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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, February 4, 2003

1530

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

Mr. Jack Smit (Chairperson, Board of Directors, Credit Union Central of Canada)

1535

1540

1545

The Chair

Mr. Robert Ascah (Vice-President, ATB Financial (Alberta Treasury Board))

1550

1555

The Chair

Mr. Gary Seveny (President and Chief Executive Officer, CS CO-OP (Community Financial Services))

1600

1605

The Chair

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

1610

The Chair

Mr. Jack Smit

Mr. Richard Harris

The Chair

Mr. Wayne Nygren (Director, Board of Directors, and Chair, Legislative Affairs Advisory Committee, Credit Union Central of Canada)

1615

The Chair

Mr. Pierre Paquette (Joliette, BQ)

The Chair

Mrs. Madeleine Brillant (Vice President, Corporate Affairs, CS CO-OP (Community Financial Services))

The Chair

Ms. Joanne De Laurentiis (President and Chief Executive Officer, Credit Union Central of Canada)

1620

Mr. Pierre Paquette

Mr. Gary Seveny

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Mr. Jack Smit

1625

The Chair

Mr. Wayne Nygren

Mr. Bryon Wilfert

Mr. Wayne Nygren

Mr. Bryon Wilfert

Mr. Wayne Nygren

1630

Mr. Bryon Wilfert

Mr. Wayne Nygren

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Robert Ascah

Mr. Roy Cullen

Mr. Jack Smit

Mr. Roy Cullen

Mr. Jack Smit

1635

Mr. Roy Cullen

Mr. Jack Smit

The Chair

Mr. Gary Seveny

The Chair

Ms. Joanne De Laurentiis

The Chair

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

Mr. Jack Smit

1640

Mr. Lorne Nystrom

Mr. Jack Smit

Mr. Gary Seveny

Mr. Lorne Nystrom

1645

Mr. Gary Seveny

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. Robert Ascah

Mr. Shawn Murphy

Mr. Robert Ascah

Mr. Shawn Murphy

1650

Mr. Wayne Nygren

The Chair

Ms. Joanne De Laurentiis

The Chair

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

1655

Mr. Wayne Nygren

Ms. Sophia Leung

Mr. Wayne Nygren

Ms. Sophia Leung

Mr. Wayne Nygren

Ms. Sophia Leung

Mr. Wayne Nygren

Ms. Sophia Leung

The Chair

Mr. Rick Casson (Lethbridge, Canadian Alliance)

1700

Mr. Robert Ascah

Mr. Rick Casson

Mr. Robert Ascah

Mr. Rick Casson

Mr. Gary Seveny

1705

The Chair

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

The Chair

Ms. Joanne De Laurentiis

1710

Mr. Wayne Nygren

Ms. Maria Minna

Mr. Wayne Nygren

Ms. Maria Minna

Mr. Wayne Nygren

The Chair

Mr. Gary Seveny

Ms. Maria Minna

The Chair

Mr. Ivan Grose (Oshawa, Lib.)

1715

The Chair

Mr. Wayne Nygren

Mr. Ivan Grose

The Chair

Mr. Roy Cullen

1720

The Chair

Mr. Gary Seveny

Mr. Roy Cullen

Mr. Gary Seveny

Mr. Roy Cullen

The Chair

Mr. Wayne Nygren

The Chair

Mr. Robert Ascah

The Chair

Ms. Joanne De Laurentiis

1725

The Chair

CANADA

Standing Committee on Finance

NUMBER 038

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, February 4, 2003

[Recorded by Electronic Apparatus]

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[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Good afternoon, ladies and gentlemen.

This meeting concerns, pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers.

We have with us, from the Credit Union Central of Canada, Joanne De Laurentiis, president and chief executive officer; Wayne Nygren, director, board of directors, and chair of the legislative affairs advisory committee, president and CEO of Credit Union Central of British Columbia; and Jack Smit, chairperson, board of directors, president and CEO, St. Willibrord Community Credit Union. I understand you have to leave at around 5, so we'll excuse you at that time. From Alberta Treasury Board Financial we have Robert Ascah, vice-president, corporate planning. And from the CS Co-Op, community financial services, Gary Seveny, president and chief executive officer, and Madeleine Brillant, vice-president, corporate affairs. Welcome to you all.

I think we'll go to the Credit Union Central of Canada. The brief is going to be presented by Mr. Smit. We will go in the order of the agenda. All people will speak before we do our rounds of questions.

Go ahead, Mr. Smit.

Mr. Jack Smit (Chairperson, Board of Directors, Credit Union Central of Canada): Thank you, Madam Chair and members of the House of Commons Standing Committee on Finance, for this opportunity to appear before you. We'd like very much to express our support for this process, and we hope our comments today will assist the committee in its deliberations.

