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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Monday, February 3, 2003

1530

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

Mr. Gordon Nixon (President and Chief Executive Officer, RBC Financial Group)

1535

1540

1545

The Chair

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

Mr. Gordon Nixon

1550

Mr. Richard Harris

Mr. Gordon Nixon

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

1555

Mr. Gordon Nixon

1600

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

The Chair

Mr. Gary Pillitteri

Mr. Gordon Nixon

1605

The Chair

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

The Chair

Mr. Lorne Nystrom

Mr. Gordon Nixon

Mr. Lorne Nystrom

Mr. Gordon Nixon

Mr. Lorne Nystrom

1610

Mr. Gordon Nixon

Mr. Lorne Nystrom

Mr. Gordon Nixon

Mr. Lorne Nystrom

Mr. Gordon Nixon

The Chair

Ms. Albina Guarnieri (Mississauga East, Lib.)

Mr. Gordon Nixon

1615

Ms. Albina Guarnieri

Mr. Gordon Nixon

1620

The Chair

Mr. Scott Brison (Kings—Hants, PC)

Mr. Gordon Nixon

1625

Mr. Scott Brison

Mr. Gordon Nixon

Mr. Scott Brison

Mr. Gordon Nixon

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

1630

Mr. Gordon Nixon

The Chair

Mr. Réal Raymond (President and Chief Executive Officer, National Bank of Canada)

1640

1645

The Chair

Mr. Richard Harris

Mr. Réal Raymond

Mr. Richard Harris

Mr. Réal Raymond

Mr. Richard Harris

Mr. Réal Raymond

Mr. Richard Harris

The Chair

Mr. Richard Harris

Mr. Réal Raymond

Mr. Richard Harris

1650

The Chair

Mr. Réal Raymond

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

1655

Mr. Réal Raymond

Mr. Shawn Murphy

Mr. Réal Raymond

1700

The Chair

Ms. Maria Minna (Beaches—East York, Lib.)

Mr. Réal Raymond

Ms. Maria Minna

1705

The Chair

Mr. Réal Raymond

The Chair

M. Lorne Nystrom

Mr. Réal Raymond

Mr. Lorne Nystrom

1710

Mr. Réal Raymond

The Chair

Mr. Bryon Wilfert

Mr. Réal Raymond

1715

Mr. Bryon Wilfert

Mr. Réal Raymond

The Chair

Mr. Scott Brison

Mr. Réal Raymond

Mr. Scott Brison

Mr. Réal Raymond

Mr. Scott Brison

Mr. Réal Raymond

Mr. Scott Brison

1720

Mr. Réal Raymond

Mr. Scott Brison

Mr. Réal Raymond

Mr. Scott Brison

Mr. Réal Raymond

The Chair

Mr. Gary Pillitteri

Mr. Scott Brison

Mr. Gary Pillitteri

The Chair

Mr. Gary Pillitteri

1725

Mr. Réal Raymond

The Chair

Mr. John Hunkin (Chairman and Chief Executive Officer, Canadian Imperial Bank of Commerce)

1735

1740

1745

The Chair

Mr. Richard Harris

Mr. John Hunkin

Mr. Richard Harris

1750

Mr. John Hunkin

The Chair

Mr. Bryon Wilfert

1755

Mr. John Hunkin

The Chair

Mr. Bryon Wilfert

Mr. John Hunkin

1800

The Chair

Mr. Shawn Murphy

Mr. John Hunkin

1805

Mr. Shawn Murphy

Mr. John Hunkin

Mr. Shawn Murphy

Mr. John Hunkin

The Chair

Mr. Lorne Nystrom

Mr. John Hunkin

Mr. Lorne Nystrom

Mr. John Hunkin

Mr. Lorne Nystrom

1810

Mr. John Hunkin

The Chair

Ms. Maria Minna

1815

Mr. John Hunkin

Ms. Maria Minna

1820

The Chair

Mr. John Hunkin

Ms. Maria Minna

Mr. John Hunkin

The Chair

Mr. John Hunkin

The Chair

Mr. Scott Brison

Mr. John Hunkin

Mr. Scott Brison

Mr. John Hunkin

Mr. Scott Brison

Mr. John Hunkin

1825

Mr. Scott Brison

Mr. John Hunkin

Mr. Scott Brison

Mr. John Hunkin

Mr. Scott Brison

The Chair

Mr. John Hunkin

Mr. Scott Brison

The Chair

CANADA

Standing Committee on Finance

NUMBER 036

2nd SESSION

37th PARLIAMENT

EVIDENCE

Monday, February 3, 2003

[Recorded by Electronic Apparatus]

¹ (1530)

[English]

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

We will continue, pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers. I would hope that today we could direct our questions specifically to the public interest aspects.

Our witnesses from 3:30 p.m. to 4:30 p.m. are from RBC Financial Group. We are very pleased to welcome Gordon Nixon, president and chief executive officer; Charles Coffey,executive vice-president,government and community affairs; and Anne Sutherland, senior vice-president, client segment strategies.

Welcome to you all.

Mr. Nixon, please commence your presentation. The mikes will come on automatically.

Mr. Gordon Nixon (President and Chief Executive Officer, RBC Financial Group): Thank you, Madam Chair, and good afternoon, everyone.

You've asked for our views on the major considerations that should apply in determining the public interest elements of large bank mergers in Canada. At the Senate committee hearings late last year we expressed the need for greater clarity with respect to criteria used to evaluate the public interest impact. We also urged that steps be taken to eliminate duplication in the process in regard to the role of the public interest review versus the roles of OSFI and the Competition Bureau. Today I would like to build on our previous submission with some additional thoughts on how we can develop a merger review process that properly addresses the public interest, advances the country's prosperity, and ensures our nation's future financial sovereignty.

There seems to be a growing consensus that the merger review process should address these issues up front and that the government itself has stated publicly that the public interest tests associated with bank mergers need greater clarity. It is important to Canada's financial system that the merger process be clear, efficient, and timely, and that there be some consistency between government and industry objectives.

The alternative is a situation that hurts our industry in ways that we certainly do not believe is in the public interest. A poor review process is not only disruptive to employees, clients, and investors, it restricts the ability of our financial service companies to make investment decisions and to maximize their potential.

The fact that we already have guidelines in place that deal with issues like access to service, branch closures, and transitional issues such as employment creates additional ambiguity and leaves the industry struggling with how to define public interest issues, let alone find remedies. It is imperative that the government define more precisely not only the concept of public interest, but also specific guidelines and requirements for addressing the public interest impact assessment.

Your deliberations should not be compromised by time constraints or politics. Without a clear, transparent, and predictable process, the likelihood of formal merger proposals being tabled and approved is remote, and if mergers are proposed, they run the risk of being embroiled in a politically charged process. This would not be in anyone's interest and is not conducive to the establishment of good public policy.

I believe the public interest process would be more productive if it had a clear mandate, did not duplicate issues being raised by OSFI and the Competition Bureau, and took into account existing federal guidelines that banks must already satisfy around key areas of public interest. I also believe that to be truly effective, it must advance the debate beyond a simple re-examination of old concerns to one that actually addresses how merger aspirants deal with the public interest issues.

If the government's public interest criteria have clearly captured the key areas of concern and if banks have properly addressed them in their public interest impact assessment, this committee, on behalf of the public interest, could review the assessment of merging parties and call upon the banks, the Competition Bureau, OSFI, and the Department of Finance to testify as necessary. In other words, if the public interest criteria and policy objectives are clear, the parliamentary process can focus on ensuring that mergers are in compliance with those criteria.

Broadly speaking, I believe the public interest assessment should revolve around three key areas that encompass much of what you've been asked to consider by the Hon. John Manley and the Hon. Maurizio Bevilacqua.

First, mergers should be examined in terms of their long-term impact on Canada's future prosperity and standard of living. Opening the doors to bank mergers will, in my view, result in significant consolidation and reorganization in financial services, impacting not only the big banks but also smaller institutions, foreign banks, and other non-bank financial companies. This will impact the ability of our banks to compete globally and the ability of other financial institutions to compete domestically.

There is abundant evidence that consolidation within the financial services industry can be strategically good for a country. It provides a greater opportunity to develop national champions capable of competing in a global marketplace. While size is only one measure of success, if you look at the world's largest financial institutions as measured by market value, most have grown through acquisition and domestic consolidation. Our country needs internationally competitive industries. They generate the capital and jobs to support ongoing economic vitality; they generate higher incomes and pensions for Canadians; and they generate additional tax revenues.

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Global companies with Canadian head offices are critical to maintaining the level of investment and innovation that keeps bright young people in Canada. We do not have enough world-class companies, and I am concerned that the trend has been going in the wrong direction. Canada has just one company in the top 200 world-wide and ranks well behind a variety of smaller economies, such as Hong Kong, Spain, the Netherlands, Australia, Italy, and Switzerland, and on a per capita basis ranks fifteenth in the world.

Mergers would help Canada's financial sector build efficiency and profitability, which is good for shareholders, clients, our international standing, and our reputation as sound and stable business partners. Economies of scale and scope generate greater efficiency and lower unit costs. This is supported by a number of academic studies that clearly show Canadian banks would realize cost savings from further increases in their size through consolidation. There are no guarantees of success, but we should be creating an environment that both encourages Canadian business and provides them with the opportunity to aim for greater heights. Not only would consolidation create opportunities for our large banks, it would result in new competition and investment in this sector, providing opportunity for smaller Canadian banks, foreign banks, and other Canadian financial institutions. Both previous testimony and the market activities of other financial companies besides the major banks support this view. In addition, as a small bank operating in the United States, RBC can attest to the fact that upper-end consolidation provides significant opportunity to acquire branches and customers.

Second, I believe mergers need to be considered in the context of Canada's financial sovereignty. As a country, we need to decide whether it's important to control our own financial sector and what public policy would best achieve that goal. Since the mid-1990s there has been more than $3.4 trillion of financial services consolidation worldwide, with more than a trillion of that taking place in the United States. Notwithstanding the goal of several Canadian banks to expand their retail banking operations in the United States, as well as our industry's strong North American competitive position, our scale and market valuations have restricted the ability of our industry to actively participate in that consolidation. There is every reason to believe that this trend towards global consolidation will continue, further marginalizing Canadian banks in both a North American and a global context, thereby making future expansion and international acquisitions even more challenging. We need to ask whether it's better for Canadians to control fewer but stronger banks that have the scale, efficiency, and capital to keep Canada competitive in global financial services.

I appreciate that this is a difficult issue, particularly at the local constituency level, where the tangible benefits of Canadian banks investing and growing in foreign markets are less evident. However, it is a critical consideration in determining long-term public policy governing our financial services industry. I passionately believe that strong Canadian-based companies, regardless of where in the world they operate, are essential to the long-term economic competitiveness of our country.

There are also many who believe that foreign takeover restrictions on our big banks should be lifted, and others who argue that they will eventually be eliminated as a result of future trade negotiations. In my opinion, the best defence of Canadian financial sovereignty is an environment that facilitates stronger Canadian-controlled banks that are less vulnerable to foreign takeover, if, as, and when the existing restrictions are removed. Restricting growth and consolidation only serves to disadvantage our Canadian financial institutions as markets globalize.

Third, mergers should be reviewed on the basis of access to service, choice among financial service providers, transitional issues, such as the impact on employment, and improvements to service. I will not suggest that bank mergers do not need to be carefully managed. There are concerns relating to implementation: short-term job dislocation; head office reductions; service disruptions; small business; and the impact on our communities. These are all real issues. However, we believe these are concerns that can be managed in ways that do serve the public interest, as well as delivering the long-term benefit of strengthening the Canadian financial services industry.

For example, banks might pledge to keep redundancies to a specific percentage of the combined workforce for an initial period, to fuse attrition to deal with a percentage of displaced employees. Banks could give undertakings to move carefully with integration, perhaps freezing branch closures for a specific timeframe or providing longer notice periods. Establishing a requirement to distribute or sell a percentage of branches could be a means of ensuring compliance with competition criteria, as well as choice among providers.

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While we believe our industry has done a good job of finding innovative ways to ensure access for rural and remote communities, low-income groups, and people with disabilities, we will continue to adjust our networks to meet these needs, and we would encourage discussion with this committee on ways to ensure that we meet the access criteria.

There has been much discussion about the impact of bank mergers on the access Canadians have to financial services and the availability of credit. This is especially true for small and medium-sized businesses, because of the critical role they play in the economy and the role banks play in helping them grow and become industry leaders. It was in the interest of addressing this issue that RBC Financial Group worked with Canadian Manufacturers and Exporters and the Canadian Federation of Independent Business to study how Canada can help its small and medium-sized business enterprises prosper and grow. While we are not perfect, small and medium-sized businesses are well served by the Canadian banking industry. We all want to continue to contribute to and augment this important sector.

The study shows that loan availability and competitive pricing in Canada are strong and that entrepreneurs are using a wide variety of financial providers, including domestic banks, foreign banks, credit unions, leasing companies, crown corporations, life insurers, trust companies, mortgage companies, and credit card companies. In fact, the domestic banks have just 50% of small business debt financing in this country. While mergers would reduce the number of domestic banks serving small business, they would also widen the scope for other providers, including foreign banks, to enter the market as they expand their existing market share. National Bank of Canada, HSBC, credit unions, and others have already confirmed their interest in buying bank branches and acquiring a greater share of all markets, particularly the small business market.

