FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 6, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'll call the meeting to order, and welcome everyone here this morning.

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The finance committee is presently holding pre-budget consultations, but today we are studying the report of the task force on the future of the Canadian financial services sector, known in the business as the MacKay report.

We're going to begin with Dr. Paul Bowles, Department of Economics, University of Northern British Columbia. You have anywhere between five and seven minutes to make your presentation and thereafter we'll engage in what I'm sure will be a very interesting question and answer session. Welcome.

Dr. Paul Bowles (Individual Presentation): Thank you for the opportunity of speaking to you.

I would like to make four points this morning.

The first point I would like to make is that in my remarks I will be discussing the retail banking sector. The main institutions we are talking about here are the chartered banks, the trust companies, and the credit unions. There has been a tendency to describe a financial services industry. While this may be useful for some purposes, I do not believe it is useful for all purposes. In particular, the retail banking sector should be restricted to deposit-taking institutions. There are no real close substitutes in terms of deposit-taking institutions for banks, trust companies, and credit unions.

The second point I would like to make is that under some circumstances there are very good theoretical reasons for permitting bank mergers. Under some circumstances there are very good theoretical reasons for opposing bank mergers. Therefore I regard this question as being chiefly an empirical one, one that requires a careful analysis of the existing circumstances and trends that are happening.

Having suggested that an empirical analysis is required, I will now move to my third point, which is to give you some data that I think are relevant for discussion of this issue. I'm going to look here at what I will call the geography of finance. I want to look particularly at the concerns that have been raised about bank mergers and the accessibility of finance in non-metropolitan B.C.—that is, B.C. essentially outside of the lower mainland.

To do this we don't have very good data. Data on assets per bank branch are not publicly available. However, if one does a geographical inventory looking at small communities in B.C., which I would define as being fewer than 100,000 people, and if one compiles an inventory drawn from Statistics Canada population census data and the Canadian Payments Association, then you come up with a list of of 172 communities in rural B.C. Of these, 23 have no financial institution at present, and 52 have only one financial institution.

If one defines high-concentration communities as being those communities in which there are three or fewer financial institutions, then one finds that of these 172 communities, 119, or 69% of communities, can be classified as high-concentration communities. These have only limited competition—three financial institutions or fewer within the retail banking sector.

So that's the starting point. The question then arises of what will happen if there are bank mergers. Here there's a possibility of course that communities will have a reduction in the number of banks available through a reduction in the number of banks that are therefore being merged. That 69% figure then increases to 75% as a direct result of bank mergers.

What will the consequences of this be? Well, I believe that despite the fact that the banks do operate national pricing, nevertheless those national prices, those interest rates, are often negotiable, and the negotiability of those rates will be greater in high-competition than in low-competition areas.

There are also non-rate aspects of bank competition, such as service charges. I draw the committee's attention to the work done by the Canadian Federation of Independent Business, which has looked at service charge increases in communities with a small number of banks and found them to be higher.

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It is important to note that banking services are precisely that, that banks provide a service as well as a product, and those services seem to be the subject of some criticism. If one looks, for example, at the National Quality Institute figures, bank services are not rated highly by consumers in terms of value for money, and this is likely to be exacerbated by further concentration in banking in rural areas.

I would also like to briefly touch upon the issue of branch closures. I did a report for the B.C. task force in which I constructed a bank closure vulnerability index. The purpose of this index was not to predict exactly how many branches will close, but rather to look at the probability that branches would close and the consequences of that for the competitive environment of rural B.C. communities. The index showed that 75% of small B.C. communities were either moderately or highly vulnerable to branch closures.

The fourth point, and my final point, is that one needs to bear in mind a wider context here. There has been a significant restructuring of bank branches in terms of their geographic locations. Essentially, if one looks at the past 30 years, bank branches have been moving out of downtown cores and out of rural areas and into suburbs. In terms of function, bank branches have moved away from their original function as clearing houses undertaking the business of clearing cheques from depositors and have now moved towards selling financial products to consumers. Both of these trends point to a concentration of them amongst wealthy individuals and in urban cores.

I think there is a process of marginalization of small and rural communities going on as a result of the restructuring in the Canadian economy and globally. I think, therefore, in conclusion, that we need to look at ways to increase competition in the banking sector, that we need to think of ways in which rural communities can be protected during this restructuring. I think that foreign competition is unlikely to do that. I think that's a very weak empirical reed upon which to rest a case in terms of rural financial markets, and I would suggest that some regulation along the lines of using, for example, the United States Community Reinvestment Act, might be the best place to start.

Thank you.

The Chairman: Thank you very much, Dr. Bowles.

We'll now hear from the Fraser Institute: Mr. Fazil Milhar, director of regulatory studies; and Mr. Jason Clemens, policy analyst. Welcome.

Mr. Jason Clemens (Policy Analyst, Fraser Institute): Thank you. I'm going to be presenting the response to the MacKay report and Fazil will be available for questions after. I want to start by thanking the committee for the opportunity to present on the matter.

The first thing we'd like to talk about is the notion that contestable markets, which in our paper we stress, should be the context within which the bank mergers are questioned; and that is that rather than counting the number of firms, we need to look into barriers' absence or the presence of barriers to entry.

Second, we agree fully with the MacKay report that the public policy should not be in the position of second-guessing business decisions, which was kind of the mantle upon which the MacKay report was based.

We are very supportive of all of the recommendations on both domestic and foreign competition in terms of the structural recommendations made within the MacKay report. Two specific concerns we have—and our suggestion would be that they just require a greater amount of debate and discussion—would be on access to the CPA. The specific concern would be compensation for those who have developed and made investments in the CPA, and it's simply that a discussion should take place. The second is that a greater discussion should take place on the ramifications of joining or amalgamating the CDIC and CompCorp, the insurance system and the banking system.

Now, the focus of our paper was really on technology within the context of contestable markets, and we took a very broad scope since much of the information, in order to do a microanalysis, is proprietary. Our findings are that the domestic branch system in aggregate for the big five banks has declined by 8.5% over the last 10 years; at the same time, the number of instant tellers has increased by 204%.

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What's important is this does not account for population. We would agree fully with Dr. Mathewson and Dr. Quigley that what we have right now is an inefficient rationalization of the branch system, in that as the branch has become less important, we don't have an efficient way to rationalize the system, and that allowing mergers is an efficient way to allow for rationalization.

What we see over the last 10 years is as population has increased the domestic capacity of the banks has decreased 23%. The domestic capacity of the instant teller machine network of only the big five again has increased 63%. So we really do have a replacement of the domestic bricks and mortar banking system by technology—that is, the instant teller.

In complement to that are telephone banking and Internet. Right now the big five have 5.8 million registered telephone bankers or customers who do banking through the telephone. In addition to that there are 1.6 million Internet bankers who do their banking over the Internet. Through these two systems we have both a transaction-based banking—that is, the ability to pay bills, make transfers, deposits, etc., through the instant teller, the Internet, and telephone banking—and at the same time sales-based banking, which is applying for credit cards, credit, mortgages, and performing transactions for stock accounts and mutual fund accounts over the phone and through the Internet.

I think we have to understand, and in our paper we tried to stress, that the market or the environment within which financial services take place is rapidly changing due to technology, and that will continue to go forward.

In terms of the rationalization of the merger system, that would be based on the clustering. If there are questions about that we can discuss it at length. I would refer to Dr. Mathewson and Dr. Quigley's paper again in terms of their discussion of mergers and the rationalization of the system.

The estimates that were garnered out of our study suggest that for each Canadian, per capita savings would be between $1,000 and $3,000 over the next 10 years, given the mergers. All of that is prefaced on contestable markets. Again our suggestions are very much along the lines of the MacKay report in terms of opening both the domestic and foreign markets.

Secondly, we dealt with employment issues. We looked again at the big five banks over last ten years. Our findings were that even though you had two dramatic employment incidents, one being the recession of the early nineties and the second being the integration of most of the large brokerage houses and four of the largest trust companies, total employment in the sector increased 9%. So over the 10-year period, even though you had these contractions in two periods and a fundamental transition in employment, net employment grew 9%. In addition to that, total wages and benefits, accounting for inflation, grew 90%. On a per-year basis it grew 8% over the 10-year period. So we had an increase in both the total amount of wages and benefits as well as employment.

Thirdly, what I would re-emphasize is the MacKay report's finding that public policy should not second-guess business decisions. Unfortunately there are several areas where I think there were some contradictions in the report. One of those would be in the lending to small and medium-sized enterprises. I'll speak briefly—and again we can get into this, and Fazil and I are available—on the notion that HR policy should somehow be affected and/or dictated by legislation. It seems to me, in my own background, coming from banking, there is quite a bit of movement upward in the banking system. To somehow limit that by legislation— I think for one thing it makes an assertion that small and medium-size businesses value continuity, and I think the banks aren't addressing that internally through their own human resource policy.

Also, we have to realize, in terms of SME financing, the traditional role of the banks has been the financing of accounts receivable and inventory, and even a StatsCan report of two years ago found the real problem is internal financing—that small and medium-size businesses aren't able to use accounts payable.

The second source of financing for small businesses with banks is the traditional capital financing. The areas the MacKay report addresses are more into equity investments and venture capital, which would effectively change the traditional role of banking in the SMEs. I think there may be more effective ways to deal with that type of financing. Again, however, that was not the focus of our study.

Finally, in terms of some of the recommendations, there is the issue of regulatory reform. We would fully agree with the need for streamlining the regulatory process. One concern we have is in terms of our competitive ability relative to the United States. What we've seen in the last five months is three major bank merger announcements in the United States. One created the fifth-largest commercial bank in the United States and was approved in five months. The second merger has created the largest commercial bank in the United States and was approved in four months. And finally, the merger between Citibank and Travelers will create the world's largest financial corporation, and that was approved in five and a half months.

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The Royal Bank and Bank of Montreal merger is now in its eighth month, while the CIBC and TD merger is now in its fifth month. So if we take the view of streamlining the regulatory process, I think we definitely have to look at the timeline.

I would also suggest that we should look at the role of the Minister of Finance in final approval, and that a referral base system similar to the one utilized by the United States may be a more efficient and effective process for allowing parliamentary input and allowing specialists and bureaucrats to do economic analysis.

Finally, in terms of some of the recommendations in the MacKay report, we would like a brief discussion on penalties and fines. If any penalties or fines are to be put in place, an understanding of the dynamic nature of the marketplace needs to be incorporated so that banks, like any other businesses, would be able to react to market changes and so it does not create a disincentive for those talented people on boards and senior managers to remove themselves from the industry due to the threat of penalties simply reacting to market changes.

In conclusion, we overwhelmingly would support the structural recommendations made by MacKay with very few concerns. Again, the concerns would be that more discussion needs to take place in regard to those matters.

Fazil and myself are available for any questions in regard to our particular study. Thank you.

The Chairman: Thank you, Mr. Clemens.

Now we'll go to a representative from Cordillera Books, Richmond Book Services, Mr. Sydney Heal. Welcome.

Mr. S.C. Heal (Proprietor, Cordillera Books/Richmond Book Services): Good morning. I feel overpowered among this august group, particularly as I am probably representing the smallest business that is being represented here today.

I am a published author, age 72. Officially I am retired, but I still run a small but active book distribution business, wholesale and retail. I sell books by mail order in countries from the European Community to Australia and New Zealand. I tend to specialize in maritime history, shipping, and naval subjects in both my writing and my sales. Prior to retirement I worked in management positions in three major industries: marine insurance, ship management, and real estate. I hold professional qualifications in marine insurance and real estate.

My concerns are as follows.

The banks discriminate against small-business people. Small loans are only possible to obtain if the risk is fully secured in favour of the bank. When I started my business in 1991—this was post-retirement, keep in mind—the Toronto Dominion Bank, regardless of personal assessment, would only advance a start-up loan of $5,000 against a 100% security of Canada savings bonds. It was cheaper and easier to cash in the bonds.

I operate my business without the benefit of Visa or MasterCard. I have no loans, nor do I now need them. To satisfy occasional customer requests, I have twice considered charge facilities. The first time, the Toronto Dominion declined without any consideration of my product or the type of clientele I have. They declined because my business is primarily mail order, and they claimed they had a bad experience with mail-order operators.

The second time, CIBC wanted a full general credit application and the setting up of an escrowed guarantee of $5,000. Why? That is a good question, when it is not my credit that is on the line. My average retail sale is probably less than $100. My customers are mostly mature middle-aged or older people who have a high sense of honour and fiscal responsibility. Since starting this business I have had three NSF cheques, and all were made good. I have never had a foreign cheque bounce on me. My catalogue clearly states “no credit cards”, and I will happily accept foreign personal cheques.

Bank charges are horrendous. I receive bank drafts from Germany. The Bank of Montreal takes a flat minimum of $10 on the incoming payment for simply writing a negotiable cheque to me at this end. Because many of my transactions leave me with only a 15% net mark-up, the bank plunders my receivable and sometimes leaves me with as little as 5%. Whenever possible, my German customers pay me through Visa or MasterCard, which I negotiate through a friend who charges me the bank's fee, meaning that I perhaps lose only 3% rather than a far larger amount deducted. The only advantage of MasterCard or Visa for collecting German accounts is that I receive prompt payment without a longer wait for payment by conventional means.

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In general, I consider that credit unions offer a far better, more personal and friendlier service to small customers, personal or business. There seems little justification that merged banks will provide a better, more competitive service to small-business customers, although there is some evidence that in the face of public criticism the chartered banks may now be making a better effort to fill what became a huge void following adoption of computer banking and their points system. I realize the days of personal connection with one's managers are probably gone forever.

That is my brief, and I really have nothing to add to that. As far as I'm concerned, it's a straight condemnation of the system as it presently exists as far as a small-business person is concerned. I have to go around them, rather than through them, to get what I need.

Thank you.

The Chairman: Thank you very much.

We will now hear from Professor Cohen.

Professor Marjorie Griffin Cohen (Member, B.C. Task Force on Bank Mergers): Thank you.

My name is Marjorie Griffin Cohen, and I was part of a three-person task force in B.C. to examine the bank mergers that were proposed recently. The other two people are here as well: Blair Lekstrom and David Rosenberg. David Rosenberg chaired this task force on bank mergers.

We went to eight communities, and I think we had 152 written submissions and a number of submissions that were not written. We also had three research papers commissioned for this task force.

Basically, we found there would be no benefit to people in B.C. or to the economy of B.C. through bank mergers. Our major recommendation was that the bank mergers not occur. We found that the combination of privileged regulatory position, past deregulation of the scope of bank activities, and dominant market position makes the proposed mergers untenable. The combination of mergers and deregulation gives rise to the prospect of prohibitive advantage to one or more chartered banks.

There were three areas we were looking at. One was employment. Our research paper showed, by using three different methods of looking at what would happen to employment, that according to our best estimates, more than 3,000 direct jobs would be lost in B.C. if these proposed bank mergers occurred. We estimated that the total impact would be closer to 7,000 jobs lost as a result of the bank mergers. Across Canada, we estimated 30,000 jobs directly and 60,000 indirectly. We also noted that there would be a considerable gender impact; that is, women would tend to lose jobs because there would be a flattening of the management structure as a result of this.

Generally, with regard to access, the problem, as Professor Bowles indicated, would be particularly access problems in small communities. Generally, we would see greater centralization of loan decisions, greater risk aversion on the part of banks, particularly for investment in small communities, increased service charges, and a larger turnover of account management.

But we were particularly interested in what would happen to customer service, and we were also interested in the argument about the contestability of markets. We found that in discussing this there was generally a considerable confusion between cost-cutting and efficiency. We found there was no evidence of real efficiency gains to be made as a result of large bank mergers; that is, there tends to be efficiency gains if banks are small, but when you get into the large area, it's very debatable whether there are efficiency gains, at least from practices in other countries.

Of course, the worry from customers and what appears to happen is that charges increase, and there's less access for customer service. Customer service tends to be more machine-oriented, and so on.

Generally, we did not see any mitigating measures that could be put forward that would be useful with regard to bank mergers. We had heard from a number of banks, particularly with regard to guarantees around employment. Basically, we found these would be rather short-term measures and there would be no way to enforce them once you went through with bank mergers.

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Secondly, some of the recommendations for mitigation seemed more in the interest of banks than of the communities. For example, there was one suggestion that there be a divestiture of branch banks to meet competition guidelines. This would be disastrous for rural communities. We are not going to see foreign banks increase their performance in communities that large banks leave. That simply is not likely to happen. So these are measures to meet the needs of the merging banks, rather than the communities that are most affected.

The other suggestion, of course, was the removal of the 10% single ownership rule to allow more foreign banks into Canada. We do not think that, as I said, they are likely to move into small communities and service these kinds of communities in B.C.

We have a variety of other recommendations that are not conditions associated with the mergers themselves, but which we think need to happen. These are issues that are discussed in the MacKay task force. For example, we recommend that everyone be guaranteed access to essential banking services, which includes chequing and savings accounts, and that is something put forward by the MacKay report.

We also recommend that there be an independent body, an ombudsman, to adjudicate customer complaints, and that this not be done within the banks themselves. This also is a recommendation of MacKay.

We also recommend various kinds of disclosure requirements, such as are in the U.S. Community Reinvestment Act. We think these should be implemented through legislation in Canada.

We also recommend stronger control over privacy information within and among financial institutions. This is also noted and recommended by MacKay. And we also have various kinds of recommendations about commitments to communities, micro-lending, measures to assess the social and environmental decisions of lending practices, and participation in housing, education, and other kinds of micro-lending programs. Some of these are recommended in MacKay as well. We also have some recommendations about a greater national and regional integration among credit unions, which is touched upon by MacKay as well.

So there are some things in the MacKay task force we certainly do approve of, although we are not giving a caution light to these particular bank mergers. And while they do not discuss these particular bank mergers, we have, and we've done considerable work on that. I think this is the only place where there has been a task force to go out and look at these specifically, and it was overwhelmingly no; we are saying red light to these particular bank mergers.

The Chairman: Thank you. And thank you, Mr. Lekstrom and Mr. Rosenberg.

We'll now get into the question and answer period. We'll begin with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

Ladies and gentlemen, thank you for your presentations this morning.

I do have some questions for you. My first one is to Mr. Bowles. In your presentation you talked about some rural communities having—

The Chairman: Excuse me, Mr. Harris.

Mr. Lekstrom and Mr. Rosenberg, would you like to speak as well?

Mr. David Rosenberg (Chair, B.C. Task Force on Bank Mergers): Yes, I think I should just add a few points. I don't want to be repetitive, so I'll attempt to not repeat what Marjorie said, but perhaps I could point out a few additional items.

The Chairman: It's just that I saw the three names together in the task force report, so I figured you had a spokesperson. If you have three, that's even better.

Mr. David Rosenberg: Thank you, Mr. Chair and members of the committee. Welcome to Vancouver and thank you for letting me speak.

What you'll have here is our report. I tried to have copies for everyone. I know that Mr. Harris will have received a copy, because all presenters who came before our task force received a copy of this report.

I think what I'd like to start out by doing is just pointing out a few common conclusions that were reached by our task force as well as the MacKay task force.

You'll find all of our recommendations in this report. If you take a look at page 56, there's a list of the recommendations. Marjorie has covered most of them in detail, but for your reference, they are there.

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We found, as did the federal task force, that there should be a stronger ban on tied selling; that there should be the appointment of an ombudsman dedicated to the financial sector; that there should be assured access to banking services for low-income Canadians; that there should be community accountability; and that the roles of credit unions should be enhanced.

You'll note that the MacKay task force—and it's page 22 in his report—pointed out that the federal task force did not look at the proposed bank mergers, the two specific mergers. If you look at our terms of reference, which are found on page 6 of this report, you'll see that's the specific reason this task force was created. We went out to look at the two proposed bank mergers.

I believe that British Columbia is the only province that has held public consultation with respect to the bank mergers. Our process was designed to be independent, open to the public, and to take into account the public interest. We went to seven different locations. We held eleven hearings. There were close to 400 people who appeared before us. There were 154 written submissions.

Everyone who wanted to be heard was heard. We heard from students, we heard from seniors, we heard from small-business owners, we heard from British Columbians from all walks of life. We also heard from politicians and bankers. But at the end of the day, with that public input and the papers we commissioned, we sat down and wrote this report for the British Columbia government, and our recommendations were accepted. So this is now government policy as far as British Columbia is concerned.

I won't summarize the research papers, as Marjorie and Professor Bowles have already done so. But what I'd like to do if I could is address two of the main arguments we heard that were in favour of the proposed bank mergers, and why we didn't accept those arguments.

The first argument put forward by those banks favouring merger and those supporters of the merger was that the mergers would allow for greater efficiency, that the efficiency created by the mergers would be somehow passed on to the consumers. We found that was actually a confusion between cost-cutting and efficiency, that in fact the merged banks wouldn't be more efficient because mergers of institutions over a certain size don't create greater efficiencies. As a result, we concluded that the cost-cutting that would take place by the merged banks would be accomplished by branch closures, lay-offs, and decreased service.

The second argument the proponents put forward was that these mergers are appropriate and important because the competition that's being offered by foreign banks in Canada would offset the dominant market share the merged banks would have, and this greater competition would somehow benefit Canadians. We found that even though the regulations that are in place would allow foreign banks to enter Canada, over the last ten years there's actually been a significant decrease in foreign bank presence in Canada. I think the numbers we looked at showed that in 1987 there were 59 foreign banks or schedule II banks in Canada, and in 1996 there were only 45.

I obviously can't go through this entire report with you today, but what I would like to do is leave it with you and suggest that you carefully review our recommendations if you have the opportunity to do so.

We'd like to leave you with this thought. The federal task force recommended that there be public assessment of proposed schedule I bank mergers and other bank mergers. We believe that we in British Columbia have really created the model for public input into the proposed mergers. We went out and invited everyone and we heard from everyone, and we conducted independent research in British Columbia about the British Columbia situation. Whereas the federal task force says we should have a public review before there would be any mergers, we say we have done the public review and the mergers are not in the public interest.

Thank you.

The Chairman: Thank you, Mr. Rosenberg.

Mr. Lekstrom.

Mr. Blair Lekstrom (Mayor of Dawson Creek; Member, B.C. Task Force on Bank Mergers): Thank you, and good morning.

You threw me off there a bit. I had traveled about 750 miles, and I certainly have had many discussions with Marjorie, so I had heard what she was going to say, probably.

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Thank you for this opportunity this morning. I'm going to bring a little different perspective on the part of small communities. As mayor, I represent the city of Dawson Creek, a community in the northeast part of British Columbia of about 11,500 people. The issue of the bank mergers is certainly of significant importance to small communities, I believe, right across this country. The banks have promoted the mergers and they've brought information forward, and certainly I'll touch on the first issue of jobs.

The issue of jobs and lay-offs is a concern. Although the banks have said they're going to try to do this through attrition and most likely will be able to downsize through that method, it's not the issue of being able to do it through attrition; it's the issue of positions being lost in communities the size of ours right across this country, I'm sure, that concerns us very greatly. We have to look to the future for our children. There have to be jobs there. Being able to downsize through attrition is very honourable and with the least disruption to families and so on, but if there are no positions there in the future for our children as they are growing up, I believe that will be a greater detriment to our society than many things we face today.

So although the banks have made many commitments on the issue of jobs, I have great reservations regarding what takes place with these proposed bank mergers when I look into the future.

The other issue we talk about is technology. The banks have put forward the issue of technology and having to merge in order to become more efficient and able to promote the technology in a more cost-effective manner. I've worked in the technology industry for 18 years of my life and certainly I have seen no indication that as we promote technology the jobs are increased. I've seen just the opposite. As technology advances and the communications industry service sometimes—and I will emphasize sometimes—is enhanced, on the other side of that we have the downside as far as jobs go, and I believe that impact on our society and on families is much greater than any benefit we see as a result of technology.

One of the issues that faces small communities across this country—and I'm sure Dawson Creek is going to fall right in line with that—is that we presently have all of the major chartered banks as well as a credit union in our community. Should these mergers go ahead—and I'm going to speculate somewhat, but there's been no indication otherwise—we're going to see the four major banks that represent the four major corners in our downtown core amalgamated into two locations. That would decimate our downtown core in the city of Dawson Creek by leaving two empty buildings. I'm not saying they wouldn't be filled immediately, but certainly it's not an easy job in small communities right across this country at the present time to try to find large tenants to come into a downtown core and fill buildings of that size. They aren't built as commercial space, so you're looking at considerable cost in order to renovate. So that issue has grave concern from the small community perspective.

I'm not going to touch too much on the report. I believe Marjorie and David have gone through that fairly well. It was interesting, though, for the members of the task force going across the province. We heard from a member of the Peachland council here in British Columbia that their only bank had closed its doors in Peachland, and now the residents of that community have to drive into Westbank, which is just on the outside of Kelowna, to do their banking. As I see it, not only has a hardship been created for these people, but after people do their banking, they're not returning home to Peachland to spend their money in the Peachland stores and to do their business there. They've gone into Westbank, they're doing their banking, and as a result, they're usually staying and many of them are spending their money there. That was a grave concern brought forward by this member of the Peachland council. I share that concern.

What we're dealing with here is the question of whether bank mergers are good for the country. As was indicated before, we looked at it on a smaller perspective as a task force: are bank mergers good for British Columbians? The answer overwhelmingly was no, and we went to public consultation.

I think the one thing we have to remember is that certainly the banks are out promoting the mergers. They feel they're in their best interests in order to move forward in the global economy that faces us in the future. But how can a merger be good if it's not accepted by both the customers who keep those banks going and the actual business, which is the bank?

I see one side saying it's good, I see one side saying it's not good from the perspective of British Columbians, but I also see a large number of people out there who are unsure. I think this is a major issue and a very in-depth issue, and certainly over the last number of months, with thousands of pages of literature having been read by me and members of the task force, it's been very much a learning experience as well.

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Do I believe the banks have done a good job educating people about these bank mergers? Certainly not. I certainly hope they don't take offence to that, but they're big business. I deal with people throughout our community all the time, and having listened to the public consultation process, there's a lot of information that has not been relayed out there. In all honesty, there is also the trust factor. When it comes to jobs, who do we believe? There are reports saying there will be massive job loss. There are report saying that we'll try to not have job loss, and if there is, it will be through attrition.

I think we have a situation here where— I understand business and I understand the bottom line. But I also understand what's good for society and what we have to do to promote a good future for our children and for this country and for this province. That's the job I'm here to do, to try to put forward to you. I think we have to look at it in a very broad perspective, not a dollars or cents or in a global economy perspective, but look at our society and what it can do.

It was encouraging to see the recommendations of the MacKay task force reflect some of the recommendations our task force came forward with. I don't believe the issue is a simple yes or no answer when we ask if bank mergers are good or bad. There are many issues here. I could go on, and I'm probably over my time.

I'll touch on one other issue, the issue of agriculture and their access to capital. It's certainly a concern in our area. Agriculture is the backbone of our economy in the Peace River area of British Columbia, and for some time there's been a concern on access to capital. I look back to the early 1980s, when devastating effects took place up in our part of the province.

Overall, the issue of what this means to people and their communities is of the utmost importance to me. With that, I will thank you for the time you have given me here this morning and be more than happy to answer any questions. Thank you.

The Chairman: Thank you very much.

We'll move to the question and answer section. Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. I'll start again with Mr. Bowles.

In your presentation you talked about communities not having access to banking services. I just wanted to ask you, given the use of new technology in the financial services sector, what exactly does it mean to say that a community does not have a financial institution? Are you making that statement based on sort of a bricks and mortar scenario? If you are, how do you rationalize then the technology that now provides virtual banks, Internet banking, telephone banking, credit cards, auto loans, mortgages, RRSPs and RIFs, which are all available over the phone or through the Internet or through independent or franchise agents of the financial services sector? I just wondered about your statement that communities do not have a financial institution or access to services.

Dr. Paul Bowles: Thanks for your question.

In doing this study, you are correct in saying that my primary interest was in looking at the presence or otherwise of physical financial institutions in particular locations. You are also correct to point out that Canada has a very wide network of automatic banking machines. In fact, as I mentioned in my report, it's second only to Japan among the OECD countries in its coverage of ABMs. However, the question arises of what is the degree of substitutability of a full-service branch. I was looking at this and these other electronic means of banking you suggested.

I will read to you, if I may, first a report from the Canadian Federation of Independent Business, which was published this year and which says:

For now, in addition to experimenting with new electronic service methods, governments, financial institutions, and other major suppliers to small and medium enterprises will still have to rely on traditional delivery mechanisms to deal with this marketplace.

This indicates that those are not perfect substitutes for each other, and that certainly for small and medium business enterprises, the presence of a physical branch is still necessary.

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I'd also bring your attention to a study from the United States where Stephen Rhoades, a member of the U.S. Federal Reserve System, suggested that ABMs

—increased in number from 18,000 in 1980 to over 100,000 in 1994. Despite these large numbers, ATMs have proven to be primarily a convenient cash dispenser rather than anything approaching a general substitute for the traditional banking office.

That is a direct quotation. Therefore, I think you are correct in pointing out there are alternative means of delivery, but the degree of substitutability must be open to question.

Mr. Dick Harris: Thank you.

My next question is directed to Mr. Rosenberg, Ms. Griffin Cohen, or Mr. Lekstrom.

One of the main points of your presentation and of your report, which I've read, centres around your fear about the job loss in the banking industry should these mergers occur, and the fact that the banks would probably rationalize their branches, going to more high-technology-type service, and this would result in some major job losses. But this technology change in the banks didn't start yesterday, nor will it start if the banks merge. In fact it started maybe 10 or 12 years ago.

Banks have been forced, by both external and internal pressures, to develop a faster, much higher technology way of doing banking. We've seen the ATMs. We have Internet banking now and telephone banking. So the way of banking has dramatically changed, through technology, over the last 10 to 12 years.

Other industries have brought in higher technology. I can speak of the sawmills in my area of Prince George. I go to mills now that are 500% more productive with half the staff or less because of technology, and they're more profitable. But with all the technological changes banks have gone through over the last 10 years, the number of employees has increased by about 9% to 10%. As well, wages have increased over the last 10 or 12 years by an average of about 7% to 10% a year.

So despite all the technological changes, the modernization, the new ways of doing banking, and the less personal types of services that are available through the banking industry now, employee numbers have gone up and wages have gone up. Given the experience with technological changes in the banking industry and the fact they're going to take another step forward, if they didn't decrease staff numbers in the last 12 years, and in fact increased them, and the wages have gone up, how do you rationalize saying that all of a sudden this will turn around and go down?

Mr. David Rosenberg: Dr. McBride's paper that was commissioned is attached to our report. He goes through three different models for how he concludes there will be, on average, 3,100 direct job losses in British Colombia and around 6,000 indirect job losses. His paper really says for itself how he arrives at that conclusion, but perhaps I can add just a few points of my own from what I've heard.

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Mr. Dick Harris: If I could just interject for a moment, they said those exact things ten years ago when the banks were starting to talk about bringing in ATMs, Internet banking, and telephone banking. The Chicken Littles of the world were saying the sky is falling, we are going to have massive lay-offs in the banking industry, and the whole system is going to hell in a handbasket. In fact that didn't happen.

Mr. David Rosenberg: Perhaps, Mr. Harris, in case you think it's just fear-mongering or from the Chicken Littles from some academic institutions, we should look at the banks themselves. The Royal Bank and the Bank of Montreal themselves say there will be job losses in the short term. I believe the Royal Bank says approximately 10,000 jobs will be lost through attrition and the Bank of Montreal says it will be 8,000 jobs. I don't know if you want to accept the banks' numbers, but I would think that would be a conservative estimate, coming from the banks themselves.

The second thing when you're dealing with technology—and we looked at British Columbia per se, as that was our task—is I believe one of the papers gives the statistic that only 17.6% of British Columbians have access to modems. That means fewer than one in five British Columbians will be able to take advantage of this tremendous technology that's being offered by these Internet providers.

The third thing we heard from British Columbians, with respect to technology in particular, is they didn't really want it, and felt some aspects of it were being foisted upon them. We're not saying technology is bad. In fact I think we heard from British Columbians that it's tremendously convenient on some occasions. I think Professor Bowles was saying that only in small areas, such as using ATMs for cash dispensing, do British Columbians want to use technology. But when it comes to things like small businesses arranging loans, they want to go to their local bank, meet a person face to face, and have a relationship with a manager, who determines whether or not they will be granted that loan. So technology isn't the answer in that respect.

Mr. Dick Harris: I dispute your figures. I know we probably get our figures from different sources, and I want to assure you I don't get all my numbers from the banks. The fact is, the increase in the use of Internet banking and telephone banking has been astronomical over the last number of years. I think you have to admit that five, ten, or fifteen years from now we won't even recognize the banking industry compared to what it is today. We will have taken that huge step forward even from here.

