FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Thursday, February 6, 2003

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1535

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

Mr. Harold MacKay (Former Chair, Task Force on Future of the Financial Services Sector, As Individual)

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1540

¹

1545

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1550

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1555

The Chair

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

Mr. Harold MacKay

Mr. Richard Harris

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1600

Mr. Harold MacKay

Mr. Richard Harris

Mr. Harold MacKay

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1605

Mr. Richard Harris

Mr. Harold MacKay

The Chair

Mr. Pierre Paquette (Joliette, BQ)

Mr. Harold MacKay

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1610

Mr. Pierre Paquette

Mr. Harold MacKay

Mr. Pierre Paquette

Mr. Harold MacKay

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1615

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Harold MacKay

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1620

Mr. Roy Cullen

Mr. Harold MacKay

Mr. Roy Cullen

Mr. Harold MacKay

Mr. Roy Cullen

Mr. Harold MacKay

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1625

Mr. Roy Cullen

Mr. Harold MacKay

The Chair

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

Mr. Harold MacKay

Mr. Lorne Nystrom

Mr. Harold MacKay

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1630

Mr. Lorne Nystrom

Mr. Harold MacKay

Mr. Lorne Nystrom

Mr. Harold MacKay

Mr. Lorne Nystrom

Mr. Harold MacKay

Mr. Lorne Nystrom

Mr. Harold MacKay

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1635

The Chair

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

Mr. Harold MacKay

Ms. Sophia Leung

Mr. Harold MacKay

Ms. Sophia Leung

Mr. Harold MacKay

Ms. Sophia Leung

Mr. Harold MacKay

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 041

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Thursday, February 6, 2003

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Welcome, everyone. Pursuant to Standing Order 108(2), we are studying the public interest implications of large bank mergers.

    Today we're very pleased to have with us Mr. Harold MacKay, the former chair of the task force on the future of the financial services sector. Welcome, Mr. MacKay. I'm going to give you the floor to make your comments before we ask some questions.

    Mr. Harold MacKay (Former Chair, Task Force on Future of the Financial Services Sector, As Individual): Thank you very much, Madam Chair, for the invitation to be with you and your committee this afternoon. This is actually my second opportunity to meet with the committee. The first was in the fall of 1998, when I met with you to discuss the report the task force had delivered to the Minister of Finance, it being my privilege, as you've just noted, to chair that group. Since that time a good deal of water has passed under the bridge. We've seen Bill C-38 and Bill C-8. Many of our task force recommendations were, in fact, implemented in those legislative packages. I believe, however, the delay in getting that legislation in place--understandable delay, given its complexity--does mean we're only now beginning to see some of the fruits of that new framework.

    This afternoon I know you're interested in one issue in particular, the public interest criteria in the bank merger review process. I suppose it is appropriate that I should speak to you about this, because it was our task force that first proposed that there should be such a formal process. I should emphasize to you this afternoon that the views I'm going to express are my personal thoughts; I have not consulted my task force colleagues.

    First, a bit of history. Prior to the creation of the task force there was an ill-defined policy of the government that “big shall not buy big.” The Bank Act required ministerial approval of any bank merger, and the Minister of Finance had unfettered discretion as to whether to give the approval. The policy, which was only vaguely enunciated, was understood by the market to mean the minister would not approve a large bank merger in any circumstance, the subject was simply off the public agenda. One reason for setting up the task force in 1996 was to zero in on this question and determine whether this policy was in Canada's interest. We decided it was not. As we said in one of our background papers:

An approach that prejudges merger proposals as unacceptable without examining the costs and the rewards is simplistic and not good public policy. Canadians are the ultimate victims of such an inflexible policy.

So we rejected the “big shall not buy big” policy, and instead we said a merger proposal should be judged on its own merits.

We recognized that a merger of any two of the big five banks would be the subject of significant public interest. Indeed, we didn't have to speculate on the point, because, you'll recall, in January 1998, when we were about halfway through our work, first the Royal Bank and the Bank of Montreal and then the CIBC and the TD announced their intention to merge. We therefore had the advantage, as we thought about these things, of watching two merger proposals being kicked around--and I think that's the appropriate word in the public perception--and proceeding through what was then the regulatory process. So what did we learn?

In the first place, it became crystal clear, if there'd ever been any doubt, that a proposed big bank merger would galvanize public opinion and media and public interest as few other subjects do. Second, we concluded that unless there was some better focus for the discussion, the intense public interest would inevitably lead to a chaotic and unhelpful exchange of views between merger proponents and opponents. Third, the lack of a formal framework for that discussion meant the minister was being deprived of an orderly analysis of the factors affecting the public interest. He had the Competition Bureau and OSFI reports, but little else except rhetoric on both sides. So we concluded and recommended that in any future merger discussion there should be a much better process to inform the Minister of Finance on the public interest factors.