Before dealing with the issue of bank mergers and the public interest, I would like to take this opportunity to briefly update the finance committee on the present state of the cooperative financial system. As you may already know, the cooperative financial system is very diverse and complex. Outside Quebec it currently comprises approximately 641 credit unions and affiliated caisses populaires operating at nearly 1,830 locations. These credit unions have combined assets of approximately $65 billion. The system also includes a wealth management arm that offers products and services through our Credential Group companies, and the Credential Group is well known for its ethical funds offerings, Canada's first family of socially responsible mutual funds. Our insurance products are offered through the CUMIS group and the Cooperators. Trust and loan products and services are available through the Co-operative Trust Company of Canada.

Our membership continues to rise, and we now have nearly 4.6 million members. In addition, Caisse Desjardins, the Quebec-based financial cooperative system, has assets of $85 billion and over 5 million members. It's actually a little known fact that Canada has the highest per capita membership in its cooperative financial services sector.

As you are aware, provincial governments are the primary regulators of credit unions in Canada. Key players at the provincial level include the nine provincial central organizations, which have the task of managing our system liquidity in the respective provinces, while also carrying out relevant trade association functions. The Credit Union Central of Canada is the system's national trade association and central finance facility. We're regulated under the federal Cooperative Credit Associations Act.

The cooperative financial system, like the commercial bank, offers a full range of financial services to Canadians. However, we're distinguished by the fact that customers of credit unions are also members and owners. Credit unions operate on the basis of principles and values that emphasize democratic participation by members in governance and a commitment to the communities in which credit unions are based. Member ownership ensures that credit unions are uniquely sensitive to the members' needs and aspirations. In fact, in 330 communities across Canada, excluding Quebec, credit unions provide the only financial institution.

Turning to the issue under consideration today, we have a number of comments to make in regard to bank mergers and how they relate to the public interest.

First, we'd like to state that Canadian Central views mergers in the financial service sector as a legitimate business strategy that can produce healthy outcomes for consumers and financial institutions. We do not distinguish between mergers involving large institutions and those involving small institutions in this respect. In our system merger activity is continuous and plays an important role in enhancing our ability to service our members. Between 1990 and 2001 the total number of credit unions and caisses populaires actually decreased from 2,700 to 1,772 as a result of such activity, and that trend is continuing. Recently, the merger of Coast Capital Savings Credit Union and Surrey Metro Savings in British Columbia has resulted in the largest credit union in Canada in terms of members, 300,000, and the second largest in terms of assets, approximately $6 billion. As we speak, a very important merger is under way involving the Credit Union Central of British Columbia and the Credit Union Central of Ontario. These two centrals are planning to establish a combined finance facility that will produce some very important efficiencies for credit union operations in both British Columbia and Ontario. The facility, which, for planning purposes, is known as Opco, will be capable of including other provincial centrals as well, and we certainly have indications from other provincial centrals that they will be joining Opco.

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Committee members are no doubt aware of the forces that are driving bank mergers and consolidation, and those forces apply equally to the cooperative financial sector. Mergers help financial institutions grapple with decreasing margins and increasing operating and technology costs. Credit unions, like the banks, must continually find ways to reduce costs through the more efficient use of resources and spreading these costs over a wider base of customers. Mergers also enable our credit unions to further expand the suite of services available to our members.

To recap this first point, Canadian Central believes mergers between financial institutions are a legitimate and viable business strategy and can benefit both customers and financial institutions. Consequently, this business strategy should be available to all players in the Canadian financial system, including banks.

The second point, however, is that big bank mergers will need to be carefully considered from the vantage point of the general competition policy administered through the Competition Bureau of Canada. We're confident that this policy is capable of assessing the competitive impact of a proposed large bank merger and identifying the remedies that could help to preserve the basic level of competition in select markets. Of course, any proposed merger must also satisfy the prudential standards that are administered by the Office of the Superintendent of Financial Institutions.

Our third point concerns competitive balance in the Canadian financial system. In respect of larger public interest criteria, the Canadian central is very concerned about this issue. We believe, in anticipation of large bank mergers, a key public policy consideration must be whether a strong second tier of financial institutions exists to balance the market power of the big banks. That's necessary to ensure that our consumers continue to have real choices in the market for retail financial services. From our perspective, the most promising means of ensuring this competitive balance is for the federal government to continue with measures that will strengthen the ability of the cooperative financial sector to compete against the large banks. In this respect, we think it's important to give consideration to the extent to which a second tier of retail financial institutions has developed or is developing in Canada.