I'm going to play the devil's advocate to your report. You knew I was going to do that anyway. Let's say the agenda the banks have behind all this merger stuff is simply a way to rationalize their branches. They have too much physical infrastructure; they want to rationalize it. Let's just say that's the main reason behind all this.

Given the fact that the banks could simply begin to close their branches anyway and begin to have lay-offs in Canada—and I'm sure that without too much trouble they could arrive at an agreeable way with each other to begin to close branches—let's say their goal was to divest themselves of infrastructure in order to improve their bottom line. Let's say they could do that anyway if they wanted to, and I think they could. Would it be better for them to make a decision to simply downsize their operations, close branches that were unprofitable or made very little profit, go to a business structure that included only the most profitable things about the business they wanted to be involved in, and do that all on their own because they could; or would it be better to develop a new plan of doing business in the country that had set objectives, realistic objectives and commitments as part of it, as will be demanded of the banks when they do bring their proposals to merge forward?

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Remember, there has been no formal proposal to merge to this date. A lot of the things we're reading and hypothesizing about are based on existing conditions and the things we've heard from the banks.

When the rubber hits the road, the banks will have to come before Parliament, the Minister of Finance, and all the other regulatory bodies, with a firm proposal plan that must contain in writing all the commitments they're making verbally now, with mitigation plans as far as employment, branch closures, services and things like that are concerned.

What do you think would be the best route to take from a realistic point of view—our return to letting the banks downsize as they wish, or having some sort of an idea of what they want to do, being able to make a decision based on the firm proposal they put forward?

Dr. Paul Bowles: That's a long question, but I will speak just as soon as I get a chance.

Mr. David Rosenberg: I'll be short, but perhaps I won't answer all of your premises, because there are many in there. If you don't mind, I'll just address one or two, and then let others who are more qualified to do so address it.

You might just ask yourself why the banks are even coming forward to discuss a merger. Of course they're in a privileged regulatory position and they do need government approval, but there's a reason for that. They're not like any other corporations that can just downsize as they see fit. They are chartered and were protected in a regulatory framework for many years so that they could grow without competition or with restricted competition.

Mr. Dick Harris: But there is no regulation that says they can't close a branch.

Mr. David Rosenberg: No, so why don't they just close the branches?

Mr. Dick Harris: My question was what you would prefer. If they want to become more profitable and more competitive, if they want to just vest themselves in the unprofitable areas, such as, in their opinion, maybe some bricks and mortar—

Mr. David Rosenberg: Well, then, Mr. Harris, I'm a little bit surprised. As I recall, when you appeared in front of the task force you made the point that the mergers shouldn't be allowed until there is real competition in place. Let me just finish on that, and I'll pass this along so that I don't dominate all the time here.

One of our studies addresses this in detail. The point is that as long as they're not allowed to merge where they're in a small community, there is real competition. It may not be price competition, but it's competition for that market. As long as they are both there in a community, competing with each other for the business, there is some guarantee of consumer interest or public interest.

The Chairman: Thank you, Mr. Rosenberg.

Professor Cohen.

Prof. Marjorie Griffin Cohen: I just can't get beyond your premise that jobs in banking have increased because of technological change or for any other reason. According to the Canadian Bankers Association, there really has been quite a substantial decrease in employment, particularly in the 1990s, but beginning in 1986. In B.C., we've had a particular problem. We've had about a 5% decrease in employment since 1991. Canada-wide, it's been a 7.5% decrease in employment. Some of this has to do with technological change, of course, but other parts of it have to do with takeovers of trust companies. Certainly the Royal Bank takeover of Royal Trust had a big impact on jobs. Two thousand jobs were lost in that.

So we did have a concern that was legitimate, and we do recognize that some job loss happens as a result of technological change. But when there is no competition between banks, there is much more incentive to close branches.

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By the way, I really do like your idea of a new plan with set objectives. Since there has been deregulation in the banking industry, it is much easier for banks to be less responsive to community needs. It does seem that in Canada we could do something that has been very similar to the kind of thing that has happened in the U.S. under the Community Reinvestment Act. When you have mergers there, you have to look at what has happened to the performance in banks with regard to their activities in the community and the amount of lending. There's full disclosure of information so that you know who they're lending to and under what conditions. We do not have that here in Canada. Also, you have a notion of how much from a particular community is being reinvested within that community. This is not a requirement in the U.S. for normal bank activity, but it is a requirement when you have mergers, and it does seem to be a very important kind of issue that could be extended to bank behaviour.

As David Rosenberg pointed out, banks are in an extremely privileged position. They create the money in our society. We've given them the ability to do that. They therefore have different kinds of obligations than an ordinary business does.

You're quite right, they can close any kind of branch, but the fact that competition exists now prevents them from doing that to some extent. That is an important point. We have the most highly concentrated banking industry in the world right now—or in the developed world, at least—and these bank mergers would make it even tighter. This means we will have less and less competition, however you look at it.

Mr. Blair Lekstrom: Mr. Harris, in way of just following through, I'll go back some time now to the first question you asked about how we can anticipate there will be actual job losses as a result of this technological change, when you reflect an increase over the last ten years.

When we look at the technological industry, if we're going to take two operations that each has a technological platform they input their data into—we'll call them that for today—and if we amalgamate those into one platform in the operation, certainly there are going to be efficiencies gained. With those efficiency gains comes the need for fewer employees for the input into those platforms. That is pretty straightforward in the technological sense of the industry.

So when I look at the numbers in the research that reflect job loss, that is certainly one of the factors I can take in, and I can certainly back that up with fact. When I look at the technological industry, it makes sense. That's not to say the banks are wrong in doing that, but the facts show that we as a society have to be very careful in putting that into a fine balance as the technology advances.

Mr. Dick Harris: My point, though, was that technological changes in the banking industry have gone against the trend that we've seen in other areas in other sectors, where technology has in fact downsized the employees. In fact, in the last ten years there has been a net increase of between 8% and 10% in the employees of the big five banks in Canada, despite all the technology.

Mr. Blair Lekstrom: I'm speaking strictly on the proposed bank mergers that we're discussing here today, and that's what's in front of the—

Prof. Marjorie Griffin Cohen: You should use the Canadian Bankers Association numbers. I think they were more accurate.

Mr. Blair Lekstrom: Thanks.

The Chairman: Did you say you think the banks were more accurate?

Prof. Marjorie Griffin Cohen: Yes. The numbers I have on a decrease in employment come from the Bankers Association. They don't have any reason to not speak truly about that, and this is strange.

Mr. Dick Harris: I think the difference in the numbers comes from the fact that the CBA includes— The numbers I have are specifically for the big five banks.

Prof. Marjorie Griffin Cohen: That's what these are. These are the six largest chartered banks.

Mr. Dick Harris: It's a difference in numbers, I guess.

Prof. Marjorie Griffin Cohen: Yes.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): You said these are the six largest chartered banks.

Prof. Marjorie Griffin Cohen: Yes, and since one doesn't operate here, we basically have numbers for five in B.C. But these are what the banks are putting forward, and there's no reason not to believe them.

The Chairman: If we're fortunate in this country, maybe we'll get a standard information package that has numbers everybody can agree on one day. That will be a great day in Canadian history.

Mr. Milhar, maybe you want to say a few words about this.

Mr. Fazil Milhar (Director of Regulatory Studies, Fraser Institute): Thank you.

There's been a lot of discussion about technology and job destruction. If technology is a job destruction mechanism, the United States should see job destruction happening at this moment.

The United States has the lowest unemployment rate in the world at the moment. The fact of the matter is the United States is the most highly technologically advanced country in the world, and they have created about 14.5 million jobs in the last five years.

Canada is a highly technologically advanced country. We have had technological progress for the last several decades. What we have seen in the last five years is a million jobs created, with about 300,000 or 400,000 jobs created last year alone, 80% of them full-time.

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So where is this notion that technology destroys jobs? On net, technological change improves productivity, economic growth, economic activity and job creation. That's borne out by the facts. In fact, in spite of all the integration that has occurred and the tremendous amount of technological change that has occurred, as we have discussed just now, the employment numbers for the banks clearly show that employment is up at the big five, because the big five have been investing a lot of money in technological changes or new technologies.

There has been a lot of discussion about small and medium-sized businesses, about whether they're getting enough money or not, whether there's enough availability of small and medium-sized business lending. Another point to make is that as of September 1997, the big five banks alone had around $46 billion in lending outstanding to small and medium-sized enterprises. Independent surveys show that 87% of the loans that come up are approved.

Clearly, one has to think through this issue of technological change in the long term, not in the short term. Short term, sure there is going to be some displacement, but that can be clearly accommodated through some sort of attrition or through natural turnover, which occurs in the banking industry at a rate of about 10%.

One last point to make is that banks are not a social service agency. Banks are there to be prudent managers of your hard-earned money. Would you trust the banks taking high risks with your mother's pension, for example? That's the question that each of us has to ask ourselves. Banks are custodians of hard-earned money, yours and mine. It's important that we think of them as people who should be managing their funds very prudently, not lending willy-nilly across the board.

Thank you.

Mr. Jason Clemens: If I could say something very quickly, the statistics in our study controlled for full-time equivalent status. The CBA numbers do not control to the same extent. Our numbers have been validated independently, with discussions through the CBA. According to FTE employment numbers, employment for the big five increased over the last ten years.

Secondly, just on an observational level, if you just think about the branch system ten years ago, what you noticed was that there were ten tellers and maybe two sales people. What we see today is the exact opposite: you see two or three tellers, and you see a host of sales people who deal with GIC sales, account openings, RRSPs, mutual funds, a plethora of services. That's what accounts for the increasing wages. And I would stress that this is what technology allows for—higher-paying, higher-skilled jobs, and a movement towards those and away from people who used to be at the front line in terms of teller service. Again, all of that is included in this study.

Thank you.

The Chairman: Professor Bowles, did you want to say a few words on this?

Dr. Paul Bowles: Yes, perhaps I could just make one quick comment.

The relationship between technology and jobs is an analytical red herring in this context. That debate goes back at least until the time when David Ricardo inserted his chapter on machinery in the third edition of The Principles of Political Economy and Taxation in 1821. The relationship between technology and unemployment since then has been a matter of debate and will continue to be a matter of debate, and I suspect it will not be resolved here today.

What is clear is that the bank mergers are not a change in technology. The bank mergers will lead to job losses, and even the banks accept that. The only question is whether they will be all through natural attrition or whether they will include lay-offs as well. So let's not confuse a bank merger with a change in technology.

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers (Lotbinière, BQ): Welcome. I wish to thank you for your presentation today.

I want to stress at the outset that the MacKay report deals with the whole issue of the future of the financial services industry in Canada, but we cannot ignore the other players who are involved in this review of financial services. I know that a lot of the discussion is about bank mergers, but we must not forget all the other players such as insurance companies, credit unions and the Mouvement des caisses Desjardins in Québec. We need to look at the whole picture.

The position of our party can be summarized around three themes. We first of all need to protect access to financing for consumers and SMEs. We need to look at the whole issue of a monitoring committee. Banks are asking for a lot of things but we would like banks to be accountable to the House of Commons and to be held to very strict rules in order for us to be able to monitor the impact of mergers.

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We also believe banks should be responsible to society and to communities. Any merger should be coupled with community reinvestment like in the United States. I do not support the comments of the Fraser Institute and I have difficulty when they compare statistics dealing with a country of 250 million people and those for Canada which has 30 million people. It is always easy to get into a battle over statistics.

Our main concern, which seems also to be the consensus here today, is to protect access to financing. Do you think there needs to be a wider consultation process in this regard? I know you did a lot of work in British Columbia. The finance committee is making a lot of efforts at the present time: we have met Mr. MacKay and his colleagues who wrote the report and we are travelling throughout the country to hear various organizations. But in view of the importance of this debate and of the consequences it will have on Canada's financial health in the coming 10, 15 or 20 years, should we not widen this debate and our consultations in order to give everybody an opportunity to be heard? My question is directed to all members of the panel. Who wants to tackle it first?

[English]

The Chairman: Who would like to begin?

Mr. Nelson Riis: On a point of order, Mr. Chairman, before we begin, could you remind us what the Minister of Finance has said on this issue? It may be relevant at this point.

The Chairman: It was just that no merger would take place until public consultations with Canadians are held.

Mr. Nelson Riis: On the bank proposal?

The Chairman: Yes, on the specific mergers.

Everybody probably wants to say something. Dr. Bowles, followed by Mr. Rosenberg.

Dr. Paul Bowles: I'll just make one quick comment, and that's to say I agree with the three areas of emphasis that you discussed. Your question seemed to be whether we would support broader consultation. From my point of view, I have enjoyed very much listening to Mr. Heal's comments this morning. I think many of us academics can always debate things, but the evidence from people like Mr. Heal should be heard and has a very good place in this sort of debate.

The Chairman: Mr. Rosenberg.

Mr. David Rosenberg: Concerning your question about public consultation, I agree with Professor Bowles that Mr. Heal's remarks were very helpful. They are the types of remarks that we heard throughout our public consultation process, when people came forward throughout British Columbia.

Specifically concerning further consultations, if you look at our recommendations on pages 56 and 57 and the first appendix to the report of the British Columbia Task Force on Bank Mergers, you'll find that recommendations 6, 14, and 15 specifically address the consultation process. Recommendation 6 deals with the social and ethical responsibilities and the banks. I don't think you were specifically questioning us about that, but in recommendations 14 and 15 this task force felt there should be an act of Parliament prior to a schedule I bank merger. We also recommended that public hearings be convened throughout Canada as part of Parliament's consideration of the request, and that the Government of Canada consult with provincial governments on any schedule I proposed bank merger.

Thank you.

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers: I'm very happy with Mr. Rosenberg's answer. You must understand that I got your brief only this morning and that my questions—

[Editor's Note: Inaudible]— I therefore ask the other witnesses to respond.

[English]

The Chairman: Mr. Milhar.

Mr. Fazil Milhar: I'm all for consultations as long as we can get a set of numbers and can discuss the economic costs and benefits of the mergers in a meaningful way in the long term.

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Let's not look at the issue in the short run, in terms of some job displacements. I'll be the first to admit they're going to occur, but we have to look at this issue in the long term in regard to whether we are going to be competitive vis-à-vis the United States and so on. As long as there's going to be a discussion about the economic costs and benefits of these mergers, as opposed to rhetoric, I'm certainly interested in participating in discussions and public consultations.

Prof. Marjorie Griffin Cohen: When we were travelling throughout British Columbia, it was very interesting to hear people talk about their experiences with banks. It wasn't a situation in which people were angry with the banks; they weren't bank-bashing. By and large, in small communities we heard from people who work in the banks, people who are the bankers, and people who live in the community, and there were good relationships between them. What we did hear was what the real economic costs and benefits are to communities when there are changes in the banks, and there were some particularly interesting ones.

One story I recall as being very instructive came out in Dawson Creek. A businessman there had started a new publishing business, and it grew very rapidly. He had a great deal of difficulty convincing his bank to give him the kind of credit he needed in order to expand as rapidly as his customer base was growing. As a result of this, he changed his financial institution three times within the space of a year. His point was that if there was a merger, he would not have been able to do that and his business would have gone under. Basically the traditional approach of the bankers was if it grows too fast, it's too risky. But he was able to shift his banking. This was extremely important to him, and his business is highly successful.

To us, that is the kind of value that lies in talking to people who are going to be affected by this. It's not that there is an anti-bank sentiment. I know there is some, but it was not what we were hearing. What we were hearing was genuine concern about the economic development of communities—and not just rural communities, but communities in urban areas as well.

You said there should be a community reinvestment provision if the bank mergers are allowed to go ahead. Our recommendation is that we have this even if the bank mergers do not go ahead, because this is an important feature similar to the kinds of things that have happened elsewhere. It would be important to institute it in Canada in order to hold banks more accountable.

Mr. Blair Lekstrom: Just briefly, in following through on the issue of public consultation, it's of utmost importance. That's certainly reflected here today.

There's something that I think would have to be a primary issue in the public consultation process. As I look at what the province of British Columbia did with the commission of this task force that it put together and of which I was a member, I think task forces far too often meet in the large urban centres. They sometimes don't reflect what you may hear in the small rural communities from across our province or across this country. The public consultation process is very significant and very important, but certainly it has to be dealt with in a manner that allows us to get a good cross-section of people right across this country. I think that has to be looked at. A community of 10,000 people certainly may reflect somewhat different concerns from those of a community of 500,000 or a million people.

The Chairman: Mr. Riis.

Mr. Nelson Riis: Thank you very much, Mr. Chairman. This has been a fascinating set of presentations.

I was hoping there would be a banker here, because in the last issue of Reader's Digest, which is my source of research, there was a story about a little girl who put a $46 deposit in the bank. She noticed that banks are making super profits, so she thought she'd parlay that into interest. A few months later, she went to the bank to take her money out but she had no money in it because of the service charges applied every month for not using the account. I thought that was an interesting story. But there are no bankers here today, at least not at the table.

Professor Bowles, I particularly enjoyed your Geography of Finance. If there's one thing that distinguishes Canada from some other countries, it's our constant effort to provide equal opportunity for people, whether they're in a rural area, whether people are trying to get access, whether it's for a small business, a large business and so on. It seems to me this is a fundamental theme that we should be pursuing here. Do these bank mergers provide Canadians with equal opportunity in terms of accessing capital?

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On the one hand, I think this debate has taken an interesting twist. The groups that normally really push for added competition seem to be supporting concentration, albeit with the proposal that foreign banks will come in to provide this alternative. I want to ask a question to whoever wants to answer, because this seems to be the ace in the hole that people are holding: that if the mergers are approved, the foreign banks or alternate service agencies would come in and provide that competition. You've all referred to that in some way. How realistic is this, in your judgment?

I forget who mentioned it a moment ago, but the other point I want to make is that we're talking about a sector that has operated in a privileged environment from its very beginning. I don't think there's any other sector in which we have said, until very recently, that there can't be any competition from outside the country—and there really hasn't even been that much competition, because a lot of them have just fled, have given it up.

We have a sector that has created some of the best banks in the world, at profit levels that are startling even the bankers. I think they're embarrassed; they don't look forward to that date when those figures come out, because they have to take so much heat on all this. So we have created an excellent banking system. I suspect that when you look at banking, it actually does very little banking any more. Most of the banks do all the other things. That's another discussion we're presumably into here as well.

Reports suggest what the British Columbia consultation process reveals: that once you reach a certain size, there doesn't appear to be any efficiency in the system. I forget which study it was that said that with assets over $5 billion, there's very little efficiency in growing beyond that. Of course we're over that with our present banks in terms of the merger.

In terms of competition, is it realistic to assume that foreign banks will give us competition? That's the first question.

As for the second question, I want to thank the B.C. effort. As you said, I think B.C. is the only province that has actually made an effort to go out to consult residents on how they feel about this. I remember that when this process began, I bet Paul Martin on the floor of the House of Commons a hundred bucks that he would approve this in the end, and that this is a bit of a scam. However, because of the MacKay report that calls for public consultation, and because of the fact that Minister Martin has said he would go out and seek consultation, I think I might lose that hundred bucks. I think when Canadians are actually consulted in a realistic way, they will make the case that this is not in their best interests. It's certainly in the banks' best interests, there's no question about that.

First of all, I have a little question for Blair this morning. In the news this morning, Matthew Barrett was saying that if we don't give the banks the right to pursue this marriage, they're going to get us, they're going to cut back on services and lay off employees. If we don't let them do what they want to do, they're going to primarily cut back on services provided to communities. That was his threat this morning.

I can predict what your response will be, but I'm just curious to hear what you have to say. I'll then ask for a response from anyone in terms of the reality of foreign banks providing serious competition for Canadians. Again, we are around this table not representing the banks, we're here representing Canadian interests, business interests, consumer interests. Keeping that in mind, will foreign banks provide necessary competition?

Mr. Blair Lekstrom: Thank you, Nelson. I'll just briefly answer that.

I did not hear Mr. Barrett's comments, but if that's what was said—and I'm certainly believing that—I would have to suggest Mr. Barrett's vision of a good marriage was probably flawed from the very beginning to get to this point. That's what I would have to say in reply to that.

We're using the word “marriage” here when we're talking about the banks. Certainly the mergers are in the best interests of the banks. That's why they're being put forward. But first and foremost, the banks would not be there without the customers, and that's you and me, those of us sitting around this table. We have to consider that, because at the end of the day, a marriage has to work on both sides. If one person is pushing for something and the other side isn't too sure, I'd be very hesitant to proceed until both sides are satisfied and sure of what they want.

The Chairman: Ms. Cohen.

Prof. Marjorie Griffin Cohen: I was interested in your observation that people seem to be taking unusual positions, given those who are pursuing competition generally, those who are arguing for competition. There is one exception to this, and you may have seen it in letters to the editor of the Globe and Mail. John Crispo, an economist at the University of Toronto who normally is supportive of competition generally, has taken a principled position that is against this. That's an unusual thing to see. Normally, he does support positions of the Fraser Institute and groups like that, but he did not in this particular case.

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You asked if there is going to be an increase in foreign competition. A very small proportion of our banking is done by foreign banks in Canada. It's smaller than in almost any other country, much smaller than in the U.S. Only about 10% of the banking here is done by foreign banks.

I do think there are going to be some areas where they are going to be able to increase their activities, and one area may be wealth management, the areas in which you do not have direct access to customers in that kind of way.

So I think there are going to be areas where they can, but by and large this will not replace the kind of decrease in activities in certain areas throughout the country that would be a result of bank mergers.

The Chairman: Mr. Clemens.

Mr. Jason Clemens: I have a couple of things. I think the definition of competition is, at least in the context we put forward, being misunderstood. I would suggest that the work by Baumol and Dr. Demsetz clearly defined competition in terms of barriers to entry, not counting the number of firms in the previous paradigm of neoclassical economics, that you need a hundred firms or some magical number of competitors. So the key then is, are there barriers to entry? If so, remove them and then you have this environment of competition.

There are several papers that we cite in our study, Nathan and Neave, as well as Shaffer, who have looked specifically at the Canadian financial services sector and deemed it a contestable market with only marginal barriers.

Again, in our paper we suggest removing those marginal barriers. So I think the key in terms of what we're talking about, in terms of competitive pricing, service quality and all the things we think about in terms of competition, is the removal of barriers to entry.

Mr. Nelson Riis: So foreign banks aren't the crucial players here, necessarily, in terms of providing that competition.

Mr. Jason Clemens: Yes. The crucial point is that foreign competitors and domestic competitors would be allowed to enter any regional market, niche market.

I would agree with you that I don't think they will enter the national market on a physical level, just given the costs. But if you remove barriers to entry so that if there is monopolistic or oligopolistic pricing in any specific niche or region, foreign competitors and domestic competitors can enter that market readily and can test that market. And what I would suggest is that right now the restrictions we have, even if they are marginal restrictions, limit that type of contestability.

I would also suggest that right now we have a two-tier banking system. Clearly, we have a national banking system represented by the big six banks, and we have a regional banking system represented by foreign banks and the smaller schedule I banks. That's what exists now.

We did quite a bit of statistical work on the United States, and I would caution those who use emerging estimates in the United States and transpose those on the Canadian system. The U.S. system has regional limitations and has a pillar system that is far out of date relative to where the Canadian system is. To say that because you don't have mergers or because there's an efficiency limitation of $5 million in U.S. mergers and that could be transposed to the Canadian system is inappropriate.

I think the areas to look to, again, along with what Drs. Mathewson and Quigley and ourselves have stated, are Australia, New Zealand, and the U.K., which have similar banking systems in terms of not restricting geographic competition and not restricting the functionality of those competitors.

Mr. Fazil Milhar: I would like to add something very quickly.

We won't have the banks behaving like good boys and girls if there's no threat of entry. The only way you can make them behave and be responsive to Canadian consumers is if there is the mere threat that others will come into the market—for example, Wells Fargo coming into southwestern Ontario and lending money through the Internet, for small businesses. Clearly, CIBC, the Royal, Bank of Montreal, and all the other banks—everyone—have to be worried about those kinds of accounts. Once they start losing those small accounts—

You see, the reason they have to start to worry about that is most of the income of banks is on net interest income; that is, you have to have deposits. If you do not have deposits, you can't make money. So to that extent, as long as there is the threat of entry of other firms, domestic or foreign, the banks will behave and be responsive to Canadian consumers.

• 1330

The Chairman: Mr. Rosenberg.

Mr. David Rosenberg: Thank you, Mr. Chairman.

Mr. Riis, in direct response to your question as to how realistic is it that foreign competition will come to Canada, if you look at appendix 5, which is the last appendix in this paper—actually, pages 26 and 27 address it directly—on page 26 there's the heading, “Three prospects for increased participation of foreign banks in the retail banking sector”. It goes through some of the statistics I mentioned in my short opening about the actual decrease in presence of foreign banks in Canada, and foreign banks were all schedule II banks.

I want to make one comment. I can't add much to what's in there. In fact it's set out very succinctly and in some detail that there isn't any real foreign competition coming to Canada, particularly in the retail banking sector. However, I do agree with some of the comments made about foreign competition coming in the mono-lines or in specific niche areas. There is cherry-picking happening. For example, there's a lot of foreign competition in the credit card market. There's foreign competition in the cheque-processing or servicing area.

Let me make a short comment on that. When that type of competition comes to Canada, it doesn't benefit Canadians. What happens in that type of foreign competition is that the foreign country providing the service takes away jobs, profit, and taxes from Canada. This isn't the type of competition in which there is any employment. It's not a brick and mortar situation where there are people actually employed in Canada providing a service; it's just electronic competition. That point is made very well also on pages 26 and 27.

Thank you.

The Chairman: Are there any further comments? Dr. Bowles.

Dr. Paul Bowles: Thanks for your questions. I have a couple of points.

I might recommend to the committee a very good report done by a group from Quebec, Option Consommateurs, on what has been happening to the geography of bank branches in Canada over the last 30 years. It's the only report I've seen that takes a long time period like that. It was produced for Industry Canada for June of this year. It's a very good report if you're interested in that changing geography of finance and the way in which rural Canada has systematically been financially excluded.

Secondly, I was surprised to hear Mr. Clemens say that we should ignore the U.S. and look to Australia, since the Wallis commission recently held hearings on bank mergers in Australia and in fact decided that they should not go ahead. So I would echo his view, but probably for a different reason.

I will, however, quote one U.S. study, by Amel and Liang, in the Review of Industrial Organization, in 1997, where they collected their own data on entry of new banks into the U.S. market. Their conclusion was that new bank entry is much more likely—although even here, infrequently—in urban areas than in rural areas. Their results also indicate that new entry is primarily aimed at large and rapidly growing markets. Therefore, the suggestion that rural banking markets can be viewed as contestable because there is a likelihood of foreign competition is simply invalid. It is unlikely that foreign banks will go to rural areas. There may be increased competition in the major urban areas, but that would be it.

Mr. Nelson Riis: In the last few days, particularly in light of some of the problems experienced by the IMF meetings, Minister Martin has indicated his concern about a large bank getting into difficulty during these turbulent times.

All of a sudden the discussion in terms of bank mergers—larger is better, or worse, or whatever—takes on a different dimension, as in the last few weeks when so much uncertainty appears to be out there, to the point now where the IMF, or at least the G-7, seem almost open to taking some kind of action— I don't use the term “currency controls”, but that's basically what they're saying, that we have to do something about this, which is something you wouldn't even hear people utter six months ago.

• 1335

So in light of the turbulence in these markets and the experience we've seen to date, how valid do you think Minister Martin's concern is about having a megabank that would obviously be exposed worldwide? I mean, that's why they want to get into the merger, so they can do more foreign business.

Concerning where we are today, do you think this ought to raise some hesitancy and some concern until we actually see what's going to happen in terms of the global financial marketplace?

Prof. Marjorie Griffin Cohen: We heard similar concerns from people in British Columbia when we were part of the task force and we were told by the Royal Bank their objective was to have 40% of their assets in foreign activities. That is fairly worrisome. If you have 40% of the activities, and this is one of the two major banks in the country, if something goes wrong, which is a very serious possibility, this could certainly put the whole banking system in Canada in jeopardy.

It's not unthinkable. What happens in international markets is there are big prizes for speculation, basically. There is a huge return if it goes right. But of course there is a very big down side if it goes wrong. What has happened is that often these things are covered by national governments when things go wrong. The U.S. government certainly covered the speculative activities of their banks in Mexico. These things tend to happen because it really does create enormous economic problems within the country if these are not covered.

So we could very well be in a situation where our banks could fail, and we would not be able to allow them to. Nor would we have much control over their speculative activities internationally.

This is a very serious concern, which may actually be the one thing that prevents this from happening.

The Chairman: Are you saying they're not big now?

Prof. Marjorie Griffin Cohen: They're big now, but if you only have two major banks, then obviously they would be a whole lot bigger.

The Chairman: But if any bank would fail now, let's not kid ourselves, then we—

Prof. Marjorie Griffin Cohen: That would be a problem, but certainly you can understand it would be compounded if we have the merger go ahead.

The Chairman: Nevertheless, they're big as it is now, right?

Prof. Marjorie Griffin Cohen: They are. And it's clear there need to be some kinds of financial controls internationally. There's no doubt about that. But that is beyond the recommendation of our task force.

The Chairman: Okay.

Mr. Clemens.

Mr. Jason Clemens: Just briefly, I have two quick points.

I believe that some of the comments go against what we know just in terms of basic loan diversification. The more the loan portfolio is diversified, the more secure the returns are. So I think the notion that if we have 40% international diversification it's going to somehow increase the risk to the portfolio goes against rudimentary understanding of portfolio diversification.

I think more important is the notion of systematic risk. What we don't see is a great deal of variance among the banks in terms of their loan portfolios. So some large-scale failure or a downturn in oil and gas or something that would cause a shock to the banking system would affect almost all of the banks because their portfolios are so homogeneous in terms of one another. So I would suggest you wouldn't see a necessary difference between three major national banks and the five national banks or large national banks we have right now, simply due to the homogeneity of the loan portfolios.

The Chairman: Mr. Riis, are you done?

Mr. Nelson Riis: Yes.

The Chairman: Okay. I just want to follow up on some comments that were made vis-à-vis the public knowledge of this issue.

For those who've gone out there and consulted with, in this case, the people of British Columbia, if you were to rank the knowledge base of the people of British Columbia between zero and ten on financial services sector issues, where do you think they would lie?

Prof. Marjorie Griffin Cohen: I would be hard pressed to do that—

The Chairman: You've graded people before.

Prof. Marjorie Griffin Cohen: I've read people before, yes.

I was amazingly impressed with the quality of the submissions. I think we all were. People were extremely knowledgeable. Obviously there was a range. Some people had knowledge about their own specific situations, but a great number of people did considerable research on this and were very concerned. So we had—if you have a look at any of our submissions—very sophisticated ones, a surprising number of very sophisticated ones.

So I would say people are aware of the significance of banks for their communities, and I think they are quite well informed about what the implications would be for them through something like bank mergers.

• 1340

The Chairman: So they would pass your course.

Prof. Marjorie Griffin Cohen: They would certainly pass my course, probably with an eight.

The Chairman: Well, that's important, because you need knowledge and you need facts when you're making decisions. You can't make them just because they're fashionable.

We're going to move to Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair. As the MP for Vancouver Kingsway, I'm very happy to be home.

I agree with Professor Cohen. Your presentations were very thoughtful, very well presented and very sophisticated, and I enjoyed them all.

I have a couple of questions for Professor Bowles.

This summer the B.C. caucus made a visit to your university. We were impressed by your school. In the meantime, I have a question about your concern for the rural financial system. I know we face a lot of problems in the north besides banking. The forestry industry is in a recession. How would you relate to that? How will it affect your argument for not merging? How would that help the local industry?

Dr. Paul Bowles: Thank you. I'm glad you were impressed with our university, and we'd be happy to accept any more funding you would be prepared to give us.

Ms. Sophia Leung: We're not talking about funding.

Dr. Paul Bowles: Oh, we're not talking about that, okay.

You raised a question concerning the forest industry. As you know, members of the forest industry are big corporate players. I think your question has some importance, because what it points to is the fact that the process of financial exclusion that is occurring through the restructuring of the banking system or financial system anyway, but which would be exasperated by the bank mergers, is also occurring in a number of other areas.

For example, I would point to the problems with us getting rural doctors in B.C. I don't have the exact population here, but Fraser Lake, a small community close to Prince George, has now lost both of its rural doctors because there's difficulty in keeping trained medical staff in rural areas. Fraser Lake inhabitants now have to go Vanderhoof for rural doctors. The local airline, Central Mountain Air, just announced that it's rescheduling its flights. As of this Monday, the community of Dease Lake no longer has any air service, which means a 7.5-hour drive to Terrace. The abolition of the Crow rate and the subsidy that was given to grain farmers to ship their grains has affected the Port of Prince Rupert.