I would also point out that the small business sector is a priority of growth for RBC, with or without mergers. We are aggressively trying to increase our market share. While the availability of credit will always be a lightening rod for criticism, it is ranked well down the list of barriers to growth, behind such issues as management skills, the availability of skilled labour, and venture capital. RBC Financial Group is making a real effort to address these challenges through a variety of initiatives, including our support of women entrepreneurs, our sponsorship of the National Angel Organization, our work with the Queen's Centre for Enterprise and Development, and our provision of free planning resources to small business clients.

As for access, our industry has a solid track record in finding new ways to serve those clients with special needs, such as people with disabilities, low-income Canadians, and those in rural areas. We are committed to these initiatives, and in some cases we are obliged under federal guidelines to provide them. Over the past years we have demonstrated significant flexibility in serving clients at times and locations convenient to them. Mobile sales forces, Internet banking, telephone banking, and banking machines help provide service to clients who might find coming to a branch less convenient. In fact, almost 95% of transactions now occur outside our branch network; we have invested and will continue to invest in alternative distribution channels. However, we also know that despite the dramatic increase in alternative banking channels, 70% of our clients still visit our branches at least once every three months for advice, to handle more complex transactions, or to resolve issues. Here too we have shown flexibility by recently investing $35 million to expand and improve our branch service.

An example of finding innovative ways to serve low-income Canadians is our Cash and Save location in Toronto's Parkdale neighbourhood, which was developed to meet this need in partnership with the local community. We have developed innovative ways to serve remote communities through shared facilities, in aboriginal communities through agency branches, where the local community runs the bank and we provide technology, training, and a pool of capital for loans.

We understand that branch access is important to Canadians. We believe this access would be maintained under Competition Bureau and public interest guidelines, which could require merging banks to sell a minimum of branches as ongoing concerns, thus ensuring choice is maintained in most communities. As the Senate committee noted in its report, properly regulated mergers can enhance competition.

In summary, we recognize that issues of access, service, employment, and credit must be key considerations in any merger initiative. Our industry's track record is strong, but I don't believe anyone in the industry would be against a constructive discussion of additional remedies to deal with these issues. I believe it is your role to determine the transitional issues that need to be mitigated and what thresholds are required to meet the public interest.

¹ (1545)

I'd like to close with a request of you and your colleagues in Parliament. The time has come to provide Canada's financial services industry with clear direction on the government's policy and expectations with respect to bank mergers and the restructuring of the financial services landscape. We need a process that is more predictable and more transparent than it is today, and public policy that aligns the interests of government and our industry.

As the CEO of a large financial institution, I have the responsibility, along with the bank's board of directors, to our employees, clients, and shareholders to make considered assessment of our ability to successfully complete a transaction before we consider the work, disruption, and risk associated with a proposed merger.

Without clear criteria for public interest impact assessment, including how the costs and benefits are to be weighed to arrive at an overall result, banks proposing to merge will be uncertain as to outcome. Therefore, our request is for greater clarity around the government's policy, process, and applicable criteria on mergers. In particular, we ask for public interest criteria that do not include issues that will be addressed by OSFI and the Competition Bureau, and that are clear, transparent, and consistently applied.

From a prudential standpoint, we do not believe that an open-ended process in which there is no ability for the industry or government to predict the outcome is in the public interest. Nor is it in the public interest for transactions to be approved or turned down in one-off deals that don't anticipate the need for the industry to restructure and enhance its global competitiveness.

The government has acknowledged that mergers are a legitimate business strategy for banks. However, the merger review process has had the effect of discouraging banks from pursuing this strategy. This discrepancy between policy and process will hopefully be addressed.

I urge the government to clearly state on what basis it is prepared to accept and endorse mergers, and to ensure that the public interest review process is applied equally to all merger proposals. You have the opportunity to accomplish this, and it is our hope that you will do so.

We thank you for the opportunity to present our views. I'll be happy to answer your questions.

The Chair: Thank you very much.

There will be five-minute rounds. We have eight people on the list. The list is full at this point, so we'll be able to go to the next. Then we will start with new rounds in the next hour.

Mr. Harris is next for five minutes, please.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you very much, and thank you, Mr. Nixon, for your excellent presentation.

The way I understand it, and I think most members on this committee, the banks are looking for a road map showing where you have to go on this public interest impact process--the road to a merger--should you wish to go down that road. Some of the more common things we hear about public interest are from the consumer's point of view--access to banking facilities and small business lending. We're hearing this on a continuing basis.

It's also greatly in the public interest that our domestic banks remain strong and have the ability to grow stronger, considering the millions of Canadians who have shares in our banks through their investment and retirement portfolios. The ability of banks to compete more equitably in the global marketplace and take advantage of opportunities is essential if our domestic banks are going to remain strong and have the ability to grow. Bank mergers are quite likely part of that process.

Do you have any idea what contribution the banking industry makes to dividends in retirement portfolios throughout Canada?

Mr. Gordon Nixon: I can't give you those specific numbers. I can certainly tell you it's very significant. If you look at the overall portion of bank capitalization as a percentage of the Toronto Stock Exchange, it's a very high percentage. If you look at dividend contribution, it is an even higher percentage, because banks tend to be high-dividend-paying companies.

It is a very significant percentage, but we can certainly get back to you with the specifics.

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Mr. Richard Harris: You also talked about our entertaining, sometime down the road, the removal of the takeover restrictions on our banks by foreign interests. One of the arguments we'll hear is that if we open it up to mergers, then the first thing we'll know is we'll have gone one step further and our banks will all be owned by the Americans or by some other big European banks, for example. In dealing with this issue, and looking down the road as far as you want to look in your long-range plan, do you see this as even a remote possibility?

Mr. Gordon Nixon: I hope not. This is one of the most challenging public policy parts of the process. When you get into implementation issues around access and branches and so forth, I think they're much more manageable in terms of finding solutions and dealing with them in terms of meeting public interest.

When you get into the long-term view of what our industry will look like, there's no question that foreign ownership is something very important to this country. I've taken a slightly different view on this issue than my colleagues at the other banks have, who have been a little more aggressive in suggesting the markets should be opened up immediately to foreign ownership.

It's in the long-term interest of our industry and many industries to be opened up, so that the market will ultimately make the decisions with respect to ownership and so forth. But before we allow this to occur, it's very important that we let the industry consolidate and restructure, so that we do develop our North American or global strength and become less vulnerable to takeovers. I don't know whether foreign ownership or shareholder control rules will ultimately change with respect to the financial services industry, but if it is going to occur, we'll be far better off as a country if we have large, strong North American banks than if we have mid-sized banks vulnerable to takeover. This would certainly be the situation today.

The Chair: Thank you very much.

Mr. Wilfert, followed by Mr. Pillitteri, and Mr. Nystrom, for five minutes.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chairman. I thank Mr. Nixon and his colleagues for attending today.

I want to say from the outset that I agree with you 100% on the issue of financial sovereignty. I'm very concerned about it. I'm not sure how we will be able to address this issue, but I want to make sure Canadian banks remain in Canadian hands and Canadian interests are dealt with first and foremost.

On page 4 of your brief you realize a number of the problems. You talk about short-term job dislocation and head office reduction, etc. Then you outline a number of potential ways to mitigate these issues.

In dealing with the issue of the public interest, I would concur with you that the issue of clarity is important. The closest we've come to a major merger in Canada has been the Toronto Dominion-Canada Trust merger. One of the questions I'll be asking them is their assessment of the merger. Being in the industry, I wonder if you could share with us any comments you might have on how you see this particular process in terms of its impact, because a lot of the same issues will clearly apply if you were to merge.

Second, on page 6 of your brief you talk about undertakings and how to mitigate key public interest concerns. I think this is an extremely important point. I think people realize this. I think you've made a strong argument, as others have, about the issue of international competition. The issue really comes down to how it will impact on Canadians in terms of their communities, and the domestic impact itself.

There are market shares and all of those other issues, which others may deal with, but I'd be interested in your elaboration here. I found your comments in your October address at Queen's University most interesting, particularly as you identified one of the major problems we've heard, which is the sustainability of business access to loans, etc., which people are concerned about if there's a merger.

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Mr. Gordon Nixon: Unfortunately, my take with respect to the TD-Canada Trust merger is that it went very well. I say “unfortunately” as a competitor. But I think most of what we have heard back--and you'll get more information, obviously, from them--has been quite positive in terms of impact on their consumers and their clientele, whether it be Canada Trust or Toronto-Dominion Bank.

I would note, though, as I did in my comments, that if we get into the broad scope of bank mergers in Canada, we will be dealing with a far greater magnitude of issues than the TD-Canada Trust merger, because there you had a mid-sized financial institution being taken over by a larger institution. I think the consolidation issue will have a much greater impact on all of the banks and many of the smaller companies. So there are broader issues. But TD-Canada Trust is an example of a process that went quite well, from the regulator's perspective, from the government's perspective, and from the institution's perspective.

In terms of domestic impact, again I would stress that the lightning rod around these issues tends to be bank branches and consumer and small business issues. We are all now financial services companies, and I think you almost have to break it down product by product and sector and sector, because we have a number of businesses and we're in a number of areas beyond the branch banking or the small and medium-sized business sectors. When you look at the impacts of consolidation, you have to look at it very much on a product-by-product basis.

But I think there is an ability to mitigate those sensitive issues with respect to Canadian consumers. In the event of consolidation, there is no reason why there would be significant branch closures across the country. Branch sales are far more likely than branch closures, because there are a number of institutions that are looking to expand and build their branch networks across the country. I think you've heard, or you will hear, from some of those smaller institutions as well.

From the banks themselves, what will be required in terms of branch disposition will be dictated largely by competition issues as opposed to a desire to reduce the number of branches in our network. A lot of branch consolidation that was required from an institutional perspective in Canada has really occurred since the mid-1990s, and if you look at where the industry is today, there are not significant branch closures occurring. In fact, many institutions, including ourselves, are opening branches as well.

So the issue around branches is one that certainly can be mitigated through agreements and commitments made by two banks that are consolidating.

The issues around consumers, again, tend to be lightning-rod issues. I know one of the comments that was made by the Canadian Federation of Independent Business was that nine out of every ten small businesses would not be for bank mergers. I think a lot depends on how a question is asked. If a question is asked as to whether they would be in favour of higher taxes or more regulation, I suspect you'd get the same kind of response.

If you look at small business lending in this country, as I said in my testimony, the banks now represent about 50% of the marketplace. We have lots of competition from credit unions, from foreign banks, from other financial services companies, not to mention the intense competition that exists across the industry. When you look at international studies, it would suggest that our industry and the cost of financial services is as competitive as virtually any country in the world. If you look at it product by product, we have a very positive story to tell.

So there are consumer issues. I think the banks recognize that they have to deal with those issues and are very willing to look at new ways in which we can satisfy some of the public issues around these areas. As I say, I think we have done a reasonably good job in terms of dealing with some of these issues to date, but we're certainly willing to discuss ways that we can mitigate them in the future.

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The Chair: Mr. Pillitteri, please, for five minutes.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Madam Chair.

Gentlemen, it's very good to see you here making this presentation.

A while ago I did discuss with you, Mr. Nixon, how Canadians feel about how the banking industry serves us. Having had investments and having gone to other parts of the world, I have found that there is no better way that we Canadians could have been served by your banking institutions. I want to make that quite clear.

But by the same token, the pressure upon us is for small business to have access to capital.

I sat on this committee during the last study of bank mergers, when the banks had already made some deals to bring about bank mergers, and now the subject has come up again. While there were some proposals, now you're asking us to lay the groundwork on how you could best merge.

Also, Mr. Nixon, is it possible that one of the questions that has been asked but not fully answered is about accessibility to capital for small business? The last time we dealt with this the industry put forward the idea of creating another bank in order to address the issue of more accessibility to capital and also more risk. Most of the banks have one umbrella in terms of how you treat your customers, and there's no leverage there whatsoever, such as you find in the American banks south of the border, and that is the higher the risk, the higher the interest. So you're taking the risk that someone is willing to pay. This doesn't exist in Canada. I think this is an issue that should be addressed by you, saying this is what we are prepared to do in order to have this bank merger. I think that would alleviate some of the fear we have. By having more bank mergers, you wouldn't have the accessibility, because having only a few banks to go to there's less competition.

The issue is this. All of the other companies in the marketplace, which were charging exorbitant interest rates in the 15% to 20% range as far as 25 years ago, are no longer there, because the banking industry has been so effective over the years that it has almost eliminated the competition. I just wonder if something could be created; for example, maybe putting a proportion of assets within a bank toward serving these types of clients and also the micro lending ability to.... I think if that were brought forward, we would be looking at a different matter.

We hear that the only way you could be more competitive would be to get bigger. On the other hand, we can see that for the last 100 years the five major banks did not change any position no matter what they've done, so it has been pretty well stagnant. You've all grown to about the same level. No one has ever really taken over the marketplace, and the only way you could see it is on--

The Chair: Please watch your time.

Mr. Gary Pillitteri: Would you comment on that?

Mr. Gordon Nixon: Certainly.

