FINA Committee Report

THE PUBLIC INTEREST IMPLICATIONS OF LARGE
BANK MERGERS: A DISSENTING OPINION

Hon. Lorne Nystrom, M. P.
NDP Critic for Financial Institutions
March 2003

“The banks have survived quite nicely the way they are.”

– Dr. Robert Kerton, Consumers' Association of Canada

Minister of Finance John Manley and Secretary of State for Financial Institutions Maurizio Bevilacqua have asked the Standing Committee on Finance and the Senate Banking Committee to spend time and energy to further investigate and clarify the public interest implications of large bank mergers. In so doing they have resurrected an issue that has been thoroughly rejected by Canadians.

The position of the NDP is clear: mega bank mergers have never been, and will never be, in the public interest. When four of the largest Canadian banks proposed to merge in 1998, it took a year of public hearings, protests, $4 million, five reports and the Competition Bureau to convince then Finance Minister Paul Martin that leaving one or two large private banks in control of the nation’s credit was bad for competition, bad for jobs and bad for communities, and, therefore, not in the public interest.

There is no evidence that the Canadian financial landscape in 2003 is fundamentally different than in 1998. The MacKay task force then tabled its final report, in which it recommended that a Public Interest Impact Assessment Process be part of any bank merger proposal. The Finance Department’s Merger Review Guidelines were developed in response to MacKay to help define the public interest. The banking industry has argued that these guidelines are too broad, that they need clarity. On the whole, however, the Merger Review Guidelines are already clear and sufficient. They must remain broad, in order to give the Finance Committee enough room for interpretation on a case-by-case basis. We agree with the committee that no useful purpose could be served by being overly prescriptive in providing guidance on the public interest implication of large bank mergers. We also believe that the onus is on the merger applicants to make their case that a merger would be in the public interest.

The Canadian banking system is one of the most concentrated systems in the world. Six largest banks account for more than 85 per cent of the assets of our banking industry and have even increased their share of deposits from 70% in 1997 to 73% in 2001. What could possibly improve if only two or three banks controlled the banking business?

The Hon. Dr Douglas Peters PhD PC, the former Secretary of State (finance) for the Liberal government from 1993 to 1997 and former chief economist and senior vice president of TD Bank has shown that the public interest implications of bank mergers becomes obvious when answering the following questions:

Would the merger of Canada’s major banks:

The answer to all these questions is no. It is obvious - bank mergers in Canada would be detrimental to the public interest.

Only the systemic threat of a massive financial sector failure could justify the unholy alliances to which the Senate Banking Committee wishes to give its blessings. Even in the event of a massive financial sector failure, a diversified Canadian financial sector would more effectively manage the crisis and rely less on public funding to bail them out.

Canadian chartered banks say they need to become extra large to prosper in a global economy. They argue that only mega banks are able to compete internationally. They believe economies of scale can only be realized by mega-institutions.

All these arguments are false.

It is wrong to claim that our big banks need to grow to achieve economies of scale. Even the Bank of Canada has written that “empirical work thus far has provided no evidence that a bank has to be a mega-institution, rather than just large, to exploit most economies of scale.” When the C.E.O.s of Canada’s chartered banks argue they need to become mega banks to compete internationally, they fail to note that they already do extremely well internationally. And when they do not, evidence shows that their losses have nothing to do with size but with bad lending decisions, such as TD’s loans to the U.S. telecommunications sector and CIBC’s adventures in New York in investment banking.

A marketplace controlled by two or three financial consortiums also means that these financial giants will continue to subsidize their overseas losses on the backs of Canadian consumers and taxpayers.

Some claim that bank mergers will not hurt Canadian consumers. But those who expect some cavalry of foreign competitors to charge in and save consumers are deluding themselves. For the sheer dominance of Canadian mega banks over our domestic market place discourages foreign competition from launching any frontal assault. In fact, foreign bank subsidiaries have reduced their share of deposits from 7% in 1997 to 3% in 2001.