What we've seen is that there has been a very rapid and interlinked change in the service that is available to rural communities. There is a changing economic geography in which certain core cities are increasing their financial and economic weight, and those in the rural communities are becoming increasingly marginalized, so the bank mergers must be seen with that larger context.

Ms. Sophia Leung: Thank you.

To the presenter from the Fraser Institute, you support the bank mergers due to cost savings and efficiencies. What about the human concerns for job losses and the impact on small communities like Dawson Creek?

Mr. Fazil Milhar: The reason for supporting the bank mergers is that of the efficiency gains over the next ten to twenty years. At the same time, I think the concern about job losses is rightly placed at the moment. In the short run, there is going to be a transition and there are going to be job losses, true. But the question is whether you want to protect jobs at the moment and then lose jobs in the long run. The question is also whether you want to think about this issue in the short term or long term.

• 1345

As we have pointed out in our study, clearly the employment numbers are up among the big five banks if you look at the last ten years. The financial service sector is growing because of technological change. You see growth in different kinds of financial service deliveries, such as mobile banking. You see people delivering services in different ways, which would of course create more jobs. For example, if you're trying to get a mortgage today, you can get it over the Internet. There are also people who will come to your home, sit down with you, and do the banking for you. You're clearly going to highly specialized services and high-wage jobs. In the long run, we are going to see employment growth.

If you look at all the phases of technological change over the years—over the centuries, in fact—what you do see is that there is creative destruction, as Professor Schumpeper put it in 1942. At the same time, more jobs come out of that in the long run. That is why I think the committee and the Government of Canada should perhaps be taking a long-term view as opposed to a short-term view on this merger issue.

The Chairman: Thank you.

Ms. Sophia Leung: Professor Cohen, I would like to thank you and your team. I really enjoyed your presentation, and I'll take time to read all of your brief. It's very well written.

On page 56, number 4, you express concern about foreign control. You would like to see the 10% rule maintained. If I can stay on that, why the foreign control? As you know, there's globalization today, and we really have concerns about that overall. Both B.C. and the rest of Canada are very limited in terms of international market. Why do you feel we need to be concerned? That certainly will limit us in terms of our future development.

Prof. Marjorie Griffin Cohen: The elimination of the 10% rule has been a recommendation of the banks as something they would agree to as a condition of merger in order to increase competition. By and large, we feel it would not affect the increase in competition in one way: the major barrier for companies now operating in Canada is the size of the existing firms, their oligopolistic nature.

We were concerned about the 10% rule. Basically, we thought this would be more in the interest of the banks gobbling each other up and having more and more of a monopoly, and then being subject to an international takeover, which is a possibility. Certainly when we raised this with the banks, they did not deny it. They thought it was a serious possibility.

We also recognize that it is possible that the bigger the banks become, the more attractive they will be as a takeover target for foreign banks. We therefore feel the 10% rule is about the only thing that has been in any way effective in keeping our Canadian banking system Canadian.

Ms. Sophia Leung: Thank you.

The Chairman: We'll have one question each from the following members: Ms. Bennett, then Mr. Gallaway and Mr. McKay.

Ms. Carolyn Bennett (St. Paul's, Lib.): Does that include a statement like the one made by Mr. Harris?

The Chairman: You get to make a speech. You could always have sections to your questions.

Ms. Carolyn Bennett: I will restrict my questions to the Fraser Institute. I have some concern that in the mission statement at the beginning it says that you do social research providing for the well-being of Canadians, yet your brief is really confined to cost. I don't see anything about service in your brief. And it certainly says that public policy should not and cannot second-guess business strategy. Those of us who are charged with public policy do feel that we are charged with doing things in the public interest, so I am concerned that there is nothing in your brief about the accountability to communities.

There are big hunks of the MacKay report that you've chosen not to talk about. How do we look at things like the Community Reinvestment Act that they have in the States? You seem to have some appetite for comparing us to the United States.

• 1350

Do you have a comment on what the responsibility is of the banks or of the financial sector to this huge country where there will not be an economic reason to have a branch in a certain area? We could end up with three quarters of the country having no branches. I don't believe the banks have actually helped at the moment in terms of fibre optics or whatever it takes to actually get the rest of Canada connected.

When we were in Iqaluit, in Grise Fjord, or Pangnirtung or Cape Dorset, the only server was in Iqaluit. People have huge long-distance charges to do anything on the Internet. I don't see how you can expect that we, as public policy people, can ignore those things for the sake of what you call competition or cost. If people don't have any service, how can they be reassured that you think the costs will go down?

The Chairman: Mr. Clemens.

Mr. Jason Clemens: Sure. I guess what I would stress is table one, where we have our cost estimates. I would suggest Canadians saving $1,000 to $3,000 over the next 10 years—

Ms. Carolyn Bennett: What if they don't have a branch, and they can't actually do it? What are they going to save? How do you subtract from zero?

Mr. Jason Clemens: No, but again, the question concerns the services they are getting. If the cost of those services—

Ms. Carolyn Bennett: I'm saying if they close the branch, how do they save costs?

Mr. Jason Clemens: Again, in our paper we suggest this bricks and mortar notion of banking is passé in many countries and is right now, as we discuss, being destroyed.

As we go through the paper, as population has increased, the capacity of the branch banking system in Canada has decreased, and the capacity of the Internet, telephone banking, and instant tellers has increased. The question is can customers in rural, urban, or whichever centres you want to discuss complete transaction-based banking such as paying bills, making withdrawals, etc., as well as sales-related services?

What we have noticed in New Zealand, and what we have noticed in southwestern Ontario, where I used to work in the banking industry, is there has been a proliferation of non-branch-based services—that is, mortgage specialists and retirement specialists who are not serviced in a branch. They are in a region, so rather than customers having to make that 2.15 appointment and come running into the branch to meet, the person comes to them.

I would suggest those types of alternative delivery systems would be increased through the process of a merger.

Ms. Carolyn Bennett: Mr. Clemens, my dad owns a flower shop, and every day he has to take off the till. When they closed the branch at the corner, he chose to take his business to the branch across the street rather than have to get into his car every day to go to the closest Royal Bank. He had this option, because his flower shop happens to be in north Toronto. In small communities, people are now being asked to get in their car and have an employee take the till off by driving an hour this way and an hour back. I don't see that the banks have been sending some bonded person to pick up my dad's till every day. I don't see that there has been any real change in the way of doing business. Should my dad even be able to fill out a deposit slip on the Internet, I don't see that anybody has been dying to come and make this easier.

Mr. Jason Clemens: Actually, if you look at the CPA statistics for the last 10 years, we now see almost half of all transfers through the CPA are electronic. That would be such as the direct payment system whereby you go in and at your dad's shop, for instance, the person, rather than giving him $20, will use an Interac card.

Further to this, I think the proliferation of e-cash and the new e-cards, which I think we will see in the next five years, is going to further reduce the need for physical cash.

Most of our transactions will not involve going in with a $20 bill and getting change. I think as technology advances, and if we don't impede this technology, the kinds of things you are talking about will simply be memories of when we had to exchange $20 bills, and it will be much more electronic-based.

Ms. Carolyn Bennett: If only one person comes and pays cash in the store every day, my dad has this problem of having to get this money to the bank. At 98% electronic banking, we still have a problem.

Mr. Fazil Milhar: Can I quickly respond to another concern you have raised about public policy, which politicians have a responsibility for? In 1997 the six major banks made about $7.5 billion in profit and they paid about $6.9 billion in taxes. They paid about $66 million or so in charitable donations.

• 1355

If we are to have a competitive system so they can perform well, so they can pay high taxes and can provide high-paying jobs, we want to make sure there is a regulatory framework allowing them to do this. What you do not want to do is tie their hands behind their backs and ask them to do a trapeze act. And to that end, because there's competition coming from these new technologies and new banks coming from the United States and so on, we need to ensure our banks can compete. We want our guys to be winners. If they're not winners, they can't have high-paying jobs, they can't create jobs, nor can they pay the high levels of taxes they pay right now.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Could I speak now? Since I'm limited to one question it will be very general.

I've much enjoyed this morning. It certainly represents a continuum of opinion one hears, not only in British Columbia. You don't have to be in British Columbia to hear this broad range of opinion.

But it also seems to me we are entering into an area where we may regard the study of economic models as a science and try to turn this into a scientific process. No offence to the economists here this morning, but I'm not certain it's a science that merits the kind of accuracy—I'm trying to be nice about this.

The Chairman: Is there a question?

Mr. Roger Gallaway: Yes, there is a question.

I want to ask the question because I'm being requested to ask it. Mr. Clemens or Mr. Milhar raised the point that 87% of SME loan applications are approved—I believe you said this—yet we have a group called the Canadian Federation of Independent Business, which is violently opposed to any bank mergers. They say your numbers are bogus. In fact, their research would indicate the opposite. Groups such as Democracy Watch that have appeared before our committee have maintained the banks will not reveal any data whatsoever that would allow one to arrive at this kind of a conclusion.

So we have this very precise number of 87% approval, yet we have a number of other groups who are immersed in the industry saying this is not true. How do you respond to this?

Mr. Fazil Milhar: I'm just citing that. It was an independent survey. There are independent surveys done on the banks on whether loans are approved or not, especially in the small and medium-sized enterprises. I was quoting a study, an independent survey, that showed 87% of small and medium-sized enterprise loans had been approved.

Now, there are some studies coming out of some banks—I can't mention the name of the bank, of course, but I've heard this from sources—that the approval rate now has gone up to 93% in one particular bank.

We can debate the issue of small and medium-sized lending and whether there is enough lending, but it's important that we consider the issue of venture capital, raising of capital and venture capital, as possible sources of financing for small and medium-sized enterprises. Banks traditionally have not done this, and perhaps it's time to think about this issue in a larger picture.

Prof. Marjorie Griffin Cohen: I think what you'll find is the 87% figure does not include the kind of self-selection of people who do not go through applying to the large banks for loans. But it's quite interesting, because a great number of the small loans are completely secured, so there is virtually no risk on the part of the big banks. This is by groups such as Community Futures, etc.

Clearly, there is variation among the banks about their service of small businesses. Some have decreased considerably the proportion of their lending that goes to small business and others have increased it slightly.

Certainly you are familiar with the reports that have come out by the Tony Ianno task force giving this kind of information on the parts of banks.

The Chairman: Thank you.

Mr. McKay.

Mr. John McKay (Scarborough East, Lib.): Last and least, is that it?

I want to talk to the Fraser Institute about a sort of disingenuous response to Mr. Riis' question, because it's a very troublesome area.

• 1400

These proposals, if they go through, would basically control something in the order of $1 trillion worth of assets, which is basically equivalent to our GDP, which is about five or six times the size of the entire federal government's budget.

The banks have not been known for their perspicacity in investments. Particularly, one of the proposing banks, the CIBC, has been swallowing Oppenheimer and having some difficulties. The market has basically discounted its shares by 80 down to 40—something in that range.

If these mergers go through, I suggest to you we would cease to have a shareholders' problem at CIBC and would have a national problem with CIBC because we cannot afford to let a banking system go down. That is ultimately the major question that follows with these mergers. We've been abused. Mr. Heal has been abused by his banks before, and I dare say that afterwards he'll be abused, regardless of whether it's one way or the other.

The real issue here is that the proposed mergers, as contemplated, are way too large for the size of our economy and the ability of our economy to seek reasonable alternatives.

Mr. Jason Clemens: Thank you. Again I would reiterate the comments I made in response to the distinguished member, Mr. Riis. On the notion of systematic risk, we'd have to articulate that there is a substantial difference between the loan portfolios of the five national banks. If we don't see a substantial or material difference between the loan portfolios, any type of shock you're discussing would affect the banks equally, with some variance.

Mr. John McKay: I don't understand that response, because the difference between the loan portfolios has nothing to do with our current situation. You could have a blue-chip loan portfolio, but in the context of what we are presently looking at—trillion-dollar meltdowns in markets—it doesn't matter. So the proposed mergers would then impose an enormous problem on the banking system, and therefore the people of Canada.

Mr. Jason Clemens: But what I'm suggesting is that the magnitude of the problem is the same, regardless of whether you have three or five, given the fact that you have—

Mr. John McKay: No, it's not. Let's say the TD Bank fails and its assets are in the order of $150 billion to $200 billion. The best estimate I've heard is that the government would end up eating about 10% of that. So it's one thing to be eating $20 billion; it's another thing to be eating 10% of $500 billion or something like that.

Mr. Jason Clemens: No. You're suggesting something extraneous to the system could cause a shock and one of the major banks could fail. I'm trying to suggest that if you look at the data for the loan portfolios, they are significantly homogeneous. The banks tend to have the same types of proportional loans regionally and sectorally, so any shock that would affect the TD Bank, in your example, would, to either a greater or lesser extent, also affect the other major banks, given the homogeneity of their loan portfolios.

So I guess the scenario you gave would be a situation in which there was an external shock or an internal shock that only affected one of the major banks—in this new scenario one of the major merged banks—and would not at the same time affect the other banks to the same extent, greater or less. My response is that I don't see that type of shock happening. The example you gave of CIBC and Oppenheimer is an integration problem, and I would agree with you that there was marginal discounting of their stock in the market. But again, it's not to any extent a failure.

Mr. John McKay: Fifty percent is a lot.

Mr. Jason Clemens: But most people were looking at the financial services market, and the discounts in most banks in the U.S., Canada, and Europe are not due to CIBC's integration problems; they're due to loan exposure in Asia and Russia. Again, this is the type of shock we're talking about that will affect and has affected all of the banks to nearly the same extent. So again, it's a question of the systematic loan portfolios that each of those banks has, and whether or not there's a differential that would affect them differently.

• 1405

Mr. John McKay: I'd turn your argument exactly on its head, because you say they all own similar portfolios of stocks, so if we run the tape forward and there is global meltdown in terms of the value of stocks, and the merger has gone through and we have a bank failure, we will have to eat $50 billion, and that will become a Government of Canada problem. If the mergers don't go ahead, it would be the shareholders' problem.

Mr. Jason Clemens: I don't see how it wouldn't be a shareholders' problem now.

Mr. John McKay: Now it's a shareholders' problem.

Mr. Jason Clemens: The mergers will effectively double the market capitalization and book capitalization of the four merged banks going to two. So you would see a significant increase in the market capitalization in terms of the equity.

Mr. John McKay: With that market capitalization in a meltdown of global markets, the Government of Canada would have to save the banking system.

Mr. Jason Clemens: I apologize for not being clear enough. The point is that if you have $100 million in equity distributed among five major banks and you then merge four of them to two, you will still relatively have $100 billion in market capitalization. The loan portfolios will still be significantly the same, except they will have been compacted. So the argument I'm putting forward is that in order for it to affect the merged entity more than it would have affected the pre-merged entity, you'd have to see a difference in the loan portfolios or a difference in the equity structures pre-merger and post-merger. None of the suggestions and plans I've seen suggest you will see those types of structural changes.

Mr. Nelson Riis: Going back to Jason's comment, when Mexico opened up we saw one of the Canadian banks get very exposed in Mexico and take a real beating. That was one of the banks. Wouldn't there be a likelihood that if we had the mergers approved, there would be a tendency for one of the big mergers to move into one of the newly emerging markets, maybe Indonesia, Brazil, or whatever, and become very exposed? It wouldn't be all the banks, but one big bank would be exposed heavily in let's say Brazil or the Latin American market and could go into a free fall, and the other banks wouldn't be there. They would be in other places. I don't know where else you would go and be healthy today, but let's say they're not in Indonesia or a few other spots. Wouldn't this be a possible threat?

I think Minister Martin is concerned about this kind of thing, as opposed to one sector, like oil and gas, getting into trouble or whatever—a bank being exposed geographically in an area that goes into a free fall.

Mr. Jason Clemens: I would agree with you and would agree completely that systematic risk is an important question. I would agree with Mr. McKay that if you had material differences in the loan portfolios it would be an important question. But it's interesting if you look at the diversity. For instance, the Bank of Nova Scotia is the largest bank in the Caribbean region and is the most diversified internationally, relative to the other banks. If you look at the derivation of their earnings, they're still relatively homogeneous to the remaining four national banks. So even though they have more exposure in the Caribbean region relative to the other banks—the Bank of Montreal, for instance, has more exposure to the United States market than most of the other banks in terms of retail banking—you still see a great deal of homogeneity in terms of the structure of their loans.

I would just reiterate that the systemic nature of their loan portfolios doesn't change, given mergers.

The Chairman: Thank you.

Mr. Jason Clemens: I would just add quickly that a great deal of information is proprietary. With the amount of data we have to analyse, I would agree with you that specific geographic diversification, if it's material, is worrisome. I would give the 1992 example of CIBC where they actually incurred a net loss because of the losses in Canary Wharf. But again, the data that is available suggests the loan portfolios are much more homogeneous than we put forward that they earn.

Mr. John McKay: That won't change.

The Chairman: Thank you.

Ms. Cohen.

Prof. Marjorie Griffin Cohen: I just want to make one final small point. I think Roger Gallaway raised something very important, in that when economists talk about markets, this is not a science. There is no degree of accuracy, and in many cases this belief in self-regulatory markets is an ideology more than anything we see in practice.

When we focus on things like these kinds of issues, particularly when we narrow them down to simply employment issues and access to customers, we don't look at a very much bigger issue that will happen as a result of bank mergers—that is, what it will mean for our governments and for our people to be able to exert themselves in order to have the kind of society we want and the kind of economy we want when there is an enormous concentration of wealth in the hands of a few people in this country.

• 1410

I think this concentration of power will jeopardize important objectives of our economical and political systems. The important thing is that these systems serve people, not that the systems be dominant and that people somehow have to then conform and be a part of the system in that way.

The Chairman: Thank you, Professor Cohen.

I have a question, if I may.

Mr. Dick Harris: Make it short.

The Chairman: You're right, a concentration of wealth and power is a very important issue. Who owns these banks?

Prof. Marjorie Griffin Cohen: That 10% ownership rule is important. We say that people own the banks because their pension systems are invested in them, etc., which is true, but an enormous amount of power is held by the people who are in control of the banks. It's one reason we should not get rid of the 10% rule, by the way, so that people can still continue to be important participants in the bank. But there's a difference between people having their pension funds in there and having any power over what's done with that money. That is a big difference.

The Chairman: But they receive benefits from that in the form of dividends. They make a profit.

Prof. Marjorie Griffin Cohen: They do. But that's not the major issue for people. Whether or not they get a profit in their pension plan is not the overriding concern. It's the significant control over economic and social policy in this country that's the main worry. If the big concentration that exists now in Canada becomes larger, this control will be even bigger.

The Chairman: Are you concerned about the fact that when you look at the share held by—I'm talking about some measures of domestic industry concentration—the five largest banks of personal deposit and all the deposit-taking institutions, it is 58.1%, according to the MacKay report, and that when you look at the five largest life insurance companies, life insurance premium concentration is 59.3%? The point I'm making is this. Unfortunately, Canada is talking about these mergers as if they are the only things that really matter to the financial services sector, that a sector that employs 500,000 people is responsible for 5% of the GDP, and that whether we like it or not, the status quo simply is not an option.

Unfortunately, this entire merger issue really hijacked the public debate. So we're not talking about minimum privacy standards, and we're not talking about issues that are important to Canadians.

There's the whole issue of competition, the ability for us to recommend measures to enhance competition. What better way to give consumer protection than to enhance competition in the marketplace? What better way to modernize the credit unions? What better way to provide second-tier financial institutions that would enhance competition? How can we enhance the entrepreneurial spirit in Canada by allowing people to start up financial services sector firms that may in fact provide the competition we all talk about?

So I think the debate has to go above and beyond the merger issue, not to mention the fact that this committee is not even looking at the two proposed mergers. We are looking at mergers as a legitimate business practice that is practised throughout the world.

What we want to do is to look at the issues of public interest— for example, the jobs issue. Here's a perfect example where governments of all colours and stripes have downsized because they wanted to build efficiencies into their own system and were applauded by Canadians from coast to coast. On the other hand, we have banks that have always criticized big bureaucracies. And what are they doing? Well, they're creating this huge bureaucracy by joining. So do you understand the inconsistencies of the debate? I mean, there are so many. But I think we need to look seriously at some trends.

• 1415

People are disputing the issue of technology. Well, one thing I know for sure and I can say with certainty is that we've moved from the coin: we went to the bill; we went to the credit card; we went to the debit card; and we're going to the smart card. That I'm certain of. Nobody can dispute that.

I also know there used to be 500 people working on a farm until the tractor came into play. That's for sure. And if there's anybody on the panel who can dispute that, let me know. Right?

Mr. Blair Lekstrom: It's a big farm.

The Chairman: Yes, that's right, it's a big farm.

Do you know what I'm getting at? There are certainties we need to address head-on. It seems to me everybody cares about the issue of having branches in small communities and that sort of thing, but there are certain efficiency realities we also have to look at.

So now this is the question, by the way. I just outlined to you the concentration, right? Now, if this is going to result in saving a bank branch, would you let banks or deposit-taking institutions sell insurance and get into the leasing business?

Mr. Blair Lekstrom: Are you asking if they were allowed to do that and it meant saving the branches, would I be in favour of that?

The Chairman: Yes.

Mr. Blair Lekstrom: I think prior to just a simple yes or no, I'd have to look at the implications that are tied to that. But certainly I'm not in disagreement that we have to look at all aspects in order to cover the issues I brought forward as far as the small-community perspective is concerned.

If the issue is there, and the impact resulted in the betterment of small communities across this country, certainly I would entertain that. But I would certainly not sit here today and commit a yes or a no without having all the facts in front of me and being able to investigate them. I think far too often that's the case when decisions are made.

I think there is great room for us to look at a number of options, as has been indicated through the MacKay report, when you look at the financial services sector. I don't believe the status quo is acceptable either. I don't think anybody around this table believes change isn't inevitable. But again, I go back to the issue of balance. Balance in society with the change that's coming is the most important aspect we have to deal with, whether it be in the financial services sector or any other sector we deal with.

The Chairman: Let me rephrase the question. Do you think branches have a better chance of surviving if they're selling more products or providing more services?

Mr. Blair Lekstrom: By providing more services, yes. Now that product, again, I would have to sit here and investigate that without committing myself to saying something that two weeks down the road, after investigating, I would find to be a wrong statement.

Again, I'm prepared to look at all aspects of it for the betterment of our communities. I think that's what we're all here to do, whether you're on the bank side, on the side of small communities, or on the side of government. Everybody has a perspective here, which is to look at what's in the best interest of the public out there.

The Chairman: How many branches do you see the insurance companies have in your town? Is it a place where people go often?

Mr. Blair Lekstrom: Yes, they do, actually.

The Chairman: To insurance brokers? To the smal—

Mr. S.C. Heal: They go to insurance agencies, but not companies, like Dawson Creek. In fact I'm personally very critical of this idea that the banks should move into the insurance business, because having been in the insurance business for a good many years, and having professional qualifications, which I have to work for, I might add, I know this is not something I would want to bestow on an inexperienced bank clerk who is doubling as an insurance agent or something along these lines.

The other thing is, where does it stop? They will talk in terms of personal lines insurance, auto insurance, and the stuff that affects the individual personally, but I suggest that in an agricultural community there are very special risks associated with the business of being a farmer—for example, insuring livestock, crop insurance, and hail insurance.

• 1420

In my own section of the business, which is marine insurance, I know full well there's absolutely no way that a bank that is alive today can provide the service that is provided by specialist marine underwriters and highly trained insurance brokers and a market structure that is as pervasive as the banking system itself, unless it is going to take the whole structure of marine insurance and move it bodily into the bank.

The Chairman: Mr. Heal, this again is an either/or situation. Going back to what Ms. Bennett said, there are areas in our country that are isolated and that can't access technology. That's a reality. But there's also another reality; that is, there are people who can access technology, so you have to proceed with technological advancement. The world is not a homogeneous place, so what you have to do is to address the various needs of individuals. The point I'm making is that an expert in that particular insurance field will still exist. Is that right?

Mr. S.C. Heal: Yes.

The Chairman: You mentioned being involved in a specialized field. We have that situation already. You can co-exist, believe it or not. Why don't you give me a choice as a consumer, so that if I want to go to my branch and buy insurance, I can do that, or if I want to lease my car, I can do that? Why not?

Mr. S.C. Heal: That's a matter of choice. But my own personal choice would be that if I were buying insurance of even the simplest nature, I would want to get in touch with my insurance broker, who I know has the knowledge to back it up. Many of the credit unions have insurance subsidiaries of one kind or another, and they probably operate fairly efficiently. But I still wouldn't use a credit union insurance outlet in preference to a first-class insurance broker for insuring my home or anything else.

The Chairman: Just a physical structure—

Mr. S.C. Heal: Yes, to some extent I suppose you're right. But on the other hand, having had extensive experience in the industry, I think I speak with some degree of authority about the problems that are involved in a very highly specialized industry.

The Chairman: So if you have a subsidiary that is physically removed from the brick and mortar of the bank, that's okay. But should the individual be within the branch, then that's not okay.

Mr. S.C. Heal: That's my inclination. For example, the banks have taken over the securities business. CIBC owns Wood Gundy and so forth, and it goes on and on. I agree that there probably has only been a change of ownership there, not so much a change of philosophy. A securities dealer is still a securities dealer, whether he's owned by the original shareholders of Wood Gundy or by the present-day owners, the CIBC.

The Chairman: Mr. Riis.

Mr. Nelson Riis: I was just noticing the time. There are a lot of people here who were supposed to be on at 11 o'clock. They probably all have busy lives, and I just wondered if you should—

Mr. S.C. Heal: I think I've made my point.

The Chairman: Okay. The reason I ask these questions is because I think the debate should be a little bit broader than the two mergers.

Anyway, on behalf of the committee I would like to thank you very much. It has been a very interesting discussion.

The meeting is suspended for two minutes.

• 1424

• 1428

The Chairman: I call the meeting to order and again welcome everyone here this morning.

First, we'll hear from the Vancouver Board of Trade. Mr. Darcy Rezac, welcome.

Mr. Darcy Rezac (Managing Director, Vancouver Board of Trade): Thank you, Mr. Chairman.

The Vancouver Board of Trade is a business association that's funded entirely by business, with a membership of 4,400. We've been around since 1887. All the banks are members, and most of the credit unions in the lower mainland are members as well.

Our business is economics. We provide government with advice, both solicited and unsolicited, on a variety of issues, mainly in the economic arena. Every now and then we'll wade into areas like crime and so on and comment on that as well, but essentially it's economics. We're in very tough circumstances in British Columbia right now, as you probably know.

• 1430

We're members of the World Economic Forum in Davos, Switzerland, and are off to a conference later this week. We receive lots of foreign visitors, as well.

One of the things we're very proud of in Canada, when we meet with people from abroad and travel abroad, is the strength of our financial institutions. Of course we don't have to look much further than some of our closest trading partners in Asia to see what the obverse of that coin reflects, so we have to be very proud of that.

We at the board are very short when bank bashing becomes the sport of the day, because we think the strength of our financial institutions and their profits are something that ought to be celebrated.

Bank profits, after all, go to three places. One, they go to taxes, and 70% of taxes go to social programs through transfer payments. Profits go to dividends, and one Canadian in two is a Canadian shareholder, therefore they benefit directly from bank profits. And the third place that profits go, of course, is to retained earnings to do more of one and two above. So bank profits ought to be something that we celebrate. Certainly in British Columbia bank profits have been criticized roundly by some factions, including the provincial government, but I think it's something that we ought to celebrate. So that's a bit of a preface for my remarks.

Essentially what I want to do today is bring to your attention the importance of the banking industry to the economy of British Columbia—and I've handed out copies of the analysis to your staff, Mr. Chairman.

We are well served by financial institutions in British Columbia. Credit unions provide good competition to banks. Banks provide good competition to banks.

We think a study we did back in November 1997 on the economic impact of the banking sector is a very important one for us to bring to your attention. There are two main points; I won't go through the whole report.

You've heard data from your earlier presenters in terms of the service to small business. Small business can go to a variety of competitors in B.C. Credit unions provide an excellent service and are excellent competition for the big banks. The big banks themselves approve most of the loans, 75% of the loans that small and medium-sized business apply for, according to the research we did.

As of February 1997, total deposits and like items held by banks in British Columbia amounted to $66.8 billion. Loans and similar items were $81 billion. Thus the banks acted as the net importers of $14 billion of capital used by residents and businesses in this region. So there's a net importation of capital.

Also, in terms of how our banks shape up with respect to the cost to small and medium-sized business—and most of our members are small and medium-sized business—on the cost side, according to our research, the spreads in Canada are much better than those in the U.S. We show that the spread between bank rates, what banks pay for money and what they borrow and the rate at which they lend out that money, in Canada was 1.73%; in the United States, 2.35%; in the United Kingdom, 2.91%; in France, 3.1%; in Italy, 5.7%; and in Germany, 7.9%. So in terms of the cost of money, our members are well served.

I suspect that has a lot to do with competition, and certainly competition by credit unions provides for much better pricing from the consumer's perspective.

After reading the MacKay report, I find it's a well-crafted piece. If the board of trade were to write a piece on the challenges and opportunities in this sector, we'd be proud to have a piece like this. It was a very thoughtful document, and we couldn't find much fault in that.

In terms of the merger, it's our observation that bigness doesn't necessarily mean worse service. Does British Airways provide worse service than Canadian Airlines, even though it's 10 or 15 times as large? Not necessarily. Does American Airlines, which has 1,000 aircraft, compared to the 120-some-odd that Air Canada has, provide worse service? Not necessarily. So we don't have a quarrel with size per se, particularly when you take a look at what's happening around the world, with the changes that are taking place in technology and in terms of where we compete.

• 1435

We do think it's important, though, in terms of concentration of financial assets, that, as the MacKay report points out, there ought to be more competition. And we feel credit unions should be able to operate nationally. That's absolutely imperative.

If the concentration of combining the banks simply resulted in fewer players in the field, then we would have a concern. But we're confident that with the changes that are taking place in technology and globalization and so on, and hopefully in legislation and regulations, increased competition will be available. Already we see increased competition in Vancouver from others that haven't been here before, and if that persists, the proposed merger should be able to provide for a stronger banking system and for others such as the credit union movement to become more national in their scope.

So essentially that's it, Mr. Chairman. I will be happy to entertain questions.

The Chairman: Thank you very much, Mr. Rezac.

We will now move to the Credit Union Central of British Columbia, Mr. Wayne Nygren. Welcome.

Mr. Wayne A. Nygren (President and Chief Executive Officer, Credit Union Central of British Columbia): Thank you. It's good to be here. Thanks for inviting us and giving us an opportunity to share some of the issues that we have and would like to talk to you about.

My name is Wayne Nygren and I'm the president and chief executive officer of the Credit Union Central of British Columbia. I'm also on the board of directors of the Credit Union Central of Canada, and I chair their national legislation committee. I'm also on the board of directors of the Canadian Payments Association, representing the credit unions in Canada.

With me is Richard Thomas, my vice-president of government relations and corporate secretary. He also serves with me on the national legislation committee and has been on the public policy committee of the Canadian Co-operative Association since 1981.

Before we begin to talk about some of the issues, I'd like to give you a brief sketch about the size and scope of the credit union system in British Columbia.

Since 1960 we've established ourselves. We've grown to $21 billion in assets; we serve over 1.4 million British Columbians; and we have 335 locations in 125 communities. Collectively, credit unions in B.C. operate 418 ATM machines, and there are 28 communities in the province in which the only financial organization is a credit union. We can talk a bit about that a little later on.

The number of credit unions in British Columbia peaked in 1961 at 328, and that number has declined almost annually to the point where British Columbia now counts just 86 credit unions with 335 locations. Since that time membership has increased sixfold and assets have increased eightyfold. Today the system in British Columbia, including our Credit Union Central and Stabilization Central, has in excess of 7,000 employees—a major contributor to the economy.

While not all credit unions in British Columbia are of the size to address all of the financial service needs of their members, more and more are coming into a position to do so. Credit unions offer a full array of not only deposit-taking and lending services, but also card services, trust services, mutual funds, and brokerage, through wholly owned subsidiaries, in both general and life insurance.

Credit unions in British Columbia have owned and operated insurance agencies since 1960. Today 38 credit unions operate their own insurance subsidiaries. Also, as in most other provinces, credit unions in British Columbia have incorporated a central credit union to serve as a system central banker, service corporation, and trade association. In B.C. that organization is Credit Union Central of British Columbia.

Credit unions in British Columbia have also established a second central credit union, which is Stabilization Central. That organization is legally separate and distinct from the Credit Union Central of British Columbia. It was established in 1989 to work with any credit union that encounters managerial or financial difficulties, a responsibility previously performed by the provincial government.

• 1440

The credit rating of the credit union system is very important to us. At this point in time we have one of the highest ratings in the country. Our ratings are the same as those of the big banks—that is, R1-mid and A1+—from both the rating agencies.