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    I want to talk for a moment about the discretion the minister has in relation to mergers. The idea that the minister should have a wide discretion to accept or reject a merger is nothing new, although by reading some of the recent press commentary, one would think it is, that in some way, it's been invented as part of the recent reforms. That's not the case. It's been part of the law for decades. Neither is it unique to Canada. As I understand it, in many, indeed most, countries similar discretion is provided to a government official or to a regulator. I believe ministerial discretion of this sort is entirely appropriate, and indeed necessary, in the national interest. The large banks are the most important financial intermediaries in our country. A strong and competitive Canadian banking sector is critical to Canada's future. We've had such a sector in the past, and our public policy should continue to foster it. On the other hand, it's a sector that's already concentrated, and someone must have the responsibility to ensure that further concentration can coexist with well-served Canadian customers.

    Let me return to the subject of bank mergers. Our task force concluded that they represent a legitimate business strategy. While one can debate the merits of any particular merger, and I for one certainly do not agree with the idea that mergers are some sort of panacea or absolute necessity, there can be no doubt that consolidation can bring benefits to banks, to their customers, and to the countries in which they're based. International examples make the point. The Netherlands saw significant consolidation more than a decade ago. Three world leaders in finance emerged, ING, Rabobank, and ABN-AMRO. So we on the task force said, leave the discretion with the minister as it is, but make it real. As a first step, we said, unblock the “big shall not buy big” clog in the pipeline, get rid of it, but ensure that the ministerial discretion is used so that any merger benefits Canada and doesn't damage the public interest. Be sure there's a way the minister's well informed to make the decision to approve or disapprove a merger or to design public interest conditions for any approval.

    With that objective, we recommended that proponents of a merger should deliver a public interest impact assessment. This is a unique Canadian requirement. It was not, I emphasize, designed as a political roadblock to mergers, but rather as a way to provide for a rational policy discussion. It was not intended as a way to frustrate bank mergers, as some commentators still contend, but as a way to facilitate the debate and potentially to enhance the probability of ministerial approval of well-crafted proposals. It was also an open invitation to the banks to recognize that they should give heed to the national interest as well as their self-interest as they pursue their strategic options. Neither--and this is important to your review, I believe--did we intend the public interest review process as a way to fetter ministerial discretion. We were not suggesting there should be a series of precise hurdles through which a bank would be asked to jump to have a merger approved, with an assured approval from the minister once those hurdles were met. Such an approach would be far too simplistic. The public interest cannot be crammed into narrow compartments.

    Any merger of big banks would involve trade-offs. There would be benefits for the banks, and those could, but not necessarily would, bring benefits to their Canadian customers and to the country generally. There would also be costs, some of which could be mitigated and some of which could not. In the end, the Minister of Finance is the guardian of the public interest. It's for the minister to balance the costs and benefits by evaluating the risks and the opportunities, all in the context of a specific deal and the expectations of the country for its financial sector in general and the banks in particular. I want to emphasize that the minister should come to that decision after putting all the factors in the balance. There's simply no magic formula that can achieve a decision.

    In light of this, we suggested that there ought to be an open, transparent, and collaborative review process, where the public interest impact assessment would address at least the costs and benefits to customers, small and medium-sized businesses; regional impacts; international competitiveness; employee impacts in both the short term and the long term; adoption of innovative technologies; and the precedential impact, including the impact on the rest of the sector. The present guidelines you're considering draw on those recommendations. We also recognized--and this is important--that in any particular deal there were likely to be other public interest considerations, which could only be determined when the deal was on the table.

    As you'll see from the factors I've mentioned, some refer to potential public interest costs. Some are inherently positive, where there can be public interest benefits, and others can contain both positive and negative elements. Let me drill down on a few of them.

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    We speak of international competitiveness. In fact, we devoted an entire chapter of one of our papers to this idea. We saw possible benefits for Canadians if our banks remain internationally competitive. If they're innovative and competitive, and if they can operate successfully in other markets, especially the United States, they are likely to bring back to Canada the benefits of those experiences, better efficiencies with improved pricing, new product offerings, and improved service delivery techniques, all to the benefit of Canadian customers. In addition, in a world in which Canada's businesses, large and small, now cross borders for their markets, it's important that Canada's financial institutions have the skill sets, the capital, and the presence to be with them as they finance their international activities. This can be done only by competitive institutions based in Canada, not by laggards. Finally, an internationally competitive Canadian banking sector will better ensure that in the long run there will be high-quality head office jobs based in this country and that the banking sector won't consist of a series of branch plants administering policies established by companies based outside Canada.

    Therefore, I expect that a bank proposing a merger would, in its public interest impact assessment, fully describe how it proposes to use the merger to ensure that enhanced competitiveness will not merely be an escape to foreign markets, but will achieve desirable consequences for Canadian customers. That's the competitiveness factor.

    Some factors involve obvious possible costs. For example, the question of access to branches and to financing in some regions and the broad question of choice for medium and small businesses have implications that extend beyond the analysis traditionally done by the Competition Bureau. In addition, there would certainly be job losses in the short term through any merger, and the hope would be that they would be offset by long-term job benefits. The public interest impact assessment process requires the banks to identify those issues in a candid fashion and to describe mitigating steps to ensure that there is no undue harm to the public interest.