This committee has certainly played an important role in the passage of the federal government's recent financial reform legislation. As you know, Bill C-8 made it easier to incorporate new banks. This effort represents the most recent attempt by the federal government to inject more competition into the banking sector. Previous Bank Act revisions also featured initiatives aimed at creating more banking institutions to serve the needs of Canadian consumers. So far, however, these attempts to foster a strong second tier of banking institutions have met with limited success. The foreign banks incorporated since 1980 have brought very little competition to the retail financial services market. Recent amendments have offered means for these foreign bank subsidiaries to reduce their operations in Canada by becoming branches, and some are choosing to do so. Similarly, the domestic stand-alone banks that have been established in recent years have not made a significant impact on the retail market. A number of the other domestic banks are operating arms of existing non-bank financial institutions, including two credit unions. This underlines the fact that the important second tier of financial institutions does not find its source in the banking sector. There are few indications that it will soon change.

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Canadian Central believes only the cooperative financial sector in Canada has the real potential to serve as the crucial second tier of financial institutions envisaged in government policy. In terms of membership, retail presence, asset size, and range of products and services, there are currently no other financial institutions in Canada with the capacity to offer a significant alternative to large banks or a megabank resulting from a merger. We certainly commend the federal government for its efforts in Bill C-8 to provide the financial cooperative system with new ways to compete against the commercial banks. However, we believe the federal government should increase its engagement with the cooperative financial sector and build upon recent efforts to strengthen our capacity to compete.

There are several actions that the federal government can undertake to meet this objective. First, it can act quickly to complete the changes that are authorized in Bill C-8 by enacting the remaining regulations under the Cooperative Credit Associations Act. Second, it can continue the consultation with representatives of the cooperative financial system to further the development of federal cooperative bank legislation. Third, it can enact the legislation and regulations, where necessary, that will enable initiatives such as the Credit Union Central of British Columbia and the Credit Union Central of Ontario merger to proceed and enhance our capacity to compete against the big banks. My colleague Mr. Nygren is helping to spearhead this merger, and I'd be very pleased to provide more information about that transaction in the question period to follow.

Canadian Central believes these actions should proceed without delay, and we're very encouraged by the response we have been receiving from the finance department in that respect. The competitive conditions a large bank merger would create are already being felt in the financial services marketplace. The large banks are growing larger, even without mergers, and the need for cost efficiencies in scale in the credit union system is a current, not a future need. In addition, legislative or regulatory change of even minor dimensions requires considerable lead time. For example, regulations are still being drafted to flesh out the amendments found in Bill C-8.

To conclude our presentation, I would like to recap the position that we've outlined today. Canadian Central supports mergers, including mergers of large banks, as a legitimate business strategy that can offer benefits to consumers and financial institutions. Any mergers should be consistent with Canadian competition policy and meet the prudential requirements as set out by OSFI. Finally, the federal government should move quickly to foster the competitive balance in the Canadian financial system by strengthening the capacity of the cooperative financial system to offer competition to large banks. This will help ensure that Canadians have continuing access and choice with regard to retail financial services.

Canadian Central would like to once again thank the House of Commons Standing Committee on Finance for inviting us to present our views on this very important matter of public policy, and we'll be pleased to expand on any of the recommendations we have made in these remarks. We welcome your questions. Thank you.

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The Chair: Thank you very much.

Now we'll go to ATB Financial, Robert Ascah.

Mr. Robert Ascah (Vice-President, ATB Financial (Alberta Treasury Board)): Madam Chair, honourable members, ATB Financial appreciates the opportunity to present its views to this committee on the matter of bank mergers and the public interest.

Two caveats are necessary before proceeding. First, these are the views of ATB's senior management, not those of our shareholder, the Government of Alberta. Second, I will not address issues relating to the manner of ownership.

My presentation is divided into four parts. The first is a brief history of ATB to give you some perspective on our views. Second, I will look at some of the major elements of the current financial services environment we believe are important to understand the context of this important policy issue. Third, I will address the four elements of the public interest test the committee has been requested to examine. Finally, I will outline some attributes of a good merger policy and potential sources of competition, should large bank mergers be permitted to proceed.

In the 1935 Alberta general election William Aberhart won a landslide victory against the United Farmers of Alberta. Aberhart faced a treasury so empty that the civil service payroll was in peril. Initial loans were advanced from the federal government to avoid default, but eventually suspended over disagreement with the federal government about the creation of a loan council. As Alberta did not agree to the council, financial support was not forthcoming to Alberta, and on April 1, 1936, Alberta became the only province to default on its debt. The default radicalized the government, and a series of legislation, aimed primarily at the banking industry, was introduced, but defeated because of constitutional challenges, reservation, or disallowance by the federal government. Recognizing the creation of credit was central to the government's agenda. The Alberta government applied to the federal government for a bank charter, but it was refused. In 1938 the government passed the Treasury Branches Act that, with slight modification, remained intact until 1995.