On the national front, the Credit Union Central of British Columbia is the largest member of the Credit Union Central of Canada. We have 30% of the shares of Canadian central, and we have three representatives on a board of eleven.

Let me turn to the MacKay task force. The credit unions of British Columbia strongly endorse the four main themes identified by the task force: enhancing competition and competitiveness, empowering consumers, meeting the expectations of Canadians, and improving the regulatory framework.

Starting with the credit union system, we commend the thoroughness and accuracy of the task force as a portrayal of the strengths and weaknesses of Canada's co-operative financial sector. We would agree that while government cannot legislate a vibrant second tier of financial institutions, credit unions in Canada have developed and continue to develop as the primary competitors of Canada's chartered banks in serving the retail needs of Canadians.

We support the task force recommendation that changes be made to the Co-operative Credit Associations Act of Canada to permit central credit unions to better serve their members, both through revisions to the definition of the word “control”, for the purposes of section 390, and a revision of the minority investment regulations, pursuant to the section of the CCAA. That's really the 10-50 rule.

We also welcome the recommendation of the task force that the federal government adopt legislation that would permit the establishment of co-operative banks in Canada, so that we can effectively move beyond our provinces. As you may know, both Canadian central and a number of provincial central credit unions are engaged in reviewing the ways in which central credit unions serve both credit unions and their members. Those discussions have been extensive and, as Mr. MacKay would recognize, democratic and divergent. Representatives of Credit Union Central of British Columbia are at the forefront of these discussions, and we look forward to bringing a national system consensus to the federal government by the end of the year.

More generally, credit unions in British Columbia are strong supporters of greater competition in the financial services industry. A good case could be made that no financial institutions in Canada are more entrepreneurial than Canada's credit unions. To that end, we support the task force position that new ways be found to encourage both domestic and foreign entrants into Canada's financial services marketplace. Greater competition best serves Canadians. We believe this should be the touchstone for any decision by the federal government in respect of revising its financial institution legislation and in considering a merger of financial institutions.

We also believe that governments and regulators ought to strictly enforce legislation that prohibits anti-competitive practices. Other than chartered banks, financial institutions in British Columbia have been statutorily prohibited from tied selling since 1990. We commend the federal government for having recently proclaimed similar provisions in the Bank Act.

That said, we note the clear difference between cross-selling and tied selling. The former is and must remain an acceptable business practice, one that can and should benefit consumers. The latter should be prohibited absolutely. Mr. Chairperson, we support the recommendation of the task force that both federal and provincial governments seek to reduce overregulation and duplicate regulation, while ensuring that a prudential regulatory framework remains current with the changing marketplace.

Just to comment on that, some positive negotiations have taken place with the federal and provincial governments even regarding our own regulation. We're regulated both federally and provincially. In the past our internal auditor, our external auditor, the provincial regulator, and the federal regulator all looked at exactly the same information. The federal regulator and the provincial regulator have now come to the agreement that they will do inspections in alternate years. The only problem is that they haven't reduced the cost, but they have reduced some of the time it took to have all the regulators come in.

Credit unions in British Columbia do not support harmonization. Harmonization can lead to regulation with the lowest common denominator. If you look at the system, at what has happened, and you look at the strong systems in Canada, that's very obvious: British Columbia, a very strong system; Saskatchewan, a very strong system; and Quebec, very positive legislation, enabling legislation, and credit union legislation. Yet if you look at organizations like Manitoba and Ontario, where the system has certainly not been very dominant, the regulation is really an inhibitor for moving forward. So the regulatory environment has played a very key role in British Columbia for the credit unions, for the strength they've had.

• 1445

If the government of the day had chosen to simply harmonize our legislation with that of other governments, credit unions would not be permitted to retail insurance through subsidiaries, engage in automobile leasing, or provide a number of other financial services. We believe legislation must enable competition and innovation, not restrict it.

Thank you very much. I'm certainly open to questions, and I have a copy of my brief here with me.

The Chairman: Thank you very much, Mr. Nygren.

We will now hear from Brian Carroll, from Citizens Bank.

Mr. Brian Carroll (Consultant, Citizens Bank): Thank you, Mr. Chair.

To put this in perspective, I'd like to introduce who I am and who I'm representing, as well as my colleagues here today. I'm actually a lead consultant for a proposal for a national community bank, which is being proposed to be formed out of a group of credit unions as well as Citizens Bank, thus my presence.

Unfortunately, Linda Crompton had a conflict and has moved in the other direction in the country today, so I offer her regrets. She'd love an opportunity to present here at another time.

With me today is Harri Jannson, who is the president and CEO of Richmond Savings Credit Union here in B.C.; also with me is Len Gatto, who is the president and CEO of Gulf and Fraser Fishermen's Credit Union.

In total, there are 12 credit unions involved—in every province except Prince Edward Island and the province of Quebec, which effectively is served by Desjardins—as well as Citizens Bank, which is a wholly owned schedule II bank subsidiary of VanCity.

We don't want to take a lot of time. We thought perhaps we'd do just one presentation amongst the three of us for a couple of moments.

What we're talking about here is a group of credit unions that are large and small, urban and rural, and, as I say, in all provinces except Quebec and P.E.I. They effectively came together to put together a business case for the formation of a national co-operative or community bank, if you will. This started a number of months ago, prior to the MacKay task force report being released for any of us, obviously. As we'll see, there's a number of similarities between what the task force has presented and what we're seeking, so we're actually pretty heartened by it.

The group being represented currently has about 800,000 members, about 25% of the system assets under administration in the Canadian credit union system—leaving Desjardins separate from that—about 140 or 150 outlets coast to coast to coast.

Maybe I could talk for a couple of moments in terms of some of the key findings that came out in the MacKay task force that have us particularly excited. The first finding is that competition in financial services should be enhanced by the facilitation of new entrants and the strengthening of smaller institutions, and also the provision for them of greater flexibility, clearly one of the themes in the MacKay task force.

Other elements of the report were support for creation of a national co-operative bank under the Bank Act—we indeed are proposing something pretty much identical to that—and support for removing of restrictive provisions on the business activities of the credit unions and their centrals, as Wayne has just addressed. It recognizes that the fundamental strength of the credit union system lies in the solid roots to the community, in fact basically the ownership in the community. If you have a community bond that owes you, it's very difficult to move branches out of that community, even given a marginal performance of a branch, if that should occur. It notes the particular strength of the credit unions in western Canada and also their strength in financing small to medium-sized enterprises and also agricultural operations.

Finally—and I think this is really the key finding as it affects the credit union system and indeed our proposal—it recognizes the challenges the Canadian credit union system has in terms of fragmentation of the capital. These credit unions effectively have to operate as an independent entity, carrying their own capital. With the cumbersome system-wide decision making we have in about 850 to 870 credit unions in Canada, each with their own board, management team, VPs of finance and technology and so on down the line, it's very hard to get consensus in that environment. Obviously there's functional duplication between these organizations.

• 1450

Our proposal seeks to form a national community bank or a co-operative bank that is fully compatible with the findings and recommendations of the MacKay task force.

I would like to cover for a couple of moments exactly what the key elements in our proposal are. We have provided you with a brief on this. I realize you only received it this morning so you won't have had time to examine it all.

It is an institution that's fully owned by the members. It's effectively a national credit union, except it operates under federal powers and regulations. It provides a standard suite of products and services from coast to coast to coast, so once you're a member of one outlet you're effectively a member of all the outlets.

This is probably the key element. Like a credit union, rather than trying to maximize quarterly shareholder returns, it is community owned and tries to maximize the dividends as well as commit the returns to the communities that continue to own the bank.

I should point out that we have done a preliminary business case on this, and we've found that largely through the economies of scale and scope that you would expect, as well as through some avoidance of lost business as our members move from region to region and province to province and may be picked up by other institutions, the returns that are available to the communities actually go up quite substantially.

We believe the proposal continues to differentiate itself from the major banks in Canada through its community focus and ownership and its co-operative values. The proposal is specifically designed to be fully complementary with any credit unions that choose not to participate and the centrals that will service their needs. In fact, in a number of areas it's still pretty preliminary, but we are examining, as Wayne mentioned, an overall system in the context of how we can share the backroom services and technologies we all need to compete nowadays.

It has moved us out from a provincial regulatory environment. Currently, if a member were to move from this credit union to that credit union in B.C., they would effectively have to close their account. Hopefully we capture them at the other end and they reopen their account. Because they are under the same regulatory environment they can share standard products and services, but if they happen to move across the Rockies into Alberta there would be a difference in the products and services available to them. Obviously, we question whether that brings any value to the Canadian public.

I should point out that we are proposing an adjustment to the federal Bank Act. If you think of it as a tier II financial institution—-some people are calling it a schedule III community bank, and I'm not really sure what to call it—it would effectively be a member-owned community bank that operates from coast to coast. We don't propose legislation that would be proprietary to our use. I suppose, if another mutual-owned bank were to care to operate in that environment, we would propose any kind of standard legislation. We don't propose to operate in a regime that, quite frankly, is materially different from the current bank environment either.

I think that's a brief overview. We will be happy to answer any questions.

The Chairman: Yes. Thank you, Mr. Carroll.

We will now go to Mr. Liam Hopkins from IFC Vancouver.

Mr. Liam Hopkins (Executive Director, International Financial Centre Vancouver): Thank you, Mr. Chairman.

I'm sorry I don't have a brief with me. The chairman of the board asked me to come in his place, so it was short notice. I'll speak from the top of my head, although I have read the MacKay report and I know what's in there.

First I'll tell you a little bit about the International Financial Centre. It was established ten years ago through what was initially a federal government initiative that named both Vancouver and Montreal international banking centres. Then each province, not satisfied with the number of activities that were permitted, opened up their own legislation and expanded the base of activities that could be done under their legislation.

• 1455

Over the past 10 years it has been slow, but it has been successful. All our 40 core members are financial institutions. This covers all the sectors. We also have associate members; these would be the accounting firms, law firms, and other businesses interested in developing Vancouver as an international centre.

We're very interested in the area of competition, particularly when it comes to foreign banks or foreign financial institutions. We would like to see the Canadian market open to foreign competition. I think it should be one of the requirements of any bank merger that this foreign competition should be allowed.

The MacKay report is an excellent report. It's very well balanced. Sometimes, while reading it, I thought they were trying to please everybody in the financial community. That's a very difficult thing to do. However, I think they did an excellent job.

One of the areas that struck me and that stood out quite a bit was their comments on withholding tax and capital tax, two very important issues as far as I'm concerned. I've been a proponent of getting rid of the withholding tax situation within Canada with as many countries as they can, particularly with the United States. One of the areas where we find our competition from other offshore centres is that they don't have these restrictions we have. Therefore the federal legislation has not been used because one of the impediments within the legislation is the problem with withholding tax.

The way I read the report, there was some mention that the withholding tax would only apply to foreign investors or anybody making a loan or an investment in Canada, so they would eliminate the withholding tax here. I don't think that's practical or possible. I think it has to be both ways on both sides of the border. I think it would be an excellent idea to have this done and I'd certainly support it 100%.

I think the other area they addressed was capital tax. This is an area we're finding a great deal of difficulty with, where there is capital tax on new financial institutions locating here. I think even the existing financial institutions are hampered by very heavy capital tax both federally and provincially.

On the mergers, if you go back and look at banks generally, if they've merged—there's been quite a number of mergers over the years—I think they've worked out very smoothly. I was involved in one of them. Of course you're always a little nervous in the beginning, but things obviously worked out for me.

I believe a sound, strong bank is a very important thing. The way you have a strong bank is through a sound capital base. It goes without saying that when you have a merger, the capital is bigger and therefore the bank is stronger. I think that's important.

I think in the area of service, as you pointed out in the earlier session, Mr. Chairman, technology is such an important thing. It's happening daily. We can barely keep up with it. But the cost of this technology is enormous. I think the banks are going to provide more and more service through technology. Branch banking is going; I think you'll find technology taking its place in many areas. The machine will be there. I think the public now are accustomed to using machines. I find them fabulous. I think more and more we'll place them around Canada in the rural areas. But the cost of doing so is enormous. I think if you can join forces in an area like this it is definitely beneficial. It is also more cost-efficient, and those cost savings could be passed on to the consumer.

I don't want to spend too much time on the retail side because I'm not expert on it, but this is a big end of the business.

Looking at the bigger banks, risk overseas was brought up in the earlier session. Over the years, the banks have come through a very difficult time, but they've learned a very good lesson and they've learned all about country risk. They're very much aware of it and in many of their transactions they share the risk or they pass on the risk or the risk is covered by a government agency like EDC, for example. So they're very reluctant to take too much risk. I think they've managed this foreign risk very well. I think they are well situated to go into international markets at present and to do business there. On a global basis, we have to be there if we want to survive.

• 1500

So as far as the mergers are concerned, for those points I think a sound bank is important. There's the bigger capital base, there's the cost saving of the technology, and the expertise they have in the overseas risk is important. But I would emphasize that the tax is also important.

That's all I have to say. Thank you.

The Chairman: Thank you very much, Mr. Hopkins.

Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Gentlemen, thanks for your excellent presentation.

I would be remiss if I didn't assume that one or maybe more of you had something to do with those great credit union ads on television, so congratulations. In my city, Ole Sorensen is probably one of the happier guys in town. His business has expanded, and I'm sure the advertising campaign had something to do with that.

I was very interested a while ago when I read that the credit union structure in Canada was looking into becoming more bank-like in some respects, and here today we had the presentation on that desire.

There's no doubt there will continue to be some dramatic changes in the financial services industry in Canada, particularly in the banking business. A lot of concerns have been expressed today about what will happen to us as residents of both urban and rural areas. Ms. Bennett gave a very good example this morning of the possibility of bank closures in the small communities.

The credit unions have a wonderful reputation of being more community oriented and having a great community relationship in British Columbia. The question is whether the credit union structure is fully prepared to take up any slack that would be caused by rationalization as a result of mergers, technological changes or the way the big banks do banking. Are you ready to get in there and fill most of the voids that may occur? I'm not just talking about mergers; I'm talking about technology as well.

The Chairman: Mr. Nygren, followed by Mr. Jannson.

Mr. Wayne Nygren: Let me just back up to your first question, because I think it's very critical. You commented on our province-wide advertising campaign: “If your bank won't change, maybe you should”. All of the advertising we did prior to that indicated that if a consumer was unhappy with their bank, 99% of the time they went to another bank. They never looked at us as a real alternative, even though we provided all the services, and probably more services in a lot of cases. That's why we really started putting out that ad, trying to get that message across very clearly.

One of the things that really concerned people who looked at us as an alternative, which we're trying to address with a national organization, is they didn't see us as a national network. They saw us as a small parochial credit union that was very successful, very involved in our community, but not a national network that could serve them from coast to coast. This is the message we are trying to get out.

We are looking at trying to develop that now. We did some Environics studies just recently; we just got them out in the last couple of days. I think 70% of the population who belong to banks would look very seriously at the credit union if there were a national network—if they could see themselves with a national network, a national branding or something across the country. That's why we've had to look at the whole area of restructuring ourselves, how we keep this local identity and uniqueness, but move out and get efficiencies and get this thing the public want—something they can tie in with that's a national branding or a national network of associations. That's why we took a look at the whole structure issue and what we would have to do in terms of becoming one—the whole area of the co-operative legislation, the CCAA, and looking at a co-operative bank act in Canada that would move us into a broader perspective.

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The Chairman: Mr. Jannson.

Mr. Harri Jannson (President and Chief Executive Officer, Richmond Savings Credit Union): My name is Harri Jannson. I'm the president and CEO of Richmond Savings.

Mr. Harris, let me first point out that I represent a group in the credit union system that is looking at forming a national co-operative bank. As Brian said, we represent all provinces except Quebec and P.E.I. We're a going concern. This year my institution is celebrating being in business for 50 years. We represent some 800,000 members across the country.

In answer to your question as to whether or not we can take up the slack, I would say that individually credit unions across Canada will have a difficult time taking up the slack. On a combined basis, whether it be centrals being combined to form stronger, more cohesive organizations or, like us, a group forming a national co-operative bank, yes, we can. On an individual basis it's very difficult. When it comes to the cost of doing business, typically a credit union spends about 80¢ to make a dollar. A bank spends around 60¢. If the mergers go through, once the costs are out of the way they'll be spending about 45¢. That makes it very difficult for us to provide a decent return to our members. That's the primary reason the group of us has gotten together and really forged ahead.

Mr. Dick Harris: One of you gentlemen—I'm not sure who, maybe it was Mr. Nygren—was talking about the federal and provincial regulations you operate under. Are you finding that there is a lot of overlapping between the federal and provincial regulations, and are you able to put forward some recommendations that would help to alleviate that situation, which has to be costly to your operations?

Mr. Wayne Nygren: I'll let Richard Thomas answer that. He's our vice-president of governmental affairs, and he looks after the legislative environment.

Mr. Richard Thomas (Vice-President, Government Operations, and Corporate Secretary, Credit Union Central of British Columbia): Thank you, Wayne. There are indeed provisions of the federal statute, the Co-operative Credit Associations Act, and the provincial credit union legislation that do overlap. In some cases they're absolutely contradictory, and if we comply with one statute, we're in violation of the other.

I wish to emphasize, though, that only applies to Credit Union Central of British Columbia. Canadian central is only regulated under the federal statute. There are five other provincial centrals that are in the same boat as we are. It is not the same problem for individual credit unions, which are principally regulated under the Credit Union Corporation Act and the Financial Institution Act of British Columbia.

As Mr. Nygren pointed out, we have made some progress in the last year or so in addressing that regulatory overlap. I don't believe that at this point in time there are any proposals to put directly in front of you that address that overlap, although we are working with both federal and provincial regulatory authorities to identify those situations.

The Chairman: Thank you.

Mr. Carroll.

Mr. Brian Carroll: Mr. Harris, maybe I can round that out from a slightly different perspective. In terms of the community bank proposal that is being brought forward, part of the rationale has been that each province has a different set of credit union powers and considerations available to it. In B.C. you're able to retail insurance, while in other provinces you aren't. You can deal similarly with securities, leasing, and various other details through the provinces.

One of the big decisions we would have to make is whether to rationalize the interprovincial regulations and to develop some common platform there, if you will. We looked at this and found that each province has a slightly different twist to this regime at the credit union level. The alternative is to operate under a federal act. We did look at the trust act, the CCA Act, and the Bank Act. What we found was that if you took a least-change approach, a least-move approach, the Bank Act basically already is designed for an entity that has wholesale capabilities—it does its own transactions and that sort of business, its own clearing—and also has retail powers, obviously, which I think is really what is material to consumers.

• 1510

Our rationale was that it's easier to amend the federal Bank Act to allow for a second tier of institution than to try to rationalize or consolidate ten provincial acts, and then probably the federal act as well, because as Richard points out, they largely oversee the centrals, and then you fall under regulations—OSFI and CDIC and that sort of business.

Mr. Dick Harris: My last question is to Mr. Carroll as well.

Given the seemingly endless pace at which bureaucracy and governments move sometimes, in a perfect world, how far away from your national community bank do you think you are today?

Mr. Brian Carroll: If I can get some clarification, is that in terms of presenting a submission, what I would say we're seeking, or in terms of getting the response to it?

Mr. Dick Harris: In terms of opening day.

Mr. Brian Carroll: To give you a bit of a framework, we actually have done quite a bit of work on this. As I mentioned, we started in advance; actually, it was started to be contemplated well in advance of even the bank merger discussions. I was driving off to a meeting the day that Mr. Cleghorn announced his big plan.

So it started well back. A business case has been developed, and some legislation has been conceived. We would be ready to table that immediately if we understood the channel to table it to, and in terms of the response, I would put it back towards people like you.

If we were to have empowering legislation available to us, I think you would find that you could start to roll the bank component out within 12 months after that. My expectation is that nobody is going to roll out anything before the millennium because of all the systems issues, and it needs that much time for public consultation and so on.

The Chairman: Thank you, Mr. Harris.

Mr. Riis.

Mr. Nelson Riis: Thank you, Mr. Chairman.

When I hear these excellent presentations, I keep thinking of Little Red Riding Hood and the wolf getting together.

When I think of people who are interested in credit unions, they're normally people who are not really that enthusiastic about banks. That's kind of why they're there, and even the ads say if you're dissatisfied, then join us.

My first question, maybe to Wayne, is how will your members feel about this? Here they thought they were joining a credit union and were part of a credit union, and now somehow they're going to be part of a bank.

My question—and I'll add on two or three other little ones at the same time—is who would actually own this bank? How would your members feel about it? And where would the centrals fit into this bank?

I'll leave it at that to start with.

Mr. Wayne Nygren: First of all, the centrals are working with the federal government, with the MacKay commission, along with the credit union system, to look at enabling legislation so that we can expand our services. What you call this organization hasn't been determined yet, but it does have national powers, and that's certainly an issue the system is dealing with. There's certainly a lot of comfort with the name “bank” in some areas, but in some areas there's a lot of discomfort. You're absolutely right.

So we're doing some Environics studies now, across Canada, to get the feeling of the membership to see what they would think of the name “bank”, even though its fundamental principles are certainly co-operative principles. They operate differently, their profit structure is different, and they have a different value system, but it's certainly an area that we're trying to get a better handle on.

Right now, we're trying to look not so much at the name “bank” but at a structure, trying to figure out a structure that will allow us to operate across the country and, as Harri said, reduce some of the operational costs, give us more flexibility, give us a provincial network, and give us a different image in many respects.

Mr. Nelson Riis: Mr. Carroll, can I ask you a specific question? Do you work for a bank now?

Mr. Brian Carroll: No, I don't, actually, and I sense there might be bit of fog.

• 1515

Mr. Nelson Riis: What is this Citizens Bank?

Mr. Brian Carroll: Okay. I'm merely a consultant working for a group of twelve credit unions and Citizens Bank. Citizens Bank is a virtual bank owned by VanCity Savings, which is a credit union.

Mr. Nelson Riis: Can you hold it there?

So a credit union now owns this bank?

Mr. Brian Carroll: True.

Mr. Nelson Riis: Why couldn't a credit union just own a number of banks? If they want to get into banking, why couldn't they get into banking this way, just by buying a bank, like VanCity has done?

Mr. Brian Carroll: There are actually a couple of reasons.

First of all, the Citizens Bank is a schedule II bank. So it could be wholly owned by a single entity, as opposed to the 10% rule. It operates in a virtual environment. This was a trade-off for its charter, so it doesn't operate a branch system. It also happens to have a couple of branches through Citizens Trust, which was the founding company before VanCity purchased it.

One of the issues with a schedule II bank comes back to the old issue of whether you want a tier II Canadian institution, of whether this is a public policy benefit. It's not really up to us to decide that. We believe there is a benefit. If we try to compete on an identical playing field with the schedule I banks, which are already diversified, already own subordinate or subsidiary companies, are obviously very well capitalized, we have to remember that the credit union system as a whole in Canada has $47 billion in assets under administration. It's smaller than Canada Trust, smaller than National Bank, but it has a couple of benefits. It does have a very good reputation. It already has a branch infrastructure across the country. Obviously, with Citizens, it has an electronic banking capability.

To try to grow Citizens into a branch network perhaps would not be an impossible task, but it would be a formidable and heroic task.

Mr. Nelson Riis: Okay, I think you've answered my question.

You call for deposit insurance of $100,000. Why not stick with $60,000 or some other amount? Is it $100,000 now with a credit union?

Mr. Brian Carroll: Yes, it actually varies from province to province, Mr. Riis.

For B.C. I'm going to get this wrong. Wayne probably knows it cold.

Mr. Wayne Nygren: A number of different provincial jurisdictions have different deposit levels. For example, we have $100,000 in British Columbia, Alberta has unlimited, Saskatchewan has unlimited, Quebec has $100,000, and Ontario has $60,000. So if we're looking at a financial organization with deposit insurance, the majority of the credit union system already has at least $100,000 or unlimited.

Mr. Nelson Riis: Whereas the banks have $60,000?

Mr. Wayne Nygren: Yes, they have $60,000. So it wouldn't be a benefit to us to go to a $60,000 limit when most of us already have $100,000 or unlimited.

Mr. Harri Jannson: Mr. Riis, I'm not sure we answered your question about whether our members want to have us switch from a credit union to a bank.

VanCity conducted a survey. I can't quite remember who did the survey; it wasn't Environics, but it was a reputable firm. They asked this question: would you continue dealing with your institution if it went from a credit union to a bank? The response rate was 80% yes, provided the products were competitive.

“Bank” is a term we're using fairly loosely. The government has told us they're not about to write the credit union act or get involved in a credit union act that is a provincial legislation. In order to form a national organization, we must have federal regulations because the provinces are quite a bit different.

But back to the nub of it, our credit unions are currently owned by our members and it's one vote per member. They decide who sits on the board. What we're envisaging is that those credit union boards would be converted into co-operative boards. Those co-operative boards would hold shares in the bank. The co-operative would be owned by the members.

We contribute quite considerably to our communities by forming a national organization owned by co-operatives that used to be called credit unions. We feel we can enhance what we return to the community. So if we simply become a big bank, I think our members will tell us this is not what they want. If we stick to the principles of the co-operative principle and the involvement in the community, I think our members will benefit from it.

Mr. Nelson Riis: So you're using the word “bank” just because there's not another handy word?

Mr. Harri Jannson: Exactly.

Mr. Nelson Riis: It could be something else. But it's a national organization?

Mr. Harri Jannson: Right.

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Mr. Nelson Riis: First of all, I really support this initiative, so don't get my critical comments or my questions wrong.

What I'd like to ask you, Harri, is if this happens and one day we can walk into this sort of people's bank someplace, say in downtown Winnipeg, and then walk next door into either an existing or a merged bank, what should be different?

Back to Wayne's comment that credit unions have different value systems and so on, I guess what I have increasingly been hearing lately is that a lot of credit unions have forgotten they're credit unions. They think they're kind of little mini-banks, and they've got banking mentality attached to them. This is what I constantly hear. But assuming that's not the case and a national organization would be a really nice credit union bank, what should be the difference?

Mr. Harri Jannson: I think I have some background to be able to speak to that, because I spent 20 years at one of the big banks.

The difference is we do not react to what analysts think about what our earnings should be in the next quarter. We know we are not going to be as profitable as the banks. We are not looking for a 17% or 18% return on equity and telling the analysts we're going to do that year in and year out, come hell or high water.

We think the point of differentiation is the personal service and attention we pay to our customers and the relationship we develop with them, and we don't just give lip service to that. We still have tellers in our branches and we will continue to have them. If a Canadian bank opens its door today, a new branch, where you used to see hours of service from 10 a.m. to 3 p.m. on Thursdays and Fridays, now you see hours of service and hours of teller service. So they are limiting the interface, because it's very expensive for them to do that.

We undertake that we will continue to do that because we're not driven by the same profitability motive as the Canadian banks, i.e. pleasing the analysts so the shares continue to go up in value. We are owned by our members, so we are in business to please our members. If we then start to act like banks, saying we don't have tellers here— because many of the new branches opened up by the banks recently do not have teller service, and they advertise that. We will not do that.

Consciously, Mr. Riis, what that means is we'll never get down to the cost level of the Canadian banks, and that's a very conscious decision on our part.

Mr. Nelson Riis: Thank you.

The Chairman: Mr. Gatto.

Mr. Len Gatto (Chief Executive Officer, Gulf and Fraser Fishermen's Credit Union): Thank you.

I'd like to expand on that. First of all, I've been 25 years in the co-op system. I'm the CEO of the Gulf and Fraser Fishermen's Credit Union. We're 58 years old; we were founded 58 years ago by the fishing fraternity to look after their industry. We have assets of approximately $300 million. We've recently just merged with another credit union, which was the hydro workers in the province of British Columbia. So we have a market niche that's a little different from that of the banks.

How do we feel about the national image and the co-operative side of it, where you form the co-operative bank? Where we would be different—I think, Mr. Riis, you asked that question—is that the equity that credit unions now hold would buy shares in the national bank. They would be a subsidiary of the bank and be their own division. We wouldn't lose the autonomy and uniqueness we have today. I have a board of directors that's made up of blue-collar fishermen; they would stay in place. They would in turn vote for a director of the bank, but they would still be the directors of the co-operative.

The returns the bank would earn from the shares we would have put in as equity from our retained earnings of the Gulf and Fraser would be paid back in a form of dividends to the co-operative board to use in their community for the causes they want to support. That could be anything from looking after fishermen who have had hard times to opening up seniors' homes for them because they didn't look after themselves properly. It might mean opening a co-operative hospital; it might mean opening a co-operative school—but in the area in which we deal and serve. I operate in the downtown core of Vancouver, but I also have branches in the fishing areas of Steveston and Richmond. We also deal with members all up the coast, mainly electronically.

We feel that through the co-operatives we could service those members. So that's where we'd be different. I find it rather ironic—and I'm not here to bash the banks, believe me—that the announcements coming out now from the major banks supporting this and supporting that are things that I think we have done in the past for years.

I know in the province of British Columbia, where we had the local autonomy in the communities we service— Wayne alluded to this earlier, that we're the only financial institution in 28 communities. Probably in a number of those communities we were not the only one at that time, but the banks didn't do as well as they had anticipated and pulled up their roots. That philosophy will continue.

• 1525

We're wrestling with that word “ bank”, believe me. We know we cannot go to our membership—which I would have to do—to propose this initiative for their blessing. I don't have the authority to deliver them the national bank. They will tell me through their board of directors, which are elected by them, that they want that initiative. If we structure it properly we will be the alternative to them, and we must have a national focus. We're too vulnerable.

The Province of British Columbia, as we know, is using the “R” word. We're possibly in a recession. That affects us. If we can trade off to the healthier provinces, as they're doing in Ontario and Alberta, and move money across to different areas, that would be a benefit to our members and our people. Those are the things we're wrestling with. That's a schematic on how the co-operative would stay in effect and the local autonomy would stay there.

Thank you.

The Chairman: Thank you, Mr. Riis.

Mr. Nygren.

Mr. Wayne Nygren: If you go back to your original comment on what we're about, when we established ourselves 60 years ago we were there and filled a need. We filled a gap. There was nobody in the rural communities. Personal loans were really difficult to get. If you weren't on a main sewer line, you couldn't get a mortgage loan. We actually filled a need. The gap was there. There was nobody in those rural communities. Even the average individual had a tough time getting a loan or financial services. That has changed so dramatically now. There are so many people filling that gap. So we have to look again at what our special service is going to be and where we're going to focus our business.

Things that were important to us a number of years ago and drove the business do not drive the business any more. Things like loyalty, democratic control and local involvement are very important, but they don't drive the business any more. If you ask our members what's really important to them, they'll tell you they want access, price and service. So we have to build on it and find out what their priority is. It's not the local control with the annual meetings and things. Even though community involvement is critically important, it doesn't drive the business. That's why we're trying to look at how we can develop a structure that will give them what they need.

The loyalty is not like it was 20 or 30 years ago. If you can get 0.5% somewhere else, you're gone. So you have to compete in this environment reasonably. As Harri said, you may have to meet it dead on. Our costs will never be exactly the same as the banks dollar for dollar, so we certainly have to look at how to minimize our costs of operation, and at the same time provide service and value. Our members are asking for different things and that whole environment is changing. What was important to them years ago is not the driving force. That will not drive our business any more.

The Chairman: Thank you.

Mr. Gallaway.

Mr. Roger Gallaway: Thank you, Mr. Chairman.

I want to ask Mr. Hopkins about a remark he made about the banks having learned their lesson with respect to risks and losses. One of earlier witnesses—and I know you wouldn't have heard that individual this morning—referred to the fact that in 1992 the CIBC lost money because of their exposure at Canary Wharf. An interesting observation in that case is that notwithstanding the fact the CIBC lost money, their shares had a record year in 1992. This is interesting because there was a new Bank Act in 1992.

Yesterday we heard from a British Columbia economist who also pointed out your assertion that the banks have learned their lesson. We heard that what is occurring in terms of what some would call turbulence in the market and others would call meltdown in certain areas was not foreseeable. In fact, three or four months ago people were saying there were some problems, but nobody understood or could foresee the nature and extent of those problems.

With regard to what's happening in markets today, do you think it's a question of whether the banks have learned their lessons or whether the banks are, like others, relying upon experts who can't tell what the problem is?

Mr. Liam Hopkins: The banks have their own experts and there will be losses in different areas, particularly overseas. But those losses have been minimized because of the lesson they learned in the early 1980s. I think they do a very good job of managing their foreign portfolios.

• 1530

Now, certain things happen in the world that nobody can foresee. As a matter of fact, when you look at the MacKay report and what we're talking about here, we're all sitting in a backroom trying to plan a strategy for the future of the financial services industry when we really don't know what's going to happen out there—because things will happen.