Instead, foreign financial institutions will tighten their grip on Canada’s financial institutions by taking advantage of Paul Martin’s jettisoning of the 10% wide ownership rule, which guaranteed that no single shareholder would control more than 10% of the ownership of a chartered bank.

As stated in the 1998 NDP minority report (A Response to the "First [Interim] Report" of the Standing Committee on Finance—"The Future Starts Now"):

“Banks decide which firms survive and which ones fail; which jobs are created and which jobs are destroyed; who gets a home and who does not. Simply put, banks are not ordinary corporations. The banking sector does much more than just lend deposits. Banking institutions create money by granting loans to firms, consumers or governments. Banks also create money through indirect means such as securitization and off-balance sheet activities.”

Parliament has given Banks a special protected situation in Canada that is unlike any other industry. Banks have benefited from a special charter, allowing them to control credit; they have gradually increased their grip over the trust industry, absorbed all the large brokerage firms and are breaking new ground in the insurance market. Now, in the name of global competitiveness, they want to concentrate control by merging ultimately into two or three megabanks.

Bank charters granted by Parliament confer powers so sweeping that to prevent abuse, banks must be regulated by a democratically elected government and submitted to the discipline of market competition. Market concentration erodes competition and challenges the authority of Parliament. Leaving one or two private banks in control of the nation’s credit is not in the public interest.

Experience has shown that the more a banking system is concentrated, the greater the risk of speculation at everyone’s expense. Japanese mega banks have accumulated $1 trillion (U.S.) of potential losses because of speculative loans. Similar losses have happened to mega banks in the United States, France, Switzerland and Germany.

We are being hopelessly naive if we think such disasters could not occur in Canada. What will happen if a $700 billion mega bank were to fail? The federal government would have little choice but to step in and bail it out with taxpayers’ money.

The truth is that big banks want to merge to reduce competition and create greater profits to keep shareholders happy. In order for this to happen, consumers and communities will have to contend with reduced competition, less choice and higher service charges — not to mention lay-offs and branch closures. In fact, when Canada Trust merged with TD bank, Canada Trust’s higher service fees were imposed upon TD Bank customers by the new TD Canada Trust Corporation. Moreover, there is compelling evidence that mega bank mergers would make a bad situation worse for Canada’s small businesses, businesses that have generated the majority of new jobs.

The relationship of Canadians with the banking sector goes well beyond the simplistic view that what is good for bank shares is good for Canadians. The fact that many Canadians are directly and indirectly shareholders of major banks, and that mergers may improve the return on their shares, is cold comfort for someone who needs a mortgage today, or an affordable loan.

It is clear that by supporting bank mergers, the Senate Banking Committee is failing to acknowledge the needs of Canadians. Important issues are being forgotten. We know that it was the Parliament of Canada that granted charters to Canada’s big banks. These charters were privileges that allowed Canadian banks to have a dominant position in the domestic market. Banks are therefore not only accountable to their shareholders; they are accountable to the Parliament of Canada. For the unelected, unaccountable Senate to suggest that a bank merger review process should exclude a review by the House of Commons Finance Committee is no less than an abrogation of responsibility. Further still, any mega bank merger that is triggered simply by the thirst for ever-rising profits should be submitted to a vote in the House of Commons, after having been reviewed by the Finance Committee.

What about the rising stress of families falling deeper into debt and the many Canadians with no choice but to work in retirement? With heartbreaking levels of child poverty, poor childcare programs and education, the state of the working poor is reaching crisis proportions. Should not the Senate Banking Committee, and of course the House Finance Committee, provide a perspective on these more pressing issues?

If Parliament is serious about reopening a debate about banking, it should focus on the bread and butter issues that are important to working Canadians. A starting point would be to examine bank service charges, abusive credit card rates, ATM rip-offs, community reinvestment, offshore tax havens, CEO stock options.

Under no circumstances should the business imperative override the democratic process. We must stop pretending that mega bank mergers will in any way serve the public interest and start working to enhance, not hinder, the economic potential of all Canadians.