One brief comment I would make is that we have all grown, but we have all changed dramatically in terms of the services we provide to customers. I think the Canadian banks are as different from one another today as they have ever been in history, in terms of the product line.

I think you raise a very valid point, and I would respond in a couple of ways.

First, I think since 1998 there have been a lot of changes with respect to the competitive landscape in Canada, for small businesses as well. I think that's been a positive. We've seen a lot of new competitors come into the marketplace, which has had a positive impact.

I would also point out that according to industry statistics, 85% of our small and medium-sized enterprise loan applications are approved. And I think, internally, our statistics would show an even higher number. So again, I know it's a lightening rod at the local constituency level, but our success rate is quite high.

But you raise a very valid point, and that's the difference between Canada and the U.S. I think the banks are trying to play a role in enhancing what you might describe as the sub-prime lending market, which doesn't exist to the same degree in Canada.

Most small businesses are financed in Canada more aggressively than they are in the United States. Most of them receive better packages, if you will, than they can get in the U.S. What you have in the U.S. is an alternative financing market--by some banks, but also by many finance companies and so forth--that you might describe as high-risk lending--very high interest rate, sub-prime lending.

When you look at the statistics from the survey that we did with the CFIB, the CME, and Queen's, one of the differences between Canada and the U.S.--where we do have a weakness--is in that high-interest lending, sub-prime marketplace, which doesn't exist to the same degree in Canada.

The only challenge I would throw out on that is that it's not a market that the banks, in and of themselves, should step in and facilitate. There are a lot of other potential financial providers in that high-risk lending market, mezzanine financing, sub-prime lending. Developing that in the Canadian marketplace would be a positive for small business, and I think banks have a role to play in that. I think we are playing a role in that.

I think the same argument you've heard before can be made with respect to venture capital, which is again an area where our small businesses find it more challenging than U.S. small businesses. There's just that much more venture capital available in the United States than in Canada. But it's not a bank market.

º (1605)

The Chair: Thank you very much.

Mr. Nystrom, five minutes.

I suggest people shorten their questions so we can maybe get a few more in.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Did you say five or ten?

The Chair: Five.

Mr. Lorne Nystrom: Okay, very quickly, welcome to the committee.

First of all, I have a question on process. If a bank merger is to occur, there's a process where the Competition Bureau looks at it, as well as the Office of the Superintendent of Financial Institutions, and of course the Senate and House of Commons finance and banking committees.

I noticed that the Senate committee on banking and commerce made a recommendation that there should not be public hearings of the finance committee of the House of Commons if there is a bank merger. I also noticed that the Banque Nationale made that recommendation in their brief.

Do you support this committee having hearings if you are involved in the proposed bank merger, or would you agree with the Banque Nationale and the Senate?

Mr. Gordon Nixon: We wouldn't agree entirely with the Senate committee recommendation on that point. I think to a degree we view this process we're currently going through as a public hearing process with respect to bank mergers, and we would hope it would be viewed as such by this committee.

What we have suggested, and we actually recommended it in the body of my statement, was that we use the House of Commons process to essentially review the proposal and ensure the criteria established by this committee are met. In other words, we have suggested that this committee should be involved in the merger process, bringing the banks in, bringing in Finance, OSFI, the Competition Bureau, to make sure the criteria established and set by this committee are complied with and met.

So we're not suggesting this committee should not be involved in the process, but we certainly would not suggest that full public hearings with respect to specific transactions would be necessary if we get clear public interest criteria from this process. It is our hope that the public interest criteria will be established here, and then this process will be used to represent the public interest in terms of approving mergers.

Mr. Lorne Nystrom: So what you are saying is that once you have a specific merger proposal on the table, a public hearing by this committee is not necessary on that specific proposal. That is, if you come to us in a couple of years with a proposed merger between yourselves and the Bank of Montreal, this committee should not be holding public hearings regarding that specific proposal.

Mr. Gordon Nixon: My view is that public hearings across the country would not be useful if this committee has established criteria and rules with respect to mergers. I think the public hearings, as I would describe public hearings, would be a public process involving this committee, where you would bring in the banks, OSFI, the Competition Bureau, the Department of Finance to ensure that the public interest criteria this committee has set are being complied with.

That's how I would suggest the public hearing process would occur.

Mr. Lorne Nystrom: I'm really surprised that the biggest bank in the country, in terms of democratic accountability, wouldn't want to be out there in a very transparent way allowing the public to express their opinion on this.

Your charter has been granted as a privilege by the Parliament of Canada. So why wouldn't you want to come before the Parliament of Canada in a public hearing about that specific proposal? I'm surprised. People in the country want some democratic accountability. You're really snubbing your nose at that.

º (1610)

Mr. Gordon Nixon: Well, I don't think I am. I'm suggesting that we actually include this process in that. To a degree, is this not a public hearing to allow the various interested parties to express their views with respect to mergers, public policy around mergers, and criteria with respect to public interest?

The request from the Government of Canada has been for public interest to be defined through this public interest hearing. We're very supportive of that process.

Mr. Lorne Nystrom: I'll ask you a question in terms of the public interest that my constituents will be asking me in Regina--Qu'Appelle. Indeed for a couple years there has been a merger proposal between the Royal Bank and the Bank of Montreal. What are the job losses likely to be across the country in such a proposal?

Mr. Gordon Nixon: I think the job losses across the country would be very few. I think job losses would be isolated primarily to head office locations, i.e., Toronto, with respect to the Canadian banks, although clearly there's an opportunity to mitigate those losses.

I think back in 1998 the suggestion was that of the combined workforce, approximately 10% of the jobs would be eliminated. I think that would have aggregated at the time to approximately 9,000 jobs.

We hire approximately 5,000 people per year into our operations in Canada. We move about 12,000 people between various opportunities. I think as part of the public interest criteria with respect to jobs, that's an area where mitigation of job losses could be dealt with through attrition and commitments that would be made by the banks.

Mr. Lorne Nystrom: Now you're saying you think this, but again, you don't know. Again, this might be two or three years away. Doesn't the public have the right for you to come before the House of Commons committee, the Standing Committee on Finance, and say, “This is going to be what the job loss is; this is what's going to happen”? If we don't have public hearings at the time, how can that happen?

Mr. Gordon Nixon: No. I think I suggested that we should have public hearings. I suggested that if we establish what the rules should be with respect to employment, as an example, then I think the public hearing process should ensure that we come before this public hearing process and we comply with the commitments we're making to live up to those criteria.

So we're suggesting that the criteria not be established through a public hearing process at the tail end of a transaction. We're suggesting that they be established through this public hearing process and that we appear before this committee to ensure compliance with the criteria that are set.

So I'm not suggesting we should circumvent this committee. In fact, as I think I've said in my testimony, I think we should use this committee process as an opportunity to ensure compliance.

The Chair: Thank you very much. You're over time.

Ms. Guarnieri, please.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you, Madam Chair.

I'd like to begin by congratulating you on RBC reclaiming, I understand, the status as the most respected organization, according to an Ipsos-Reid poll. That's refreshing to actually hear considering many of the U.S.'s biggest banks are currently being fined for misconduct.

I'd like your opinion on some of the regulations the government has imposed on your company. It's certainly a sign of distinction. You're utmost in their consideration.

Your ownership is restricted. Your plans to merge with other banks have been prevented. You're not allowed to use your assets, your branch network, to sell insurance. You're not allowed to lease cars. We've encouraged foreign companies at your expense.

Despite these restrictions, however, you still manage to generate profits and grow at more than a reasonable pace. How do you explain your results? Is it a case of what doesn't kill you makes you stronger? Or is it a case that the wounds don't show?

Mr. Gordon Nixon: I'm not sure how to start the answer to that question.

In terms of some of the areas in which we've been restricted, obviously we would have views. When you get into areas like insurance and leasing, we've made it clear that we think those markets should be opened up, particularly if one of the objectives is to ensure competitive pricing at the consumer level. We think there are advantages to that, notwithstanding that there have been restrictions with respect to those industry sectors.

The first comment I'd make--and I think it's a very important one, because we're not here crying the blues about the state of our industry--is that Canada can be very proud of having one of the best and strongest financial services industries in the world, and frankly, can be proud of having one of the best and strongest economies in the world. In fact, I don't think anybody is even close at this juncture in terms of our performance. It's really more a question of living up to our potential.

If you look at financial services, we have a competitive advantage. Part of it is our history and the regulatory environment in which we've operated over the last 100 years. The result of that is that we have very strong banks, with some good competitive advantages. We lead most countries in the world with respect to innovation, pricing, and cost. We think that's a competitive advantage that we should be able to export to the benefit of Canadians. We think it is an industry that we should be able to move more aggressively--in the United States, in our case in particular, because that's our strategic priority--and grow more. I think mergers or consolidation would provide us with an opportunity to do that more effectively. We will continue to do that with or without mergers.

We clearly have challenges, given our size and scale. We're vulnerable to things like foreign takeover, but we have a strong industry. We'll continue to move forward. It's really more a question of whether we can in our industry live up to our potential, and what is the best structure for the industry to allow it to live up to its potential? That's where this discussion should occur.

We have a solid industry and strong financial services companies in this country, and I think we'll continue to perform reasonably well, but we can do more and more for the benefit of the country.

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Ms. Albina Guarnieri: No doubt you've weathered the storm of the past few years very well, but I'd like to turn your attention to some businesses that are not doing as well.

Last week, as you know, Catherine Swift appeared before us. She was here with a collection of surveys showing that small businesses feel they are suffering from a credit crunch. It seems to be the one area, about the mergers, where there is sustained growth. You mentioned earlier that it was a lightning rod--I believe those were the words you used.

Canadians have many alternatives for deposits, general banking, Visa cards, mortgages, but a credit line for small business seems to be the nearly exclusive purview of the five major banks. At the same time, we do recognize that the administrative costs of loans to small business make them less attractive investments for the banks.

I recall some four years ago asking Matthew Barrett almost the same question, about whether it would be an appropriate and affordable concession to offer a substantial increase in credit available to small business as part of an approval merger. To be quite frank, we didn't get an answer then, and I certainly applaud your mentioning in your text that you welcome constructive discussion about the issue.

Would it be your view that a merger would be sufficiently beneficial to the banks involved that they could offer a modest, or perhaps not so modest, increase in loans to small business? Would that be a consideration, something on which you would be willing to offer some substantive support?

Mr. Gordon Nixon: The first comment I'd make is to highlight again that 50% of small business credit is now provided by the non-major banks, which I think is very healthy for the industry. It's not just the purview of the Canadian banks; there are others, and they compete very aggressively.

We are pushing our organization, as I know our competitors are, to increase their outstandings to small business. I think if you look at outstanding credit available today in Canada to small business, there has been an increase, and there's been an increase in competition from others. So the perspective that there is a credit scarcity with respect to the small business market in Canada I don't think is necessarily valid. Would we like to increase our market share and extend more capital to small business? Yes, but you still have to find attractive opportunities that meet criteria of safety and soundness.

If there's a hole, it's in the area that was raised earlier by your colleague, the area of high-risk credit, because that tends to be where there is greater sensitivity. There is less of a mature market in Canada for high-rate lending, sub-prime lending, mezzanine financing, venture capital. I think the banks certainly can do more on that front. I think we're all trying and willing to look for new ways where we can, but I think it's important that these initiatives are done in the context of providing reasonable returns for the capital allocated; otherwise, they won't survive. There is an opportunity for more to be done.

There is not the scarcity of credit that sometimes gets the play in the media or with others. When we interviewed the small businesses as part of our survey, credit was way down the list of issues to small business in this country. It was below a number of other areas like skilled labour, environmental issues, taxes, which, again, are always a hot button. I think it's very important to get that message across.

º (1620)

The Chair: Thank you very much.

Thank you, Ms. Guarnieri.

Mr. Brison, you have five minutes, and then I'm going to let Mr. Murphy have the last couple of minutes.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Madam Chair.

Thank you very much for appearing before us today, Mr. Nixon.

In 1993 Canada was ahead of the U.S. in financial services deregulation. Now, with the last vestiges of Glass-Steagall gone in the U.S., clearly, the regulatory environment for Canadian financial services players, banks and other financial services entities, is less conducive to growth and strengthening your businesses. With the loosening of ownership rules in Canada and the increase in regulatory burden in Canada compared to the U.S., aren't we planting the seeds for a U.S. or a foreign-owned Canadian financial services sector with this trend?

Mr. Gordon Nixon: There's clearly the risk of that. I'm not sure it's driven strictly by regulation. Regulation in the United States has its challenges as well, and it also has its inefficiencies, but I do think, for a small country like Canada, minimizing those inefficiencies, particularly with a neighbour to the south of such a size and scale, is important to all industry, and to the financial services industry as well.

I think the bigger issue with foreign ownership is that if there were no protection for our financial services industry, in my view, the Canadian banks would be extremely vulnerable to foreign takeover, and there are a number of reasons for that. We tend to be small on a North American or global scale. We tend to be less expensive, we just don't traditionally trade at the same valuations the U.S. banks do, and part of that is because of our regulated environment. We're very good at what we do, we're very efficient, we have very high levels of innovation and productivity. We have very sophisticated products relative to a lot of foreign banks, U.S. banks in particular. When you put all that together, we become very attractive takeover candidates, if laws and regulations were to permit it. It's something I would hate to see occur. I think the issue from a policy perspective is that if you try to look five or ten years down the road, and that's very difficult to do, if we are in an environment where ownership restrictions are more difficult to enforce, it's in our interest to protect our industry for the future by allowing it today to take steps that will put it in a very strong position, as opposed to a vulnerable position. I think that's really the key issue with ownership.