The 1980s were an important period in ATB's evolution, because of a depression that resulted from falling oil prices. During this period the banks withdrew liquidity in the system, with loans declining by about 20%. During this period ATB increased its market share and established a strong loyalty among its customers, both large and small. Many of our customers still say, if it weren't for ATB, we wouldn't be here.

In 1996 the Treasury Branches Amendment Act was proclaimed, which created a board of directors to direct and manage the affairs of ATB. Here are some of the public policy directives that were articulated by the then provincial treasurer. ATB will operate on sound banking and business principles and not be a lender of last resort. ATB will remain a provider of services to all areas of the province. ATB will optimize profit by giving fair value to customers and meeting the commercially viable needs of Albertans. ATB will concentrate its services in independent business, agriculture, and consumer services. ATB will operate independently of the government.

In 1997 ATB's governing legislation was overhauled, making it a crown corporation. Since 1997 ATB has been profitable and has added nearly $900 million to retained earnings. We have a conservative risk profile, with approximately half of our assets in residential mortgages and consumer loans. The remaining loans are about equally divided between commercial, agricultural,and independent business loans. Like other financial institutions that seek to remain relevant to their customers, ATB has launched a wealth management platform both to meet the needs of our aging customer base and to reduce our dependence on spread income.

The committee may be particularly interested in ATB's network of rural branches and agencies. We have 104 of 145 branches located outside Edmonton and Calgary metropolitan areas. Approximately two-thirds of our deposit and loan business is done through our rural network. In addition, we distribute our services through 132 agencies. Agencies may be run by insurance brokers, grocery stores, travel agents, etc., and provide primarily deposit-taking, cheque-cashing, and loan referrals. We have not closed down any rural branches and have an understanding with the province that we will advise them prior to the closure of an agency or a branch.

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There have been a number of developments since bank mergers were debated in 1998 that we believe have changed the nature of the debate. These developments include abolition in the United States of barriers between commercial and investment banking and interstate banking; in Europe the move to one market in financial services; the increasing globalization of capital markets through the drive for standardization and harmonization of accounting principles, capital adequacy rules, disclosure requirements; and in Canada there is the view in some quarters that banking services are analogous to utility services.

On the bank merger guidelines and the public interest, which we're here to discuss today, my remarks follow the points identified by the minister's October 24 letter.

It should be noted that access in 2003 is different from access issues faced in 1938 or 1998. We have telephone banking, a customer contact centre, Internet banking, debit card service, and over 200 ABMs. Last December 82% of our transactions were electronic. Over the past month the number of our telephone banking transactions fell below the number of Internet banking transactions for the first time.

The other facet of access is the ability of the public to acquire banking services, typically meaning a transaction account. Recently, the federal government has published draft regulations defining the conditions under which consumers have the right to banking services. This is an important step in the federal government's balancing of consumers' rights with the legitimate concerns of financial institutions about customer fraud.

The distinction between large and smaller business borrowers is important, because large corporate borrowers can borrow directly through the money markets. These larger corporations have access not only to Canadian banks, but also to foreign banks and capital markets. In a 2000 survey by the Canadian Federation of Independent Business ATB was found to have the largest reported market share in Alberta. We currently have about $1.6 billion in loans outstanding. We strongly believe commitment to this market over the long term is critical. It is a profitable area for us, and being limited geographically, we, of necessity and through good business practice, work with our clients to fulfil their needs. This is also very true in our agricultural portfolio.

I'm going to skip over the long-term prospects and talk a bit about the adjustment or transition issues.

From a financial perspective, it is important to ask how government intervention would affect the economics of a merger. Keep in mind that shareholders expect economies to be realized. The degree to which moral suasion or regulation inhibits banks from rationalizing operations will weaken the business case for a merger. If the government believes no more than, for example, 10,000 jobs should be eliminated, this should be communicated in policy.

There are two attributes for good merger policy. The first is transparency. Institutions should be clear about competition, safety and soundness rules, and the public interest test. For instance, how is adequate access to be defined? What employment losses are acceptable? The second is predictability. The entities proposing a merger should have a high degree of assurance that there is a likelihood of success if all criteria are met as set out in legislation, regulation, and policy.

Finally, on some of the sources of competition, my remarks are focused more narrowly on the deposit-taking sector. Without a lifting of ownership restrictions, it is unlikely we will see significant competition from foreign institutions. While it may be politically unpalatable for one of the big banks to be sold to a foreign bank, if large foreign banks were to bid for a significant portion of a bank's branch network, existing competition would be maintained, and possibly enhanced.

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I won't comment on the credit unions, because they're ably represented here today.

Smaller institutions, like Canadian Western Bank, PC Financial, Laurentian Bank, and the new Bank West, have attractive propositions for their customers, but their ability to participate in a meaningful way again depends on access to significant amounts of capital. Laurentian Bank's purchase of Scotia Bank branches, the credit unions' purchase of Bank of Montreal branches, and CWB's purchase of Laurentian Bank branches illustrate that there is an appetite for taking over assets and deposit liabilities. Ownership liberalization in Bill C-8 would clearly enable a smaller firm to be taken over by a larger entitiy that, in turn, could provide capital for branch acquisitions.