So in the scenario I spoke to, yes, there will be problems out there. But when the banks do take a risk in a country, they share that risk, or they pass the risk on to somewhere else, or they get some kind of guarantee. So they protect their assets a lot better now than they did before because of the lesson they learned. But nothing is perfect. I think every financial institution can expect to have some losses. But they've been minimized, and they've handled them much better than before. They have to be in some of these markets, but they do it cautiously and prudently now.

Mr. Roger Gallaway: The other topic I wanted to raise is something we haven't really talked about a lot, and that is the whole question of the empowerment of consumers, what I would call the consumer protection provisions of the MacKay report. I must confess that I'm not terribly familiar with the credit union side, although I'm learning. In the bank sector there is a series of ombudsmen, and the banks have created what I would call an office of the super-ombudsman, who oversees the other five or six. If I am dealing with a credit union and I have a complaint, whatever the nature of that complaint might be, assuming it can be resolved at the level of the manager, does it go to the board of directors of the credit union or is there a need for an ombudsman similar to what the banks have moved to create in the past?

Mr. Len Gatto: Mr. Gallaway, the members can write, and do write quite often, directly to the board of directors. I just dealt with two issues at my board meeting last week, and that is basically how it's handled.

Now, if they are not satisfied with the board of directors' answer or solution, there is an appeal commission that goes through the Stabilization Central or FICOM, the provincial arm of the government. I have been the CEO of our particular credit union for sixteen and a half years, and we've never had anything go that far. It has always been dealt with by the board, usually to the satisfaction of both parties.

Mr. Roger Gallaway: So the fact that MacKay would recommend some sort of ombudsman for all financial institutions, one would assume, isn't going to bother you.

Mr. Len Gatto: I don't know if it would bother me. I still feel that we don't want to lose the strength of our organizations, and that is that they work with the membership of those organizations. The board has been elected by those members, and a lot of them know them personally. That is probably where our success is. As long as it doesn't become too bureaucratic, I think it would probably be a good idea, but without consultation of us.

Mr. Harri Jannson: I think you'll find that members deal directly with us. Being in the community, I get phone calls daily from members. It's not like trying to reach the CEO of a Canadian bank, where you won't get through. I have a direct line and people know it, so if there is unhappiness in the community, they pick up the phone and call me directly.

The Chairman: If you were to join and come up with a national organization, you would be subjected to the federal ombudsman if in fact it—

Mr. Harri Jannson: I have no problem with that whatsoever. The way we handle it right now, being in the community, people know who we are. I walk down the street in Richmond, and people know who I am.

The Chairman: So in many ways you're saying that self-regulation is probably just as good.

Mr. Harri Jannson: Yes.

The Chairman: Mr. Carroll, and then we'll go to Mr. Thomas.

Mr. Brian Carroll: Perhaps I can add to that, Mr. Gallaway. If you ask credit union directors or co-operative directors under the proposed community bank—really nothing has changed on that; they're community people—why they've volunteered to become a director, it typically is for one of a few reasons, but one very common reason is that as a member of a credit union, be it a one-branch or fifty-branch credit union, they don't like the way a particular service is offered or they think something better could be offered, so they run for the board. So it's no different from, say, a democratic process—

• 1535

Mr. Roger Gallaway: Running for office.

Mr. Brian Carroll: Just running.

So they run for the board, and obviously they can effect change that way. A number of credit unions have an ombudsman-type function. We would actually support any kind of federal ombudsman, obviously as long as it doesn't add a bureaucracy to it, but I would have a hard time picturing why it would. It would just be another venue for somebody to go to with an issue.

The Chairman: You would be paying for that, too. You know that, don't you?

Mr. Brian Carroll: We'd be paying for that, but—and here's the flip side of it—we'd be falling under a single regulatory environment, so I think it's a quid pro quo.

The Chairman: Mr. Thomas.

Mr. Richard Thomas: I have one observation as far as your relation to credit unions goes.

We get a number of calls at the central from members of credit unions who mistakenly phone us thinking we're the head office for the system. A lot of those calls come to me. I firmly believe we now do play an ombudsman role on behalf of credit unions. If a member has not been able to get satisfaction at their credit union, nine times out of ten I'm able to say, “Have you spoken to the general manager? Have you tried to raise it with the board?” The answer is no, and as Mr. Jannson points out, it gets addressed to that level. We will intervene and try to bring parties together if indeed a member has exhausted those avenues, and generally we can get some resolution.

Mr. Riis may be the only person sitting around this table who goes back to the 1980s, when interest rates went through the ceiling in this country and the federal government appointed and asked financial institutions to appoint one representative to play that role on behalf of their institution where customers/members/borrowers were at risk of having their mortgages go into default because they couldn't afford the new higher interest rate. I was that person for the credit unions in British Columbia. For all the credit unions in British Columbia at that time, I handled fewer than six calls in the entire time I was in that role.

I did have one call with one member of a credit union. I spoke to her twice that day. The shorter of the two calls was two and a half hours. By the time we were finished, she was inviting me out to meet her daughter.

So I honestly and truly believe we do play that role properly. At a credit union level, I'm not sure there's a need for the ombudsman function. I think an informal system does exist.

The Chairman: Thank you, Mr. Gallaway.

Ms. Leung.

Ms. Sophia Leung: Thank you, Mr. Chairman.

I enjoyed your presentations.

Obviously the credit union is doing well, Wayne. But I understand some of the credit union is strongly controlled by certain political groups. Would you explain how you can truly reflect the members' needs and wishes? Would you like to answer that?

Mr. Wayne Nygren: Why would you give that one to me?

Ms. Sophia Leung: We know you're in B.C., where we're talking—

Mr. Wayne Nygren: I think certainly different boards of directors are made up of different people who have different interests; that's correct. And that's really the democratic process at work. If the members vote them in, they do.

Basically there are different credit unions that have certainly different affiliations with different organizations, but all we look at is the strength of the organization, and for the most part, they are very strong and very capable of carrying on.

Ms. Sophia Leung: Thank you.

Mr. Brian Carroll: If I can supplement that from the community bank proposal that is being contemplated, you're absolutely right, and Wayne addressed it quite well. Different groups operate the governance of different credit unions, and that is an issue on occasion for the group I'm working with. What's being proposed is that you effectively have two boards: you have a community co-operative board in the proposal, which would be very similar to a credit union board today; and then you also have a national bank board, which they elect, in turn, or they have their members elect—whichever mechanism, but it's elected from members, if you will.

Mr. Nelson Riis: Like the Senate.

Mr. Brian Carroll: Or not. It's an elected Senate.

Is there any way to expunge these records at all? No?

But at any rate, the bank board would obviously have to be bank qualified under standard Bank Act qualifications. So I expect you would find that at the national bank board level, or community bank, it would be very difficult for, say, a slate of candidates to run, whereas I suppose at the co-operative level or credit union level it can still occur.

Ms. Sophia Leung: Go ahead.

Mr. Wayne Nygren: With our structure, we're certainly open to be governed by a number of different special interest groups' jurisdictions. Our main concern is that they're financially prudent and that members' deposits are not at risk and they're meeting the needs. That's really all we ask, and that's what's happening for the most part.

• 1540

Ms. Sophia Leung: Thank you. I have another question in general.

There is a suggestion to have an independent watchdog to monitor the financial system internationally to prevent a global crisis. Now, do you see a role for such a body in B.C. to perform that?

Mr. Wayne Nygren: My answer at this point in time is no. I think there has to be— You've got the World Bank; you've got the International Monetary fund. There are a number of bodies set up in terms of a global perspective. I don't think there's really a role for an international person internally.

The Chairman: Any further comments?

Thank you, Ms. Leung. Ms. Bennett is next.

Ms. Carolyn Bennett: I was just asking about the proposal for the national community bank. You said Quebec and P.E.I. are not included. What percentage of the co-ops in B.C. and in each of the other provinces would be part of this proposal?

The Chairman: Mr. Carroll.

Mr. Brian Carroll: Thank you. I'll try to do the math quickly in my head. Basically the proposal that's been put together-I should be clear on this—was simply the proposal to put together the business case to see if it's even viable, and to have some meaningful discussions such as this and with OSFI and various other people and provinces.

Right now there is a disproportionate number, in terms of assets, that are resident in British Columbia. I suppose that's because throughout central B.C. they were doing a lot of work in terms of examining system structure, and that kind of blossomed, if you will, to some credit unions looking at this option.

Other provinces are doing it, but I think B.C. was a leader in that. The proposal—I guess you could call it that—was never really shopped across the country. What we wanted to do, though, is have a mix across the country to challenge some of the assumptions as we were putting together the design for this, and to make sure we had some large and small and urban centres—I guess you could say Toronto versus the prairies.

Right now I think it would be impossible for us to forecast. If we were to get the powers and move ahead, it would be impossible to forecast how many would participate or not. I can tell you this: at the end of the business case we asked that the proposition go back to each of the participating boards that sponsored the business case, and they had to make a conscious decision about whether they were going to pursue legislation—give a standard resolution on that. All but one have voted to go ahead. We're still waiting for the board vote from the other one. So there still seems to be an appetite, but it's at that stage.

The Chairman: Mr. Jannson.

Mr. Harri Jannson: Ms. Bennett, we deliberately left the group fairly small because there are a number of fairly complex issues to go through, never mind that we're in different provinces. The fact that it's 12 is simply trying to keep it small so we can get things done in a hurry. A number of credit unions across the country have expressed interest in looking at the model and participating. We've said, look, let us just get it together, and once we're finished and we get positive response from the powers that be, then we'll open it up.

Ms. Carolyn Bennett: Could it end up being half of the credit unions in the country?

Mr. Harri Jannson: It could, yes.

Ms. Carolyn Bennett: Could it be more than that?

Mr. Harri Jannson: It could be.

Ms. Carolyn Bennett: Could it be all of them?

Mr. Harri Jannson: It's very hard to predict. The group, the 12 of us, see the need for change yesterday. There are credit unions in this country that don't see the need for immediate change but are looking down the road saying, well, we're going to have to change. If you are a credit union in a non-competitive marketplace, your world probably is not going to change as fast as if you're a credit union in downtown Toronto or Vancouver, where competition is very stiff. Fifty percent of us who are part of this organization are in highly competitive markets. We need to change rapidly. So that's what has motivated us to get together.

Ms. Carolyn Bennett: Thank you.

The Chairman: Thank you, Ms. Bennett.

Mr. McKay.

Mr. John McKay: I'm a little surprised that your movement is not more critical of MacKay because of the regulatory mess you're in: two auditors in any given year; certain lines regulated federally, some lines regulated provincially. You're doing an end run by, in effect, creating a bank, and the members of that bank will therefore be subject to federal and provincial regulations, and you wish to go national. The times they are a-changing, quite clearly.

• 1545

The regulatory mish-mash we have in this nation seems to inhibit your desire to come into the 20th century before it becomes the 21st century. So why, therefore, is there reluctance to call upon MacKay to say the federal government should just be the regulatory entity for all financial institutions and all financial instruments?

Mr. Harri Jannson: I guess in a perfect world, if we felt we could influence the decision makers to do that, we probably would. We're trying to work within the framework of what is out there because we feel that's probably the fastest way to get this changed, but I can't disagree with you at all.

Mr. John McKay: So that is a desirable goal. Is that true across the table?

Mr. Wayne Nygren: Let me just comment. The credit union system is the largest financial network in this province, as it is in Quebec and Saskatchewan, because of the way the operations are and because of the legislative environment. So we're all provincial jurisdictions. But having said that, one of our key weaknesses is we haven't been able to network across the country, even though we individually have good regulation and legislation.

MacKay has recommended that we look at networking across the country through a co-operative banking structure. So we're trying to build in a positive provincial regulation and legislation, and that's why we're looking at the $100,000 deposit insurance. We're looking at the BIS formula rather than the leverage formula—things that would make us competitive and the best qualities we have on a provincial jurisdiction, and move those into the national network through a co-operative bank, which Harold MacKay has recommended.

Mr. John McKay: But if this committee and others are looking at clearing away a lot of regulatory deadwood, would it be desirable to move in that direction to a unitary system of federal regulation?

Mr. Wayne Nygren: It would be, subject to our getting regulations we felt comfortable with. Right now some of the federal regulations would not be that positive for us.

Mr. John McKay: I am assuming that, because you speak very positively of the way B.C. has treated the movement. Presumably that's a model to look at.

The Chairman: Mr. Carroll.

Mr. Brian Carroll: I would echo what both Harri and Wayne have said. I suppose if there were some synthesis of the legislation and it were workable for all parties, obviously there would be some clear benefits in that. It would give everybody a clear map for the future. I guess our thinking is there's kind of a converging issue here. The credit unions, as Harri has pointed out, are looking toward the federal model—call it a bank because that's a working name for it, if you will—because they feel the pressure today.

When we asked people whether this amount of change made sense to them or not, a large part of the response was yes, we need to have results quickly and they have to be material results. So they looked at the existing landscape a bit. Maybe they didn't take the elegant approach, but I guess they took it from the viewpoint of a regulated entity as opposed to a regulator. That was number one.

Number two, which is something we support very strongly in MacKay's report, is that Canada is really unique as a developed nation in not having a co-operative financial institution legislation that would allow you to run either provincially, federally, or state-federally, depending on your country. Right now, if you want to be a retail co-operative financial institution, you have to basically run provincially. The part we applaud is that this will give us the option, and there are probably some that will continue to operate provincially for their own reasons.

Mr. John McKay: I guess it comes down to trying to make a federally regulatory environment attractive to the players in order to be able to do so.

• 1550

The co-op movement's pretty strong in B.C., very strong in Quebec, somewhat strong in Saskatchewan, and virtually nowhere in Ontario. Do you see Ontario as a real opportunity area to do some back-filling that will necessarily go on? Whether the banks merge or not, they'll be getting out of bricks, mortar and people—they're going off in another direction totally. Is there any means by which the federal government can encourage the co-op movement to do some of that back-filling?

The Chairman: Mr. Carroll.

Mr. Brian Carroll: Your observation is right that the co-operative movement hasn't established itself in the Ontario market and a few other markets as well, but Ontario is the most obvious. I think—and we're still struggling with this ourselves—whether you're looking at consolidating centrals and backroom operations, forming a bank and partnering with the centrals or whatever the mechanism is, in terms of how to penetrate the Ontario market, we believe the market is there, but we need to be competitive and have a full range of products and services.

The one thing we have in Ontario is a lot of locations, and obviously nobody today's building with bricks and mortar to that scale in branches. We may find that we have to establish some sort of partnering arrangement, or what have you, not with a bank but with some other co-operative-type entity. Those are things we're trying to flush out right now, and I think we have to somehow bring that forward as part of a proposal. But it is a key element.

Mr. John McKay: What drives us absolutely crazy as federal politicians is the way banks treat their customer base. Arguably it's quite abusive. It becomes quite abusive in the context of closures, where decisions are made in a very strange fashion. You know, you have 16 branches and you have to get it down to 14. I don't care how you do it, just do it. Those are the marching orders to the VP.

Would there be any role for the federal government, or some means by which the credit unions would be automatically consulted, when a bank intends to close a branch? Would that be a meaningful thing to do?

Mr. Harri Jannson: I think that would be relatively difficult. Let me say this from experience. Right now branch closures are not going on, and there is one simple reason for that.

Mr. John McKay: Oh, really?

Mr. Harri Jannson: Today, and probably for the last three or four months, banks have not announced—

Mr. John McKay: Oh yeah, but they're just being nice to us.

Mr. Harri Jannson: Exactly. There's a reason. They don't want to upset anybody. But there's also another reason why banks may close branches, and it isn't always the only reason. Very few of the branches the banks are closing are being closed because they're not profitable. They're closing them because they're not profitable enough.

So when you ask whether a credit union should be consulted before a branch is closed, I guess you're asking whether we would want to take on that branch if they were closing it. If that's what you're suggesting, I think it would depend. If it were a four-corners in downtown Toronto, one of the branches closed and the other three had been there for 75 years, our business would be the last one in and the first one out, so I'm not sure that's what we would be looking for.

Back to your previous point, B.C. credit unions are very strong and have been very successful. We are down to about 85, and 10 or 15 years ago it was about 175. My last count in Ontario is that there are over 300. By getting together and having a national organization, we can share some of the experiences we've had in British Columbia to help some of the credit unions in Ontario. They will have to merge and there will have to be fewer of them so they can compete head-on.

When you have 300 credit unions in Ontario, there are probably only three or four that are sizeable enough to be any meaningful competition to anybody.

The Chairman: Wayne Nygren.

Mr. Wayne Nygren: When we talked to Senator Kirby, his key concerns for us were to try to address small business lending and the Ontario market.

• 1555

If you look at the Ontario market gross, it basically breaks down into two distinct markets: the Toronto market and rural Ontario. The credit union system in rural Ontario is reasonably strong and has a lot of branch networks. In Toronto, it's obviously very anemic. Because of the closed bond legislation, they couldn't expand. So it's not really an Ontario problem per se, it's more of a Toronto problem. That's where the lack of networking in credit unions is, so that's a completely different issue.

I'll tell you about one of the things we're looking at. For example, as soon as there's a hint of a branch closure here in British Columbia, they'll form a credit union system immediately. That's as a result of the strength of the credit union system. They phone us at central, and then we'll basically—

Mr. John McKay: Good.

Mr. Wayne Nygren: That's the community.

Mr. John McKay: The TD Bank told us exactly the opposite.

Mr. Wayne Nygren: Well, for the last one, we went to Clinton, where the Bank of Montreal closed. The mayor of Clinton phoned me and asked me if I'd like to put a credit union in. I phoned around, and within about three weeks I had a credit union go in there, take over the premises and the vaults, change the signage, and move in. We've done the same thing with about four or five communities. As soon as the branch does close, the community gets together and the first thing it does is try to get a credit union. But that's not the situation in Ontario, especially in the Toronto market, because there is an abundance of financial organizations there.

The Chairman: Mr. Thomas.

Mr. Richard Thomas: I'm just going to point out that in his introductory remarks, Wayne noted that there are about 28 communities where we are the only game in town. The last two were Clinton and Elkford—one in the south Cariboo, one in the east Kootenays. In both cases, the bank pulled out. In both cases, an existing credit union put a branch in that location. The community rallied around the need for financial services.

The thing with credit unions or financial cooperatives is that they have to come from the bottom up. They can't be imposed from the top down. It might not have made sense for a credit union to have been in Elkford or Clinton when a bank branch was there. When there was no service, though, it clearly was a good idea, and they have taken off.

One of the weirder ideas I've heard around the bank mergers is that the banks be required to sell to the credit union system all the branches that they don't want. I'm not sure that's in the best interests of the credit union system. If somebody wants to hang that albatross around our neck, we need to talk a little bit.

The Chairman: Mr. Carroll or Mr. Gatto.

Mr. Len Gatto: I just have one comment. The credit unions are represented in Canada in 300 locations where we are the sole financial institution.

Is it okay to submit a letter to you people regarding the question on the Ontario market? We really haven't given enough thought to your comment, Mr. McKay, so if we could take that away and come back to you, we would write a letter to you on our views on that.

Mr. John McKay: Certainly.

Mr. Len Gatto: Good. Thank you.

The Chairman: I just have a question in reference to leasing and insurance. In British Columbia credit unions, you can sell through your branches. What kind of experience have you had thus far?

Mr. Wayne Nygren: I'm going to let Richard comment. He has the stats.

Mr. Richard Thomas: Mr. Chairperson, I'm glad you raised the issue of insurance, because I think Mr. Lekstrom identified earlier his concerns over financial institutions retailing it.

Let me clarify at the top. He indicated that he didn't want to be dealing with a teller who was a part-time insurance agent. Every staffer of a credit union in this province who sells insurance is an employee of the credit union's insurance agency subsidiary, not the credit union. Every employee is fully licensed and is trained in accordance with the provincial legislation in terms of regulation of insurance agents. Every one is regulated by the Insurance Council of British Columbia, and overregulated by the Financial Institutions Commission. Let's make that clear right up front.

I spent two years working as a government employee in this province in the regulation of credit unions in the policy area. That goes back to 1978. Without fear of contradiction, I believe I can still say that in that twenty-year period, there has never been a complaint raised with the regulatory authority in this province, with respect to a credit union selling insurance or a credit union agency selling insurance, that was not filed by someone who was associated with the insurance industry—never.

The Chairman: Can I ask you a question? If you create this millennium project bank or whatever it is that you're creating—

Mr. John McKay: The Millennium Bank.

The Chairman: Millennium Bank.

• 1600

Mr. John McKay: The only question is whether it's the next one or the one following it.

The Chairman: If you look at the status quo, banks cannot sell—I'm talking about retail now—so this would be something you would lose.

Mr. Richard Thomas: Well, MacKay has recommended that smaller federal financial institutions be permitted to get into the game as soon as the rules can be changed, and that the larger ones—those with capitalization in excess of $5 billion—be permitted into the game in three years' time. If a national initiative goes ahead, I think it would probably be one of the smaller institutions. We'd therefore qualify if the federal government adopts MacKay's recommendation on that front.

The Chairman: What's your position on banks' retailing insurance and leasing?

Mr. Richard Thomas: We've not opposed it. Quite frankly, it would be hypocritical to do so. Over the years, our support for opposing bank entry into the field has been sought in this province by an insurance brokers association. We've refused to do so. We've been in the game since the late 1960s, and we fully support competition. We have not opposed banks' getting involved in the field.

The Chairman: Let me ask you a question. You're unique in the financial services sector. Your culture is unique. We all agree with that. Perhaps we can even go as far as saying you are the product of the expression of the democratic will of your members. I would have to think that if that's the case, then logically your members would also agree with what you just said.

Mr. Richard Thomas: I'm sorry, with respect to the banks' being in the field?

The Chairman: About retailing.

Mr. Richard Thomas: I would agree with that.

The Chairman: Describe for me your prototype, your average consumer.

Mr. Harri Jannson: It depends on your marketplace, really. I should tell you that if you surveyed all of the members of Richmond Savings—and there are some 80,000—and asked them whether they saw themselves as members or customers, most of them would say customers.

Mr. Nygren pointed out earlier that Richmond Savings was founded fifty years ago because people in Richmond couldn't get a mortgage from a bank or a financial institution because it's on a bog. They formed their own credit union, and that was the genesis of it.

Our members are looking for different things today than they were fifteen or twenty years ago. If we're not convenient, if we're not competitive, if we don't have competitive pricing and products, they're not going to stay with us for very long. I can't quote the survey, but I've seen the results: they see themselves as customers first and as members second. There may be a handful who see it as the reverse, but I think it's predominantly as customers.

The Chairman: But your customers obviously agree with what Mr. Thomas said.

Mr. Harri Jannson: I would say so, yes.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: I just have a quick question. In the communities where a bank has pulled out and you're now the only game in town, what do the people in that community tend to do? Can you track what market share you get of those people? The people from the Fraser Institute were explaining to us that the virtual bank is the thing. How many people will deal with their previous bank, the previous bricks-and-mortar, on-line or on the telephone, and how many people will actually march across to take their deposits to you?

Mr. Wayne Nygren: Let me go back to the last example I gave you, Clinton, where the last closure was just recently. When the Bank of Montreal decided it wanted to pull out of Clinton, the Quesnel and District Credit Union, for example, decided it would look at it. It did a survey of the whole community. It went around from house to house and found those who wanted to be involved, who would support the credit union. To make a long story short, we doubled the business that the Bank of Montreal had, and the community feels it's their organization.

You almost have to do a door-to-door campaign and say “We're going to come in if you support us.” You have to ask the people if they'll support this financial organization. A lot of them come in effectively, and it almost breaks even for the first part of it. So it's not there as a profit machine, it's there strictly as a service provider.

Ms. Carolyn Bennett: How do banks justify closing branches if they actually lose the business of a whole community?

• 1605

Mr. Wayne Nygren: Well, they have decided it is not profitable enough to remain open at that location. We will therefore come in there with the initial intention of filling the gap by providing the service. In many cases—practically the majority of them—we actually build it into a profitable operation, though, because we take the time to go door to door and ask people if they will support us if we come in, and they do.

The Chairman: We'll go to Mr. McKay for a final, very short question.

Mr. John McKay: Mr. Hopkins is feeling lonely down there, so I thought I'd ask him a question.

What is the point of Vancouver being an international financial centre? What does it gain by being that, and can you explain to me why Toronto is not an international financial centre?

Mr. Liam Hopkins: The second question is a difficult one.

The Chairman: Just start with the first one.

Mr. Liam Hopkins: We'll start with the first. That's the best place to start.

We do attract a lot of international financial activity here in Vancouver. That creates a lot more expertise in the industry, and it also creates some jobs. It also attracts business people who come here under our initiative, but who can also do additional business outside of the initiative. In other words, somebody might want to do some transactions here. They find out about Vancouver through our initiative. They come to Vancouver and for some reason they may buy, shall we say, a hotel or whatever the case may be. Unfortunately, I've always referred these people to banks, not the credit unions for some reason.

But we do focus on Vancouver as a centre to do international business of all kinds, whether or not it falls within our mandate or within the legislation we have. It's cheaper to do these activities because there is a tax refund in the case of British Columbia. It's a cheaper tax situation when you do certain types of international business with non-residents, and that's the important aspect of it.

On the second question, I think you have to go back to the federal government and ask it why it left Toronto out. As you know, there is still litigation going on between the City of Toronto and the federal government, and that's been there for ten years. I think it was a regional situation. It really started in Montreal, in Quebec. They wanted to do some business there, and then Vancouver jumped on the wagon.

The Chairman: Although the benefits of these so-called international centres— When you look at what has happened in England, for example, they have truly developed an international financial services sector centre. I think our definition of what constitutes an international financial services sector is quite different.

Mr. Liam Hopkins: Oh, by far. We don't relate ourselves to places like London or New York or Tokyo, but you have about forty other financial centres of our size out there, or sometimes smaller, and they are attracting a lot of business. Of course, the one I always refer to that started at the same time as ours is the one in Dublin, for obvious reasons. It has been very successful in attracting a lot of business there. The reason for that, of course, is that it's in the capital city of Dublin. But they also have fewer restrictions on them than we have to run through for legislation.

The Chairman: Thank you, Mr. Hopkins, Mr. McKay.

On behalf of the committee, I'd like to thank you very much. When I read the MacKay task force report, I think one of the sectors that will really be going through serious evolution is yours, so these are exciting times for credit unions.

It also shows in many ways that whenever voids are created, opportunities also arise as a result. We should keep that in mind as we rethink and try to reshape the financial services sector. Of course, I'm telling you things you already know.

Mr. Wayne Nygren: Just as a closing comment, When we talked to Harold MacKay, one of the things we raised was the aspect of who can be the real competition in this country. It really has to be a distribution network.

The federal government can talk as much as it wants about foreign banks, but they don't have a distribution network. The credit union is really the only logical alternative in terms of it becoming a competitive environment in this country. I think that's what the whole MacKay report pointed out, and that's why we're looking at the national perspective.

What he also indicated, probably without saying it, is that it's the most underutilized network in this whole country in terms of the network that it has, the branch locations, the amount of assets that it administers. That's why we are looking at the broader picture of it.

• 1610

The Chairman: You were talking about distribution centres. As you probably remember, the post office, particularly in rural Canada and small town Canada, was a really important part of the infrastructure. Do you see a role for Canada Post in this debate?

Mr. Harri Jannson: They're already partnering with one of the chartered banks, the Bank of Montreal, in setting up a bank loans branch and a post office—we'll split the rent, we'll train your people to be tellers to process the deposits. The biggest challenge, when they leave a town and try to convince people in the town to continue to deal with a bank, is where to put their deposits. Canada Post can do that.

The Chairman: Canada Post is a deposit-taking institution.

Mr. Harri Jannson: Yes.

Mr. Wayne Nygren: We're looking at two possible relationships—one is with Canada Post and the other is with the Business Development Bank—and whether we can partner with federal agencies. They've approached us for both of those issues. We're looking at both of them.

The Chairman: On behalf of the committee, once again, thank you very much. It's been very interesting.

The meeting is suspended.

• 1611

• 1702

The Chairman: I'd like to call this meeting to order and welcome everyone here this afternoon.

We have the pleasure to have with us representatives from the Insurance Brokers Association of British Columbia. As an individual we have Mr. Ian MacLeod, and from Southern Cross Sheepskins Inc. we have Mr. Ashley Dermer. We're awaiting the arrival of Mr. George L. Molpass from Primex Forest Products Ltd., and Chris O'Toole as an individual.

We will begin with the representatives from the Insurance Brokers Association of British Columbia, Mr. Michael Megson, president; Brent Atkinson, Atkinson, Terry Insurance Brokers; and Roger Finnie.

Welcome.

Mr. Michael Megson (President, Insurance Brokers Association of British Columbia): Thank you, Mr. Chairman.

Let me just introduce ourselves again more formally. I'm Michael Megson and I am currently the president of the Insurance Brokers Association of British Columbia. I am an independent insurance broker. I have a brokerage firm in Greater Victoria.

My two colleagues are here. Mr. Brent Atkinson is a former president of our association and is a brokerage owner in Greater Vancouver. Mr. Roger Finnie is an executive director of our association and is also a brokerage owner in Greater Vancouver.

Good afternoon, committee members and ladies and gentlemen. It is our privilege to have an opportunity to share with you today some of our sentiments regarding the MacKay report's recommendation to grant banks special insurance sales privileges. Our comments will be restricted to this specific issue.

The Insurance Brokers Association of B.C. is one of this province's largest trade associations. We represent over 750 member offices and 6,000 general insurance brokers across B.C. The majority of insurance brokers are women and the industry employs many younger British Columbians as well. Our members have a presence in over 116 communities across this great expansive province.

Our organization stated to the MacKay task force during their last tour last year that consumers should be paramount in contemplating any changes to our financial services environment. The task force has patently ignored consumer opinion in proposing to grant banks additional special insurance and sales privileges. Their own research indicates that a majority of Canadians believe banks have too much power and influence already, let alone granting them more.

Importantly, the research also concludes that a majority of Canadians are satisfied with the level of service from their insurance brokers, and believe there is adequate competition in the insurance marketplace. Yet the task force has chosen to selectively ignore these facts. Additional empirical data from our public opinion surveys conducted in B.C. show that consumers consistently rank insurance brokers very highly on a range of attributes, and B.C. consumers believe the insurance environment works in this province.

• 1705

An Insurance Corporation of British Columbia study, which was done in 1995 with a sample size of 2,500, showed 95% of consumers were very or somewhat satisfied with their insurance brokers. Three additional surveys conducted in 1998, 1997 and 1996 by one of B.C.'s most reputable market research firms gave B.C.'s independent insurance brokers high marks as well, with over 80% of public respondents rating their brokers highly for their service, knowledge, fairness, honesty, trustworthiness, product knowledge and respect.

Why would the task force recommend granting banks additional special insurance sales privileges, when all their own research shows that Canadians don't want banks to have more power, and the current insurance distribution system is operating effectively?

The case report is flawed in other ways as well. Our national organization, the Insurance Brokers Association of Canada, which I'll refer to as IBAC, has stated already that the report shows a shocking lack of understanding of the property and casualty insurance industry and its uniqueness. It applies arguments about the life insurance industry to property and casualty as well, with little regard for the distinction.

For example, one of the arguments it uses to support its position to grant banks additional insurance sales privileges is that Canadians are under-insured and banks will fix this problem by offering products to lower-income Canadians and other under-insureds. This argument is flawed. Banks are not interested in serving low-income Canadians and other under-insureds, whether it is for property and casualty insurance or for life. In fact, they are headed in the opposite direction today. Hongkong Bank, which owns Canada Direct Insurance, cherry-picks auto and home insurance clients and has little interest in offering insurance to anyone but the cream of the crop. In fact, they advertise and promote this fact.

On a level playing field competition front, the MacKay report ignores the fact that banks have cheaper access to capital than insurance brokers, thereby giving them a leg up in competing with independent brokers. It's easy to undercut your competitor on price when your cost of money is half that of your independent broker competitor. It's only a matter of time before this major cost advantage would drive independent brokers out of business, and the related jobs that go with it as well.

Speaking of unlevel playing fields, why would a bank that sells insurance at its branch want to lend money to a local insurance broker who happens to be a bank competitor? Furthermore, how level is a playing field when an independent broker has to hand over her entire business plan to her bank competitor in order to get a loan? Even if, under the new regime, there are some banks that do not sell insurance at their branches for a certain period, who is to say they will not decide to get into the insurance industry later? Then what will happen to the broker customer? Will she have to switch institutions? In small and medium-sized towns outside of Vancouver, switching will not be an option. Who's interest does this serve?

The MacKay report ignores the fact that banks would use insurance policy expiry dates to solicit insurance. No privacy or other law will stop this commingling of data. Moreover, when it occurs it is very difficult to provide ample evidence for successful prosecution.

