by Mr. Discepola.

Mr. Bryon Wilfert: Thank you, Madam Chair. Mr. Comper, thank you very much for your presentation.

We want to maintain our banking system, and I think we do have a very strong banking system in Canada, one that's the envy of the world in terms of how it works.

At the same time, I hear that many mergers don't work; you mentioned that today, and Mr. Godsoe mentioned that up to 70% have failed. We've seen what's happened in Japan, and bigger isn't necessarily better.

You mentioned two things. You mentioned, one, the cultural aspect when two diverse elements come together, in this case two different banks--so cultural issues and, secondly, the shared vision issues.

I would commend you on your paper, “The Public Interest and Large Bank Mergers”, because it's probably the most cogent piece I've seen so far, and because of the fact that in it you've come up with six key recommendations on the public interest, which I think is extremely important. I note particularly--as you mention on page 2--that you say, “mergers can serve the public interest only when they contribute to higher economic growth and rising living standards for Canadians” .

I have said before that I think the international argument that has been made by the banks I would generally accept. My concern is on the domestic front, keeping a strong Canadian-controlled financial sector, and I'm struck by what you presented today, by what you said about small business, and what Mr. Godsoe said about small business. I've heard all of these who say that isn't.... When Catherine Swift of the CFIB was here, she had a lot of concerns from her members, and both you and others have said that doesn't jive with what we have.

If I accept what you've told me, the question is how do we get clarity in terms of your lending policies and in terms of your service record? I have asked the question. I'm going to ask it a little differently.

I know in the U.S. they have the Community Reinvestment Act and I'm not suggesting that I necessarily want to see that replicated here, but you had to go through that in the United States, the different financial system. But we need to assure Canadians, and certainly small businesses, that whatever happens--and I will take some of your suggestions in here to heart--the access for the financial dollars they need in order to be able to do business will not dry up.

I'd like you to respond to those two aspects as well, and also maybe to touch on the fact that you've also suggested that in your bank you see this broad vision of going into the United States and expanding. Where do you see that in terms of any ownership implications in Canada down the road?

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Mr. Tony Comper: Mr. Wilfert, the best way I can respond to your first question, which is how can I assure you and comment on the access to credit, is that for more than 15 years now we have been consistently focusing on the small business segment and we wouldn't have doubled our market share if we weren't consistently there in good times and in bad, particularly in the recessionary climate of 1990-91 and again when we had the softening and downturn a couple of years ago.

We have been consistently out in the marketplace and consistently there for our small business clients. And why? As I said, because this is good business. It's not because we have to be compelled to do so, but because it's a very attractive business. In fact, we think the retail and commercial business, the small business, is the cornerstone in our domestic franchise.

So I think our track record speaks for itself, and as I said, I wouldn't propose to contemplate, among all of our choices, merging or consolidating with someone who didn't share that view of how important that business is.

On the second part of your question with respect to growth in the United States, could you help me one more time with that?

Mr. Bryon Wilfert: I know that seems to be one of the options that you.... All the banks have indicated that it's not the issue in Canada, because it's pretty solid in terms of the players here. It's this international component, which I certainly understand. I just get a little concerned, actually more than concerned, when I hear the word “integration”, when I hear the words that “maybe we'll have to change the ownership aspects that presently exist in Canada in order for us....”

We're very different from the United States, and sometimes people want to take the best of what they think they see in the U.S. and disregard those implications. And because mergers in fact have a 70% failure rate, we won't get another chance. We either do it right now or we'll have catastrophic implications, I would think, for the Canadian financial sector and for Canadians generally--and again, I go back to some of the issues that I see in Japan.

Mr. Tony Comper: With respect to the ownership limitations, I don't think we need ownership limitations to stop us from having competition. I'm all in favour of competition coming here. The fact of the matter is, though, that the public policy with respect to it has allowed the Canadian financial services industry to grow and become what it is in Canada today. We've been very well served by those policies, but we don't need them to be able to compete.

So there's a public policy issue that is important and by which we've been well served, but it's not necessary for us to compete, and I'm all in favour of providing the level playing field and allowing the competition to be here.

But simultaneously, the part that goes with that is that you can't, I believe, hamstring our own financial services industries while simultaneously allowing those who aren't constrained by similar rules to come in here and compete. I believe in the level playing field and I think it's going to be necessary if we're going to continue to grow.

Mr. Scott Brison: Thank you, Madame Chairman and thank you, Mr. Comper for appearing before us today. I also recognize a fellow Nova Scotian, Tim O'Neill, here today. It's great to have you here, and we're very proud of your success and your most recent recognition.

First, congratulations on some of your programs with regard to small business. In the Hill Times there was a recent advertisement telling us, I think, of business loans at prime. I came from a small business background and wish I could have received business loans at prime. Maybe I wouldn't qualify today; I'm not sure. It's until March 31? I think it's a good initiative.