    At the end of the day, it's the job of the minister, informed by the Competition Bureau, by OSFI, and by an understanding of a broad spectrum of public interest considerations, to balance the pros and cons of any transaction. We recognized in our report that the minister might well have to engage in discussions with the institution to nuance or tailor a transaction to achieve a proper balance. As we said:

The Minister's discretion is not restricted to approving or rejecting a merger as proposed; conditions may be established under which the proposed merger might be allowed. Indeed, if the Minister is to treat merger proposals as an opportunity to reshape the industry for the benefit of all Canadians, the review process must be viewed as a means of identifying a range of creative options that increase the net benefit to Canada to be derived from the transaction.

    With all this background, let me draw some conclusions.

    First, a formal merger review process, including a public interest impact assessment mechanism, is a very important part of any merger assessment. I believe some have suggested to your committee that it should not exist. In my view, it certainly should not be abandoned, radically shrunk, or unduly formalized, as some have suggested. It should be recognized for what it is, the provision of a much needed mechanism for sensible ministerial decisions.

    Second, the process should be viewed by the banks as an opportunity to advance their positions, not as a barrier to sensible proposals. The 1998 merger experience makes it crystal clear that without such a framework for informed dialogue, merger proposals will almost certainly be misunderstood, misinterpreted, and misrepresented.

    Third, the present merger review guidelines identify the principal public interest issues that will arise in any merger. They are a general road map, and a pretty good one, I believe, at least as a first cut. The minister should formally and publicly advise the banks of any further public interest issues the minister considers to be important in the context of a specific deal. These should be identified very early in the process, so the banks have an ample opportunity to respond.

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    Fourth, by definition, the public interest consequences of a proposed merger will involve, as I've said, a balancing of costs and benefits, although some have urged, I think, the contrary on you. In my view, it's not possible for you to precisely describe in the guidelines the degree of comfort the minister must have on each and every issue before concluding that the public interest test has been met. Indeed, any attempt to do that would be based on a misunderstanding of the process. The factors are not a series of separate public interest tests, they're a package of public interest considerations. In the end, the minister must apply his or her judgment to the entire gamut of factors put in the balance.

    I believe the present merger review guidelines have this as their premise, although this is not as clearly stated as it should be. Any clarification you suggest of individual items should, I believe, avoid establishing fixed numeric criteria. Too much precision could well restrict a minister from doing what is right for the country and the public interest in the context of a particular deal. It would be more useful to explicitly recognize in the guidelines the need for the minister to balance these public interest pluses and minuses in making the final decision, to put to rest any misconception that there are specific hurdles for success on an item-by-item basis.

    Fifth, I would recommend that greater emphasis and explanation be given in the guidelines to what I will call, for want of a better word, the choice issue. The Competition Bureau normally deals with a market in which merger proponents are suppliers of goods and services who are more than delighted to say, yes, we will sell, to any buyer who is willing to pay the going price. Most suppliers are not in the business of turning customers away. On the other hand, banks are, as they assess credit applications, in the business of saying no to many of those who approach them for credit. This is of particular concern to many in the small and medium-sized business community, and it's a valid concern. For Canadian banks sometimes seem to prefer to say no, rather than pricing for risk up the interest curve. Choice in a banking context is more than a determination of potential monopoly or oligopoly power. It entails having reasonable assurance that there is a sufficient universe of suppliers of credit, in both number and lending philosophy, to provide prospective borrowers with reasonable options when they hear the word no from a lender.

    The question of whether there will remain sufficient choice, understood in this broader sense, after a merger is an important part of the public interest. While difficult to quantify, it should be a key factor for any minister. Merger proponents should be encouraged to design their proposals to preserve and, if possible, augment choice in this sense.

    Sixth and finally, as a process issue, I note that our task force did not recommend parliamentary hearings as part of the merger review process. We proposed instead a process in which submissions from the banks and other persons, companies, and organizations would be promptly posted on a well-publicized website, to ensure a robust debate to which all Canadians would have immediate access, with opportunity for full participation. I continue to believe this would be a good way to proceed. A merger proposal requires an efficient, focused process. As things now stand, proponents and opponents must make their representations in five places, to the Competition Bureau, to OSFI, to this committee, to the Senate committee, and to the minister. In my view, this is cumbersome: there are too many players. The process can subject our financial system and capital markets to unnecessary delay and uncertainty.

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    I suggest that the requirement for legislative hearings in the context of specific mergers should be reconsidered. As far as I know, there's no similar process in any other country. Your committee serves a vital function, as it provides periodic recommendations on financial sector policy, including merger policy. I'm sure these hearings will provide much valuable policy advice to the ministers in response to their request. No doubt, as time goes on, further advice on policy will be sought and provided in the future. All this should provide a means to achieve an evergreen, relevant policy framework within which the minister can work on individual transactions.

    Thank you very much, Madam Chair, for this opportunity. I look forward to discussing these issues with you and your colleagues.

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

    Mr. Harris. I'm going to allow each questioner up to eight minutes.

    Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Wow, we get a bonus this afternoon.

    It's nice to see you again, Mr. MacKay. It's been a few years since we were in the bank merger exercise. I always appreciate your points of view and your opinions.