º (1625)

Mr. Scott Brison: There's a real risk that any public impact review process is going to be politicized. If you think of various sectors and industries in Canada, if you look at the hierarchy of needs, food and shelter are pretty important, as well as banking services. Yet if a grocery or food distribution company wants to merge with another one, it goes through the Competition Bureau, but there's no public impact review process. If developers or people who own apartment buildings want to merge, people who provide shelter over people's heads, they don't have to go through a public impact review process. I think any public impact review process stands the risk of being politicized significantly.

In your interview in the National Post in November you said you believe there's a shift in opinion, but the politicians are afraid of backlash from mergers. At that time you didn't believe there'd be any mergers until after the next federal election. This summer two of the banks were discussing mergers, and the Minister of Finance, allegedly, was aware of it, but when the Prime Minister became aware in October, he said there would be no mergers until after his retirement. When you think of it, as a country, if we determine the fate of mergers between players in our financial services sector by the Prime Minister's retirement schedule and the timing of the next federal election, I don't want to say it makes us seem a little screwy, but some might.

Mr. Gordon Nixon: You can be assured I won't.

Some hon. members: Oh, oh!

Mr. Scott Brison: But some might say that.

Doesn't this level of political uncertainty with the financial services sector do an awful lot to reduce the quality of the environment from the investor's perspective and really threaten our economic sovereignty more than strengthen it in the long run? At the end of the day, economic sovereignty is created by economic growth and prosperity, and a healthy financial services sector that can grow and prosper without the impedimenta of an unstable political environment is probably one way to achieve that.

Mr. Gordon Nixon: I don't think the Prime Minister has said mergers won't happen until after his retirement date. What I would highlight is that the current process, for whatever reason or however we got here, is a good process, and I would suggest that to some degree it has done our industry a favour. I think the worst thing for our industry would be to have mergers out there. If one merger were announced, probably you would have other transactions announced. If that were done before a process like this occurred, where you have the ability to establish the rules and criteria for mergers, I think it would be very destructive to the industry. I think it would return us to where we were in 1998, which would be a discussion of mergers by public referendum, with a lot of politics and a lot of issues that are just not healthy for our industry and not healthy for the country. For whatever reason and however we got to where we are, I think this process is a very good one. Your committee has the ability to determine with a higher degree of certainty whether mergers can move forward. If we come out of this process with a clear definition of public interest and public interest criteria, the banks can make a decision as to whether they want to meet those criteria.

The Chair: Thank you very much.

We're going to Mr. Cullen.

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

Thank you, Mr. Nixon, Mr. Coffey, Ms. Sutherland.

One of the motivations, I suspect, for you, and perhaps for us as well, is to get greater clarity on the public interest test. It'll be a debate, I suspect, at some point on how much detail or how much specificity is good for you and good for us. The more specific we can be, the greater clarity, in a sense. There's always going to be some subjectivity.

You throw out three general areas, Canada's prosperity and standard of living, financial sovereignty, and access choice in transitional issues. In the final analysis, this committee may have different criteria or more, or subsets, but do you think it should be an all or nothing thing? Let's say a proposed merger met two of your tests but didn't meet the third one? Should they be weighted? Do you have any thoughts on how we should proceed with that? What would make sense?

º (1630)

Mr. Gordon Nixon: I think I would almost bifurcate it into two areas. The first one would revolve around public policy, and that would deal with issues like financial sovereignty and the structure of the financial services industry. To me, that is a major policy issue, and we should recognize that if we go down this route there's going to be significant consolidation within the industry and we should make sure we're comfortable as a country with enabling that to occur. I think I've made some arguments as to why we think it would be good for the country in the longer term, but I think that's a major policy issue.

I think when you get into the other part, which is really more the implementation issues around access, around credit availability, around employment, that's where I think we would ask you to provide us with more specifics with respect to what it is we would have to do in the face of a transaction to meet public interest criteria. I think we could certainly work with this committee and work with the government in terms of what those criteria should be that would allow the banks to gain the benefits of consolidation, but at the same time ensure that we meet public interest around areas like employment, access, and so forth.

I do think we have a reasonably strong ability to meet most of those tests if we can have a good healthy discussion around how we meet those tests. What I think would be harmful to the industry is to have those discussions in the face of a merger in the context of public hearings. I think we're far better off to define those criteria through this process and then ensure that we have the opportunity to meet those.

The Chair: Thank you very much.

Our time is up for this session. We are going to be hearing two more sessions, and people who didn't get on the list this time will be added to the beginning of the next list.

I thank you on behalf of all of my colleagues for coming today and answering our questions.

I will suspend, but I would ask if you're planning to do media interviews, you do them outside so we can go on with our next hour of hearing quite rapidly.

We are suspended for one or two minutes.

º (1632)

º (1635)

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

Our second set of witnesses today are from the National Bank of Canada. We have, first, Réal Raymond, president and chief executive officer. Welcome, sir. Bienvenue. Joining him today is Jean-Paul Caron, who is the vice-president of corporate affairs; and also Jean Houde, senior vice-president, corporate affairs, and member of the executive committee of the National Bank of Canada.

When you are ready, Mr. Raymond, please start your presentation.

[Translation]

Mr. Réal Raymond (President and Chief Executive Officer, National Bank of Canada): Note to Publications concerning affiliation: Banque Nationale du Canada (capitalize Nationale)

Thank you, Madam Chair.

Ladies and gentlemen members of the Committee, let me begin by thanking you for giving us this opportunity to present the point of view of the National Bank of Canada and to discuss the issues related to bank mergers in Canada.

The immediate task facing the Committee consists of clarifying the concept of “public interest” and the process by which it can be considered when merger proposals are reviewed. It is not our intention to reopen the subject of the desirability of bank mergers. We think that by passing Bill C-8, the Parliament has clearly indicated that mergers of large banks can be entertained as long as certain conditions are met. The brief by the National Bank and the suggestions it makes are therefore essentially about how to review merger proposals, not their relevance.

The view of the National Bank is that it is possible to reconcile the formation of larger banks internationally with maintaining a financial system that performs as well and is as competitive as ours is now. To be convinced of this, we can consult the exhaustive findings of the MacKay Report, which says: “Interest rate spreads on small business loans are significantly smaller in Canada than in the United States.” Likewise, “the average monthly fee for a Canadian SME was $18, compared to an average of... $27 in the United States.” For individuals, “the average fee in Canada was $10 a month...and about $15.50 (Canadian) in the United States.”

As I mentioned, these figures are taken from the MacKay Report.

Let us consider some of the different dimensions of the public interest. From the perspective of the assumed benefits of mergers, there is the creation of bank groups with greater resources, enabling them to expand internationally, better serve large Canadian companies on the capital markets and invest more in a service offering for all consumers of financial services. I won't dwell on this subject because I am certain that my colleagues from the other banks will speak at great length about the potential advantages of mergers.

From the perspective of the public interest, the dilemma posed by these mergers is the price that Canadians might have to pay if the concentration generated by mergers results in a perceptible weakening of competition. This could mean reduced and more expensive service offerings for the users of a banking system that cared less about quality of service. It is crucial for the merger process not to have such perverse effects.

The National Bank thinks that it is possible to avoid this pitfall by applying a clearly proactive approach in the corrective measures agreed to in advance. This approach should especially affect banking services for individuals and SMEs. In the eyes of this clientele, real competition is still measured by what is offered at the local level by suppliers with brick and mortar branches and loan offices, where the special relationship between banker and customer is established.

In a region where the two merged banks would obtain too large a market share, we think that the divestiture of service points and portfolios could sustain real competition. The proposal we submit to the Committee is that in a region vulnerable in this way, the best way to maintain real competition is to elicit the replacement of either of the two banks by a third party absent from or barely present in that region.

Our proposal on divestitures is intended precisely to maximize the possibilities of a new competitor appearing on the market. This proposal is based on the American practice by which regulatory agencies have intervened on a number of occasions to prevent excessive concentration on the local level.

The National Bank's proposal is the following. First, in a given territory, divestiture should provide for the presence of groups of branches and SME loan offices of only one of the two banks and not an amalgamation of service points, often the smallest or least profitable ones, of either of the two banks.

º (1640)

Secondly, the territory so covered should be rather large, either a whole province or in the most densely populated provinces, a geographically continuous area that includes a population of two to three million inhabitants and corresponds to one socio-economic reality. The replacement of one of the merged banks by a third party would eliminate potential problems with respect to the public interest. In regions where the risk of concentration is higher, branch closings would be kept to a minimum; the number of institutions serving individuals and SMEs would remain practically unchanged.

Concerns about employment would be at least partly addressed because layoffs in the branches would be minimized; more off-site supervisory and support jobs could be maintained.

Finally, in terms of national competition, it would create conditions allowing smaller institutions to be strengthened or a new banking competitor to emerge, in part compensating for the loss of a large national bank.

To summarize, a number of dimensions of the public interest, in particular, SME financing, access to banking services in rural areas and, to some extent, the preservation of jobs, would be appropriately covered by a proactive approach by the Competition Bureau. To be sure of achieving the desired result, the Minister of Finance could give public instructions to the Competition Bureau on divestitures of networks of service points to individuals and SMEs.

The treatment of employees and the other aspects of the execution of mergers are also public interest concerns. In this respect, the National Bank proposes that any request for review of mergers be accompanied by commitments regarding the employees and certain sensitive aspects, such as continuity of service and mergers of branches. The aspects related to services would be analyzed by the Competition Bureau. The others would fall under the purview of the Office of the Superintendent of Financial Institutions.

Finally, following the example of the Federal Reserve Board in the United States, either of these bodies could hold public hearings, allowing interested parties to express their views. As we explained in our brief, the National Bank has concluded that the Public Interest Impact Assessment and its review by Parliament is not a compulsory phase of the merger approval process.

For our part, we at the National Bank would be seriously interested in acquiring viable local networks of basic services for individuals and SMEs or national operational units divested as the result of the merger of two large Canadian banks. We have the desire, experience and resources required to play a larger role on the Canadian financial market. We think that mergers between big banks can be an opportunity to continue our expansion outside Québec and by doing so, help maintain competition throughout Canada.

Thank you for giving me this opportunity to express the point of view of the National Bank and to propose perspectives that would advance the discussion of the concept of public interest in the context of bank mergers. Thank you.

º (1645)

[English]

The Chair: Thank you.

Now we will go to five-minute rounds, and we'll start with Mr. Harris, please.

Mr. Richard Harris: Thank you, Madam Chair.

Mr. Raymond, thank you for your presentation.

Five minutes is not nearly long enough to deal with all the questions.

I'm going to start with a broad question. It's a popular line of thought I think that smaller banks could be sitting waiting for opportunities to arise as a result of the merger of two or more of the bigger banks in Canada. Your bank probably fits into that scenario.

Can you give us an idea of how you view this opportunity? In your bank's business plan, is this something you're--for lack of a better word--really looking forward to happening, as far as your bank's concerned?

Mr. Réal Raymond: Thank you for the question.

Yes, as far as we're concerned, a potential expansion of our operation in retail banking and commercial banking is certainly something we're looking forward to see happening.

It's quite obvious that we're in a very mature market in Canada. So to take expansion and to go forward, and to take market shares outside the province of Quebec, where we are very strong, as you know, certainly requires some consolidation going on. Based on that, we feel we can certainly play an important role to maintain the competition. We have the capital, we have a knowledge of this market, and we're already part of the payment system in the country, so there is nothing that we don't know about this country and the way it works that will refrain us from being a really serious competitor.

But the process has to be in place making sure that if we decide to go ahead and make an acquisition, we can sustain the competition, and the basis on which it is done is positive for the acquirer.

Mr. Richard Harris: We're anticipating, I guess--if mergers occur and there's a rationalization of branches--that people like yourselves, the Alberta Treasury Board, and the credit unions in Canada will certainly see this as an opportunity as well.

Just how much of a benefit is it to move into an established branch bank that has been vacated, as opposed to setting up a new structure?

Mr. Réal Raymond: There is a lot of financial advantage. First of all, you already have the clients and the relationship established there. You already have the employees there to service those customers. So it's a huge, huge advantage, because you have a business that is already going on, instead of trying to steal, if I can use that term, clients from the existing banks that are already covering this market.

Mr. Richard Harris: I have time for one quick one, I think.

In your opinion, do bank mergers necessarily mean a shrinking of competition, or do you sort of feel that where branches were closed, for lack of a better word, they would most certainly be taken up by somebody who wants to expand their business?

Mr. Réal Raymond: That's clearly our point of view. We feel very strongly that this is the case.

Mr. Richard Harris: Thank you very much.

The Chair: You actually have one minute left.

Mr. Richard Harris: Oh, do I? That's wonderful. It must be late in the day.

“The National Bank's proposal is the following”--the paragraph that begins with “first”, on page 2 in your presentation, could you just explain that to me?