Finally, ATB Financial has a long, rich history of offering competitive alternative financial services to Albertans. As I indicated earlier, we offer a menu of financial services similar to those of credit unions and the chartered banks. With respect to bank mergers, we would be an interested buyer. As a rule of thumb, the number of branches in a region compared to the total number of branches is a good proxy for market share. Calgary and Edmonton are markets where we are currently underrepresented. Therefore, in the event of an allowed merger, ATB sees opportunities to increase its market penetration through possible mergers of branches and an opportunity to attract customers and staff, either through negotiated transactions or general dissatisfaction arising from a large merger.

Thank you for your attention. I look forward to questions.

The Chair: Thank you very much.

Now we'll hear from CS CO-OP (Community Financial Services). Please commence.

Mr. Gary Seveny (President and Chief Executive Officer, CS CO-OP (Community Financial Services)): Madam Chair, committee members, I want to thank you for inviting us to appear before you this afternoon to present CS CO-OP's views on the public interest in Canadian bank mergers.

An efficient competitive financial sector is the backbone of a successful modern economy, and it is imperative that the process for considering bank mergers and the meaning of public interest be as clearly understood as possible. CS CO-OP offers a perhaps unique perspective on the issue of bank mergers. We are both a customer of two major Canadian banks and a competitor of all banks in the provision of financial services to Canadians.

Let me begin by talking about our relationship as a customer of big Canadian banks. CS CO-OP is large by credit union standards, but small when compared to the asset size and capitalization of the big five Canadian banks. Because of the differences in our relative size, we often rely on the size and scale efficiencies of Canadian banks to provide products and services we could not offer to our members, our clients, on our own. For example, CS CO-OP and its wholly owned bank subsidiary, CS Alterna Bank, use one of the big five Canadian banks to serve as a direct clearer in the clearing and settlement of payment transactions with our members. We mention other arrangements we have with one or more other banks in our submission.

The key point is that in assessing the public interest impact of a bank merger, it is imperative that consideration be given to business clients as well as retail customers. While the impact of a particular bank merger proposal cannot be foreseen and must be judged on its merits, it is possible that the merger of two or more of Canada's largest banks would translate into lower costs for smaller financial institutions that purchase services from them. Lower costs flowing through to bank customers such as CS CO-OP would enable us to keep costs to our own customers as low as possible, continuing to make us an attractive competitive proposition. In our view, it would be in the public interest to obtain such a result.

Now let's look at the other side of the coin, CS CO-OP and CS Alterna Bank as competitors of the major banks. From this perspective, we see at least two important public interest considerations, the increasing importance of size and scale as a key determinant of competitive success and growth opportunities for us and our other competitors.

As a competitor of the major banks, we understand the desirability of building greater scale and size. In fact, the drive to achieve greater size and scale is an important contributing factor in the rapid consolidation of Canada's credit union system, one of the most significant developments in our community over the past decade. One of the reasons for increasing size and scale is to build the capacity to invest in expensive new technology Canadians have come to expect from us and from our competitors. It is also increasingly essential to competing effectively in the Canadian financial services market against foreign companies. Large multinational competitors, such as ING Direct, MBNA, Citibank, GE Capital, and General Motors Acceptance Corporation, enjoy tremendous market capitalization and scale capacity to be formidable competitors to all Canadian financial institutions, large and small.

There is little doubt that size and scale will continue to be an important issue for the Canadian financial sector in the future. Ensuring that Canadian financial institutions have sufficient size and scale to compete in an increasingly North American, and indeed global, market for financial services is an important public interest consideration.

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Looking now at potential growth opportunities emerging from big bank mergers, we think we are well positioned to obtain additional customers and acquire new assets. With regard to the first, there may well be some customers of the newly merged bank wanting to move their business to a credit union or cooperative bank. We believe credit unions offer more personal service at the local community level, an attractive proposition for bank customers worried about becoming lost in a much larger institution. CS CO-OP would welcome disaffected bank customers. Opportunities for us to acquire branches or other business operations from merging banks might also arise. The recent merger of TD Bank and Canada Trust illustrates this point, with branches in three markets being sold and Canada Trust's MasterCard portfolio being purchased by a foreign bank competitor.

The potential interest of the credit union system and its capability to participate in such new business opportunities should not be underestimated. Although it was not in a merger context, the Manitoba, Saskatchewan, and Alberta credit union systems acquired 48 branches from the Bank of Montreal in 2000. We believe it would be in the public interest to consider how a bank merger might help strengthen smaller competitors in the financial services marketplace. Furthermore, when analysing the potential impact of the big bank merger, government policies aimed at meeting the public interest by increasing competition in the financial services sector should be considered.