    I have two questions. The first one comes from what a witness this morning suggested to the committee, that perhaps, in order to fully examine public interest, this committee should consider expanding the mandate to include, for example, the retailing of insurance products in the banks, the issue of foreign ownership, and I suppose we could even extend that to another one of the most popular ones, auto leasing. These clearly don't appear to be in our mandate. How do you feel about that? Do you think these issues are definitely for another time, another place?

    Mr. Harold MacKay: The first two you mention, Mr. Harris, insurance and auto leasing, I think are for another time and another place and don't have an immediate correlation I can touch on the subject of bank mergers. They're obviously very important topics and very hot topics. Those are two issues in respect of which the government, on the previous occasion, did not accept the recommendations of our task force. I think they are important issues. They are areas where Canadian financial sector policy deviates from that in most other countries in the world. One has to ask why and what consequences flow from that deviation. So I believe they're important topics, but I can't put them together with the bank merger issue.

    The third topic, which I understand you to be phrasing as partly a foreign ownership, partly a foreign bank topic, I think is relevant here to a degree. Canadian banking law is premised in a way I believe is totally consistent with our trade arrangements; it does not in any way prohibit foreign ownership, but ensures a Canadian head office control in a real sense. I think that's very much to our benefit, and I don't see that being part of the debate. But the foreign bank presence in the country is a legitimate part of the debate, as part of a bigger issue, competition.

    I think it is relevant, as one thinks about bank mergers and the question of choice I mentioned or access, to be thinking about what the competitive landscape looks like. One of the elements of that landscape is, of course, the presence of foreign participants. I don't think there's any silver bullet. Canadian rules of entry for foreign banks are really quite generous and comparable to the U.S. rules, as I understand them. But I believe it to be a relevant consideration, unlike the other two.

    Mr. Richard Harris: My next question is on ministerial discretion as part of the decision-making process. Actually, you termed it the final decision. One of the things Mr. Hunkin from CIBC talked about yesterday was that banks have to plan with a high degree of predictability. I think that holds true with most corporations. The larger you are, the more predictable things have to be before you proceed. We have a high degree of predictability in the Competition Bureau and within OSFI. We've been asked as a committee to give advice to the government on defining the implications bank mergers might have on public interest. Do you believe some hard-framed public interest criteria can be established based on the work this committee does and the work the minister could lay out, in order that the minister can present to the banks a defined road map of how to get through the public interest jungle, as they get through the Competition Bureau and OSFI, thereby giving the banks the high predictability where they can look at it and say, this is a non-starter, because we can't comply, or, yes, we can tailor our proposals so we are in compliance at all three levels? The banks, and for that matter, any business in this country, when dealing with the government, I believe have the right to look at some clearly defined routes to get where they want to go as far as government regulations go. I believe they have a right to expect that decisions, having met criteria laid out by government through regulations or otherwise, not be refused for purely political reasons.

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    Mr. Harold MacKay: I think there are a couple of ways to look at that, legitimate ways. The phrase “purely political reasons” can either mean bad things or good things. If they're partisan political reasons, if that's what it's all about, or pandering to something other than the national interest, that's the bad thing. If, however, it does mean political in the best sense of that term, doing what's in the public interest, then I'm all for it.

    Mr. Richard Harris: What I meant is that if the bank can be 100% sure it's complied with everything, and they can be, I think, if they have a clear enough road map, they should expect there to be no reason for their proposal to be refused, according to all the guidelines and criteria set out.

    Mr. Harold MacKay: I find the issues too numerous and too complex to really permit that sort of check list approach. One can imagine, for instance, that there would be two or three merger proposals on the table at once. One can also imagine that a minister would stand back and say, not all these can go forward. He could say then nothing will go forward, and that wouldn't make much sense to me either if it would benefit the Canadian financial sector and Canadian customers generally if something went forward. I believe in such a circumstance, to illustrate one matter, the Competition Bureau, OSFI, and the minister would all be looking for the same thing, where the optimal benefit is. On this question of choice, for instance, what degree of restructuring of retail branches might be necessary in any given combination of banks to achieve that result? That is a contextual matter. I don't believe it can be resolved by numeric solutions.

    So in my own judgment, you can do better than the present guidelines, which only name categories of issues. I think it would be fair to better describe what the government has in mind on each of those categories and to give a directional sense of where the bank should be trying to go, and if there are problems, what sort of mitigating steps should be considered. But I don't believe it is possible on these issues to provide the kind of certainty you just described. In fact, I think it would be counterproductive, and I think it would not be consistent with international practice.

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    Mr. Richard Harris: If that's the case, maybe the process should be reversed. Maybe it should be the government that is going to do all the work in saying, if you want to merge, here's what you have to do. The banks have clearly said all they want to know is the rules of the game. Is it possible for the government to simply tell them the rules of the game?

    Mr. Harold MacKay: We already have a very concentrated banking sector. This does mean proposals for mergers will not be as simplistic as they would be in, say, the U.S. sector, unless in the U.S. a couple of the big clearing banks decided to merge, in which case there would be the same set of issues on the table. I don't believe it is wise or possible to provide bottom line certainty of the sort you mentioned. I think the banks do deserve a clearer articulation of these issues. Some of them may, in fact, not be terribly significant, some of them require more and better definition, but I don't think you can get to the point of saying there are 10 public interest issues, and as long as you do this and this and this on each issue, you will have an approval. The public interest is a more complex concept than that, I believe.