There's an inherent public impact review process already. OSFI, the Competition Bureau, labour laws: these are very tough hurdles to go through. Further to that, you have a finance minister representing a government that faces an electorate every three to four years. That, in and of itself, is a public impact review process. It's your job to help make that government's job easier in terms of selling these things to the public.

In 1998, at the time of the proposed merger between your bank and Royal Bank, you proposed to then Minister Martin a doubling of small business lending, setting up a separate bank for small business lending, lowering service charges, providing job guarantees and services to rural communities. I think, really, your em-PHAS-is has been on the wrong syl-LAB-le, to a certain extent, because I don't think this government is looking at it from the perspective of public interest. I think you could offer free beer to every bank customer on Fridays and it wouldn't make a huge difference. I think it has more to do with politics than with public interest, from this government's perspective.

This summer we had a finance minister who quietly said yes to proposed mergers; in the fall, a Prime Minister who said no to mergers until after he retires. Given the sulphuric, politically charged banana republic approach this government is taking toward your sector, do you actually expect to see any successful merger proposals before the next federal election?

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Mr. Tony Comper: What I expect to see, Mr. Brison, and why I'm here, and what I think the charge is that the minister has given to this committee, is to spell out the rules; to lend clarity to the process, so that over and above those issues that are clearly within the mandate and the scope of OFSI and the Competition Bureau—safety and soundness and whether there will be competition—you can ask whether there are any other issues.

Meeting the public interest test has been one of the elements in the merger approval process. There has been a lot of ambiguity around what would serve the public interest. My view is that's why the Minister of Finance has charged this committee with a brief to ask what else, over and above anything that might arise from OSFI and the Competition Bureau, is required.

Mr. Scott Brison: But four years have passed—in fact, over four years—since you addressed issues like small business lending, like service charges, like job guarantees, like rural communities and service to rural communities. What public interest criteria would go beyond that which you've already addressed in mergers before? I think I'm one of the few members of the committee who was here then and is still here today. I find it frustrating that we're still dealing with this issue four years later, during a period of time when there's been unprecedented change in other countries in the way they approach their financial services, merger and consolidation, and all kinds of advancements and changes. I fear Canada is falling behind during that period because of the political uncertainty that exists in Canada.

What other criteria, beyond that which you've covered four years ago, beyond that which you have voluntarily addressed today, could you possibly address as part of a new set of requirements and a public impact review process?

Mr. Tony Comper: That's precisely what I'll be expecting to see as the outcome from this committee work, Mr. Brison, whether there's anything over and above the obvious areas, which I think we all agree on--access to credit, access to services in rural communities, and things of that nature.

Mr. Scott Brison: Maybe I'm on to something with this free beer thing.

Mr. Tony Comper: But remember the process. At the time of the last merger proposals in 1998, the government was very clear. They said, time out, that you guys were jumping the gun, pre-empting the process. They had to get the MacKay task force finished, then they had to go through Bill C-8 and put in place a merger approval process.

All that machinery is now in place, and the one missing ingredient is whatever might arise from the Senate committee or this committee with respect to the definition of the public interest test. Then we will have, I hope, clarity around the rules of the game and the rules of the road.

Mr. Scott Brison: But capital markets don't like uncertainty. Given all the political uncertainty the government has created, and after the Prime Minister's latest edict against bank mergers, the bank stocks dropped, I think, 3% as a result. And given that 9 million to 10 million Canadians own bank shares directly or indirectly, couldn't it be argued that what we're doing here today is contrary to the public interest, that this continuation of endless debate that isn't going anywhere is not in the public interest, and that what is really lacking is political leadership--a government, a finance minister, and a Prime Minister who simply say yes or no? Either propose bank mergers or bugger off and don't bother us with them for a period of time, because I think this is really getting frustrating for all us, including you.

The Chair: You're over time, Mr. Brison.

Mr. Comper, would you like to answer?

Mr. Tony Comper: I would certainly agree that the more expeditiously we can get the process completed and defined the more it would be in our interest and in the interest of all Canadians.

The Chair: Thank you.

You have the last five minutes, Mr. Discepola.

Thank you, Mr. Brison.

Mr. Nick Discepola: Thank you, Chair.

When the Competition Bureau and OSFI testified in front of us, they alluded to a process in 1998 that, if my memory serves me correctly, was in excess of nine months. The legislation now calls for a review process to be completed within five months. I think the industry pretty well accepts five months, and I'm wondering if that is acceptable from your perspective--including the review by this parliamentary committee, which seems to be favoured.

Do you feel that timeframe is appropriate? I'm asking this in the context of one of your responses to Mr. Cullen. I don't want to paraphrase you, so you can take all the time you need in answering.

You seemed to indicate that you're in favour of first in, first out. The Competition Bureau and OSFI also seemed to indicate that they would have to be compelled through regulation or legislation to address the first merger request before it entertained the second.