Mr. Réal Raymond: The one I just made?

Mr. Richard Harris: Yes, on page 2 of the brief. “The National Bank's proposal is the following”, and then there's a bullet there that starts out “first, in a given territory, divestiture should provide for the presence of groups”.

º (1650)

The Chair: It was your major recommendation, your first recommendation.

Mr. Réal Raymond: What we're saying here is very simple. Instead of letting the merged banks decide which point of service they will let go to make their proposal be approved by the competition office, we're saying a process has to be in place by which a buyer will have the opportunity to have a cluster of branches in a geographical area large enough that employees can be kept, keep the superior activities in this region in place, and make sure a buyer is in a position to compete going forward.

In the United States, this is what they have in place. This is what they're doing. Even though you have 10,000 banks there, they're still following that, making sure that regionally the potential buyers are in a position to compete in the long run. Adding to that proposal, what we've seen in the U.S. is a proposal by which the former banks cannot go after the customers for a period of time. By doing this you make sure of what I spoke about earlier, that you have a real and new competition in place to replace the former one.

The Chair: Thank you very much.

Mr. Murphy, please. My apologies for getting you out of order the last time.

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

Mr. Raymond, I just want to probe the issue a little more on access to small business. I believe that is the number one issue in these discussions. I agree that this public interest has to be defined, there has to be clarity, there have to be rules, and we have to avoid duplication. A lot of the talk about branch closures can be better dealt with through the Competition Bureau.

One of the biggest concerns I hear as a member of Parliament is access to capital in the small business sector. The banks serve this country well. There's vibrant competition in the retail industry. There's vibrant competition in that larger blue chip sector. But coming back to that small business sector, I'm seeing the devastating results when chartered banks pull out of industries, which they have in the past. They make strategic decisions based primarily on return and weight of capital--decisions made primarily in Toronto, although not in your case. They will not loan to the hospitality industry in a certain sector. They will not loan to the agricultural industry in a certain sector.

They talk about applications being approved. In a lot of cases these applications aren't even accepted, so whether they're approved or not is totally irrelevant to these discussions.

Would you agree with mandating the merging entities to come forward with a detailed plan indicating how they intend to offer services to all sectors within all regions of the country for a reasonable time? They've pulled out before, and we'll be going from six banks to, let's say, three banks. They're all doing this for strategic reasons. I can see them pulling out of all....

They're doing it now. You know they're doing it. They going to pull out of agricultural lending in every province west of Thunder Bay. They're going to pull out of hospitality lending anywhere east of Montreal. These are devastating decisions. I want your comments and views on how we can prohibit that from going forward.

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Mr. Réal Raymond: From my personal point of view, the only way you can achieve that is by not adding rules to the existing rules. I think there are enough rules in this country to supervise the role of the banks vis-à-vis retail banking, retail customers, or the SME market.

The SMEs have choices. The only way they can have choices is by making sure there are enough players in the local environment or original environment that they can borrow money at conditions that are acceptable to the banks. The only way to do that is to make sure smaller players, like ourselves, have a great deal of expertise in dealing with SMEs.

You certainly know that the National Bank of Canada lends twice as much to the SME market compared to its natural market share in the country. So we know that market. We can add to the competition in areas or regions we're not in now. By acquiring existing assets or existing operations in some regions like Alberta, or anywhere else, we can only add to the competition.

The other thing I'd like to point out is not all the banks have the same problems in terms of concentration in some sectors at the same time. I might be big in pulp and paper but not in oil and gas. A credit union can be very much involved in the agricultural sector but not in something else. So we're not acting at the same time in the same industries in the same way. So by adding potential competition locally, you reduce that risk.

Mr. Shawn Murphy: I'm not grasping your answer totally. I've explained the problem that has existed in the past. You say you don't see a need for further rules, but the rules haven't worked in the past. I don't see going from five or six major players in the banking industry down to three as helping the situation whatsoever.

I can see what you're saying about choice, but that issue is better left to the Competition Bureau, to ensure that no one entity has an excess of market share. Going from five or six banks to three is not going to help the situation of existing banks withdrawing from certain sectors, as they have in the past. That is a public interest issue, which I think this committee has to discuss and deliberate on. The answer you've given is really not helpful.

Mr. Réal Raymond: As far as I'm concerned, this country has a very efficient and competitive banking system. We're in the business of lending money; we're not in the business of not lending money. We're in the business of lending money; this is part of our business. When we decide not to lend, it's because we perceive the risk as too high or the pricing as not according to our criteria.

If you set rules limiting the banks in terms of pricing and forcing them to take some risks they're not in a position to take—in terms of protecting their depositors and all that—we would have to add capital. It would be costly. So there is a balance between risk and lending money. There always is this balance.

If we have three players in a region, I agree with you. The risk is that we are going to have less competition and less choice there. This is not what we're proposing. We're proposing making sure there is the right guidance from the Minister of Finance to the Competition Bureau, to ensure there is enough competition in a certain area and all sectors are well covered. The behaviour of the banks will not be exactly the same at the same time, because of the different structure of the balance sheets of those banks.

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The Chair: Thank you very much.

Ms. Minna, five minutes.

Ms. Maria Minna (Beaches—East York, Lib.): Thank you, Madam Chair.

As we look at the potential shrinkage in the number of banks, let's assume there have been two mergers. There were nearly two mergers the last time. Just for the sake of argument, let's say the mergers have taken place. Two banks have merged, and we are possibly down to three banks.

When you have a smaller number of banks—say you have two or three left—and one bank fails, the repercussions on the economy and the country would be enormous. Given the fact there is a much heightened or raised risk for the country, should we as a government then be looking at revamping, strengthening, and making much stronger the regulatory system by which we control and evaluate the banks—so much so as to make sure we have zero fail? The government is responsible at the end of the day if there is a failure, because it's the guarantor.

So I guess I'm not sure and am not comfortable whether the current regulatory system addresses or is able to handle this situation. Given the higher risk, should we be looking at increasing and strengthening the regulatory system and making it such that we would not tolerate any failures, so it would have to be absolutely fail-safe? What would your reaction be to this, or your suggestion?

Mr. Réal Raymond: I'm going to start with the last portion of your question. I don't think we've suffered major depositor losses in this country.

Did you want to make a comment on this?

Ms. Maria Minna: No. Sorry, go ahead.

Mr. Réal Raymond: It's been very efficient. It's certainly been the job of the Office of the Superintendent of Financial Institutions to make sure the system was well covered and well supervised, and that if there was a potential failure, somebody would be there to acquire the assets and to put up the capital required.

We've experienced this with the trust business in this country over the last 15 years. We've experienced this with the smaller banks that have been taken over by some other banks. We've been participating in this.

So I feel strongly that the Office of the Superintendent of Financial Institutions has the tools and means today to make sure that Canadians are well protected. It does a very good job and is one of the best supervisory organizations there is. I feel strongly it's there already. I don't think you have to add anything else to it.

Having stronger banks whereby some banks will be stronger and play a more international role.... At the same time, you should keep in mind that our proposal here is to make sure that smaller players can take advantage of it and have their business grow and become bigger themselves in terms of capital, capacity, and efficiency.

So it is less of an issue or less risky this way around than the other way around, isn't it?

Ms. Maria Minna: I'm not so sure.

What you're saying is that if a bank fails, or is about to fail, because they've extended themselves too much internationally, or what have you.... As I understand it, the main argument for or purpose of a bank merger is that the banks need to be able to play better on the international markets, because they can't otherwise do it. I must admit to you that I still don't buy this argument. Nonetheless, this is the argument I hear.

So let's say they've extended themselves and there's a problem. In today's market environment we have a much larger number of banks, or what have you, but in a reduced situation where we've had mergers and we're down to a small number of big banks, say two, and one of these big giants is going to go down, even if you say there will be others to pick up the pieces, the fact of the matter is that the repercussions to this country and its economy would be enormous. To make 100% sure it would never happen in this country, and that the investments abroad and everything are sound, you don't think we need to strengthen the regulatory system we have today? You're saying it is enough and we don't need to strengthen it to make sure this kind of stuff doesn't happen? You don't think this needs to be the next step?

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The Chair: Mr. Raymond, a brief answer, please.

Mr. Réal Raymond: I disagree with you on this because you take it for granted that if we don't change, we're better protected and more efficient and all that the way we are now. I don't believe it.

If we can expand smaller institutions to become bigger ones, we are going to be in a better position. We already have the right supervisory office in place with the right tools. They shouldn't give up the supervisory role they would have of those banks' activities outside Canada. They would have to keep an eye on them like they do today.

The Chair: Thank you.

We'll go to Mr. Nystrom for five minutes.

[Translation]

M. Lorne Nystrom: Thank you very much, Madam Chair.

Welcome to our committee.

A few weeks ago, a Senate committee announced that public hearings would not at all be necessary in discussions of a possible merger. In your presentation today, you say you agree with the Senate. I am very much concerned with questions of democratic accountability.

Why do you want to exclude the Finance Committee from the public review of a merger? It is very important to have Canadians' input on this kind of proposal. Why do you agree with the Senate of Canada on this kind of exclusion? You have a charter from the Parliament of Canada, which is a genuine privilege. As members of Parliament, Mr. Brison, myself and the other members are responsible to the Canadian public. Why not hold a public hearing such as this one here today to examine a specific merger proposal? Even Mr. Pillitteri agrees on that.

Mr. Réal Raymond: We're not saying there should be no public hearings. We're saying that, if the Minister of Finance provides the Office of the Superintendent of Financial Institutions and the Competition Bureau with the necessary rules and framework, which obviously should be approved by members of Parliament, a framework that is appropriate and well understood by the various players, public hearings could be held by the Office of the Superintendent of Financial Institutions or by the Competition Bureau. At those hearings, all the parties would be heard, as is the case here.

I don't believe we need to come back before parliamentarians if those rules and framework have been clearly established by the Minister of Finance at the outset. This does not deprive Canadians of the opportunity to express their views at the regional level or to the various agencies representing consumer interests, SME or large businesses. We're not saying that should be ruled out. We're saying that this power should be given to the organizations that are in place to ensure the rules are complied with.

In my mind, the main public interest factor is to ensure that there is true competition at the local and regional levels. If the ground rules established by the department guide the regulatory agencies in this direction, I believe the Canadian public interest will be well served.

Mr. Lorne Nystrom: But it's the Finance Committee that must ensure the Finance Department's rules are complied with. The Finance Committee is, as we say in English, the watchdog. The role of parliamentarians is to act as the watchdogs of our society. The Competition Office is full of civil servants who have not been elected. We are the elected representatives, and we are responsible to our electors. In a democratic society, it is very important that the Parliament of Canada have more power. In my opinion, too many decisions are now being made by the Prime Minister, by two or three ministers or by two or three bureaucrats. We need a more democratic system.

You agree with the Senate, whose members are not elected, which is not at all democratic, which is not at all accountable to voters. I'm somewhat surprised that you have adopted this position.

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Mr. Réal Raymond: I believe what is important for parliamentarians is to provide a framework for the industrial sectors, the banking system and the other industrial sectors. Once that framework has been set, I don't believe it is up to parliamentarians to make a business decision, to decide whether two banks should merge.

The government, and thus the Finance Committee, must set the framework, ensure that the rules are complied with and that there is competition for Canadians. But I'm not sure it's appropriate or necessary for the Finance Committee to decide whether such and such a bank should merge with another bank--because that's what this would mean--if the ground rules were followed by the regulatory agencies put in place by the government precisely to play that role.

Moreover, you don't do this in other industrial sectors. Representatives of large Canadian industrial sectors don't reappear before Parliament. Mergers recently took place in the insurance world, and the Finance Committee didn't examine those mergers. The Competition Bureau ensures that there is enough competition in the sector. Those people are in the financial services sector, just like the banks, and they didn't have to go through this. Why should the banking system obey different rules or appear before parliamentarians to have business transactions approved? We have to ensure that the rules are in place at the outset, which is not necessarily the case today, because the notion of the public interest is not very clearly defined. This is what we are recommending to you here, along with rules for better competition.

[English]

The Chair: Thank you.

Now we'll go to Mr. Wilfert for five minutes, followed by Mr. Brison.

Mr. Bryon Wilfert: Thank you, Madam Chairman.

Thank you, gentlemen, for appearing.

I want to refer to an item you raise on page 10 of your brief. Before I do that, I just want to say that Canada, in my view, has one of the best records in maintaining a safe and sound banking and financial system. If you look at our deposit insurance system, for example, it's fully paid by the participants; it's not in deficit.

Some have argued that Canadians, because we have an enviable record in management and supervision and regulation, would need to have significantly stricter controls or implements put in place because of the systematic risk that may be involved with mergers.

In your brief, you refer on page 10--and I'd like you to elaborate if you would, please--under opportunities.... I see your comments particularly about opportunities in Canada, as opposed to some of the other banks that have talked about the international stage. You indicate that it's important to realize that every layer of regulation and controls weighs more heavily on institutions like the National Bank than others. And you go on to say that the ultimate result of mergers, if it is to transform the banks into virtual public utilities with every aspect of their operation regulated, is there's a risk of weakening the financial system rather than strengthening it.