    The Chair: Thank you very much.

    Mr. Paquette.

[Translation]

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

    Welcome, Mr. MacKay. I am very happy to meet you. I have to admit that I did not know much about your work until a few months ago but now, without being a specialist, it has become part of my life.

    I didn't quite understand, regarding the role of the committee in this process, how you see it playing out. The act says presently that both parliamentary committees must hold hearings at the same time as the OSFI and the Competition Bureau fulfill their functions under their own mandate. You mentioned that are too many places where presentations have to be made and that capital markets cannot wait very long for a decision on a merger proposal.

    So do you mean to say that the Office of the Superintendent of Financial Institutions and the Competition Bureau should carry out their mandate, that the parliamentary committees should make recommendations in the course of their usual work on various issues and that the minister should be the only one to make the public interest assessment?

[English]

    Mr. Harold MacKay: Maybe I should expand on that a little. The entire process we're describing is actually not mandated by legislation, as I understand it, but only by policy guidelines. Those policies do spell out the referral to both the House of Commons finance committee and the Senate committee, with not only the issues relating to merger policy, the discussion we're having now, but also comments on specific transactions. I don't find the discussion on policy at all anomalous. In fact, I think it is immensely helpful to the government. So I believe the kind of discussions and hearings you're presently having, which, by the way, aren't contemplated in the policy, are good. However, with a hearing directed to specific mergers, a specific business transaction, I'm not aware of other parliamentary hearings of this committee that approach that question. This is what is a bit different, and for me, it's that which makes it more cumbersome than it really needs to be. I would have thought you, as a committee, would want to keep your hand and focus on these policy issues very squarely. Get the groups in, have the policy matters out, make your recommendations. But you wouldn't necessarily want to rerun the movie on each transaction, item by item, nor do I think that is good for markets. That's the distinction I was trying to make.

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[Translation]

    Mr. Pierre Paquette: If that is the case, the committee should make recommendations to the minister on how to carry out his own consultations.

    For example, you mentioned that access or choice can be quite different from one region of Canada to the next. I believe the Atlantic Provinces have problems which do not exist in Toronto or Montreal. In the Gaspe, choice and access to services are not the same.

    This means that the committee should recommend regional consultations so that people from the Gaspe region do not have to travel to Ottawa to talk with the minister. I do not think they would travel to appear before the Standing Committee on Finance; the committee would be the one to travel.

    In your view, how would one take into account in a practical way the differences between the financial markets in various communities?

[English]

    Mr. Harold MacKay: I'm sure a variety of means could be suggested to obtain comments on a specific business transaction. The one our task force recommended, largely because we had used it in our own work extremely successfully, was to invite submissions widely, to receive submissions, as we did all the way from one-page letters from individual concerned citizens to very sophisticated reports from organizations. On the day we received those bits of material, we immediately posted them on the Internet. That led to very lively debate among both individuals and organizations. It was quite remarkable. This was five years ago, before Internet use was as widespread as it now is. It provided an extraordinarily good forum for everyone to make their case known in a very visible fashion. That is a process.

    There is another process now, which, as I understand it, essentially involves such individuals--individuals may have more of a problem than groups, because of your time constraints--getting their points of view made to you and the Senate committee, and no doubt they will make them directly through to the minister, because they will want to be sure they're pounding the table in that arena as well. That's another process.

    A third one might be the one you suggest, and this can only be tested on a particular merger. What really should happen is that there should be a small task force investigating an issue in a particular region, because that merger has special issues for that region. I don't discount that at all, but I do say the present five-group review does strike me as a bit cumbersome, that's all.

[Translation]

    Mr. Pierre Paquette: May I ask another question, Madam Chair?

    The Chair: Yes.

    Mr. Pierre Paquette: I do not believe that all groups will appear before the Office of the Superintendent of Financial Institution and the Competition Bureau. It does not come naturally to many of these groups to talk to these agencies which are quite specialized and technocratic.

    I am still wondering about the democratic quality of the process, especially when we talk about public interest. I am always worried when technocrats and experts impose their views on the prejudices of the public, which always need to be taken into account, in my view. I understand your argument, but there should be a way to take into account the feelings or perceptions of the public, especially in the various communities.

    I have one last question. The banks told us that several proposals could be submitted at the same time. Once the government gives a green light to mergers, two or three merger proposals could be tabled within a couple of hours. Do you have any suggestions to make as to the process to be followed? For example, should one merger proposal be fully assessed before looking at the second one, or should both be looked at objectively in terms of competition and prudential standards and only after the technical work has been completed would the public interest assessment take place? I would like to have your views on this.