The report also ignores the fact that consumers already have lots of choice in terms of insurance products and services across Canada. In British Columbia, for example, there are over 6,000 general insurance agents, 900 general insurance offices, and more than 40 insurance companies actively competing for British Columbians' home, auto and business insurance. The insurance market remains dynamic and customer-oriented, while banks proceed to shut down branches and scale back hours of operation.

All of us gathered in this room today know that small business is and will increasingly become the foremost job creator in Canada. Granting Canada's banks additional special insurance sales privileges will undoubtedly lead to job loss and hardship. Importantly, the jobs we create today as insurance brokers are good-quality jobs that build valuable employment skills, families and communities.

The insurance brokers across British Columbia are extremely concerned about the task force's lack of sensitivity to this issue and many other important matters that we and our Insurance Brokers Association of Canada colleagues have raised in relation to the report. We hope and anticipate that upon completion of your hearings you'll conclude, as previous national governments have, that giving banks additional special in-bank insurance sales privileges is not, for a multitude of reasons, in the best interest of Canadians.

I'll have my colleague Mr. Atkinson add a few remarks to this.

The Chairman: Thank you.

Mr. Brent Atkinson (Atkinson, Terry Insurance Brokers, Insurance Brokers Association of British Columbia): I would just like to add a couple of comments as an individual independent broker.

Insurance brokers such as me are currently purchasing substantial new computer hardware and software that will allow us to upload and download information between the brokers and the companies. It will also facilitate on-site policy issuance to avoid handling costs and remain competitive, with excellent customer service. These capital expenditures are fairly substantial for most independent brokers. It is of dire concern to us that at this time the task force recommendation would be to allow banks to retail insurance from their branches.

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There are numerous different distribution channels throughout the system. We have telephone call centres, direct writers, independent brokers, and companies who have their own sales representatives, all providing reasonable competition in the marketplace for the consumer. Therefore we don't see any need, at this point in time, to add anything additional to that mix.

It's our feeling that the banks as such are not particularly competitive in the current environment in which they're allowed to operate, such as small business loans, interest on credit cards, service charges and other issues, and we don't feel that they would in any way be more competitive if they were allowed to write insurance.

I understand that CDIC is writing something like $259 million worth of business in the country now through their insurance company, but that they have now since had two rate increases and their rates are in the middle of the path, such that their prices are not any more competitive than those of the majority of the companies that have served their customers in the country for a number of years.

So our concern simply is that we believe our industry is very competitive. We don't believe the MacKay Task Force addressed that issue, and we certainly don't feel that adding retail bank branches to the availability of selling insurance would add anything to benefit the consumer.

The Chairman: Thank you, Mr. Atkinson.

Mr. MacLeod.

Mr. Ian C. MacLeod (Individual Presentation): As a very brief point of background because I am appearing here as an individual, I am a partner with a major Vancouver law firm. In a previous career I spent 15 years as a small-town branch banker throughout British Columbia. In 1992-93 I was president of the British Columbia Chamber of Commerce and have been involved in a whole range of public policy issues—and, in fact, since before that time.

I was the founding chair/editor/author of a major report entitled Moving Forward - The Vision of B.C. Business, which looked at the needs and challenges facing B.C. business. I'll talk a little more about that later, but we had a survey of over 600 businesses, a very comprehensive survey with in-depth interviews with a couple of dozen CEOs and the input from a whole lot of existing reports, in order to publish that report.

At the same time, I was the regional co-chair of the Canadian Chamber's Aim for a Million jobs project, and I'm also involved to this date on a number of issues around jobs, skill training and future of work, and so forth.

But I am making this submission on my own account, and I should point out that my firm and I act in no meaningful way for any of the big five banks.

In this submission I'm going to very briefly overview several points. The first is what Canadians are looking for from their bank at the consumer or branch level, the role served by the bank, some basic principles, some key issues and conclusions.

From the basic consumer level, the key components that Canadians are looking for from their banks are secure deposit-taking, business loans, consumer loans, other financial services such as safety deposit boxes, RRSPs, and so forth, and the public looks to the bank as a source of major, quality employment.

I think first and foremost what Canadians want from their banks is security and safety for their deposits, and with that goes that there be comfort that their loans wouldn't be subject to demands for payment somewhat arbitrarily due to bank liquidity problems. I don't think we've seen that in Canada since at least the 1930s. So to the extent that size is linked to security, the mergers can only enhance that security for deposits.

Secondly, on the credit front, either consumer or business, Canadian businesses, particularly the small and medium-sized businesses, need access to credit on reasonable terms, and to a lesser degree individuals need that credit access, although I'll talk about some of the alternatives later.

The funds transfer issue is less and less a major issue with debit cards and ATM machines.

Finally, on the job issue I've already mentioned, the gist of my submission is the following. On the issue of stability, when I did the Moving Forward project, which I started by mentioning, of the top six strengths that businesses told us existed in the B.C. economy, five of them were what you might call natural endowments: the living environment, the geographic location, access to natural resources, the Canadian culture, and the clean environment.

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The only one of those top six strengths of the B.C. economy that was not a natural endowment was the strength and stability of the Canadian financial institutions. We found that a little bit surprising, given the amount of public commentary that was viewed as negative to the banks, but that's what business told us. So to the extent that the mergers add to that strength and size, they can only add to that sense of comfort that business has.

The second issue is one of competition, and it's not for me to make the argument for the banks—they can do that themselves—but they've argued quite extensively on the issue of technological investments that are required and the economies of scale that go from being able to spread that cost across merged institutions.

The third is an issue of financing of major investments. Nobody is building new pulp mills these days, but if one was, it's in excess of a billion dollars to build one of those. If one was looking to build a computer-chip plant, a fabrication plant is in excess of $1.3 billion. You need access to financial institutions of significant size to fund projects of that size, and again, the mergers will help create that size, both for the Canadian domestic market and in the international competition.

Fourth, it gets to the issue of globalization. Globalization, international trade, is with us to stay. Over a third of the Canadian economy is based on trade. Canadians are very good at trading. We have no choice but to stay globally competitive, and to the extent that our Canadian businesses have to play in the world marketplace, our Canadian banks should be able to provide them the financial and other services they need, and by necessity, some of that will have to come with size.

The key issues that flow from all of that are, first, the access to credit, the availability that may or may not come as the mergers come about. I would be much more concerned if the banks were the only source of credit, but there are probably a dozen alternate sources, ranging from the automotive lease companies to credit unions, the venture capital firms, the life companies, the pension funds, private lenders, the schedule II banks. All of them are there providing lending and credit facilities.

If the banks don't provide the service, if they become non-responsive to the local community needs, all those other institutions are going to be only too willing and able to jump in and fill the gap. In fact, if the mergers create that lack of community sensitivity that some have expressed as being the big concern and the banks are forced to have less of a market share, it may even be to the benefit of the small business community as those others fill the void.

The only area where I have some concern is for those small businesses that are on the margin. If you have a business that is close to making it but it's a judgment call of the financial institution whether the loan is available or not, if they have five places to go instead of three, that personal relationship, that judgment call issue may tip the balance. But those are only going to be on the very few marginal, creditworthy businesses where a merger might cut out some of the competition and, in turn, reduce some of the available credit.

Another issue is, what if a bank decides to pull out of a town, or if there were two of them there and one decides to pull out?

I'll give you a brief example from my personal experience. This goes back 20 years, when I was small-town banker. I went into a town where there was a single bank. The service that had been provided was not particularly good. A lot of the community was dealing with a competitor bank 16 miles away, to the extent that the competitor bank saw an opportunity to open in this town. I arrived in the town the same day as that other competitor bank opened, and a month or two later a credit union also opened.

But my mandate was to provide service and to get involved in the community, which I did, to the extent that after two years the other two institutions closed out again. It was simply a matter of service; if you provide the service, you will keep your client.

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Another issue, and one that is talked about quite a bit in the MacKay report, is credit for the so-called equity groups: aboriginal businesses, women's businesses, micro businesses. I have some concern, even if the banks won't disagree with it, that they get mandated to provide credit that wouldn't otherwise qualify. The reason I have that concern is if you are making credit decisions based on other than sound business risk principles, in effect you are subsidizing those business losses, which will inevitably come through the charges you impose on all the other customers of the bank or on the shareholders of the bank.

If there is a public policy basis for lending to those groups, and I think there arguably is, it should be done in a transparent way through things such as loan guarantee programs. Otherwise, it is in effect a taxation by regulation. You download a role that government has traditionally played and impose it on the business community through regulation, and nobody is ever accountable or measurable for it.

The third point has to do with services, which I've already mentioned. The fourth has to do with jobs. I don't think the jobs issue should be on the table in this debate. Change is inevitable. Governments cannot ever maintain the status quo. If they could, we would still be building wooden ships, as we did at the turn of the century, which nobody would buy.

There is a role for government obviously to assist in the transition when you have a changing economy. There is a lot of public attention that comes when a major employer cuts 2,000 or 2,500 jobs. But the fact is in British Columbia there are, give or take, 150,000 business enterprises, virtually all of them being small and medium-sized business. If each of them hired one person, that would be 150,000 new jobs, and not one headline would be made in one paper. The banks, if they merge and through certain consolidation or rationalization of services cut people, have a number of alternate jobs to get picked up. I don't think we can afford as an economy to try to preserve jobs that aren't economically sustainable.

On a broader macroeconomic issue, Canada's productivity has been slipping against most of the OECD for 20 years, and B.C. has been slipping against Canada. That inevitably, without any doubt, translates over time to lower incomes and fewer jobs, and the data are showing that in Canada. So to the extent that we try to help, we sometimes end up hurting.

In the final analysis, I would recommend the bank mergers be allowed to proceed with a clear allowance for greater access to the Canadian market from foreign competition, the schedule IIs, and by making greater access available to the multitude of financial institutions through the Interac or ATM-accessible systems. To put it simply, size equals strength equals stability equals safety and security, which is after all what B.C. business told us they saw as being one of the strengths of the B.C. economy.

Thank you.

The Chairman: Mr. Dermer.

Mr. Ashley Dermer (President, Southern Cross Sheepskins Inc.): Thank you, Mr. Chairman. I'm going to start with a quote from Walter Stewart, a veteran Canadian journalist: “What our banks want, almost more than life itself, is to merge.” Stewart wrote that in 1997 before the mergers were announced.

Thank you for the opportunity to appear before this House of Commons Standing Committee on Finance to offer my views on the MacKay report and bank mergers. I was greatly surprised to receive the invitation just a few days ago. At the end of 1997, before the bank CEOs had announced their merger intentions, I wrote to the task force on Canadian banking. That letter no doubt led to my presence here today.

The right of citizens to participate in decisions that affect their lives is a central tenet of democracy. That right is clearly being exercised in this process, for which I am grateful. I hope a similar chance for public input occurs before Canada signs on to any multilateral agreement on investments.

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The global outlook for financial systems is changing daily, with recent events suggesting the trend to deregulation and globalization may right now be at its zenith. The huge Japanese banks, with loan write-offs of $1 trillion, threaten the stability of the world's financial system. In Russia, the banking system has disintegrated, the ruble is almost worthless, and millions face starvation in the coming winter. The Asian tiger economies are in chaos, with the bursting of their speculative bubble economies. Capital is fleeing from Latin America. Even in the U.S.A., Bank America, Citicorp and Bankers Trust lost $1 billion in July/August 1998 and the U.S. federal bank has injected $2 billion to rescue just one speculative hedge fund.

The world's derivatives markets, with total contracts reported as high $130 trillion, are an accident waiting to happen, and here the exposure of Canadian banks amounts to trillions of dollars—Stewart suggests $5 trillion—with a credit equivalent about double their total shareholders' equity.

Our banks don't publicize this off-balance-sheet exposure. In fact, one Toronto businessman recently sued CIBC in Los Angeles in an effort to force the bank to disclose its exposure to the derivatives markets.

Deregulation, globalization and unrestricted movement of capital have brought us to the edge, and the mergers of Canadian banks, which they claim will enhance their international competitiveness, is one more step down this road.

Just last month, Malaysia bucked the trend and re-regulated its markets with exchange controls, while Hong Kong injected government money into their market to burn speculators holding short positions. Taiwan has effectively banned the sale of George Soros' funds.

The trend to globalization is being arrested and reversed by these government interventions and more countries will not doubt follow, asserting their sovereignty by imposing controls against the will of the financial elite. Business Week, September 7, commented that “a backlash against globalisation has already begun.”

The Canadian banks' urge to merge is to board the Titanic after it struck the iceberg. Bigger is not necessarily better, as evidenced in Japan. The bigger the bank, the greater the calamity should disaster strike. In England, Barings Bank existed for 200 years before the recent actions of one rogue trader destroyed it. Can now Canadian bank CEOs guarantee the same fate could not befall their merged giants? If they did offer such a guarantee, should we be gullible enough to believe it?

Who will benefit from the proposed mergers? Will bank services improve for the average Canadian? Will bank workers enjoy improved job security? Hardly. Many full-time bank employees earn little more than poverty level wages. In 1995, while Mr. Cleghorn earned over $2 million, his tellers earned an increase of six cents per hour.

The banks tell us mergers and increased profits will benefit Canadians, but while profits and earnings per share have grown steadily, the dividends paid have stayed almost constant, and the dividend-earnings ratio has actually declined during periods of massive profit growth, as Walter Stewart points out in his book Bank Heist.

The banks want to compete on the world stage, but seem unable to offer genuine competition within Canada, as their rates change in lockstep. If five banks cannot offer competitive rates now, will three banks do any better?

Canadian governments on both sides of the House have a sorry record of bowing to bank lobby pressures. Thirty years ago the banks were permitted to enter the mortgage market. Then they were granted the right to sell securities and they now dominate this segment of the Canadian economy. For years, they have eyed the car leasing and insurance markets, and now the MacKay report has given them approval to enter these areas. The press described the report as a yellow light for the banks, but with the two plums of car leasing and insurance, it looks much more like a green light for the banks.

The big five already own over 400 subsidiary companies in Canada and many more overseas. The MacKay report simply accelerates this dominance of the entire Canadian economy by the banks.

The Canadian public are becoming increasingly angry with their lot. They see corporate and bank profits climbing to record highs while their wages remain frozen. They see the increased spread between loan and deposit rates and between buying and selling rates when they exchange currencies, with the banks taking unreasonable profits from every transaction.

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Canadians see an unfair tax system, where corporations pay a decreasing proportion of tax revenues, while workers pay an ever-increasing share. Their anger can bite at election time, as Kim Campbell can attest. If the proposed bank mergers are approved, the aspirations of many Liberal politicians may be jolted by a backlash of public dissatisfaction.

This is a quote from Stewart: “Our banks have become so bloated, so self satisfied, so full of themselves, and so successful in persuading our politicians of their virtues, that they may be beyond control.”

I urge the committee to reject the proposed bank mergers, and to seek suitable legislation to limit the intrusion of the banks into car leasing and insurance sales. I hope this committee will reverse the trends that have permitted the major banks to dominate the Canadian economy to an unprecedented degree.

Again, thank you for the opportunity to present my views on these matters. As a final note, I have inserted in my written piece, a small article by John Crispo, emeritus professor at the University of Toronto, who gives other excellent reasons for opposing the bank mergers. Thank you.

The Chairman: Thank you, Mr. Dermer.

M. Desrochers.

[Translation]

Mr. Odina Desrochers: Good afternoon. I would like to thank you for having come here today to share with us your views on the important MacKay report on the Canadian financial services sector.

I would like to put a few questions to the representatives of the Insurance Brokers Association of British Columbia. You seem to be very disappointed by the MacKay report. Is it your view that the sale of insurance by banks could endanger your business in British Columbia?

[English]

Mr. Brent Atkinson: Yes. I think of the bank intrusion through retail branches, where the client is forced to go to the bank and discuss his or her financial arrangements with them, for example to obtain a mortgage. The bank will use its influence at this time to encourage the client to purchase their sole insurance product as opposed to his having the choice of going to a professional broker. Another example of this occurred recently when a client of mine went to the bank to get a mortgage and was told by the bank loans officer that in order to get the best discounted rate on the mortgage, this client would have to move RRSPs and mutual funds from his or her financial adviser to the bank.

Mr. Roger Finnie (Director, Insurance Brokers Association of British Columbia): May I add to those comments, Mr. Chairman?

The Chairman: Sure.

Mr. Roger Finnie: We are very concerned as an association, as are our members, about the effects of coercion and tied selling on the public in general. The position of a bank in terms of granting credit is a very privileged position. This position must never be abused. If someone prospectively has a bank account, say for example a young couple looking at buying a house down the road, they will inherently, whether they do it deliberately or otherwise, try to buy all the bank products possible so they can save that quarter of a point or half a point on their mortgage. So it is a privileged position the banks have and it will curtail our members' activities.

Mr. Michael Megson: If I may add a point as well, as you know, the 1992 Bank Act revision allowed banks to sell insurance through subsidiaries. I want to make it clear that we brokers don't have a problem with banks being in the business on this basis. Clearly this is the market, and if they choose to compete, that's fine.

Our problem, as we stated, is their ability to retail the product out of the bank branch itself. Given the two situations my colleagues have alluded to, by choosing a bank in a case like this, where in fact a person feels compelled to purchase the product because of the credit-granting nature of the transaction they would be doing with the bank, they then have had only one choice of one product from this bank—the bank's product. Clearly, in a transaction like this, a person also loses the advocacy side of the equation that a broker can bring.

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So again, I just wanted to make it clear too that we're not anti-competition in terms of banks or whoever else may choose to get into the industry. Our problem is with the allowance of banks to retail the product out of the branches themselves.

Thank you.

[Translation]

Mr. Odina Desrochers: In your view, what could the federal government do to protect your business if these mergers come about?

[English]

Mr. Brent Atkinson: Well, we have some real concerns with regard to the MacKay report, which says somehow or other they're going to establish regulations that are going to police this issue. This issue—coercion being used by the bank—is not one the consumer feels comfortable reporting to the superintendent of insurance or to anyone else in writing, because they're deeply concerned it may affect the renewal of their line of credit or their access to the mortgage product.

Hence, although we hear verbally from many consumers in our province who have been coerced into buying insurance products from credit unions, they say although they are concerned about it, in order to get bank loans for fishing boats or whatever, they're not prepared to put it in writing and make a formal complaint. And because of this experience, we feel that regardless of the regulations the MacKay report has included, it's impossible to police.

It's also a perception of the client, and it's very difficult by regulation to police perception. Therefore, they will capture more market share, and if they're unsuccessful in capturing more market share, quite frankly, they'll do what they did in the other industries, the securities business and others such as mortgages or personal loans. They will simply use their financial strength to buy the market share.

[Translation]

Mr. Odina Desrochers: Are you aware of the act in place in Quebec relating to the Desjardins movement and to the whole insurance industry? We have tightened the regulations pertaining to the protection of the confidentiality of information. Are you aware of what has taken place in Quebec and of the fact that the insurance industry was very pleased even if these measures did not completely resolve the problem?

[English]

Mr. Michael Megson: Is that Bill 188 you're referring to? Is that the right number? I think that's what it was in Quebec.

[Translation]

Mr. Odina Desrochers: Yes.

[English]

Mr. Michael Megson: Yes, I'm aware of it and I don't think the situation— Certainly the brokers were very strong in opposing the position the Parti Québécois took in allowing Bill 188 to get passed. And I think, as my colleagues pointed out, it really hasn't changed anything in terms of what we feel is the problem—coercion and inadequate protection relative to privacy, etc.

Notwithstanding regulations that may have been put in force in that province, and that of course were also recommended by the MacKay report, I think the issue becomes that when you're in a credit-granting institution to make a transaction to borrow money, be it for a business, a home, or whatever, that particular transaction is the paramount transaction. And regardless of whether there are these regulations or whatever in place, what you usually do is buy the product at the bank itself because the perception is that it's going to enhance or improve your chances of making a credit-granting transaction complete itself.

So notwithstanding the Bill 188 that I'm aware of in the province of Quebec—and I feel that's a rather unfortunate situation for the public, the brokers, the insurance industry, and most of all the consumers in that province—our position hasn't changed at all.

Mr. Roger Finnie: Mr. Chairman, I'd like to add a comment to that.

The MacKay report did identify that 18%, I believe it was, of the public in a survey felt they had been pressured into a tied sale by a bank, and that is without even having sales through banks at this point in time.

Thank you.

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[Translation]

Mr. Odina Desrochers: I have one final question. If Bill 188 in Quebec doesn't fulfill your expectations and if the MacKay report doesn't satisfy your industry, what would you suggest the Canadian government do to correct the problem that you are denouncing?

[English]

Mr. Michael Megson: What I would like to see the federal government do is let the massive changes that took place under the 1992 revision of the Bank Act have a chance to mature and move forward. If the federal government makes a change as recommended by the MacKay report so soon, they have not really given those many changes to the act—and they were fundamental changes—time to mature. In that particular legislation in 1992, as we've stated, banks were allowed to get into the industry. They weren't allowed to get into it before, and now that they're in, they seem to want to take another step right away—that is, of course, the granting of the privilege of selling the product from their branches.

So to answer your question simply, then, I'm not trying to stop change or stand in the way of change and so on, but I believe we haven't given enough time at all to those changes, and I think we should.

Thank you.

Mr. Brent Atkinson: If I could add to this, one of the concerns I have with regard to the banks' entering into the general insurance business is much similar to their activities currently in the mutual fund business.

In the mutual fund business, primarily they sell their products exclusively, which I also believe they would do in the casualty and property business. The casualty and property business in Canada is currently served by 240 companies who are very price competitive and provide much different and varying products. The consumer's second most valuable asset is his home, and I think he needs to have the option of choice in purchasing that product and not be directed exclusively to a bank-driven in-house product, where he loses the rights of an advocate to act in his behalf should he have a claim.

As an example, if he has a claim he's not happy with and he's insured through the bank, I hardly think he's going to feel comfortable debating the issue with the bank manager who handles his mortgage. There's not going to be any intermediary who acts for the client, whereas there currently is in the system, and I think that would work to the customer's disadvantage.

[Translation]

Mr. Odina Desrochers: I understand. You are saying that you would like to have more time, but what would you like to see the federal government do concretely, once this time is up? Would you like it to legislate in order to protect your industry? Would you like it to simply refuse to allow banks to sell insurance? I would like to have a clear answer. What is in store for you tomorrow?

[English]

Mr. Brent Atkinson: I don't think there's any question; we feel it's in the best interests of the consumer that the current rules not be changed.

We don't think the changes to the Bank Act in 1992 have had the opportunity to mature and to see how the market is going to develop as a result. We think the banks are extremely anxious to get into the insurance business in a larger way, as they are extremely anxious to merge immediately, but we don't feel that either one of those is customer driven.

We understand that the bank managers or presidents are very anxious to do both; however, we certainly don't feel that this issue is consumer driven. We think the consumer is being well served now. We have surveys that would indicate that, and we see no need for going beyond the changes in the Bank Act that currently exist at this time.

Mr. Roger Finnie: If I may add to that, we hold the definite view that banks have a distinct industry base, as do property and casualty insurance companies, and you can ask the rhetorical question: where do you draw the line?

Banks are in the business of accepting assets from their customers. Insurance companies are in the business of accepting liabilities or obligations of individual consumers. If you say we start adding all this risk load onto the banking system, as are all those other things that banks get involved in, we have to look at the impact on the Canadian financial system. We also have to say, if it's insurance tomorrow, will it be real estate development in two years' time? They are distinct businesses, and they must be kept separate.

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Mr. Michael Megson: I would like to add to that.

The question was asked: do we need legislation; what do we need to be doing now? Clearly, we're not asking for legislation at all to protect our industry. We have very highly competitive, community-based businesses that are very successful, and as I say, the surveys we submitted to this body demonstrate that. The public is very happy with what we do.

So as I say, we're not driving this; it's clearly the banks that are driving this particular issue. We're not interested in having any legislation to protect our industry. We're fine as we are.

Thank you.

The Chairman: Thank you very much, Mr. Megson.

We are going to go to Mr. O'Toole. You can deliver your five-minute speech, and then we'll go back to the question and answer session.

Mr. Chris O'Toole (Individual Presentation): Mr. Chairman, am I in the right committee? Are we talking about the proposed bank mergers here?

The Chairman: Yes.

Mr. Chris O'Toole: Okay. I'm sorry, I'm not up to date with what has been going on here.

Thank you for the opportunity of addressing the committee. I'm here to talk about the proposed merger and give you my reasons for endorsing same.

Some 35 years ago I immigrated to Canada, and I started in the finance business in the late 1960s.

I spent approximately 6 months in the Greater Vancouver market, working within the finance industry as a consumer loans officer, and was transferred up north to Dawson Creek, where I spent the better part of a year.

During that period of time, I noticed there were 30 finance companies, or thereabouts, in Dawson Creek, a small town, serving an area of about 10,000 clients. It soon became apparent to me that all the finance companies were going after the same clients. I remember on many occasions talking to different associates in the field and wondering, gee whiz, we're all overloading these clients with debt and what have you. The thought came to me as I was thinking about that: gosh, what happens if these finance companies go out of business? There will be no lending done in this little town— or Prince George, or Kamloops, or wherever the case may be.

Very soon there was too much debt amongst the clients. A lot of them went into bankruptcy. There was overlending. There was no control of lending, and in due course there were many bankruptcies, many losses, and the finance companies pulled back from the lending field at that time. That was a major negative for small towns throughout B.C.—and throughout Canada, I'm sure.

The banks weren't into consumer lending in those particular days, but in any event, in the early 1970s the banks started to get into consumer lending. A lot of the finance managers who worked for the finance industries ended up changing careers and going to work for the banks in their consumer loan portfolios.

When I thought about that, it was brought home to me that the client was better served by the banking industry during that period of time and onwards, still. Their loan rates were half. All the finance managers who were going to be put out of business by the finance companies withdrawing their lending activity ended up ultimately working for the banks, so in retrospect there was no loss of jobs.

The question I see is, has the consumer in a small town, or a large town, suffered because of the demise of the finance companies? I would say no, emphatically. Loan costs are half those of the finance companies. Technology has helped to keep the borrowers' debt at reasonable levels and is reviewable at a moment's notice. So in retrospect, consumers are better off because their borrowing costs are lower.

Regarding jobs, everyone is concerned about job losses taking place because of possible branch closures. Most of these people were hired by the banks to run their loan portfolios, were gainfully employed, and retired with nice pensions. Nature abhors a vacuum, and if the banks do not adequately service their clients in these towns and cities, they will pay the price in lost business and market share.

Today, a horrific loss of jobs is occurring in the Japanese marketplace. My daughter recently visited Japan and had to cash a traveller's cheque at a branch of a major bank. It was a $200 cheque and had to be passed and approved by no less than six to seven bank employees before she received her yen exchange. Can you call that efficient? As we all know, Japanese banks are technologically behind our banks by some 10 to 20 years. They are saddled with massive bad loans, by some estimates in the area of $1 trillion U.S. My belief is that being forced by protocol to keep inefficient or unneeded employees, the banks have foreclosed themselves the opportunity of keeping an efficiently run operation.

• 1750

Jobs are not for a lifetime. Today, both because of the mortality rate in business enterprises and because of the desire for upward mobility on the part of job holders, one person is apt to hold many or at least several different jobs in a lifetime. The technological revolution is making some jobs outmoded and creating new ones. It would be my guess that two out of every four jobs created in this country in the past decade have been in the technological field. Our banks have been the leaders in this field. The business of our banks is business. The definition of business is commercial enterprise, trade, commerce, buying or selling, etc. Calvin Coolidge, the former President of the United States, once said civilization and profits go hand in hand. William Hazlitt, in 1821, wrote that: “The most sensible people to be met with in society are men and women of the world, who argue from what they see and know, instead of spinning Cob-Web distinctions of what things ought to be.”

I believe our banks know what their business is. Herbert Hoover, on October 22, 1898, said: “It is just as important that business keep out of government as government keep out of business.” Business is an ancient occupation of mankind, but it deals more and more with new products and services. It has been estimated that about 10,000 different products each year enter or leave production. Since 1950 the trend has been toward bigger and better corporations. This fact has not adversely affected the consumer in Canada. In fact, the United Nations recently stated that Canada has the highest standard of living in the world. This, in no small way, is due to the efficient and diligent backing system that exists in our great country.

Our banks are dependable, steadfast and reliable. In my own personal experience, they have earned our trust and our fate and should be allowed, without interference, to enter into the global marketplace strong and free as they always have been. I'm in favour of the Royal Bank and the Bank of Montreal merging.

The Chairman: Thank you very much, Mr. O'Toole.

Mr. Riis.

Mr. Nelson Riis: Thank you very much, Mr. Chairman.

Mr. O'Toole, what did you say you do?

Mr. Chris O'Toole: I'm a mortgage broker. I own a mortgage company.

Mr. Nelson Riis: I'm interested in your comments about the banks being in a free market. I don't suppose there's probably a more protected industry in Canada since they started 150 years ago. I can't think of another sector where we don't allow any foreign competition in our country. So I think your argument in terms of a free market for the banks is not even a starter. That may be just a difference of opinion, but I just see that these people are operating in a very privileged business environment.

Mr. Chris O'Toole: I don't agree with that, because if you look around today there's—

Mr. Nelson Riis: I mean just banking. We have not allowed a foreign bank into this country until very recently.

Mr. Chris O'Toole: Right.

Mr. Nelson Riis: Even then, it's been under very restricted conditions.

Mr. Chris O'Toole: Right. But the reality is this is going to change. If you look at the extension of credit facilities in the Canadian economy today, you have General Motors putting out Visas or Master Cards.

Mr. Nelson Riis: I agree.

Mr. Chris O'Toole: The extension of billions of dollars of extra credit is not even under bank control. There are lots of those cards in the system today, so there is an element of free market forces operating independent of the rules that are in existence for banks. I think they're somewhat constricted in terms of that competition being allowed to happen.

Mr. Nelson Riis: For somebody who's been in the banking business to make those comments is a bit surprising.

Mr. Chris O'Toole: I'm for the reality of banks being allowed to operate with unhindered controls to the current existence of the rules.

Mr. Nelson Riis: I'm glad you raised the issue of the derivatives market. This is something that hasn't been adequately uncovered. As you say, we don't know to what extent our banks are exposed in that market. When you consider the turbulence out there right now, one shudders at the possibilities. The fact that we don't know is really quite scary. There's no transparency there. I know our Minister of Finance has indicated he is confident that the banks are okay in this area. I'd feel more confident if he actually knew that was the case. Thank you for raising that particular issue.

• 1755

My first question to Mr. MacLeod is in terms of his comment that size equals stability and strength. Mr. MacLeod, would you be really happy if the four banks merged into a mega-bank? Your argument was that these two bigger banks would be good for the country and for business. You laid out a whole number of reasons for that in a very thoughtful way.

We're a major trading country, and from Kamloops we do an awful lot of trading overseas. I've never heard of a problem in terms of our trade because of a lack of banking. Perhaps there has been, but I've never heard that this has somehow hindered our ability to trade.

In terms of security of deposits, you said we never had a problem. Our deposits are secure. We have a positive insurance system, so in terms of having a larger bank to make our deposits more secure, there doesn't seem to be a problem today.

In terms of access to credit, is there really a problem these days? I question that because again, other than perhaps some small business operators, I seldom hear that, particularly from anybody in the international trading business.

In terms of providing an opportunity to finance big deals like a smelter or something, when organizations like that are financed there's normally a number of players in that financing picture, and not often just a single bank, right?

Mr. Ian MacLeod: Usually the lead bank would put the transaction together, and if the model and the pricing were right, it would be syndicated or participated in by any number of other institutions. But there has to be somebody with the wherewithal to lead the transactions. So you are partly right.

Mr. Nelson Riis: Okay, I appreciate that.

The studies we've seen would indicate that once a bank reaches an asset base of about $5 billion, efficiencies really start to fall down. A larger bank doesn't necessarily mean a more efficient bank. That's what the studies would indicate. It would certainly be a bigger bank and so on.

I know you haven't seen this article by John Crispo that Mr. Dermer left us—or perhaps you saw it in the Globe and Mail—but he questions the very motives behind this initiative. The banks were calling for the MacKay report, and before the MacKay report was out they announced this particular thing. He questions the motives and suggests some of the major players in these merged banks are going to make between tens of million dollars and hundreds of million dollars personally if these mergers are allowed, and their boards of directors will do very well as well.

Where did this call for a bank merger come from?

Mr. Ian MacLeod: I'm not sure that's really relevant.

Mr. Nelson Riis: It's relevant in the sense that the banks asked for the MacKay report, which the government then launched. Prior to its conclusion they announced out of the blue—and you have to admit it came out of the blue—what they wanted to do, without waiting for the report they actually asked to be filed. So what changed in this process? As Mr. Crispo says, he feels it's because of almost questionable motives by some of the senior bank players who stand to make tens of million dollars or hundreds of million dollars on a personal basis.