One of the forward looking policy initiatives being studied by Finance Canada is the possible creation of a new type of bank in Canada, a cooperative bank. CS CO-OP strongly supports this initiative, and we have provided a detailed written submission to Finance. I know your committee has expressed strong interest in encouraging the development of domestic competitors in the financial services market, including the cooperative sector. In raising the issue of cooperative banks, we are not suggesting that any future bank merger be prohibited until cooperative banking legislation is passed by Parliament. Rather, our interest is twofold. First, it illustrates our point that bank merger analysis requires consideration of future competitive developments. Second, we want to keep you informed of this important matter, given your committee's interest in strengthening the cooperative sector and offering a broader array of competitive choices for Canadians.

In conclusion, I do not want to pretend that we have exhaustively reviewed every factor that might be included in the public interest test, but we suggest that you consider the following four: first, the possibility of lower costs resulting from scale and size efficiencies that business customers of a bank, such as us, may be able to pass on to our own customers; second, the desirability of enabling Canadian financial institutions to compete more effectively in what is becoming a North American, and indeed global, market for financial services; third, the prospect of growth opportunities for competitors by obtaining bank customers and acquiring bank assets; and fourth, the potential for new government policies, such as permitting cooperative banks, to affect the future state of competition in the financial services marketplace.

We at CS CO-OP believe bank mergers do not, by definition, necessarily harm customers and competitors. We are both a customer and a competitor. We see particular circumstances of bank mergers yielding benefits to customers and competitors. I hope we have offered some compelling reasons as to why broad and judicious review of the public interest in future mergers is warranted. We'd be pleased to respond to any questions.

Thank you.

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The Chair: Thank you.

We'll go to the first round of questions, and I think there may be time for a second round.

Seven minutes, Mr. Harris.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Madam Chair.

Ladies and gentlemen, thank you for your excellent presentations.

With the mandate of this committee to deal with the issue of the best public interest, one of the major concerns, as we've already heard, will be from consumer groups, which will be concerned about the shrinking of access to personal banking services, particularly at the retail level. We also have heard, and will no doubt hear again, from commercial customers, SMEs in particular, who have concerns about the shrinking of availability of loans of the SME size, under $1 million, but in particular $250,000 and down. I am understanding from your presentations and the presentation we received from the National Bank of Canada yesterday--and we'll be hearing from the HSBC this week as well--that you are ready to fill any voids resulting from mergers, which you see as opportunities to expand your business. In the areas of consumer access to personal banking services and SME access to borrowing, it appears to me that you do indeed see these concerns as opportunities for yourselves to expand, and what better way to do it than in empty bank branches that could occur as a result of rationalization through mergers, and even, as we've seen, not necessarily through mergers at all? I guess what I'm hearing is that you people can play a major role in this public interest section we have to deal with.

What we need to know is how ready, willing, able, and anxious you are to take advantage of opportunities that may result from major bank mergers in our country.

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The Chair: Mr. Smit.

Mr. Jack Smit: I think there are about 71 or 72 bank branches where the credit union system collectively has filled a gap by taking them over and taking advantage of those opportunities. I pointed out earlier in my presentation that in 330 communities across Canada we're the only financial institution, and that is growing as well as banks are withdrawing from some of those communities. So we certainly have proven our willingness, and will continue to do that.

You raised the SME market, which certainly is a concern. In fact, that's one of the fastest growing segments in the credit union marketplace. Certainly across western Canada, in British Columbia and Saskatchewan and Manitoba, we have a very strong presence in the SME market. Not so much, perhaps, in Ontario, but I would like to point out that since 1997 we have grown 65% in the SME market in Ontario, so it is certainly a very strong growth market as well. In the Atlantic system we account for almost 12% of the SME lending market in numbers of customers served. This is in the brief we presented to the committee; pages 6 and 7 have some interesting statistics on that.

We are very willing to jump into that market and fill the gap, but we do need enabling legislation to do it, and I think that's what I'm pointing out. There's the merger involving British Columbia Central; Wayne is the president and CEO of that, and I'm on the board of the Ontario Central, so we're both very much involved. All the business pieces of that are done. What we need now is legislative ability for us to finalize it, and we need some of that from the federal government, as well as the provincial governments.

Mr. Richard Harris: It was my understanding that the former Minister of Finance was quite receptive to getting that enabling legislation through.

The Chair: Mr. Nygren wanted to comment.