[English]

    Mr. Harold MacKay: First, I do not believe there should be any first-mover advantage. I think that would be inappropriate. The Competition Bureau last time, when there were two proposals on the table, proceeded by reviewing both concurrently, and I think that's the way all assessments will have to be made in the future if there's more than one proposal on the table at any one time. By the way, that, to me, suggests the right procedure to resolve public interest and other issues in that context will probably have to be resolved at the time, rather than with too much description ahead of time, as we are presently doing it. But I think the main thrust of your question is, is there an advantage to the first one who puts a proposal on the table? I don't believe there should be. That's not the way for us to enhance the public interest.

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    The Chair: Thank you.

    Mr. Cullen.

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

    Thank you, Mr. MacKay. I have a few questions.

    Mr. Clark from the TD Bank came in and expressed a view I had sympathy with, that the government, through the Minister of Finance presumably, would indicate that there was an appetite for some consolidation or not before banks started on a major exercise at a huge cost and so on. Then, on the assumption that the proposals met the OSFI test, the Competition Bureau test, and the public interest test from this committee and the Senate committee, the Minister of Finance would generally be favourably disposed. I can understand how that would be a good process, but I come back to the question I put to Mr. Clark and others about concentration, and you've talked about that as well.

    The Competition Bureau, of course, will look at competition in the local market, and I would expect there to be some requirement for banks to divest, so a smart bank group will come in and say, we're going to look after those through the credit union, or whatever. So at the local market level that will be dealt with. I'm wondering if there's such a thing still as a macroeconomic concept of competition or the concentration of economic power, as I think it was referred to in 1998. How do you wrestle with these? Could the Minister of Finance say he or she would be generally receptive, provided all these other conditions were met, but with a macroeconomic view of the level of concentration, in other words, one or two or three mergers, or none? I guess that's my question.

    Mr. Harold MacKay: First, the concept of concentration of economic power as a separate test has never appealed to me particularly. I don't fully understand it, to be frank with you. If, in fact, one has been able to establish at the local or micro level, as you call it, that competition remains, and if you put the merging institutions through this filter I've described, including the choice filter and the access filter, the fact that there's a very big institution does give rise to safety and soundness issues, the “too big to fail” doctrine. I understand that, but the concentration of economic power sounds as if we are saying, in Canada we just can't stand businesses that really get to be world-scale; it would scare us to have some big beasts like that running around in our marketplace. So I'm not a fan of that as an incremental test. That's point number one.

    Your first point, which might be worth a brief comment on my part, is the idea that there ought to be a signal to the bank that the government has an appetite for consolidation. This is a bit of a slippery slope. It's one thing to say, I'm open to an idea that might be good for the country, and that was the change made in 1998 on paper. There has always been a flavour that it was only on paper and somehow the government really didn't want that to be done. It was our view in 1998, and it remains my view today, that if there's going to be consolidation in this sector, there will be significant brokering required between government and industry. It's a very concentrated sector, and we have public interest to protect. That's going to require involvement and not “stand back and let the market take us somewhere”. So on the government's saying it has an appetite for consolidation, I don't expect to see it quite like that. I think it is fair that the government needs to say, we believe the marketplace can in fact sustain some consolidation. Otherwise, they should go back to the “big shall not buy big” policy.

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    Mr. Roy Cullen: I understand what you're saying, but maybe my choice of words was bad. They will be receptive in principle to proposals, provided that all these tests are met. The difficulty I have is that if we see one merger proposal--the last time we were going to see two--we could see three. These require a lot of effort and work. In the markets they create some instability. OSFI on its own might raise some prudential issues off the top. I'm searching for ways to provide a more stable environment in which the banks might decide to come forward. Right now I don't see it.

    Mr. Harold MacKay: This is not an environment where, I believe, the full predictability that is being sought can be achieved. That is a function of the already concentrated sector. It is not at all to say creative transactions couldn't be very good for the country, but there will be in that process a lot of give and take. The signal to the banks needs to be, bear in mind the national interest as well your self-interest when you come forward and have that factored into your proposal. I think we've already seen elements of that in some of what's gone on since 1998, in the Toronto Dominion-Canada Trust relationship, for instance.

    Mr. Roy Cullen: Right.

    One of the questions I put to Mr. Comper was whether the public interest test should be a baseline requirement, and beyond that, a competition of proposals; some would be more attractive in respect of the public interest, some less attractive, and the government then could pick and choose. The banks, I think, would prefere to deal with the minimum hurdles, rather than getting into a big competition of, maybe, new products, ideas, and services.

    Maybe you want to comment on that in a moment, but I want to get to a few other issues. One is the process itself. I agree with you that we're never going to establish definitively in our report what all these criteria are, but we can hope we're going to help in the process. If the banks then come forward with a public interest impact assessment--and hopefully, they will have read these criteria and responded to those as best they can--there will be some debate, because there are going to be a lot of grey areas. I understand the need for having a truncated process, or one that's reasonable, but this committee, for example, would not want to get into that fray, in the sense of maybe clarifying or measuring those proposals against these tests, which, by definition, will be more vague than we'd like, maybe less vague than they are today.

    Mr. Harold MacKay: What's the question?

    Mr. Roy Cullen: Is it realistic that this committee, if a merger proposal is on the table, should not want to have public hearings? I know you're not in favour of it, at least that's what I heard.