Why do you think the banks announced this at this point?

The Acting Chairman (Mr. Roger Galloway): Mr. MacLeod, do you want to go first, then Mr. O'Toole?

Mr. Ian MacLeod: Business deals are not often put together on long-term time lines. They're put together when the business leaders feel there's a synergy or coming together to their mutual benefit. There may be some sinister motives, but there's a predilection among many people, particularly in Canada, that big is bad, the banks are excessively powerful, and anything that's large is worse. I haven't seen anything to suggest that's the case, so I'm not going to assume that just because it's big it's bad. The business leadership of those institutions have, for whatever their reasons, proposed that this merger go ahead, and my inclination would be that it should go ahead unless you can see good reasons for why it shouldn't.

Your comments really seem to come at it from the other direction. The predisposition is it shouldn't go ahead unless you can prove very good reason why it should. So I think that probably can explain the difference between my approach and your reading of them.

• 1800

Mr. Nelson Riis: I appreciate that. I must say that part of my reflection— You weren't here earlier today obviously, but we heard a number of witnesses, not least of which was the report from B.C.—

Mr. Ian MacLeod: I appeared before that.

Mr. Nelson Riis: —which comes out clearly against the merger. So I'm reflecting, in a sense, some of the arguments that were raised at that point.

But I have a final question to you, Mr. MacLeod, and then a quick one for the insurance people.

Minister Martin indicated concern, I think a couple of weeks ago, that in this turbulent marketplace, where we're seeing— And I don't have to describe this situation to you, but we've seen in the past how some of our Canadian banks were exposed in some areas that got into trouble. My comment, I suppose—and I'll steal a little bit of comment from my friend Mr. McKay, whom we heard earlier today—is that if one of the banks goes down today, which is a horrible situation to even contemplate, it would be very bad news for their shareholders. But if a mega-bank went down two or three years from now, it would be a problem not only for the shareholders but for the country. And we'd probably ask them to take care of this problem.

Minister Martin said in this turbulent financial marketplace right now, where we really don't know what's going to happen in the next week when we listen to the newscast, let alone next year, ought we not to be really concerned about going in and exposing the Canadian taxpayer to this possibility at this time of uncertainty? Are you saying we should set that aside and surge ahead?

Mr. Ian MacLeod: I might say that somewhat flippantly, but there's a little more behind it than that.

Change is always with us and change is accelerating, and for anybody to suggest we can maintain the status quo, they haven't been paying attention.

Mr. Nelson Riis: I haven't heard a single witness who said that yet.

Mr. Ian MacLeod: Yes. So we are certainly in turbulent times. And we've got a strength within our Canadian banking system that in many cases doesn't exist elsewhere, and it comes through the regulatory structure we have through OSFI, through the capitalization requirements imposed on our banks, and the reporting requirements.

I take the point that's been raised about the derivatives exposure, although looking at raw dollars as the size of the derivatives market is somewhat pointless. It's more a question of looking at what the unmatched exposure might be in those derivatives, because to the extent they're matched, there really shouldn't be any exposure at all.

So in the context of bank mergers, I'm not scared by the fact we're in massive turbulent times. I might be scared on some other fronts.

I well recall probably the mid-seventies, when there was talk in various quarters about certain banks going down because of their exposure to Dome Petroleum and later to Campeau and so forth. But the strength of the Canadian financial institutions allowed them to ride through it, whereas some of the smaller banks such as the Northland Bank, the Canadian Commercial Bank, and to a certain degree even the Bank of B.C., if the Hongkong Bank hadn't ridden to the rescue, would have failed.

So I think that argument can cut both ways, and I'm not concerned that we are overly exposing ourselves as long as we keep the regulatory control of OSFI on capitalization.

The Acting Chairman (Mr. Roger Gallaway): Mr. O'Toole, do you want to add to that?

Mr. Chris O'Toole: I'd like to respond to that because I've been dealing with the pertinent banks in question for some 30 years myself. I remember going in 1979 to the local branch of the Royal Bank in Richmond, asking for a $400,000 loan on a $450,000 purchase, and I was able to obtain it just like that. I put down 10% and I got 90% financing.

Of course, having dealt with the Royal Bank pulling back in their lending practices and working through the losses they suffered, as all banks did in Latin America in, I suspect, the early seventies and so forth— our banks have learned an awful lot. And having dealt within the commercial banking business in the Vancouver area over the last 25 years, I have to say we have a really mature group of bankers in this country.

Certainly, if you look around the world today— In Latin America we used to dole out our money, and the Americans are still doling out their money and undermining the depositors' cash deposits in the bank. We don't have that experience in Canada today. I think we've learned our lessons, and we're very judicious in our lending practices. They've adopted that as a culture within the banking industry.

• 1805

These banks have learned and paid the price with serious erosions of equities over the years. Today that is not prevalent, and I think it's evident, if you look around the world, that our exposure to Asia and to Latin America is very minimal because of the lessons learned in the past.

Mr. Nelson Riis: Mr. O'Toole, I really appreciate your comments and I believe they are accurate. But I tell you, I remember not too long ago—perhaps within the last two or three years—when you would walk into any bookstore in the country, particularly in airports and so on, and you had walls of the Japanese model of how to do it. Everybody read these. My office is filled with these things that people gave me to read to learn about how the world should operate. The reality today is quite different.

So I take to your comments, and I share your opinions. But I'm a little nervous these days when I see what's been happening.

My last question is to Michael, Mr. Chair, in order to help us, as committee members, understand the insurance issue. It's becoming a major one, and I think we're seeing a whole sector of our communities at some risk if the MacKay recommendation is taken.

You commented on the professionalism of the broker in terms of how important it is to get really professional advice when buying a variety of kinds of insurance. I guess implicit in your comment was that when you go to the bank in the future, you won't get that same level of professional advice. It would be a more holistic adviser when it comes to providing financial services. Could you elaborate on that for us? Why is it important to have such professional advice when it comes to taking out insurance?

I come at this rather naively, because I just have house insurance and so on. I don't even phone my broker up once a year. He sends me a bill, and I just fill it out and send it back. We might not talk for three or four years at a time. I never felt it was actually that sophisticated. Perhaps I'm misinformed.

Mr. Michael Megson: Maybe the mere fact that you haven't read your policy shows that you do rely on your broker to make the right judgment for you. I think you have to understand that the property and casualty business is a very complex business covering many things—property, of course, liability, and other things.

In relation to the banks, clearly if banks are involved in insurance sales—of course they are involved in insurance sales through their subsidiaries—those individuals have to be licensed to the qualifications of the province they happen to be operating in.

What the consumer would lose in the case of dealing with the bank is the idea of choice. We assume the banks would be using their own banking products. The Royal Bank would be using its insurance company, and the Canadian Imperial its own insurance company. Right away, the consumer is not getting a choice of a myriad of products that are being offered by the marketplace in general. They're getting one product.

At the same time, then, in the event that a claim situation happens—which is clearly why they are buying the insurance coverage—brokers are in a role of an advocacy position, whereby they advise clients. Just by the mere fact that they're brokers, they're not employed by the insurers themselves but are working for the consumer. That whole relationship is shifted by dealing directly with a company that sells the product. You're dealing with people who are employed by the bank, who are selling the product that the bank has, that the bank is offering. So you're losing that broker relationship, that advocacy relationship, that independence, if you will, that a broker provides.

I think the biggest thing is the idea of choice, what might be out there that the banks, of course, can't sell. It might be better for that individual when buying the products.

Maybe my colleagues would like to add something to that.

Mr. Roger Finnie: I could add a brief comment.

Having gone through many professional courses, I am actually a fellow of the Insurance Institute of Canada, which is the equivalent of a chartered accountant in industry. A lot of what we do involves advising on coverages, whether they're what subject matters are insured, what perils are insured or, for that matter, what values are insured. In other words, is your house worth $500,000 or is it worth $100,000? Is it insured on this basis, or is it insured that basis? It's not like counting dollars in a bank account. It is very different.

When we go through these things, we have to advise them sometimes of their shortfalls, and we have to make special arrangements for additional insurance. Hopefully, we get to know our customers very well and can tailor and design products for them and deliver those products to those customers from a multitude of sources that are available out there in the marketplace.

Mr. Nelson Riis: As a short supplementary—that's a good general response, Roger—can you think of an example in which you would give some professional advice in terms of insurance because of your knowledge, your experience, and so on, that a more naive or perhaps not as professional person in a bank would give? Again, indicate what it is that we would get by doing business with you that we might not get from going to a bank person.

• 1810

Mr. Roger Finnie: Maybe I can give you a very short example of a small businessman running a mobile business as a paper shredder. It's a simple business. There's a lot of paper out there, so he goes to businesses, carts it down, and shreds it.

This person has the ability to buy insurance for the box that sits on the back of the truck, and then there's insurance for the cab and chassis. Little does he know that on the insurance policy for the cab and chassis, there's something called the co-insurance clause. That clause says that if he doesn't insure the whole truck as one unit, in the event of a claim, and a partial claim in particular, he will be prorated on his claim to the extent of the amount of insurance he bought to the total limit of the truck, rather than just the cab and chassis. Without my knowing those clauses, he would be in a serious claim deficiency.

Mr. Nelson Riis: Good example.

Mr. Brent Atkinson: Mr. Chairman, I'd like to give a couple example, if I could. They're out of the life insurance area, not out of the casualty area, and they involve clients of mine who have done business with the bank.

As we know, banks have been selling creditor life insurance for a number of years. I have attended a bank and have been there at the counter when the client asked the bank employee whether or not there was a suicide clause exclusion if they bought mortgage life insurance. The bank clerk categorically told the client there was no suicide exclusion. I haven't been life-licensed personally for twenty years, but when I was life-licensed I was fully apprised of the fact that all life insurance policies have a two-year exclusion for suicide.

But that's not not quite as important as the other issue.

The second one deals with when you go to the bank to buy your mortgage insurance. The bank employee goes over the application with you and recommends creditor life insurance for either you or your wife, in order to protect you against the loss of that mortgage. With this particular client, after having gone over it with the bank employee, the bank employee had X'd that it was on his life only, as opposed to joint life. His wife unfortunately had terminal cancer. They had three young children. He came in to me and was somewhat distraught that the mortgage insurance he purchased through the bank and the bank employee was not joint but was only and solely on his life. It would therefore not satisfy the needs of his having to avail himself of hiring someone to help him raise his family for the next fifteen years.

The last example I have is currently in the area of mutual funds. A number of bank employees come before me to complete applications for mutual fund licences, and I visit with those employees and discuss mutual funds with them. Basically, these people are being licensed to sell mutual funds. On discussing the issue with them, they're somewhat confused at the fact that what a mutual fund really is is just a pool of common stock, that the risk factor for buying a mutual fund is in fact similar to that of buying a common stock, only you have a different spread of risk.

These employees are of the opinion that the brochures they give out for the Far East fund, the Asia fund, the high-tech fund, the whatever fund that's based on driving their car and looking in the rearview mirror as opposed to what last year's returns are, are somehow or other excellent professional advice to their financial clients in terms of what they should be investing their money in as opposed to 2.75% term deposits. I hardly think that's the professional way of dealing with that product, and I'm very concerned that this same kind of problem created in these other areas would be created in the casualty and property area.

The Chairman: Mr. Atkinson, you're governed by a body, right?

Mr. Brent Atkinson: The superintendent of insurance.

The Chairman: And you also have your own association provincially, of course.

Mr. Brent Atkinson: A trade association.

The Chairman: The people who are going to work for the bank selling insurance are going to be governed by the same ethical guidelines and everything that you are, right? They would have to take the same courses, they would have to do the same thing.

Mr. Brent Atkinson: That's true to an extent. Let me simply say that in this province there are three levels of licensing: the one-year level that can do certain things, the two-year, and brokers who have to be at level two for five years or longer.

• 1815

What I believe would happen is that the banks would endeavour to employ people who are adequately licensed so their licensing requirements would be satisfactorily met. However, with an independent brokerage, there is much more personal involvement. I believe in a bank you would tend to—I am in my bank, which I've done business with for 27 years since I started—be moved to the lowest common denominator to deal with things. You don't get a lot of personal or professional service. What you get is someone who wants to get your form filled out quickly so they can look after the next person in line. They really don't pay any individual attention to what your specific needs might be.

That's what's happening in the mutual funds area right now, as per my example. People with mutual fund licences are licensed the same as financial planners. The other confusion in the banks is that those people will be called upon to do a myriad of other duties. I don't believe they will be designated to handle insurance and insurance only.

The Chairman: So they won't be selling much insurance, then?

Mr. Brent Atkinson: Well, they may not be selling much insurance. I'm concerned about whether what they are selling is the proper coverage for the client. They're not selling much in the way of mutual funds. Most of this business has gone to financial planners in the independent marketplace. Banks are just beginning to get back into this market, or are trying to get back into this market.

The Chairman: I'll go back to a point you raised, because we did some work on this issue called tied selling. I believe your association appeared in front our committee and made a strong recommendation by saying you have to make sure the section of the Bank Act gets proclaimed and this is a very important piece of legislation and so on and so forth.

Today, though, you came here and you said it doesn't really matter because at the end of the day these kinds of attitudes are going to be in the banking system anyway. People are going to be coerced to sell products and what have you. On one hand, we heard this tied selling provision was such an important thing.

It's the same thing with the issue of privacy. The privacy issue is something you also talked about as being very important. You can't have access to all this information. If we were to put in place all these things like addressing the privacy concern issue and addressing the tied selling issue, then why should banks not be retailing insurance and vehicle leasing?

Mr. Brent Atkinson: Mr. Chairman, I can only respond in accordance with the limited experience we've had with credit unions in this province who are licensed to sell and retail insurance from their branches, although they require separate locations.

In numerous instances, I have raised tied selling and coercion in writing to the superintendent under the current regulations. Other than cease-and-desist letters going out to the respective organizations that have participated in this activity, there have been no teeth in the legislation.

Let me simply reiterate by saying it's extremely difficult for me to get my client to confirm in writing what has taken place. This is because he feels he's putting himself at risk in his future business relationship with that financial institution by reporting it, through me, to the superintendent. Although I get lots of verbal complaints, there are few I can get in writing. The few I have obtained in writing and submitted have not been dealt with, other than a cease-and-desist letter from the superintendent of insurance suggesting the credit union shouldn't be doing it.

Another prime example is that as a broker I'm obliged to send a copy of the loss payable on my insurance policy to the particular credit union that has the mortgage against that property. I have had that credit union take this loss payable copy and solicit off this information my client's business on renewal date. I have reported this on numerous occasions to the superintendent. Again, all I get is cease-and-desist letters from the superintendent out to the credit union.

So from my personal experience, what I'm saying is that the current regulations and legislation, which we have, and which you and I would like to think would be adequate to police those activities, don't have any teeth and aren't operating satisfactorily.

The Chairman: Let me ask you a question. Who are you trying to protect? You're here today, and we're talking about trying to build the 21st century modern financial services sector. Are you trying to protect the consumer? Are you trying to protect the jobs in your industry? Are you trying to protect the professional ethics of people who sell insurance? What's motivating you?

• 1820

Mr. Brent Atkinson: I guess I would say I'm trying to protect all three of those things. I'm also of the opinion, rightly or wrongly, that the banks in this country currently have garnered enough size and market share in the certain areas they have been allowed to participate in. I find it difficult to buy securities these days from an independent security and brokerage firm. Most of them have been purchased by banks. I find it difficult to get a mortgage from an independent trust company, as most of them have been taken out by the banks. I don't believe this is in the best interests of the consumer. I certainly don't believe it's in the best interests of the small business community, of which I'm an active member. I seldom, if ever, hear a small business owner or partner who is the least bit pleased with the level of service and the response he's getting from his mega-bank.

Now, we talk about them doing things globally and worldwide and losing money in Latin America or losing money somewhere else. I don't see any of their competitive nature currently expressed in my service charges, or the interest on my credit card, or my mortgage rate, or any of the other areas they're currently licensed to do business in. The MacKay report says somehow or other they're going to provide a lower-cost insurance product to the consumer. I would suggest I don't understand this and I certainly don't agree with it.

The Chairman: We're trying to get to the bottom of a few things here, so I hope you don't mind the question.

They're so bad, yet everybody wants their branches to remain open. These banks are doing such a poor job, but take away a branch and everybody is so concerned about it. Why is this? If banks in this country are so poor at service and so poor at providing competitive pricing—they're so poor at everything, according to the people who have appeared in front of our committee—then why is it we are so concerned about them shutting down the branches?

Mr. Brent Atkinson: Well, first of all, it's because they're the only game in town. It's not like Washington State, where 20 businessmen can get together and start their own bank tomorrow.

The Chairman: That's what MacKay wanted us to do.

Mr. Brent Atkinson: If you're asking me whether I believe the competitive market in banking should be opened, yes I do. I think it's a disaster in its current status. I don't like being forced to deal with only five banks, which, heaven forbid, tomorrow might be three. This doesn't do a thing for me. I don't think it does anything for the consumer.

My offices are open 73 hours a week in convenient locations to serve the public. I can't even get a teller in my bank on Saturday. Do you know what? They want me to use the ATM. I happen to choose to want to have some personal service and they won't provide me with teller service. They force me to use the ATM. They close their branches and open their tellers and do what they like from 10 a.m. to 3 p.m., and the rest of us live with it. Why do we live with it? Because they're the only game in town. There are no other strong commercial lenders that a small independent businessman can look to. Credit unions are not strong in the business area. They're strong in personal mortgages, but they're not strong in the business area.

So the answer to your question about why we do not want them to close is that if they close it means we have to travel over greater distances and not be able to get service. Whether we like it or not, we still need the service.

The Chairman: And you're also concerned about their concentration, right? You know, in the MacKay report on page 114 there's this little exhibit 6.2. You said you're in life insurance, right?

Mr. Brent Atkinson: No, I'm a casualty and property agent.

The Chairman: Is anybody in life insurance here? Well, they should be here.

Mr. Brent Atkinson: You're right. They should be.

Mr. Roger Finnie: Mr. Chairman, I would like to add that we felt somewhat maligned in the report as being blended in with the life insurance industry. We are very distinct as property and casualty insurance.

The Chairman: I feel your pain.

Mr. Roger Finnie: Thank you.

The Chairman: You know, when you look at the personal deposits and all the deposit-taking institutions and you look at the share held by the five largest banks, it is 58.1%. When you look at the share by percentage held by the five largest life insurance companies and you look at life insurance premiums, it's 59.3%. It's concentrated business. So I'm just saying let's be careful, because when we talk about concentration, there are all sorts of industries in our marketplace that are, quite frankly, very concentrated. It's not just banks.

• 1825

Mr. Brent Atkinson: Mr. Chairman, I'd like to point out to you that the casualty and property market that we represent is represented by 240 companies in the country, none of which have a market penetration in excess of 9%. So our market share is really fragmented. The life insurance market share is not. But again, we don't want to—

The Chairman: I've heard that point; it has been raised before. You don't like the fact that you're being mixed in with life insurance companies.

I don't know how they feel about being mixed up with you, but anyway—

Mr. O'Toole.

Mr. Chris O'Toole: Having bought insurance—I have a wife and three children who are grown up now—at different times, I dealt with the insurance agent on a whole life basis and term insurance over those 30 years. At different times I got sold one, two, three, four or five different policies, and I found out, 10 years on, that the insurance agent got a nice premium for selling me individual $25,000 or $50,000 policies at the time. So I'd question whether the insurance industry really looks after their clients.

I'm talking about dealing in one company alone, with seven different policies. When I ultimately spoke to another professional in a competitive company, he said, “Hey, we can save you a whole lot of money by combining all of these.”

But I'd suggest to Mr. Atkinson that I'd love to be able to walk down to my bank and buy my house insurance. I feel that I'm compelled to deal with my local fellow here in Richmond, where I have—what do they call this?—earthquake insurance. You can't buy earthquake insurance, it seems, right now. Well, maybe there might have been a change in the last year that I am not aware of. But I feel as if I'm held at ransom to some degree by the industry that really controls that particular market.

With regard to his investments the other gentleman alluded to earlier, I have money with RBC Dominion Securities, which is a financial arm of the Royal Bank. I noted, in reading the Financial Post, that there are some 1,700 mutual funds listed there. My return with RBC Dominion over the last couple of years on some RSP money and savings there have certainly equalled or bettered what any of the normal industry averages have done outside of the industry.

So to say that the banks have total control of the monetary system as regards investments is wrong, because I have the choice to go to Trimark, or to Templeton, or to whatever the case may be. There are still lots of independent mutual funds for me to go to, to invest my money, and today I can buy mutual funds in the United States through Morgan Trust, or this or that, or whatever I want to do.

So my view is that with the banks having the right to sell insurance, they're going to have to put professional people in there, just as they have to buy professional expertise within the Wood Gundys and the RBC Dominions and the other two or three mutual fund companies that they've snapped up over the years.

So really, I don't think we should be scared of allowing the banks into the insurance field. I think they can ultimately offer us cheaper— We could have lots; there are tons of major insurance companies in Canada with huge holdings and real estate holdings, and so forth. Hopefully they're making guesses on the marketplace just like anybody else.

I'd prefer to see myself as a consumer being able to go down to my local branch of the Royal Bank and buy my insurance for my life, my health, my house, the whole bit, and one-stop shop. I think a whole lot of consumers would agree with me.

The Chairman: Mr. Megson.

Mr. Michael Megson: My only comment to the speaker was that banks are allowed to be in the insurance industry as of the 1992 Bank Act. Again, they're not allowed to sell it from the branches, but they're allowed to be in the insurance industry.

The Chairman: So they're in the middle.

Mr. Michael Megson: They seem to be.

The Chairman: Is it not competitive?

Mr. Michael Megson: I think they started off pricing quite low—the CIBC—and they grew about 30%, so they've done very well in a very short time.

The Chairman: What about all those insurance firms that are pricing above them? Why are they doing that?

Mr. Michael Megson: CIBC doesn't operate in this marketplace; I'm sorry, I don't have a lot of comments I can give you on that particular issue.

Mr. Brent Atkinson: The only comment I'd like to make is that I've never had any trouble providing earthquake coverage. That may be a unique problem to his broker in Richmond with whatever markets he represents, but I have lots of clients in Richmond and I have been able to obtain earthquake insurance for them when required.

In terms of the comments with regard to RBC Dominion Securities, that's a separate independent broker that represents 1,700 mutual fund companies. You can't go into the Royal Bank branch and, from a mutual fund representative in a Royal Bank branch, buy Templeton or any of the other 1,700; you can only buy exclusively Royal Bank mutual fund products. So if you want to go to the bank, then you won't be able to get the same service that you're getting from RBC Dominion Securities, because there you're dealing with an independent broker.

• 1830

I think that difference is crucial to our discussion, because I'm an independent broker and currently the banks are allowed to sell insurance, but they're allowed to sell insurance on a level playing field. What we do not want them to do is to be able to retail insurance to the branches, exclusively with their product.

The Chairman: Thank you.

Ms. Bennett.

Ms. Carolyn Bennett: My first question is for Mr. MacLeod.

On one of the assumptions in the stability part of your brief, on the strength and stability of Canadian financial institutions, what this committee is worried about is the strength and stability of the Canadian financial sector. What we're not sure about is whether or not that sector stays stable in this sort of five-legged stool, or whether that's stable with two big ones and a short one.

Are you confident that once you get to outstrip everything else, that is still stable, and the way our country and that sector would be viewed would still be as a stable one?

Mr. Ian MacLeod: Yes. The concern implicit in your comment is that when you get two great big banks that would control something like 70% of the banking sector, and somehow through their size, create some market dominance, it would negatively impact on the rest of the industry. I think that's what I was trying to get to in some of my comments.

If they don't provide the service and the product, the others will. In fact, I personally don't deal with any of the big six banks. I deal with number seven or number eight, and the reason is that they give me outstanding service. That's what drives where I go to.

The other thing is that the financial services sector in Canada, as you've undoubtedly had presented to you time and again, is much bigger than just the banks. So the market dominance that might be a concern if you had two institutions with 70% of the industry is somewhat mitigated when you're looking instead in the whole broader sector of 30%, or whatever the number is.

So it's a question of not having— and it certainly comes back to Mr. Riis' comments earlier. Certainly I'd be concerned if we were down to one big bank, but there are slots for big banks and there are slots for smaller institutions. They each have a role to play, and they'll perhaps overlap somewhat.

Ms. Carolyn Bennett: So the bigger you are, the harder you fall—like Mr. Crispo's piece. The point is, if you allow this, and then the last two decide to merge, at what point should the government step in?

You've said that one big bank probably wouldn't be good, so if these two partners then decided to merge themselves, do you think the government should step in then?

Mr. Ian MacLeod: I don't know where the threshold would be and it's probably a different debate, but neither one of these two proposed mega-banks, if you will, is going to have more than— What's the number? It's less than 20% of the financial services market in the country. If you had one institution with 50% of the marketplace, that might be a huge concern. But that's not the debate right now, and at 20% or somewhat less than 20%, I'm not overly concerned.

Ms. Carolyn Bennett: Maybe I should include Mr. O'Toole.

Your paper says you're in favour of the Royal Bank and the Bank of Montreal merging. The issue is, when that was closely followed by TD and CIBC, then this starts to make it more worrisome to people in the sense that the bigger you are the harder you fall, and if one falls, what happens? Then ultimately responsibility comes to government.

Does the fact that TD and CIBC want to merge immediately thereafter change or have any bearing on your initial view that the Royal Bank/Bank of Montreal one was okay?

• 1835

Mr. Chris O'Toole: Personally, I don't think it really has an impact. I think we have evolved in this country to a very high degree of financial experience in serving the public. There are so many sources, and Mr. Atkinson, I think, alluded to the fact that credit unions don't give commercial service. Well, I know in Richmond they're doing all types of commercial deals with the Richmond Savings Credit Union. So is Vancouver City Savings Credit Union here in the city doing commercial deals. So there is an abundance of commercial services around there.

As I said in my letter, if the banks don't serve their constituents, they're going to lose market share, and I don't think that's what they're joining together to do, to lose market share. They're joining up to increase market share, if they can.

Ms. Carolyn Bennett: I guess my point is, for Canada— So you and Mr. MacLeod are saying that strength is stability of the institutions. If we all of a sudden have one, two, or three big, unwieldy organizations that begin losing market share because bigger all of a sudden isn't better, wouldn't the confidence Canadians have in these financial institutions erode pretty quickly? And what would that do to our country?

Mr. Chris O'Toole: I think the government has laid down some fundamental principles that will continue to maintain our banks on a very firm footing for the good of all Canadians. These things have been founded over 200 or 300 years of operation. There are as well the existing laws they operate under—deposit insurance and so forth.

And if there are only two major banks, many minor banks will come in and fill niche markets. Nature abhors a vacuum, and I think these niche players will come in if there is a niche to be filled by the world banking community. I don't think we have to worry about it as consumers today. There are all kinds of levels of financial services we can speak to and have our problems addressed.

Ms. Carolyn Bennett: I would like you both, being in favour of this merger, to say if this system right now in Canada is good—the five banks and all that. I guess the point we're trying to understand is the whole “convince me” thing. Convince me that having two big ones and one medium-sized one is best.

Mr. Chris O'Toole: But there is synergy, as Mr. MacLeod here alluded to earlier, in the savings. Why should the Royal Bank have to keep a branch open in downtown Lone Butte, B.C., along with the Bank of Montreal and the Bank of Commerce, when they're serving 3,200 clients? It does not make economic sense for those branches to have to remain open there. There are no clients for them to service. And perhaps it was done on the expectation that these towns were going to go. They should be allowed to consolidate and have the synergies of savings and so forth in different towns, and we'll all pay lower fees because of these savings.

Ms. Carolyn Bennett: I understand you're closing them anyway, just because they're not hugely profitable.

Mr. Chris O'Toole: Sure enough.

Ms. Carolyn Bennett: I mean, they're all profitable. They're closing profitable branches now just because they're not profitable enough.

Mr. Chris O'Toole: Perhaps, and so be it.

Ms. Carolyn Bennett: They're not closing the branches because they're losing money.

Mr. Chris O'Toole: But what you will get, if Ian and I own a credit union down the road, or with the managers or directors of a credit union down the road, is someone saying: “Hey, we see a niche market in there. Let's open a sub-branch there; let's supply the services that a bank is no longer giving there.” And that's going to happen in this particular case, and I feel it'll happen quite well, because maybe that's where those credit unions need to be in order to fulfil their growth needs or whatever. And the banks don't need to be there necessarily.

Ms. Carolyn Bennett: In that village, when there are two banks, doesn't it automatically happen now that one decides to come out and just leave one there, if that's what they want? I mean, we don't need a merger for— If there's not enough business for two banks, there will end up being one bank in a town, but you don't need a merger to do that.

Mr. Chris O'Toole: Unfortunately, you have your clients moving all over the country, and a bank does, as we did 30 years ago in Dawson Creek in the financial— You try to service your clients wherever they're going to be moving or going to. So I don't think the closures would take place. I mean, the Bank of Montreal can't close their branch and hand it over to the Royal. The two don't mesh at this moment in time.

Could they agree to do that without merging? I suspect they could, and sell their receivables and their client base to each other's branches. Perhaps they could, but that's not the goal here. I think the goal they want to achieve is to have the bigness to compete with the Citibanks and the Chase Manhattans and so forth—to do major deals in this country and around the world.

Ms. Carolyn Bennett: I understand the Canadian banks quite often are the lead on a lot of these syndicated loans already. I've not heard that they're missing the opportunity to do these big deals because they themselves aren't big enough, because they seem to be smart enough to be the lead on these.

• 1840

Mr. Chris O'Toole: They were certainly involved in Canary Wharf in London, so they certainly do get around to doing the big deals.

Ms. Carolyn Bennett: Scotiabank seems to be the lead broker on a lot of these syndicated deals in the world. So I guess I'm still having trouble.

The mayor of Dawson Creek was in today. He's a bit worried about this stuff. He doesn't think the mergers are a good thing for his town.

Mr. Ian MacLeod: Well, the mayor of Dawson Creek was one of the three-member panel on that provincial report you referred to. He certainly came to it from that perspective.

Ms. Carolyn Bennett: That just meant he'd been around the province listening to everybody, and he's still the mayor of Dawson Creek.

Mr. Ian MacLeod: Certainly.

Ms. Carolyn Bennett: I don't think he should be discounted for having had that experience.

Mr. Ian MacLeod: No, but I'm not saying he should be elevated either.

The Chairman: Because that's why we're doing this.

Mr. Ian MacLeod: Exactly, and that's why we're here.

You prefaced your question a moment ago about the bigger they are the harder they fall, and Mr. Dermer had talked about some of the problems with the Japanese banks, and there somehow being a link between big— and that they're eventually going to fall, and the catastrophe that falls from it. I tried to address that with some of my comments earlier, first about the role of OSFI and the capitalization and the monitoring that happens to Canadian banks.

The other is a cultural one. I don't think it's really relevant to try to compare the Japanese banking problems to ours. All of these books that are on many people's bookshelves, including my own, about the wonders of the Japanese business system talked in many ways about how there was a close integration between government and business and banking. That's all fine as long as everybody operates objectively and with the highest degree of integrity, but we all know that in the Japanese system nepotism and self-back-scratching and whatever were running rampant, to the point where you did not have an objective credit-granting system, you didn't have an objective management of the banking system. So I don't think they are the fair model to look at.

But getting back to one of your other themes, which is again to ask why big is better, I'm coming at it from the opposite direction. The management of those institutions feel there are good business reasons for why they should merge, and I think the argument is, really, why shouldn't they? Why should we not let them?

The Chairman: Mr. Dermer might have the answer.

Mr. Ashley Dermer: Yes, I think Mr. Crispo has already given us the answer. It's called a collective profit of tens of millions of dollars to the senior executives of the banks just in terms of their option value.

May I say to Mr. O'Toole and Mr. MacLeod that I do not share their degree of faith in the regulatory abilities of our financial overseers. I'm sure the British were particularly proud of the regulations they had in place, but that didn't stop the collapse of Barings, a 200-year-old institution. I'm sure the Americans were particularly proud of the regulations they had in place, but that didn't stop three of their very largest banks from blowing a billion dollars in a matter of six or eight weeks, just a couple of months ago.

With our own banks, how can we regulate when we don't know the exposure to derivatives? I agree it's not the $130 trillion, but it is a mammoth sum, which the banks simply refuse to share with us. Stewart does suggest that the direct risk to the Canadian banks is double their total shareholders' exposure, and I like Ms. Bennett's analogy of the five-legged stool and the three-legged stool. If one of those three legs gives way, it would be calamitous for the Canadian nation.

Thank you.

The Chairman: Mr. McKay.