Well, obviously we want to strengthen the system, so I would be interested in you expanding as to your comments there and how you see that impacting.

Mr. Réal Raymond: In terms of the size of the bank and the fact that the more regulated you are the more costly it is, it's quite obvious that if you have to have in place many internal guidelines to make sure you follow all the rules--and there are already a lot of rules we have to follow--if you're adding to that, it's more costly for smaller ones than bigger ones. It's quite obvious by the nature of the capital you can deploy and the number of people who can take care of that.

That is partially what we're saying here. The more you add, the more you're providing an advantage for the bigger ones instead of the smaller ones.

That said, you have to have rules in place. I'm not trying to convince this committee not to have rules, because I fully support having strict rules, but just adding more and more doesn't help. When we're talking about weakening the banking system, it's weakening the banking systems against other financial players that are already active in this market.

What can an insurance company do today, according to the existing legislation, that we can't? Almost nothing. They have access to the payment system. They can provide all the services we can provide. So if you're adding rules just specifically to the banking business instead of the whole financial sector, you're just penalizing the banks against other players in the marketplace.

Secondly, if you allow foreigners to come into the country--which I suggest we should do; I'm not against that--we should play by the same rules. If you're adding rules to the local players just to make sure the systemic risk is protected, and you allow the other sectors not to play by the same rules, you're weakening the banking system.

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Mr. Bryon Wilfert: Madam Chairman, I believe one of the elements of public interest is to maintain financial sovereignty, to make sure Canadians control our own destiny in the financial service sector.

One of the issues that is raised when we deal with the issue of mergers--and Mr. Murphy talked about the impact in certain communities--is that of the second tier, the issue of the vacuum. I presume that in your strategic planning efforts you have identified potential opportunities if mergers were to take place in certain scenarios. Without having you divulge all the details, how do you see this issue of the vacuum being addressed, not only by yourself but by others, in terms of some concerns that have been raised by the Retail Council of Canada and by the Canadian Federation of Independent Business, that some of the other new entrants into the market have been so specialized in a particular niche that they haven't been full service and haven't addressed some of these vacuum issues?

Mr. Réal Raymond: I guess what you're addressing is the local competition, which is not today addressed by foreigners. They come into some specific sectors or products and all that.

Honestly, I think going forward the real competition will be ensured by local players, not by foreigners. Foreigners will come into this country to sell some very profitable products or to cover very profitable geographic sectors, like Toronto, Montreal, or Vancouver. I don't think they're going to go elsewhere. So the only way you can get that is through local players--credit unions, ourselves, and other players.

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

Mr. Brison, it's your turn now, please, for five minutes.

Mr. Scott Brison: Thank you, Madam Chair.

As to my first question, since the last review and changes in the Bank Act, those changes were to create greater competition. We've seen a little bit of movement in that regard. Recently, I think it was Western Financial Group that received their bank charter. I think it's called Western Financial; it used to be called Hi-Alta.

Mr. Réal Raymond: It's Bank West.

Mr. Scott Brison: That's right, Bank West. It used to be called Hi-Alta Capital Inc.

Are you seeing many other examples of people taking advantage of some of the changes in the Bank Act to create greater levels of competition? Is it real, in a market sense, or just anecdotal?

Mr. Réal Raymond: Well, you see that in the insurance business. They certainly took advantage of the legislation to consolidate, that's for sure.

Secondly, as Mr. Wilfert mentioned, we've experienced some new competitors coming into the country, but these competitors are most specifically mono-liners--in credit cards, in some very specific sectors. If you compare where we stand today to three years ago, there is more of that. ING is a good example.

So by product or per region you see more competition coming from foreigners, but they're not acting locally like local players would do, being accessible to all the consumers, being accessible to the SMEs in all the regions. But in large cities and in some products it's more competitive.

Mr. Scott Brison: What percentage of banking transactions are done electronically?

Mr. Réal Raymond: It's 94%. So today 6% of transactions are conducted at the branch level.

Mr. Scott Brison: Doesn't that nullify a lot of the bricks-and-mortar arguments that are being made about banking? Last week, for instance, the CFIB was here, and they confirmed that most of their members are using the Internet to access banking services. Yet we still hear the bricks-and-mortar arguments being used. Isn't that inconsistent with that trend?

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Mr. Réal Raymond: There is a trend. You saw a lot of branches disappear over the years. It has nothing to do with mergers.

Mr. Scott Brison: It has to do with technology.

Mr. Réal Raymond: It has to do with the direction the market is taking and the fact that a lot of the activities that took place in branches in the past are now taking place through the Internet, telephone systems, and all that.

We feel very strongly still, even though you're right on that and we experience that, that having a local presence is very important, not for the transaction as such but for the advisory role and to service SMEs. You need a point of service locally. You establish a direct relationship with the entrepreneurs of a region. That is where it takes place, not at the head office. It's very nice having the Internet system and all that infrastructure in place, which we do, as do all of the others, but we strongly believe that being present locally, with premises and people in place who understand the specific requirements of that region, is quite important.

Mr. Scott Brison: I have real concerns about how we can have a public impact review process that is not highly political. We have a public impact review process now with OSFI and the Competition Bureau. The Competition Bureau is there if there's a consolidation within the food service sector and as a result a small town will end up having only one grocery store. There's not a public impact review process for that outside of the Competition Bureau. Does it really make a lot of sense to treat banking differently? From Maslow's hierarchy of needs perspective, food and shelter are right up there, and banking services didn't quite make it. I'm not being flippant. But it does seem that we're treating the banking sector differently. It's great politics to bash banks, but it may not be a good way to craft public policy.

Mr. Réal Raymond: I agree with you. That is why we're suggesting reducing that political impact on decisions with regard to mergers in the country, not by giving up your responsibilities but by providing the Minister of Finance with recommendations about what is in the public interest. As far as I'm concerned, it means competition. If you have the right process in place and the right guidance coming from the Minister of Finance, you're not giving up the political aspect of the decision-making process, but you're reducing the political impact.

You're right when you say that the banking industry has been singled out in the way that Parliament has looked at it so far. Many other industries that are very important to the country don't go through that process, and it is working.

The Chair: Thank you, Mr. Brison.

Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you, Madam Chair.

Mr. Nystrom made the remark that he and Mr. Brison represent ordinary Canadians. I'd like to remind him that it's this side of the House that represents more ordinary Canadians.

Mr. Scott Brison: Extraordinary Canadians.

Mr. Gary Pillitteri: I'll go on to my question.

The Chair: Time is running on.

Mr. Gary Pillitteri: Thank you very much for your presentation.

[Technical difficulty--Editor]...what it costs. Our costs are much lower than those of the United States, that is true.

In your presentation here you go on to discuss how you will get more real competition in a region where banks would merge to have a third party coming in. Then you go on to say that the divestures of a lot of the bricks and mortar in that area...and you're basing that on the American level.

I wonder whether or not you would go one step further. Possibly you did not put it in here. It's the fact that in most states of the United States no bank would have so much of a market share into that 30% or 35%. First, would you go as far as saying that this should be put into what you call a condition of a merger? Secondly, would you want to see this open across the country? Some banks have concentrations of credit unions in certain provinces, and we want to see this all open, because this possibly would create an opening up of the real competition within one bank and it would not have a stranglehold in any one province.

Would you like to comment on that?

» (1725)

Mr. Réal Raymond: I would. The National Bank would fully support having thresholds in terms of market share for merged banks in certain local areas. The competition office does have a breakdown in all the regions. There are about 1,000 regions that they're breaking out, and you have to have limits in terms of what would be the market share of a single bank in that region. That shall be the basis on which you decide about the disposition of assets, or points of sale, or SME offices there. That's the base.

That's not the only thing that should be there. You should make sure you can get there, but you should let the vendors, the merged banks, decide which branch they're going to dispose of. So if you let them do that, what are they going to do? Are they going to go with the less profitable ones? The potential buyers will not be in a position to ensure real, solid competition.

We're saying that you have to have limits. Over and above that, you have to make sure you ensure real competition. You have to make sure that the vendors cannot go after their former customers, for example, that the buyers will acquire enough branches to have the strength and ability to service the customers properly as they go forward. What I call the cherry-picking by the vendors shall not be part of the process. It shall be excluded. This is why we are proposing that the Minister of Finance make sure that this process is well established in the guidelines to the Competition Bureau to ensure competition going forward. This includes limits.

The Chair: Do you have anything to add, Ms. Guarnieri?

Ms. Albina Guarnieri: No.

The Chair: In that case, I want to thank you on behalf of all colleagues around the table here. Your testimony helps us in our process of public interest.

We'll suspend for a minute and start again in less than five minutes.

» (1727)

» (1733)

The Chair: Colleagues, thank you very much.

We are joined for our final part of the presentations today by representation from the Canadian Imperial Bank of Commerce. I'm very pleased to have with us Mr. John Hunkin, chairman and chief executive officer.

We will continue, pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers.

Sir, please, go ahead with your presentation to the committee.

Mr. John Hunkin (Chairman and Chief Executive Officer, Canadian Imperial Bank of Commerce): Let me begin by thanking you, Madam Chair, and the members of your committee for inviting me to appear here this evening. I would also like to thank the Minister of Finance and the Secretary of State, International Financial Institutions, for providing the impetus for these important House hearings, which I believe come at a critical time in our industry.

Canadian banks are a part of the fabric of this nation. Indeed, much as the railroads helped knit together this country, so have the banks provided an engine of growth for Canada's prosperity. No country with a weak banking system can sustain economic growth and vitality. This has been proven over and over again in countries around the world.

At CIBC our commitment is to make a difference to all stakeholders, to deliver quality and value to our customers, to earn the respect of our employees, to foster strong healthy communities, and to work diligently to exceed the expectations of shareholders. Our community activities are described in more detail in CIBC's 2002 public accountability statement, which was sent to you as part of our submission.

At the risk of stating the obvious, the financial services sector is vitally important to Canada. Let me cite a few examples. The five major banks are the largest corporate donors in Canada. In 2002, CIBC alone contributed more than $23.9 million to Canadian charities. In 2001, the banking industry paid an estimated $4.8 billion in taxes to all levels of government in Canada.

The financial services industry employs almost 200,000 individuals in the greater Toronto area alone, generating 28% of the region's gross domestic product. One indicator of its importance is the fact that the sector contributed $30 million to the GTA's recent United Way campaign, 39% of all moneys raised. So, in my view, public discussion of policies relating to the well-being of this industry should be of interest to all Canadians.

In our written submission, which you have, I have tried to address key issues outlined by Minister Manley, including access, choice, growth prospects and competitive issues, and adjustment and transition issues. Today, in my brief remarks before you, I want to concentrate on two things: first of all, what, from my perspective, has changed over the past five to ten years in our industry; and second, our views on how the bank merger review process could be improved to better reflect public interest arguments in a more transparent and timely manner.

What I am not here to do is to suggest that CIBC has merger at the top of any strategic agenda. We don't. We are pursing a very disciplined approach, focused on growing our retail and wealth management businesses, including small business and agricultural banking, and reducing capital committed to our large corporate lending and merchant banking businesses, particularly in the U.S.

We do believe that our industry is changing and evolving rapidly, and that a restructuring of Canada's financial services sector should be viewed as a legitimate and viable business option.

Let me start with what has changed in our industry, and I'll use CIBC as the example simply because it's the business I know best. I asked my staff the other day to put together a list of all the things that have changed due to sales, disposals, alliances, acquisitions at CIBC in the last ten years or so. It is a long list. More importantly, it is an instructive list because it illustrates that far from being “all-things-to-all-persons” giants, Canadian banks, because of their declining relative size, and some factors beyond their control, have had to pick and choose our niches.

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For example, we once had a much larger international presence to serve our Canadian clients abroad, but this approach proved to be extremely expensive over time and ultimately not in the interests of our shareholders. So in recent years we have taken down the CIBC flag in Germany, Italy, France, and Taiwan. We've also downsized our operations in Tokyo, Singapore, and Hong Kong.

In the area of private offshore banking, we sold CIBC Guernsey to the Butterfield Bank and CIBC Suisse to CreditAgricole Indosuez. During the same period we looked at lines of business, such as property and casualty insurance, payroll services, merchant card services, and trust and custody services. We either sold them, as was true with insurance, or, in the case of our merchant card services business, we sold our Canadian business to a larger, stronger North American player called Global Payments Inc. We took a minority stake in a larger enterprise that can afford to make the investments needed to win in the continental marketplace.

As the cost of investments around technology, human resources, and marketing grow even higher, alliances and joint ventures are often the only viable options someone of our scale and scope can reasonably contemplate and still stay within acceptable risk limits. This has worked very well for us, by the way. For example, we have a very successful joint venture in the trust and custody sector called CIBC Mellon, where we have partnered with a well-established and respected U.S. banking name. In Canada we have partnered with Loblaws to create President's Choice Financial, which has attracted more than one million customers. In the Caribbean, we have an alliance with Barclays PLC, and we combined our operations with that of our U.K. partner to create First Caribbean Bank. Most recently, we sold our U.S. brokerage business to New York-based Fahnestock holdings for a shareholding interest of 35% in the combined enterprise.