    Mr. Harold MacKay: Perhaps you would. My sense of it is, though, that if there are several merger proposals on the table, if that's really what we're involved with, and there is significant brokering going on to try to wrestle those to the ground, that exercise is not assisted by public hearings of the sort you've described.

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    Mr. Roy Cullen: When I asked Mr. Comper, I related Mr. Doug Peters' testimony that once a merger is done, it's done, you can't undo it. So if you're looking for bank undertakings, what assurance do we have that the banks will meet those undertakings? Mr. Comper said in your report you had a way to deal with that. Rather than reading your report again, I thought I'd ask you. How do you ensure that the banks live up to the undertakings I'm sure the government will demand?

    Mr. Harold MacKay: I agree with your last comment, that if there are significant mergers, there will be significant undertakings as a quid pro quo. Our concern, when we did our work, was that the legislation was not sufficiently explicit as to the ability of the government to extract and enforce the undertakings, and before I came over here, I did check to see how that had been resolved in the legislation. There were revisions made that do provide enforcement mechanisms and the ability of the government, if there are conditions not fulfilled or undertakings not performed, to go to a court and obtain a remedial order. The powers are quite broad. It doesn't send people to jail, but it provides remedial orders. I think that's much better than it was when we looked at it, when there was no such power. So I believe there now is a mechanism, and no large bank based in Canada, regulated by Canadian regulators, faced with such a provision in the law and all the other ammunition that exists, will flout an undertaking. I'm much more comfortable on that than I was.

    The Chair: Thank you.

    Mr. Nystrom.

    Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you, Madam Chair.

    Welcome, Mr. MacKay, a fellow Reginian, to the committee.

    The odds are probably pretty high that we'll not just have one proposal, but two at the same time, because you have two banks that are proposing to merge. It seems to me that might expedite things pretty quickly. Would you agree that it's likely? We, of course, don't know.

    Mr. Harold MacKay: It's certainly what we saw in 1998, and I expect that will be right, that banks will be interested in not being disadvantaged by a merger of their competitors. I suppose not every proposal might give rise to that result. If proposal one was crafted in such a way that it did entail significant divestitures and revisions of the marketplace, it might not, in fact, instil a fear factor of the sort you presuppose.

    Mr. Lorne Nystrom: I want to get back, then, if we have a couple of big bank merger proposals, to the importance of public accountability. Having a bank charter is a real privilege. It's not a corporation like the others, with the licence to print money and so on. I have very strong feedback from a lot of people that Parliament should be really involved and that this committee or some special committee of the House should be very involved in a public process at that particular time. I get the impression that you want to put more and more power into the hands of the Minister of Finance and government agencies and less power into the hands of the elected officials in making a recommendation on the feasibility and wisdom, or lack thereof, of the merger. So I'd like to ask you why you wouldn't want to have, say, the House of Commons committee conduct full-blown hearings on the proposed merger. The Senate has recommended that we don't have a role. Of course, the Senate is not elected or accountable, we are. Because of the fact that these corporations are not corporations like others, with their special privileges and special powers, most people I talk to, ordinary folks, would like to have a public, accountable process. Ministers come and go, we come from four or five different political parties here. I think this whole institution needs to be reformed to make it more accountable, more democratic, and I wouldn't want it going the other way.

    Mr. Harold MacKay: I don't want to make too much of this. My view is that you need to have clear ministerial accountability on this sort of matter, that accountability for the public interest ought not to be diffused. I believe the present process diffuses the accountability and creates the somewhat cumbersome result I described earlier. I certainly agree with you that there needs to be a solid means, at the time of any merger, for the public to present their views. There can also very well be an entitlement, if a particular merger sparks the interest of this committee, for the Senate or anybody else to present views. So I don't stand resolutely opposed or at the barricades on that question, because I agree with you about the need for input, but I do say ministerial accountability should remain the touchstone on this particular issue.

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    Mr. Lorne Nystrom: I don't disagree, I just think the parliamentary process itself, as separated from the executive process, is also a very important part of the steps for any major decision made in our country, and this is potentially a major decision.

    The ownership rule used to be 10%, now it's 20%. What are your views on this? There's again a lot of concern that if it's moved any higher than 20%, we're going to lose our banks. They could be great takeover targets for American banks, some of the larger ones, not just American, but others as well. How high does it go before this becomes a major problem? Should there be a limitation on it, or should we just open it up?

    Mr. Harold MacKay: The expansion of the potential ownership from 10% to 20% has not really been taken up by anyone since it became law a year and a half ago. That suggests the cross-ownership of institutions, which we thought might be of some interest and benefit, has not proven to be. I would not favour an extension of that figure. It provides prudential results, which are desirable on the safety and soundness front. It also enhances the Canadian-based industry. So for my side, this is as far as I would like to see us go.

    Mr. Lorne Nystrom: So you wouldn't recommend a rollback.

    Mr. Harold MacKay: I see no reason to roll it back, because the 20% number, combined with another section in the act that precludes control, and there's a definition of what influence a 20% shareholder can have, ensures, I think, very well that there will be no misuse of that power.