Mr. Wayne Nygren (Director, Board of Directors, and Chair, Legislative Affairs Advisory Committee, Credit Union Central of Canada): Let me take this from a different angle. I think we have in this country banking in two different jurisdictions; we have an urban issue and a rural issue. The urban issue is certainly one that will take care of itself. I think it's the rural issue we would be more concerned about. As the banks have closed or merged, they tend to abandon the rural markets. That's where we have the ability to step in, and that's where we have stepped in in the past, all across the prairies, Atlantic Canada, and in some respects, Ontario. We have been able to buy the bank branches as they have come up. I think they've now come to the conclusion, and a very smart one, that rather than closing them, they're better off selling them to us. We take the assets and the staff, they get good public relations. It's a good deal for both sides.

So I think the rural area will be something that will take care of itself, because there are credit unions in all those locations. As the banks merge, they will basically go out of those markets. There will be a buyer in those rural areas, the credit union system. In the urban market I think there's a different scenario, where the banks will merge and just close the branches down, because the branches are so close to each other that business will just move to another branch of the merged organization. So I think the committee has to look at two different scenarios, what banking should be and has to be in rural Canada and what the whole situation should be in urban Canada. In British Columbia, for example, the lower mainland market is totally different from the rural market outside the lower mainland. We're certainly prepared to step into the rural area. I don't think we'll be given the opportunity to step into the urban area, because other banks will take it, or they will move their customers to another branch close by when they close the one that may be four or five blocks away. That's why we need to have the legislation in place that will allow us to set up an infrastructure to support our keeping, especially, the rural branches open with efficiencies and service levels.

º (1615)

The Chair Thank you very much.

[Translation]

Go ahead, Mr. Paquette.

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

Thank you to the witnesses for their presentations. Unfortunately, I missed part of what they had to say, but I have familiarized myself with the main recommendations and I have a clear understanding of the broad approach advocated by the institutions you represent. Obviously, those involved in the co-operative sector believe that big bank mergers will translate into a loss of certain services that co-operatives will be able to take over, expanding in the process their share of the consumer market.

Having said this -- and this is a very broad question, since you touched on the subject in your submissions -- most co-operative credit institutions are currently in the process of reorganizing or restructuring. What guarantees do we have that the co-operative movement will be able to fill the void, particularly in the case of outlying communities and the most vulnerable consumers, resulting from branch closures which inevitably follow a bank merger? As you noted in all of your reports, the goal of a bank merger is to realize economies of scale, to free up funds for further acquisitions, and so forth.

First though, I'd like to hear your response to the following question. As a committee, can we expect to see, as part of a reorganization of the services provided by different co-operative institutions -- this is true in Quebec and most everywhere else - the substitutions to which you alluded in your briefs and, as we're currently seeing in Quebec, although I can't speak for the rest of Canada, ATMs in corner stores where users without access to traditional banking or co-operative services will be charged exorbitant fees?

[English]

The Chair: Who would like to start?

[Translation]

Ms. Madeleine Brillant.

Mrs. Madeleine Brillant (Vice President, Corporate Affairs, CS CO-OP (Community Financial Services)): Members of the committee, that observation is interesting in that a number of reorganizations are currently taking place within the co-operative movement at the present time. You're correct in saying that these reorganizations are fairly extensive. The changes taking place are fairly significant and are currently happening at credit union branches. This won't stop mergers or acquisitions from going through. Under the circumstances, further to the representations of the Credit Union Central of Canada, any assistance provided by the government to facilitate any requested government or legislative changes would certainly be welcomed. However, as you know, in business, particularly in the world of financial institutions, change is a fact of life and a regular occurrence. In my opinion, it doesn't stop mergers or acquisitions from happening.

[English]

The Chair: Ms. De Laurentiis.

Ms. Joanne De Laurentiis (President and Chief Executive Officer, Credit Union Central of Canada): I would like to make just three points with respect to the English Canadian credit unions. We are not competent to comment on the nature of restructuring of the Desjardins, because we do not represent the caisses.

First, as my colleague has said, when you look at the number of communities where there are only credit unions across Canada, there are 330.

Second, when you examine the governance structure of the individual credit union, it is community-based. It is the member-owner who determines the business and the direction of that credit union. There is no central Canadian office or head office that dictates to the individual credit union what business it shall be in or not be in. You want to think of them as independent and very community-responsive. So to that extent, I think there is almost a structural guarantee that they are looking after the interests of those communities.

Third, when we look at the corporate restructuring, if you will, that is in place, our major initiative, the B.C.-Ontario merger, is really designed to guarantee to the individual smaller credit union a supplier of products and services. We would cite that as evidence of the commitment and the intent to ensure that those individual credit unions, in particular the small ones in the smaller communities, are guaranteed a steady and reliable supplier of services and products.