We are creating these combinations because the partnering provides the scale and capabilities that are necessary to effectively compete and grow. We remain committed to the growth of our Canadian retail franchise, as demonstrated by our acquisition of Merrill Lynch's retail brokerage business and our continued investment in our branch banking system, cards business, and the electronic banking capability.

Canadian banks were big 20 years ago. They were in the top 30 in the world tables, as measured by assets. We are not there today. Does this matter? That depends on what kind of future you envision for the Canadian financial services sector. If you want a sector that is competitive on the world stage or even in a North American context, some sort of aggregation is necessary. If we want to ensure that large Canadian companies will continue to have the choice of accessing capital from Canadian financial institutions, some form of aggregation is necessary.

Scale determines the amount of risk a financial institution can take on. This means the consolidation that has been happening around the world has resulted in the creation of many banks that dwarf the Canadian banks in size. The result is that those banks can take on much greater risk, whether it be in their large corporate lending activities or in their growth strategies.

While there has been a great deal of needed attention placed on the small business sector, where some good progress has been made, it is actually the large corporate clients that are more likely to suffer from these trends. As larger Canadian corporate clients like Bombardier, Celestica, and BCE continue to grow, their financing needs grow apace. Canadian banks' lending capacity has not grown as quickly as that of our major international competitors.

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In our own case, we have made a conscious decision to limit our risks to levels that are prudent for an institution of our size. In this context the national interest question is, would Canada be better served by fewer, stronger Canadian financial institutions that could meet the needs of Canadian small businesses and large companies? I think the answer is yes.

In addressing the public interest implications of bank merger process I believe we must first redefine and clarify the process itself. Having experienced first-hand the disruption caused in 1998, I would not wish to put our employees, our customers, or our shareholders through another merger attempt unless we can design a process that is timely and has predictable outcomes. Predictability is of paramount importance.

Predictability to me means that the institutions putting a proposal forward to government can do so in the context of having knowledge of the analytical components to be used by regulators and government decision-makers. This allows the management and the boards of the two financial institutions to make a reasonable and rational determination as to whether or not they should go forward.

Improving predictability can only be achieved by providing a bank merger process that is transparent and based on clearly articulated tests and criteria. They should be generally non-political in nature, focusing on the general interests of consumers and shareholders alike. The analytical requirements should be measurable and predictable. They should provide a framework of public interest components that do not duplicate activities of the Competition Bureau and OSFI or other government ministries.

The other key issue is timeliness. Banking is many things, but most of all it is a dynamic business. Again, for the sake of our customers, our employees, and our shareholders, we can't put major decisions on hold to accommodate a lengthy decision process. The current bank merger process contemplates a review period of five months. I think we could do better. We would like to work with all parties to try to devise a methodology that would take 100 days or less. This would significantly reduce the period of uncertainty, not only in the markets but for our people, our customers, and our other stakeholders.

I tried, when preparing these remarks, to put myself in your position in responding to a question from your constituents about why banks should be allowed to merge. I hope my comments today have at least provided you with some potential answers. I'd be happy to address any questions you might have.

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The Chair: Thank you very much.

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

Mr. Richard Harris: Thank you, Madam Chair. Thank you, Mr. Hunkin.

I noted on page 2 of your presentation--the largest corporate donors in Canada--that CIBC alone contributed more than $23.9 million to Canadian charities. I want to thank you on behalf of the Special Olympics athletes of Prince George, B.C., for your bank's participation in our annual charity golf classic. Thank you again, and I thank you as well as all the other banks who participate.

The presentation is very straightforward. We have a mandate to define in the best public interest. I'm wondering, in your opinion, once this committee does define it and then brings it back to Parliament, where that “best public interest” portion fits, in consideration of OSFI and the Competition Bureau, two organizations a bank merger proposal would have to pass through. They have their own specific areas of jurisdiction. Where in your opinion does the “best public interest” portion fit? Does it fit with the Minister of Finance, the Secretary of State for Banks and Financial Institutions? Where does it fit?

Mr. John Hunkin: Well, ultimately--at least the way I understand the legislation--it is with the Minister of Finance, after the Competition Bureau has ruled on what is necessary to make the structure of the merger appropriately competitive and after OSFI has ruled on whether it is prudent financially to go forward with the merger. I had always assumed that it would be the Minister of Finance who would make the decision, having heard the outcome of all the discussions that came out of this.

Mr. Richard Harris: These public hearings that we're having now, I personally believe, unlike my colleague Mr. Nystrom, should be the public hearings as we define the process and the framework that bank merger proposals have to go through. These are the public hearings, not later, once we've defined what the best public interest is. And of course OSFI and the Competition Bureau have their say in it as well. I think that these public hearings are critical and final to the process, because we cannot say to the banks, “This is the framework you have to work within, and even though you meet it to all the satisfaction of the framework and in the best public interest, we can't say then you're going to have to go into more public hearings”.

We have an obligation, I believe, to lay out the road map for those who want to pursue the bank merger route. If they meet it, I think they should pretty much be there. I also agree that politics should not be a part of this. This is a business decision that should be made in the best interest of the future of our economy, given the role the banks play.

My personal opinion is that once this best interest framework is set, the bank incorporates that into their proposal, and it satisfies the Competition Bureau and OSFI, the Minster of Finance pretty much shouldn't have much reason to say no to a proposal.

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Mr. John Hunkin: I guess the point I've been trying to make on it is that whatever the process is, it must lead to a very high degree of predictability as an outcome. That is the issue I think many of us are struggling with. As I said, I went through the last go-around, and clearly the banks ourselves could take a lot of credit for what happened that time in terms of duration, etc. We'd probably rather put that one behind us.

One thing we did learn from that process is it was a long process, and it was very hard on our people. It certainly didn't improve our focus on our customers, and I can't say that our shareholders benefited much from it either. So I think it didn't have much in the way of positives flowing from it, other than maybe we learned something.

The predictability issue is really critical to any of us feeling in good faith that we would recommend a merger to our boards.

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

Mr. Wilfert, please.

Mr. Bryon Wilfert: Thank you, Madam Chairman.

I want to thank you for coming. In light of some of the difficulties we've seen in some countries in Asia, in Japan, where bailouts have been a major concern, paralyzing the political process there, in my view, Canada has a very strong, well-managed banking system. I won't use New Zealand necessarily as an example of mergers, because where they have had them under specific circumstances they have not been positive at all.

In terms of your presentation, I would like your thoughts on mitigating.... I think you've made a very clear case for Canadian banks in terms of the international component. I don't disagree with that. I think it's important that we have a very strong financial service sector, a Canadian-controlled service sector.

In mitigating particularly the early stages if a merger were proposed, the key public interest concerns, you've outlined a number of areas. We can ask for undertakings or we could in fact, through legislation, regulate what it is we would require. I would like your thoughts on that.

You comment about a clear framework. I agree with you 100%. There's no point in dragging it out. If you have a solid case.... I would tend to agree with my colleague across the way. Our job is to make sure we outline clearly what this component is, and we know what the Competition Bureau does and what OSFI does, and then it's up to whoever to come forward, and under that litmus test either you measure up or you don't.

The concern that my constituents and I'm sure others have is not so much.... I would say that the banks have made a pretty good argument about the international component. It's the fear of competition in this country and the implications.... In other countries competition has shrunk, and we haven't seen the entrants in the marketplace that have served the stakeholders, in this case consumers, well.

If you could respond.... Thank you.

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Mr. John Hunkin: I think those are real concerns. I think all Canadians should be concerned. If you reduce competition the concern can be real. However, I think there are ways to ensure better competition. First of all, the Competition Bureau is going to take a look at it and apply measures that would apply to any merger, whether it is a bank merger or any other industry, to try to ensure that there is appropriate competition. There are going to be opportunities, particularly in these instances, where the concentration that this new combined group might have in one area would be an opportunity to require them to sell off certain of their branches, and the clients with them, to other smaller competitors--it could be foreign banks in Canada, etc.--to spread out and in effect, in some cases, create stronger competitors than there were otherwise. In many instances, these competitors would be here, particularly the foreign competitors, specifically to compete in Canada and to compete for that type of client.

I think there are, in other words, all the normal mechanisms that you would look for in a merger that you'd look for the Competition Bureau to take action on. In some ways banking is a little different in Canada given the number of branches we have; overall, we have a lot of branches. Therefore, there is an opportunity to redistribute in that sense.

I start from the first base, which is this. We are an industry. I will grant you that we are a little different, and we have a special place compared with some industries, but to start with, we are a business. You can actually apply rules and measures for the amount of competition. As a matter of fact, we're an industry that's so highly regulated we have a lot of statistics, so it's not even as difficult to measure things as it may be in some other industries. We have a lot of numbers attached to us.

I think that is a concern. But to me personally going in, I would see that as a concern that I would be prepared to live with, because I think as long as the Competition Bureau approaches that in an objective, analytical way, I think we can stand the test on that, and I think we could find solutions for redistribution of branches and territories, etc.

The Chair: Thank you very much.

Mr. Wilfert.

Mr. Bryon Wilfert: I assume you've evaluated it. What lessons might you have learned from that? I know it's the closest we've had to a large-scale merger, even though it has involved the fifth largest bank and a trust company. Have you any thoughts on that?

Mr. John Hunkin: I wish we had bought it. We missed out.

Some hon. members: Oh, oh!

Mr. John Hunkin: I think the TD did a pretty good job on the TD-Canada Trust merger. They have worked very hard to get the costs out, and let us be clear, the costs need to come out.

I think one of the things I'd have to say is you'd better not do a merger unless you really want to do one, because the degree of difficulty in doing it really well is quite substantial. It is not something to be taken on lightly just to get some short-term gain. You have to be absolutely convinced it is the right thing for your institution, your people, and your customers for the longer term. It's not trivial.

¼ (1800)

The Chair: Thank you.

Mr. Murphy, it is your turn now.

Mr. Shawn Murphy: Thank you very much, Madam Chairperson.

Mr. Hunkin, thank you very much for your presentation.

I want to pursue an area that I asked a previous witness about, which is this whole access to credit for the small business sector right across Canada. I agree with you that we have to have clear rules and they have to be measurable and predictable, because I can just visualize the disruptive nature of discussions on a merger with one of your competitors where you have to disclose your whole business case and then you find out six months later that the merger, for one reason or another, is not allowed.

Before I got into politics I was a partner with one of the large law firms in Atlantic Canada. I've seen the consequences when banks withdrew from certain sectors of our economy for strategic purposes. As a member of Parliament, I think this is a public policy interest that we have to protect going forward. I'd like to see that as part of these discussions.

In the case of CIBC, and I'm just quoting a previous witness, it would appear that a strategic decision was made over the last ten years to get out of certain sectors--and I have no idea which ones--of the small business market. According to the information we have, your share of the small business market in 1989 in Canada was 19.3%. By 2000 it was reduced to 13.3%, and then down to 11.4% in 2002. The testimony from that witness--and this was a very reputable organization, the Canadian Federation of Independent Business--was that:

Canada's banking system is so concentrated that the only way for a major bank to lose 1/3 of the SME market share is through strategic decision-making, not happenstance.

So, again, I come back to my point. This is a public interest issue. I believe it ought to be protected. Do you have any recommendations that we, as a parliamentary committee, can make to the government on this whole issue of lending? I'm not going to advocate any sort of compulsory lending or loan loss provisions--you have your own decisions to make--but how can we protect certain regions of this country and all sectors?

Mr. John Hunkin: First of all, I haven't seen the statistics, but they don't jibe with ours. In our public accountability statement, which I hope you did get, there is a whole section on support for small business. With the CBA numbers, which are the numbers we tend to use, and I think they're the numbers that tend to be used here in Ottawa, we have improved our market share over the last few years. We have, for instance, specifically segmented out small business as a specific business for CIBC and have an executive vice-president responsible for that business. I assure you, one of the responsibilities there is to build that business. That includes, particularly, the lending side of the business.

Second, we're one of two banks in Canada that have a specialized agricultural department to deal with that side of the business, which we think continues to be a very important business in Canada. That has also been a very successful business for us. As a matter of fact, we have over $4.5 billion in authorized loans to agricultural customers.

If we came back here five years from now and had this discussion again about small business, I doubt that everyone in the room would be convinced that our bank or the Canadian banks are doing as good a job as they should do or could do with regard to small business. If you check around the world, you'll find that to be an issue, generally speaking, in banking. I'm not saying we should therefore ignore it, but it depends on who you ask or deal with. I know lots of small business customers who think we're doing a great job. I have to confess, I know some who don't think we're doing a great job.

I just put forward that we are focusing on it very specifically, with the idea that it is an important sector.

¼ (1805)

Mr. Shawn Murphy: To go back to my question, do you have any thoughts or comments as to how we, as a parliamentary committee, can go forward to protect the small business sector across Canada from banks making strategic decisions to withdraw from certain sectors, as they have in the past?

Mr. John Hunkin: I think it is a very bad practice to say, you shall invest x dollars in--

Mr. Shawn Murphy: I agree with you, sir.

Mr. John Hunkin: If this is good business, there are a couple things here. First is what I said earlier about branch rationalization as a result of a merger, letting other players have a first shot at this, players who are saying they want to get into this business and are prepared to do more of that sort of business. Whether this be other, smaller Canadian institutions or foreign institutions, encourage that type of thing.