Mr. John McKay: Mr. Dermer, I barely understand derivatives. My mutual fund recently wrote to me and said they were going to get into derivatives, and this conversation has made me want to go back on that letter, which I read twice and still didn't understand. Can you give me the Cole's Notes version of derivatives? And tell me, why should I be excited about that?

• 1845

Mr. Ashley Dermer: I don't think you should be excited about it; you should be awfully wary of it. I don't profess to be a learned expert on derivatives, but out of curiosity and interest I have tried to garner a little bit of information.

Basically, derivatives are a high-powered form of straight-out gambling. I understand that one derivative option contract was taking bets on how many platinum records Elton John would produce, and you could bet serious money on that.

In my piece I mention the $2 billion rescue package by the Federal Reserve just a couple of weeks ago. It was actually over $3 billion and that hedge fund was gambling on derivatives. They had on board a couple of Nobel laureate economists and the most sophisticated computer equipment. I understand they were betting on the slight variations in options spreads. They were looking, say, at an October option and a December option, and if they saw the gap widen they'd load millions onto a bet that the gap would then close, relying on their computer models. In other words, derivatives are highly obtuse financial instruments that probably 99.9% of us don't really have a handle on. But I do know our Canadian banks are exposed to them in a major way, witness what happened with the U.S. Fed just last week, south of the border.

Mr. John McKay: I'm not sure I'm greatly advanced by that answer. It's a form of— gambling is a bit of a loaded word.

Mr. Ashley Dermer: I would like to clarify. Essentially, a derivative is a financial bet on an entity that is like an index option, or an option where the value of the underlying security is not where the bet is being placed. The bet is being placed more on the option, or the derivative, based on the underlying security.

Mr. John McKay: It's placed on the contract itself, if you will, and as to whether the contract is going move up or down.

Mr. Ashley Dermer: Yes.

Mr. John McKay: You make little bits of this and little bits of that on the movement, rather than on anything else.

Mr. Ashley Dermer: That's my understanding.

Mr. John McKay: All right. So if you've bet up and—

Mr. Ashley Dermer: If it goes down, you lose all the option money you put up.

Mr. John McKay: What is your direct evidence that Canadian banks are exposed or overly exposed on that point?

Mr. Ashley Dermer: I'm relying heavily on Walter Stewart's book. This is not my academic field or my business field, but I did read Walter Stewart eagerly. I resonated with what he had to say and I would highly recommend especially the appendices of his book, where you can see the numbers. I don't have them memorized, but they are there. The name of the book is Bank Heist: How Our Financial Giants Are Costing You Money, and it's quite recent.

The Chairman: Mr. MacLeod.

Mr. Ian MacLeod: I don't pretend to be an expert on derivatives, but I have had merchant bankers explain them to me. There are still some gaps.

Mr. John McKay: Then you went for another scotch.

Mr. Ian MacLeod: Once I opened my eyes, yes.

I guess there are two major areas in which derivatives are used, and they're widely used in commercial business transactions. If you're a forest company selling lumber into the United States and you're going to get paid in U.S. dollars 30 or 90 days from now, you want to hedge on any currency exchange risk changing. You want to get your price in today's U.S. dollars, and you want to get paid in that value in 30 or 60 days. You may enter into a futures contract to sell U.S. dollars in 90 days for the same amount of U.S. dollars you're going to receive for your lumber in 90 days so that in terms of exchange risk to you as a lumber seller, you wash even. There are people who will, 90 days from now, have U.S. dollars coming available who want to sell them, so it's just a matching of future income flows between those who have money and those who don't.

In commercial transactions it's a way of hedging risk. People also do those kinds of things on hog bellies or silver or gold contracts. The mining industry uses them as well as the forest industry. So it's either currency, commodity or even exchange rate risk.

Mr. John McKay: Isn't the derivatives market even more sophisticated than that?

Mr. Ian MacLeod: It certainly is.

Mr. John McKay: It's like a bet on a bet.

Mr. Nelson Riis: It's like a hedge on a hedge.

Mr. Ian MacLeod: Yes. The basic market was established to match future income flows so you took the risk out of currency exchange, interest rate or commodity price fluctuations.

• 1850

As Mr. Dermer said, it has certainly gone way beyond that, and the people involved in arbitrage are looking at the little marginal changes in buy and sell contracts. They're buying, with very little down payment, massive future contracts, and if they don't have a hedge to offset them and the price goes against them, they will have such a small margin to cover the price that they'll be wiped out.

That's what happened with Barings. That rogue trader kept trading and trading—it was like doubling his bet each time as he lost more and more. Eventually the multiples of doubling killed him.

So derivatives are not a bad word in their own right. It's what margin is allowed and to what use they're put. But there's very good commercial reason for an awful lot of them.

Mr. John McKay: Do you think deposit-taking institutions should be permitted to play in the derivatives market?

Mr. Ian MacLeod: If they're offsetting themselves, basically it's a financial service where they're providing the conduit for the trading company or exporting company to get that match between income flows.

Mr. John McKay: But Mr. Dermer's argument is that the banks, in effect, are betting their own equity. They have their own equity on the line here in the derivatives market. It's not simply providing a facility for a client; it's more than that. They're actually playing with some form of their own equity in the market.

Mr. Ian MacLeod: If that's true, it's beyond the role the banks should be involved in. But I haven't heard anybody suggest the banks are wild speculators in the derivatives market. They provide the service to those who may be speculators on their own account, and then it's a question of credit risk.

When I look at major commercial loan transactions—and I'll use the forest company example—if they enter into a futures contract on U.S. dollars, the bank will assess a certain percentage of risk against that currency and apply it as part of the credit facility of the borrower. So it's as if it were a direct loan to that borrower. So to the extent that the bank is exposed, it's only exposed to the credit risk of the borrower for having entered into those futures contracts on behalf of their client.

Mr. John McKay: In the B.C. context, even that becomes a bit of a dodgy business if your client is a commodity client.

Mr. Ian MacLeod: I guess the risk is if the purchaser does not pay when it comes due and all of a sudden there's cash due, and if the currency has moved against you, you have to pay with dollars at today's currency conversion rate, which may leave you short. That's where the credit risk of the client comes in. It's the client that pays, not the bank.

Mr. John McKay: Is that true, though?

Mr. Ashley Dermer: Mr. McKay, you're coming awfully close to what I understand to be the facts. I think Mr. MacLeod is describing a very plebeian use of derivatives. Certainly they've been around as simple hedges for basic producers of commodities for a long time, which is what Mr. MacLeod is describing. But our Canadian banks are going further and you are trying to get a handle on that, I understand.

Let me say that the person in the Canadian banking system who made the most money last year was not a bank chairman or president who made their $2 million or $3 million. It was a trader in the backrooms—I don't know his name—and he made $10 million. I want to suggest to you that in the backrooms of the banks where the telephones work 24 hours a day non-stop and truly zap around the world, these backroom players are making the serious money. They are on bank payrolls—which is where some of the bank profits are going—and are, straight-up, betting with their own money, whether it be on currencies or on Elton John's platinum records. They are doing much more than simply hedging essential commodities.

Mr. Roger Finnie: I would like to add a comment to this in the context of insurance. You're asking about derivatives. My impression of derivatives is that they are sheer risk, which adds to the “bigger they are the harder they fall” equation in our deposit-taking institutions. We have banks that can own insurance companies, and often companies flaunt that they are bank-backed insurance companies.

• 1855

In an insurance context, let's say you own your home in Vancouver, and you come to me and say “I can't tolerate the risk of losing my home to an earthquake, so I'll pay you, Mr. Insurer, $200 for that privilege.” It then becomes my problem to have sufficient capital and reinsurance to back that up. And as I said earlier in my comments, in keeping the businesses distinct, we not only have derivative risk out there, but now we have, with bank-owned insurers, natural disaster exposures. This hasn't even come out yet. It's a very scary subject.

Mr. John McKay: I take it where you're going with your argument is that because the banks have so turned the financial contracts into financial contracts into financial contracts, you want that pillar re-established, if you will, so you are not adding to the derivative risk and also the natural disaster risk.

Mr. Roger Finnie: Correct. In a nutshell, we don't believe the deposit-taking institutions that are custodians of Canadians' money should be in those businesses.

Mr. Chris O'Toole: I have to bring the speaker back to several years ago when Lloyd's of London slowly disintegrated in front of us.

Mr. John McKay: The call on the names, yes.

Mr. Chris O'Toole: Right. And other people in Ontario who got stuck with the calls, as you say. But the insurance company virtually went bankrupt, and they couldn't really meet the claims and the rest of the insurance industry had to effectively get in behind them and fund an awful lot of their outstanding—

Mr. John McKay: And this proves the point, does it?

Mr. Roger Finnie: Mr. Chairman, there was no government assistance to Lloyd's of London, and Lloyd's of London is alive and thriving today and no policyholder went without their obligations being met.

Mr. Chris O'Toole: Well, if you talk to the people down in the eastern United States, a lot of them didn't get paid, but I guess that's another issue. The reality is the insurance industry has to compile together and stand behind— or have a major collapse because of Lloyd's, ultimately just like the banks did with the derivatives last week or two weeks ago in Washington, D.C. But I understand the collapse of long-term management was basically caused by the collapse of the Russian economy and not necessarily wild bets.

However, I don't know enough about it myself to really make a valid comment.

Mr. John McKay: To get to the essence of the question, I suppose a derivative, if I use my friend's pure analysis here, is pure risk. It is played out in what are now wholly owned subsidiaries of banks, backed presumably by essentially the entire Canadian financial system. Once you go through all of the layers, you go from Nesbitt Burns to the Bank of Montreal to the Bank of Montreal to the people of Canada. So you've stopped playing with shareholders' money at this point and you are, in essence, playing with the entire nation's “insurance policy”.

Am I off on this?

Mr. Chris O'Toole: I'm going to let Mr. MacLeod respond to this because he's more lucid than I am in this regard.

Mr. John McKay: I'm not even sure what I am asking.

Mr. Ian MacLeod: I frankly don't know, because the only references I have had to the banks' exposure to derivatives is, in effect, second-hand through a book that's been referred to by Mr. Dermer. A derivative risk is only a risk to the extent that it is not matched by an offsetting contract that can't be performed. So I really have no idea how much of those derivatives are pure speculation, how much of them are back-stopping commercial transactions, and what exposure the banks have. That's a good question, and perhaps the banks can tell you.

Mr. John McKay: But rather relevant, given literally trillions coming out of the marketplace.

• 1900

And you are right to say it's not a risk insofar as there is a contract on the other side that can be performed. If that contract cannot be performed, instead of being your problem it is now my problem, and then it becomes his problem and we just go right around the whole table and suddenly it becomes the nation's problem.

Mr. Roger Finnie: Mr. Chairman, I'd like to add to that. I think your summation of the facts here is bang-on. There are serious implications for this layering of risk to the Canada Deposit Insurance Corporation, and to the Bank of Canada, which provides all the emergency funding for the chartered banks.

The Chairman: Before we jump to this conclusion, I am having a problem here with Mr. Dermer.

Is this guy Walter Stewart you were talking about really close to banks?

Mr. Ashley Dermer: He has written two books critical of banks. He is a veteran Canadian journalist. He is a man who has done his homework and his research. I would strongly urge you to browse through his book.

The Chairman: Yes, and I will, because you told me the banks are not making these derivatives-related issues public. How does Walter Stewart know? Does he have inside information the rest of us can't access?

Mr. Ashley Dermer: I can't give an accurate answer to this, but his research has been so thorough from independent sources other than the banks.

Mr. Nelson Riis: On this point, Mr. Chairman, virtually each of the banks, according to my recollection, has a derivatives department. I remember going to one of the departments a couple of years ago to take a course on derivatives, and thank God there wasn't a test at the end of it. It was very complex.

Basically, without sounding silly, it is really just betting on bets on bets on bets. So there are layers of betting, and you either win good bucks or—the risk is very high—you can lose. Apparently there is a lot of leverage in there as well. They are highly leveraged. You can find out from the banks if you go and visit them. Presumably that is where Walter Stewart got some of his information.

The Minister of Finance isn't aware of this. I'm not sure if anyone is aware of the extent of the exposure any one bank would have to the sector.

The Chairman: Mr. Dermer, there is a reason why I ask this question, and it goes back to the question Mr. McKay asked. When I heard you speak about derivatives, I got the sense of gambling. Right?

Mr. Ashley Dermer: I believed that when I heard it.

The Chairman: When Mr. MacLeod spoke, I sensed—and I may be wrong—that it was actually done to protect you against risk.

Mr. Ashley Dermer: Can I try to clarify?

Mr. Ian MacLeod: Both are right.

The Chairman: But also, just a final question here. Have the personality traits of bankers changed over the years in the sense that they are not as conservative as they used to be? Growing up, this is what I always thought. If you want to find the most boring person, the most conservative, the “no sense of humour” sort of person—

Mr. Nelson Riis: Just be careful. We have a lot of bankers here.

The Chairman: That's fine. They agree with me.

Mr. Chris O'Toole: If you try to go to the local commercial branch today for a business loan, they scrutinize the deal very, very thoroughly and with very well trained and very efficient loan officers who know their stuff about cash flows and what have you.

I have dealt with several different banks along those lines. Today, in comparison to 20 years ago, they keep many gamblers from making mistakes by not giving them the money to do stupid deals, as one might say.

Mr. Nelson Riis: They deal in currencies now. This is a big part of the banking operation.

Mr. Chris O'Toole: To my knowledge, I don't think the banks are very astute lenders in the marketplace today.

Mr. Ashley Dermer: The Canadian banks' exposure to derivatives is definitely off-balance-sheet. It was the Globe and Mail a couple of months ago that carried the account of the Toronto businessman eager to find out CIBC's exposure to derivative risk. He couldn't do it by asking the bank or anybody else. I don't know why he chose the Los Angeles court to press his suit. But he took the CIBC to court in Los Angeles in an effort to force them to disclose the derivative risk. Because they're off-balance-sheet, none of us is going to read about it.

How Walter Stewart found out about it, I simply do not know. It is a very high-risk business. The backroom boy didn't make $10 million last year simply covering hedges on lumber. He was gambling serious money to make that $10 million paycheque over a 12-month period. Banks can bet wrongly on currencies, options and any other derivative just as readily as anybody else can. The risk is there.

• 1905

The Chairman: But is risk part of the financial services sector? Remember, you were going through Barings and you mentioned a long list of all sorts of other things that went wrong. A lot of things go right in life as well. People in the Roman Empire were very proud of their empire too, and then it fell, but other empires sprung up. That's life.

The issue is that you have to be careful. You can't be certain about everything 100% of the time. There is a risk element in the financial services sector that is always present, as you correctly pointed out. As far as we're concerned, we're trying to diminish the risk so that we have a stable sector.

Mr. MacLeod.

Mr. Ian MacLeod: Getting back to your question about whether the character of bankers has changed, I think it very definitely has. As was said, I think they are much more sophisticated.

I started in banking in 1969. In those days, they hired people straight out of high school and trained them on the job. People went through a series of about ten transfers, then became branch managers. In the meantime, they would have been exposed to all kinds of different communities and businesses and sectors. The banks provided some very good internal training, but compared to today, it was not all that sophisticated. The bankers I know today are very sophisticated, but they still get complaints about being unresponsive to loans.

I had a personal experience with a particular business that wanted to borrow some money. We lent it to the guy, and he invested it in a way that was a bad business decision. He blamed us, though, because we're the experts and should have known to not lend it to him. The next year, he then needed money for something else and we wouldn't lend it to him. He blamed us for not lending it to him and for not being willing to let him make his decision. Actually, I think it was the reverse order. I don't think he ever understood the irony of the fact that within twelve months he had accused us of being too tight and too loose at the same time.

So bankers try to be objective in their decision making, but obviously they don't please all people at all times.

The other area of complexity or sophistication has come as they've grown, as they've become more international, as the business community in general has itself become more global and more technologically linked in. They've had to be much more sophisticated.

I share the concern that other speakers have had about derivative risk, if it's there. I don't know that it's there. If it is, it should be addressed, but I'm not sure how it really even ties in to the debate over bank mergers. If you're a small bank, it's probably a bigger concern than it is for a big bank. Whatever, it's a concern. But if it's not there, we should be put at ease by finding out.

The Chairman: Ms. Leung, followed by Mr. Gallaway.

Ms. Sophia Leung: Thank you, Mr. Chairman.

I have heard a lot of pros and cons of the bank mergers. I just wonder if any of you who support the mergers will consider the human aspects, such as the job losses and the negative impact on rural small communities. And there is also the fact that they will reduce personal services.

Mr. Ian MacLeod: I think we both addressed that to a degree. In my little presentation, I did mention it. I said somewhat flippantly that if governments had tried to protect all jobs from change, we'd still be building wooden ships that nobody would buy. It's a flippant comment, but I think it's quite true. Economies change, services needs change, and dynamics of local communities change. If you try to sustain an operation or a business that is not economically viable in its own right, ultimately you're going to hurt everybody in the end.

• 1910

The other comment I made about the small business sector, and with good reason, is that you'll never see in the media where all of the jobs are being created in the small business sector. Some have suggested 2,000 or 3,000 job losses in the banks as a result of these mergers. Just the banks in this country employ something around 150,000 people, and maybe more, but I'll use that number.

If 2,000 or 3,000 people lose their jobs, it's probably traumatic and catastrophic for them as individuals. But the banks have committed that those job reductions are not going to be through layoffs or firings but through attrition. Even if they're not, to the extent that there are layoffs, as has been said, any time you have a vacuum, something will fill it. Instead of having ten jobs in a small bank branch in Lumby, you may have five jobs at the credit union, you may have the technician who services the ATM machine, and you may have somebody who's manufacturing the ATM machine.

I think the marketplace should be allowed to be as free as possible. There is a role for government in easing the transition, but not in stopping it. Some people may view that as being a little harsh in the short run. In the long run, though, I think it's to the benefit of the labour markets and the economy to allow the marketplace to work.

Ms. Sophia Leung: In the summer, the B.C. Liberal caucus took a trip to the north, and it made quite an impact on us. A lot of industries, especially mining and forestry, really went down. We were really quite concerned about how the services affected the rural areas. We assume we really want to do things in the best interests for all Canadians, especially in the depressed areas. Would you like to comment on that?

Mr. Chris O'Toole: Just to support what Mr. MacLeod said, the banks have undertaken and are prepared to virtually guarantee no fundamental loss of jobs. But the reality is this—and I alluded to it in my letter here: In Japan, where jobs were virtually guaranteed for life for the past forty or fifty years, or since the war anyway, there are companies and corporations going broke trying to keep their employees paid while there is no work for them to do. They should have fired these employees or laid them off ten or fifteen years ago. These companies are going bankrupt by the thousands and thousands annually.

If mergers take place, yes, we are going to have some job losses. But, my gosh, it's not going to be the end of the world. People change careers sometimes four or five times throughout their working life. If the banks effectively guarantee that they're going to provide employees with transfers or opportunities for growth with the bank, then there's nothing to be concerned about on the part of the consumers or the employees involved in those banks. If you ask the employees, I think there's very little concern on the part of most of them. They're for the merger. So if there is concern about job losses, the actual people involved are certainly not concerned about it.

Ms. Sophia Leung: Thank you.

I have a question for the Insurance Brokers Association. It's interesting that you mentioned coverage for natural disasters. I'm from B.C., so I know the risk we have here for earthquakes. To me, it's necessary for the consumer to have coverage for that. Do you find that it's unrealistic to look at that kind of provision for coverage? Certainly, I don't think that stands as an argument from whomever when it comes to providing that insurance coverage. Whether it's the banks or independent brokers, it's a necessity for the consumer that you should perhaps look into.

Mr. Michael Megson: To answer that, earthquake insurance certainly is available to the consumers in this marketplace. There was some difficulty with obtaining it a couple of years ago. Having said that, I think we have certainly been working with the insurance brokers and insurance companies in this country, as well as with the provincial government here, in order to change some of the regulations dealing with the Insurance Act and how it relates to earthquakes, in order to allow us some more freedom to deal with the problem. And OSFI has also instituted some checks on insurance companies to look at their ability to deal with earthquake exposure.

• 1915

So those sorts of things are in place. I would say, however, at the present time it is available in the marketplace. Most, if not everyone, wanting it are able to obtain the coverage at the present time.

Ms. Sophia Leung: Thank you.

The Chairman: Thank you very much.

Mr. Gallaway.

Mr. Roger Gallaway: Thank you, Mr. Chair.

I've just been told that derivative dealers, if that's what their correct term is, usually have their Ph.D., but—and these are my words—they're a combination of a statistician and an actuary, and perhaps a Vegas dealer, I'm not certain.

I'd have to ask the question: if there's all of this risk in these high-exposure transactions that revolve or whirl around in this area called derivatives, why aren't we then aware of any— If there are big winners, there have to be some big losers, too. Where are the big losers? Would Mr. Stewart tell us that?

Mr. Ashley Dermer: We need not rely on Mr. Stewart for that one, Mr. Gallaway. We had a classic example two weeks ago in the United States. That hedge fund was gambling on derivatives, complete with two Nobel laureates and very high-powered computers of the most sophisticated variety. They simply got it wrong, and it cost the U.S. taxpayer $3 billion to rescue them because the feds felt that if they had not been rescued by the U.S. taxpayer, the financial fallout in the U.S. and worldwide would have been immense. President Clinton addressed the nation specifically on that point, as did Greenspan when he justified the intervention of the feds to come to their rescue.

Mr. Ian MacLeod: There have certainly been examples of massive losses. Barings has been talked about. Orange County in Los Angeles went bankrupt trading in the futures market and it went against them. That was a municipal trader, obviously, not a bank.

So there has been discussion of the risk, but as a number of people have said, you go through the explanation and you need a Ph.D. in mathematics to understand it. I'm a little flippant on that, but—

Mr. John McKay: It's absolutely true. If you go to the floor of CIBC Wood Gundy, they have a whole section that's devoted to derivatives traders, and every one of them has a Ph.D. in mathematics and works on economic models that you couldn't possibly fathom. I would argue that the CEOs of the banks that ultimately own these institutions, and ultimately own these traders, and are ultimately responsible for these traders, could not explain to you what they're doing.

Mr. Ian MacLeod: That's probably right.

It may be within your mandate to look at the regulatory and disclosure regimes of the financial institutions. I think that issue is a very different from the mergers of banks, but I would agree that it's a very important issue to deal with.

The Chairman: When Confederation Life went under, what were they dealing in, derivatives? I don't think so. Were they?

Mr. Ashley Dermer: I don't know the answer to that.

The Chairman: They went under. Why did they go under?

Mr. Ian MacLeod: I think it was the real estate market with them. I remember in 1981 the real estate market plummeted. The prime rate was at 22%, and the whole economy, particularly in western Canada, went seriously into the tank.

The Chairman: You know the point I'm trying to make, right? There are always risks and there's always something that can go wrong in an economy, and I know there's this big, huge, dark cloud called “derivatives” now upon the horizon, but the reality is that Confederation Life went under and it probably wasn't dealing in derivatives.

Mr. John McKay: Mr. Chairman, that's not the point. The point is that we are trying to vision here the future of financial services, as you frequently remind us.

I can't absolutely say that MacKay addressed this—I don't recall that he did—but there may be an area where this committee needs to ask witnesses what derivatives are, what's the risk to a bank, should it be backed up by depositing institutions, and is the Canadian financial system at any risk? That's the point.

The Chairman: And that's what I'm asking. But I'm also bringing to light the fact that risk is very much part of the economic system. You always guard against risk. I don't think I'll find one Canadian who doesn't want to guard against risk, and you have to put in place whatever—

Mr. John McKay: That's if he knows he has risk.

• 1920

The Chairman: Exactly. But I think, as Mr. Dermer was saying, it's pretty clear there are risks associated with derivatives, and Mr. MacLeod also agrees, although, according to me, he did give two different interpretations of why people work with derivatives.

Mr. Ashley Dermer: I think it's a question of the scale of the risk. When Confederation Life went down—we're talking about the B.C. real estate market and certainly that is huge, but it isn't anywhere on the same scale as the value of derivatives contracts that have been written, I have read, of $132 trillion. That's an incomprehensible number on a worldwide basis. That's the value of contracts, not the risk. But the risk is still a very healthy proportion of that. It's far greater in scale than Confederation Life.

The Chairman: Since Mr. McKay correctly pointed out that risk is a very important thing to guard against, how do we guard against risk?

Mr. Ashley Dermer: For starters, I like Mr. McKay's suggestion. You cross-examine the senior executives at the banks, and preferably independent expert witnesses, as to the nature of derivative risk in the Canadian banking system.

Mr. Chris O'Toole: I don't think there's any real guarantee against risk. Being born is a risky experience these days. But the reality is we're faced with a decision whether we're going to gamble in life or take some calculated risk, and I think that's the final difference here. You have the Barings fiasco and the long-term management derivative fiasco. These are people who gambled versus risk, and I think there's a fine distinction there.

I have to believe, knowing the banking system in my small little world, we have very credible people running all of the institutions in Canada. They're very high-quality, well-trained, well-educated people. That's what we have to rely upon, and our system has stood the test for hundreds of years. That's the fundamental issue about our banks.

The Chairman: Yes, Mr. Finnie.

Mr. Roger Finnie: We as insurance brokers deal in risk every day. We deal in pure risk, and our view on the matter is that businesses should be kept distinct and separate. Banking is one business, insurance is another, and perhaps—for your argument—derivatives is yet another business.

The Chairman: So you don't agree with MacKay about a convergence of industries.

Mr. Roger Finnie: They're distinct businesses. We do not concur with that.

The Chairman: No. Okay.

Mr. Ian MacLeod: Your question was on how to deal with risk information if you have transparency or open disclosure, and that applies on all publicly traded companies. There's debate in the media today over whether the accounting profession is in some kind of conflict of interest with their consulting arms on financial disclosure and various public corporations as to change in degrees of risk. Those kinds of debates are incredibly important because business people who are investors aren't asking for no risk; they're asking for informed risk. I think that's consistent with your comment. If people have disclosed where the risk factors are, they can make their own decisions. But they have to know.

The Chairman: Are we going too fast? The world's moving at a very fast pace and money travels back and forth between borders very quickly. As it becomes faster and faster, is it going to get more and more difficult to regulate and build efficient systems?

Mr. Ian MacLeod: That is part of the debate about Internet commerce. Without doubt, the electronics are racing ahead of the regulators and the political policy-makers. That's a fair question. I don't know if you can keep up with it or if you can be in a situation where you don't have to rely on experts.

As we get more complicated and sophisticated, it's more and more difficult for one person to be all things for all people. I'm sure that's a challenge that this committee faces, just from the discussions that have gone on today, bouncing around from job protection to derivatives to general risk and so forth, and that's just in a small segment. So I think that's a very fair comment.

• 1925

Given Internet commerce, in some ways some of the rules that are in our system are almost irrelevant. That's not maybe a fair comment but it's probably a real comment. How do you tax, monitor movement of goods, and measure the size of your economy? I know Paul Martin is dealing with that on a different front under electronic commerce and encryption technology and regulation. Certainly Al Gore in the States has been leading that debate as well. I don't know where it will end, but it's a fair question.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway: This has all been rather interesting, but ultimately we have to get back to the Canadian public. We have been told here today by the group from the British Columbia task force that in their opinion, after an extensive public consultation process, British Columbians don't buy it. They don't believe it and they don't want it. They don't want to see mergers.

Mr. O'Toole raised the word “synergy”, and we know the Royal Bank is number two and I believe the Bank of Montreal is number four. Then we have one and three or five merging. There's quite a vast difference between the relative sizes of these banks, in particular the Royal Bank and the Bank of Montreal.

Mr. Barrett, in his appearance before our committee, talked about the savings that are going to ensue for Canadians. You're going to see it. They're the people who eventually have to try to make some sense of all of this and find an upside to it. What is the upside to Canadians? Mr. Barrett talked about his guarantee that he's going to come forward with to Canadians. This morning we heard from people from the Fraser Institute who talked about their economic model, where there would be savings of somewhere between $1,000 to $3,000 over a 10-year period for Canadians, whoever that mystical, mythical average Canadian might be.

That's all fine. If you were to say to someone that they're going to save $300 a year because of these synergies, it might make it a little more attractive. Yet I have to ask this question: if there is this size differential at the moment, why isn't there a cost differential at the moment; why isn't there a savings differential at the moment? Why would the sudden fusion of these two banks in an instant create savings that are not apparent in the marketplace today, and certainly at the level of personal banking?

Mr. Chris O'Toole: Thanks, Mr. Gallaway. To respond to that, if you go to the corner of Number 3 Road in Richmond and Westminster Highway, there's a VanCity on one corner, a CIBC on the other corner, a TD Bank on the other corner and a doughnut shop on the other corner because it hasn't been developed yet. But if you were to assume that the CIBC and TD will merge, it would not make sense to have the other branch across the street. I happen to know the rent that CIBC's paying on that little corner. It's about $90,000 a month, and I suspect the TD Bank right across the street is paying something similar to that. I happen to believe that with technology coming on as much as it is—and will continue to do so—the one branch could ultimately service the combined clients of both branches there. There's a savings right there of $100,000 a month, or $1.2 million a year, just on that one little corner. That's the way I would see it.

Will that be passed on to us, the consumer? If it's not, we will have the option of going over to his bank on the other corner and hopefully effecting some changes there. But the banks are in business and they're there to try to guard their particular share of the market, whatever that amounts to. But there is synergy in savings in that one aspect alone, and I am sure that's prevalent throughout the entire city and province.

Will it mean job losses? Perhaps it will, but there is attrition. I know in my bank alone in the Richmond marketplace, five or seven guys retired over the last couple of years and new, younger people are moving up through the fold. So I don't think we have to be concerned about the loss of jobs, and in some cases there are savings to be had by combining some of these branches.

• 1930

Mr. Brent Atkinson: Mr. Chairman, if I could respond to that, I'm not sure I can afford to be saved any more money by my bank.

Let's talk numbers for a minute. There are 600 banks in France, approximately 600 in the U.K., 3,600 in Germany, and 10,000 in the U.S. You can debate whether we have five, seven or twelve in Canada, but we have five large banks presently in Canada that aren't particularly competitive in the current environment. For us to allow two of the five to merge together, in my opinion, isn't going to serve the consumer in terms of any competitive savings.

The banks aren't known for being competitive in pricing. They don't have price wars like the gas stations do. Seldom can you get a term deposit at 7% from your friendly CIBC versus 4% from the Royal Bank. Every time they move in mortgages, they move lockstep together.

Canada is unique in the banking system. Due to past legislation, we've created these large, centralized banks.

One of my concerns about job losses is that the job losses will be at the community level. The job losses may be offset by jobs in Toronto, or wherever the technical, logical centres are located, or in the urban areas, but the job losses in the communities, the smaller communities throughout this province, are going to be real, and they're not going to be easily replaced in today's economy.

What is the benefit to the consumer of cutting down from five large banks to three large banks? I have yet to hear that there's going to be any appreciable benefit to the consumer. If anything, it will limit competition even further, which the Bank Act has already been doing for years, which is why we ended up with only five to seven banks of any consequence.

It's much like the insurance situation. We changed the bank legislation in 1992, and we haven't yet allowed that to mature. We're now allowing some foreign banks to nibble away at a small portion of the market share, but that hasn't happened for a long enough period of time to provide any competitive pressures in the marketplace. The small business community is not being well served now and will be served even less if you allow the banks to merge.

The Chairman: On behalf of the committee, I would really like to thank you. It has been a very interesting panel. You've all defended your positions quite well, I would add. There are questions that we need answers to, and we have to ask these questions because that's why we're here.

One thing is clear, though. As Mr. MacKay reminded me, one of our key duties and obligations is basically to try to bring about positive change to this sector, and also to paint a picture that represents the future of the financial services sector. So we need input from people like you.

One thing I did notice, though, I must say to you, is that when witnesses appear in front of our committee on this particular issue, of course the dominant issue is the merger; there's no question about it.

By the way, we're not looking at the two proposed mergers; what we're looking at is merger as a legitimate business practice according to MacKay. But we may influence the decision in the sense that when we make the recommendations, we will be dealing with issues that may in fact be related.

The challenge we face is that presenters come here with a focus on their own particular issue, because you have to defend it. What I would really like, though, is for more people to concentrate on the broad picture of what type of financial services sector you would like to build, above and beyond your own issues that you have to deal with—and rightly so; you have to make your case in front of our committee. But in the future I wouldn't mind receiving briefs from people who appear in front of us that speak to what this financial services sector should look like ten or fifteen years down the road. If we limit ourselves to issues that are only two or three years in expanse, it doesn't really address the issues that we want to deal with.

So if you ever have the time to think about the entire picture, please do that and drop us a line, because we'd really appreciate that.

Thank you very much.

The meeting is adjourned.