I'm wondering, in fairness, how we could entertain only the first in-first out. Would you be willing to accept our entertaining a TD and CIBC merger before yours, or should we allow a window of opportunity for anyone to make a proposal and then enter into discussions and analysis on both?

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Mr. Tony Comper: I'm sorry, Mr. Discepola, if I gave you the impression that I was in support of first in, first out, because I'm not. What I thought I had said was that the process is there and I believe it should be available to any proposal that wants to have access to the rules of the game. So I don't believe I would be supportive of a first in, first out concept. I think we should deal with them all.

As to the timing, the merger approval process has specified five months as a reasonable time for all the work to be done, and I would agree with that. I certainly would not be in favour of dragging it out too long. Mr. Brison made the point about capital markets hating uncertainty, and so does everybody, including our employees, customers, and other people who might be affected. But we could certainly live with the five-month timeframe outlined by the merger approval process.

Mr. Nick Discepola: Technically, you've been able to merge since 1998. Why haven't you?

Mr. Tony Comper: I think because the government has said there are a certain number of things we have to do and we have to define the rules of the game. That includes the MacKay task force, Bill C-8, the merger approval process, looking at the three tests--OSFI, the Competition Bureau, the public interest--and finally, the Minister of Finance has charged this committee and the Senate banking committee as the final step in that process.

Mr. Nick Discepola: One of the main stumbling blocks--and it's been discussed ad nauseam--is ensuring that there would be additional capital for small businesses. Some would argue that maybe you should start by lending to small businesses, and you've heard testimony with the CFIB and others.

I remember in 1998--I was here, Scott, like you--when Mr. Barrett came in front of--I'm not sure--Mr. Ianno's committee or the finance committee, and he undertook to create a small business bank. I thought that was a great initiative.

If the need was there in 1998, why hasn't the need been there since 1998? That's the cynicism, when you say you are in favour of increasing capital to small businesses.

Would you be in favour of not only disclosing your lending statistics, as you've indicated, but having some form of quota...? I don't like to use the word “quota”, because I know you're going to jump in your chair, but if you don't impose some sort of quota on additional lending or maintenance of your existing lending practices...how else could you have ensured that Mr. Barrett would have started up his small business bank and that we would be here now without this question, as opposed to maybe selling his shares and going off to London, England, or something like that?

The Chair: I think we'll wait for the answer.

Go ahead, Mr. Comper.

Mr. Tony Comper: Thank you.

With respect, the only thing I would suggest is that I'm not in favour of a quota system because it implies that we wouldn't be supportive of small business absent some compulsion to do so. The point I've tried to make is that small business is good business. You don't have to compel us to do it. We've been doubling our market share over the last 10 years and have been consistently supporting small business because it makes sense. It's economically attractive to do so.

If some of our competitors don't share that view of this business, fantastic, because it makes more of it available for us. But our view, very clearly, and it's based on sound economics, is that this is a very attractive business. You don't have to compel us to do so, because we like the business.

Mr. Nick Discepola: Then how would you reassure the small business community? We've had much testimony to that end, and I think it's been ongoing since 1993-94, when I was on the industry committee and we studied access to capital.

Nothing has been resolved. You still hear anecdotal evidence to the effect that maybe small businesses haven't been given access to capital. Some of the worries are that if we do allow bank mergers to go ahead and if you do enter foreign markets, for example, the Canadian consumers, be they small business or otherwise, might bear the brunt of some of the losses you would incur in entering these foreign markets.

You know very well it's going to be a certain time period before these ventures become profitable, so you're going to incur some losses in the short term. How can you guarantee us that Canadians won't bear the brunt of that?

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Mr. Tony Comper: Well, in our case I think our track record speaks for itself. While we've been expanding in the United States, we have been consistently supporting small business in this country.

Small businesses finance themselves in several ways. As you know, one of the ways is borrowing from banks--and other providers, by the way. There are lots of providers of credit. They also finance themselves; they need equity capital. About eight years ago we established Bank of Montreal Capital Corporation, which is a venture capital subsidiary targeted towards small businesses and very small-ticket items. We now have more than $400 million outstanding in equity capital to small businesses across the country, and that's one of the ways we have responded to that need.

In our case, in terms of our track record of expanding in the U.S., in fact we started in the U.S. in 1818. We've been there for 184 years, and we've built up a fairly successful track record. Our operations in the U.S. are very profitable, and Bank of Montreal makes 39% of its net income from the U.S.

Canadians don't typically think of banks as export industries, but in fact we're a fairly significant exporter of services and products, and a lot of that income comes back and pays dividends to the Canadians who own the banks.

The Chair: Thank you very much. On behalf of all the colleagues around the table, I thank you for preparing a brief and coming to us today to answer our questions.

We are adjourned until this afternoon, when we'll have our final oral witness, Mr. MacKay.

Thank you.