Second, a much bigger bank has greater staying power in those areas that are of interest than a smaller bank. That is one of the benefits of scale, the ability to focus on things that may not be as attractive, but may have a higher public interest. I assume that if mergers happened, the banks wouldn't stop coming to committees like this, would not end up outside the spotlight in respect of how they are dealing with these key public interest issues. I think the larger they are the more they're going to be focused on this. I think some of it's going to be moral suasion. Hopefully, most of it is going to be, because the business is just great business to do, and we want to do it.

The Chair: Thank you very much, and thanks to the questioner.

We'll now go to Mr. Nystrom.

Mr. Lorne Nystrom: Welcome to the committee, Mr. Hunkin.

You mentioned farming and agriculture. I just want to pursue that one point. I have before me the brief done by the Credit Union Central from a few days ago, when they were before the committee. They're saying here that the credit union system across the country, at the very minimum, contributed 6.5% of its profits to community initiatives and organizations. They go on to say regarding farmers:

...faced with the driest conditions in 133 years, many cattle producers are selling off their breeding cattle for lack of hay. The Community Savings Credit Union stepped in and offered interest-free bridging loans to their members facing such conditions.

Since you are one of the institutions specializing in agriculture, do you have a similar program in the CIBC for farmers who are in dire straits?

Mr. John Hunkin: I don't recall that we do, so I'd have to check that out.

Mr. Lorne Nystrom: With charities and communities and so on, what percentage of your profits would you reinvest?

Mr. John Hunkin: We exceed the imagined limit, and almost consistently exceed it, which is 1%. This year we made $650 million, and as I mentioned, we contributed almost $24 million. We didn't have a good year this year--and I'm reminded of that often by my shareholders--but we did not step back on our commitments to the community, and we never do.

Mr. Lorne Nystrom: Okay.

I have here the brief of the Canadian Federation of Independent Business, and they're talking about the small business loan market from 1989 to 2002. They compare all the banks, the credit unions, and other institutions, and the biggest drop in lending to small and medium-sized business between 1989 and 2002 is by the CIBC. They said in 1989 you had 19.3% of the market share, and you're now down to 11.4%, a drop of 7.9%. The second biggest drop was the Royal Bank, going down by 4.7%, from 24.3% to 19.6%. I just want you to comment on that. The credit unions, by the way, have gone up over that same time, from just 13.4% to 20.7%, an increase of 7.3%. So there seems to be a drop-off in CIBC lending bigger than that of any other financial institution in the country.

¼ (1810)

Mr. John Hunkin: The statistics we use are the CBA statistics, and those you've just cited do not jibe with mine. I would have to look at it, and I will get back to you on where we differ, but let me make a point, because I think it is important.

I do not think you should come to the conclusion that it is in the public interest of Canada to agree with mergers because they're going to improve the performance of the Canadian banks on small business loans or agricultural loans. I would tell you right now, I don't know how I could make sure I lived up to that without doing something that was probably not economically appropriate for my shareholders. I don't think Canada is going to have a financial institutions industry that is ultimately owned by Canadians, because I think at some point in time it is going to be very difficult for Canada, given where we are in international trade, to stand up and say, we think it's fair and reasonable that we can go to the United States and buy whatever we like anytime we like, go to the U.K. and do it, go to all major industrialized nations and have access to buy their banks and other financial institutions, and then say to foreigners here, you cannot do that. Ultimately, that will not stand the test of time.

My other point is that at this time the Canadian banks are of a scale that they cannot afford to take on the risks that are necessary to grow significantly outside Canada. Unless they are allowed aggregation in Canada to some degree, I'd say they are, to a large extent, limited in opportunities for growing outside Canada.

As to whether I think mergers are good for Canada and in the best interests of Canada, it would be on that basis, to the degree that Canadians think it important for Canada to have internationally competitive banks and financial institutions, and important too that ultimately--and I'm not saying in three or four years from now--Canada really have a credible financial institutions industry that is owned by Canadians. It may not be important to Canadians.

The Chair: Thank you very much.

We'll go now to Ms. Minna, followed by Mr. Brison.

Ms. Maria Minna: Thank you.

When I think of this area, I come to the conclusion that this is a bit of a one-way street, in the sense that you can't undo a merger once it's done. If something goes wrong, you can't very easily unravel the thing. That is one of the reasons we're all being extremely cautious in looking at the impact and in trying to get it right the first time so that we don't create a problem for ourselves.

I asked this question of a previous presenter, but I don't think I got an answer. Maybe there isn't one. But you may have been listening. One of my concerns if the mergers take place and we go from five large major banks down to two, let's say--the last time there were four banks up for merger, so it would have brought the number down considerably--is the risk to the country if one of the banks has a major problem. People say to me that's not possible, but then I look at large institutions such as AOL, which owes $100 billion. I don't know which bank loaned it money. But there are risks that are taken on the international scene. Would the banking system accept a regulatory system that is tighter or stronger? Somehow the nation has to protect itself and ensure that there are zero failures and zero problems, because the failure of one of the mega banks would be devastating to the Canadian economy. I don't think we can trivialize that.

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Mr. John Hunkin: First of all, I agree with you that what you're considering is not trivial at all. It's very significant and very serious.

I have to tell you that I think we are incredibly well regulated. Not only do we have the Canadian regulators, our primary one being OSFI, but we are also regulated by the Federal Reserve and by similar regulators in London and Japan. The regulation of banks has become very tight and very focused on reducing risk and opportunities for the types of issues you're talking about.

I would say, if anything, that the way banking is going, size by itself is not everything, and it doesn't solve all those problems, but clearly it does help. That would mean that OSFI would have a bigger institution to look at, but they'd also have one less to look at. In France, which is a much bigger country than ours, I think they're down to about three for the whole country. That is not unusual. As a matter of fact, Canada at this point in time is unusual because we really haven't had much in the way of consolidation of the banking sector itself in recent years.

The reason the previous speaker didn't give you a great answer to your question is probably because there isn't a great answer.

Ms. Maria Minna: One of the other items that comes up all the time, which of course is always of concern, is that of customer service and the number of retail branches and so on. And one of the things that is always stated is that of course, if necessary, some branches would be sold off and that there would be consolidation or redistribution. I always think of redistribution as less service, because that means somehow that some branches will have to be put out of service.

I'm going back to some of the reading I did recently on the Canada Trust and TD merger. On that one, I don't think that at the end of the day the customers actually saved money. Actually, they ended up paying a higher level of charges. There was an actual increase in price rather than a reduction, and that's not necessarily in the best interests of the customer.

To continue with that thinking, that's one area--and maybe you can expand on that a bit--the discussion that other foreign banks in Canada would also pick up some branches. But to date they have not been doing that, and I think partly the reason for that is that they actually can make only about 60% of United States charges. I mean, there isn't a real profit to make there for them, so they're not actually getting into that particular area of business. Otherwise, would banks like CIBC be selling branches now rather than waiting for mergers?

¼ (1820)

The Chair: Go ahead, Mr. Hunkin, and then we'll go to Mr. Brison.

Mr. John Hunkin: First of all, in terms of the TD and Canada Trust, I'm sure there were fees and things moving around between where Canada Trust was and where the TD was. Ultimately they go to one, and you're going to see probably some go up and some go down. So I'm not sure in that situation in particular.

Let's look at a bank in Canada. Hongkong Shanghai Bank has had a lot of success in Canada and has done a good job. From what I can see, they seem to have targeted their market well and done a good job and penetrated. I would be surprised if a bank like that--if mergers occurred--weren't interested in acquiring more branches and customers.

We hear noises in our financial world that there are others--some of the American banks--who would be interested in acquiring branches and expanding their retail networks in Canada. And we'd all be sort of eager to see that happen, because that would be a key way to making sure that this process could move forward and meet the requirements of the Competition Bureau, which ultimately is going to say they want competition.

I guess we won't know until we get there or start down the road, but I'd be very surprised if other banks wouldn't be out. As a matter of fact, I can tell you right now that if I weren't in a merger, I'd be looking to get some of the assets and some of the branches in the right places where we don't have representation. I think I'd be keenly interested.

Ms. Maria Minna: How many banks would be too few banks for Canada? Where would you stop? Where would your bottom line be?

Mr. John Hunkin: I don't think you can talk about just banks. You have to think about the conglomeration of financial institutions, so it could be more than banks.

I would think that it would be good if Canada had three larger institutions and some other smaller institutions that were able to hit particular niches and compete very effectively. It's questionable whether Canada can have more than that and still have credible scale.

The Chair: Thank you. I'd like to allow Mr. Brison some time.

Mr. John Hunkin: I'm sorry. I apologize.

The Chair: I'm sorry for interrupting you.

Mr. Brison.

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

You said that the public impact review process should not duplicate the efforts or the criteria of your other approval processes, such as OSFI and the Competition Bureau. I was trying to think, both OSFI for prudential issues and the Competition Bureau for competition issues are pretty rigorous hurdles to overcome in and of themselves.

Really, we ought to be considering this as a committee. In terms of public impact review processes, what would you consider to be appropriate criteria in addition to the already rigorous ones inherent in OSFI and the Competition Bureau?

Mr. John Hunkin: Having been pretty close to the last merger attempt, in the case of ourselves and TD, I must tell you that the Competition Bureau does a pretty thorough job, and therefore when it comes to issues of competition, whether it be in the small business area or in the agricultural area or whatever, my guess is it will have that laid out pretty well. I'm not sure, I guess is my answer.

Mr. Scott Brison: If truth be told, neither are we. That's the problem. The Competition Bureau and OSFI already represent a public impact review process that's in place and has the added advantage of not being politicized.

Your job is to maximize the return for your shareholders. Given that nine million to ten million Canadians, directly or indirectly, are bank shareholders, if a public impact review process encourages activities that are not, as you said, economically appropriate for your shareholders, couldn't it be argued that the whole notion of a highly politicized, separate public impact review process is not actually in the public interest?

Mr. John Hunkin: It certainly could.

Mr. Scott Brison: Do you expect to see merger proposals before the next federal election in Canada?

Mr. John Hunkin: I don't really know. I think it will depend a lot on these discussions and what comes out of them in the way of allowing companies to make assessments and come to the belief that if they met certain criteria in terms of the competitive elements, etc., they could get approved and there'd be sufficient clarity around it. If there isn't more clarity than there has been to date, then, no, I don't think so. I can only really speak for CIBC. I don't think we would come forward.

¼ (1825)

Mr. Scott Brison: Don't you think it's contrary to the public interest, for those nine million to ten million Canadians who are shareholders and depend on you doing your job and maximizing their return for their retirements, to have a process that is so highly politicized that the timing of the next federal election is even a factor for legitimate merger proposals in the Canadian financial services sector?

Mr. John Hunkin: Clearly, that would be the case in any industry that I can think of outside of banking. In Canada, banking has always been put in a special bracket. Clearly, that's because it impacts people right across the country.

I would not argue that anything that is good for Canadian bank shareholder value and passes the Competition Bureau is necessarily the right idea. I'm telling you what I believe: if we don't see some sort of rational approach to consolidation in the Canadian financial services industry, some of the people who today are so keen to make sure that Canada's financial services industry continues in the hands of Canadians are going to be disappointed one day. I may be wrong, but that's my belief.

I think it can be done in a way that will ensure appropriate competition and in that sense be in the best interests of Canadians. And I think you could end up with some pretty interesting organizations that would have great head offices in Canada, that would have young people who would want to work for them because they would have an opportunity to not only work in Canada for a Canadian company, but to work abroad for a Canadian company. Unless we move forward on this I question whether those opportunities are going to be available, or in the size they should be, for young Canadians.

Mr. Scott Brison: I would add to that. A small business person in my riding of Windsor, Nova Scotia, as much as he or she may find dealing with a bank whose head office is in Toronto frustrating sometimes...the client is probably better served in terms of sensitivities to his needs with a bank whose head office is in Toronto than one whose head office is in New York, or Zurich, or Chicago.

I have some real concerns that by creating a more highly politicized process in Canada for banks to pursue legitimate business directions we're actually potentially gutting the competitiveness of our financial services sector and at the same time exposing it to greater competition. From an economic sovereignty perspective--Mr. Wilfert raised the issue earlier and is consistent on that--I think we are compromising our economic sovereignty significantly in Canada by taking very much a wrong-headed approach in our approach on bank mergers and other financial services issues. It is good politics, at the end of the day, to bash banks, but good politics is not always in the interests of the public.

Mr. John Hunkin: But it is entertaining, though, you have to admit.

Mr. Scott Brison: Absolutely. It's like attacking Liberals.

The Chair: Your presence has been more than entertaining, Mr. Hunkin.

Mr. John Hunkin: I would say, on the point of foreign institutions, that we have bought Merrill Lynch's retail business twice on two different downturns in the economy. That says something all by itself.

Mr. Scott Brison: Right.

The Chair: Thank you on behalf of all committee members for appearing today and answering our questions as we go forward with deliberations.

I'd like to remind committee members that there have been some adjustments to schedules tomorrow. The times remain the same, but the Investment Dealers Association will be appearing at the 11 o'clock meeting instead of the afternoon meeting. Please take note of your notices for Thursday because a Thursday afternoon session has been added for an hour.

Thank you very much. We are adjourned.