    Mr. Lorne Nystrom: The Americans have a community reinvestment clause, having banks invest a certain percentage of their activities back into their local community. Should that be a factor in this country in respect of the merger debate? I know the situation in the United States is different, they have a different history and so on than we have here, but it has certainly been advocated by a number of folks.

    Mr. Harold MacKay: I don't favour the precise model of the United States. I do assume, however, that most of these public interest criteria we're talking about will relate to the banks' demonstration of their commitment to the Canadian communities they serve. I have no doubt that they will provide some models, and should provide some models, as part of this process to demonstrate that commitment and make it a real one.

    I want to say one other thing about that. I believe one of the things we've seen in recent years, as the banks have taken stock of their strategies and have returned to a retail strategy and a Canada strategy, is a greater interest than existed in 1998 in that sort of strategy. That's very positive. I think it does reflect, for instance, a greater interest in small business lending than in the 1997-1998 world, where the banks were flirting with large-scale international investment banking as a touchstone for success.

    Mr. Lorne Nystrom: We had Ms. Swift here from the CFIB pointing out in her charts that most banks are lending less and less to the small and medium-sized businesses in the country, but the Credit Unions have really increased. Scotiabank, by the way, has really increased its lending as well in the last four years. Is this a concern of yours? Is this something we should be looking at more seriously? Should there be some rules and regulations? Should that be part of a merger debate? I'm sure you've heard in the street--I've certainly heard in Regina--that it's more difficult for many small businesses to get capital. Her charts seemed to indicate that's the case.

    Mr. Harold MacKay: I haven't seen the most recent statistics, so I shouldn't get into a numbers debate. It is clear that small business lending is actually among the more profitable, not less profitable, parts of a bank's potential book, and as I say, the better and clearer focus on retail banking I think provides an enhanced ability for Canadian banks to deal with small businesses. I think recent experience suggests they are, and I hope they will.

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    The Chair: Thank you very much.

    Ms. Leung.

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

    Mr. MacKay, thank you very much for your very thoughtful presentation.

    The merger review process you talk about sounds like something that's really necessary. In the recent TD and Canada Trust merger, were they also subject to such review? Perhaps this process will become a built-in safeguard of checks and balances, but I'm not very clear how this would proceed. You mentioned that the minister will have all the authority, but how will this function within the time required, and who will exercise this?

    Mr. Harold MacKay: Are you thinking in the context of the Canada Trust merger as an example?

    Ms. Sophia Leung: Yes.

    Mr. Harold MacKay: The Canada Trust merger was an interesting one, because it followed the unsuccessful mergers. It did not have to go through the merger review process we've described, because Canada Trust was not one of the large institutions, as defined in the rules. However, those two institutions had the benefit of the bad experience of the big banks in 1998, when the mergers were turned down, and when they presented their merger plan, they actually dealt with many of the aspects of the public interest we are talking about here. They weren't required to do so by law, but they did so, and it made their proposal much more acceptable to the public, even without public hearings and the type of review process I've described, than it would have been had they not come forward in that fashion. So I believe it shows the ability of banks to craft proposals in a way that can achieve a positive result.

    Ms. Sophia Leung: You mentioned the Netherland experience, and after 10 years it seems to show great success. Can you cite some other examples or go into more detail? How does it occur?

    Mr. Harold MacKay: I think we're continuing to see consolidation in the banking sector around the world, and Canada, in the end, will be no exception. The Netherlands is probably the classic example. Sweden has a banking structure that is similarly highly concentrated, and there's been recent consolidation, I believe, in both Spain and France. But I don't think we can draw too many lessons from the international experience, because every country does have different traditions.

    Ms. Sophia Leung: I notice there are a lot of foreign banks participating in Canada, such as HSBC. They are really very successful. I'm from Vancouver, B.C., so I see how they start and literally take over a lot of business from the other local banks. Does that infringe upon some of the interests of the local Canadian banks? Would that create competition?

    Mr. Harold MacKay: From my point of view, it would be good if we had more banks like HSBC, smaller competitive banks. It would add an element of competition in the marketplace that would make us less fearful of consolidation by the big banks. It was interesting in 1998, when the mergers were on the table, that there was far less concern about the mergers in Quebec than in the rest of the country, because in Quebec there were two domestic institutions, the Desjardins movement and the National Bank, that provided very effective retail service to customers in that province, which was not the case in the rest of the country. So as far as I'm concerned, if there are more institutions like HSBC, it will be good for the Canadian financial sector.

    The Chair: Thank you very much.

    On behalf of my colleagues, I want to thank you for coming in here today.

    This will conclude all of the oral testimony. We had an agreement with the committee earlier that for anyone who had submitted a written proposal, we would table it with the committee. All the written proposals, and there are nine, that have been received to date have been circulated to all the member's offices, and I'll just table them now. I think they are from Mr. John Ackerman; Committee on Monetary and Economic Reform; James MacIntosh; Teamsters Canada; TG International Ltd. Management Consultants; the Honourable Henry Jackman; the Ridgeline Corporation; the Insurance Bureau of Canada; and Mr. Bernard Sieger. So those have been tabled.

    We are adjourned. Thank you very much.