º (1620)

[Translation]

Mr. Pierre Paquette: I detect something of a common theme running through your submissions, a call, if not always for legislative changes, at least for the creation of co-operative banks. One of the submissions, specifically the one by the co-operative movement, states that legislative changes should not delay any decisions in favour of bank mergers. That seems like a somewhat unusual stance, given that if the ultimate goal is to have co-operative banks, the co-operative movement should be calling upon the federal government to bring in legislation to strengthen the co-operative movement before authorizing the banks to merge and to divest themselves of part of their holdings. I read this in the brief in question. Perhaps you'll recognize the particular passage:

By raising the issue of co-operative banks we are not suggesting that any future bank merger be prohibited until co-operative banking legislation is passed by Parliament.

On the contrary, would it not be more prudent to ask the government to pick up the pace on this issue, before taking action on the bank merger question?

[English]

Mr. Gary Seveny: We are very much advocates of legislative change to allow for cooperative banking, and we would like the timetable to accelerate, obviously, but we don't think it should come with conditions that bar other institutions from getting on with their business. We've taken a very collegial approach with the committees, the government, the bureaucrats, the policy-makers, and the regulators, and we are making progress. We have not found that taking an adversarial position is beneficial at all. We think it's probably good business process to work with, rather than to hold up and put a condition on, a process. But that's purely our position as an advocate for this change: we don't want to hold up others in their business.

The Chair: Merci beaucoup.

Now we will go to Mr. Wilfert for seven minutes.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Mr. Smit, in your presentation you talk on pages 13 and 14 about the need for competitive balance, and if I read your comments correctly, you're suggesting that for the public interest, we really need to have the structural elements in place before the bank merger issue is dealt with, in order to make sure the second tier entrants have a reasonable chance of moving ahead. Is that correct?

Second, what elements are you suggesting need to be in place to ensure that the public interest is going to be addressed, given your comments on the competition issue?

Mr. Jack Smit: We are saying it's important to ensure that there is a competitive balance out there and that as credit unions, we're able to fill that gap. So we would ask for a very speedy passage of the enactments we're asking for.

The highest priority for us right now is removing the impediments that would enable us to merge the two centrals, British Columbia and Ontario, because we have been working on this now for about two years and we need to finalize it. British Columbia and Ontario do represent 65% of the credit union system outside Quebec, so I think the two provinces are significant, but also our vision is that this will be the national central facility credit unions will use. As I indicated, we have already had indications of interest from other provinces in joining this organization. What that will enable us to do is strengthen the ability of credit unions to compete, by adding products and services to our suite and providing competitive services to credit unions in the area of payments and treasury that would make them more competitive. So we need that merger to position us for that.

º (1625)

The Chair: Mr. Nygren.

Mr. Wayne Nygren: Let me just give you what the problem is. At present the credit unions are provincially regulated. The centrals, the organizations we want to merge, are regulated by their province, and partly federally. To be competitive, we have to move the centrals into a federal environment, so we have to move them from provincial regulation to federal regulation. We have the problem that the credit unions are federally regulated; they're insured by the province where they reside, whether it's Ontario or British Columbia, yet their banker will now be federally regulated, because we have to be able to move money back and forth. We have to be able to build a national entity that will reduce the costs to the credit union system. If we want to keep these credit unions independent, we have to reduce their costs. We have to get a major supplier to them with consistent and competitive pricing; otherwise, they have no place to go for services.

This has never been done before, that the province regulates the organization and the feds are asked to regulate their supplier, their banker. British Columbia's agreed to do this. We're working now with Finance in Ottawa to allow us to do it. Otherwise, we can't put the deal together. We're very pleased with the support we've received from Finance. The Ministers of Finance have been very positive, the Finance people have been very positive. It's just a matter of getting the time. The deal has been done with the provinces, the membership has approved it, but we don't have the legislative authority to do it. In other words, we're saying, before you let all these mergers go through, give us a chance to get our infrastructure together, so we at least can compete with the new mergers.

We're doing really what Harold MacKay outlined in his report, where he said the credit unions were basically an underperforming system, mainly because of their operating structure. We're trying to change that. That's what the legislation is about, moving provincial to federal, and the province has to be comfortable that if we move the banking system to federal jurisdiction, if we need the money in Alberta or in British Columbia or back in Ontario, it'll be there from the federal jurisdiction. That's our challenge.

Does that answer your question?

Mr. Bryon Wilfert: It certainly goes a long way towards answering my question. It sounds like a bit of a catch-22, but I think I hear you saying there is some light at the end of the tunnel.

Mr. Wayne Nygren: It's never been done before.

Mr. Bryon Wilfert: It's never been done before. It's not like the Pacific Western case, where they were a credit union and they went to become a bank under the Bank Act--what did that mean for them?

You made a comment, Mr. Nygren, with regard to the urban-rural divide, and I want to follow up on that, particularly on the rural aspect. I would concur with your comments, I think, generally on the urban aspect. There's been some suggestion that we might recommend some specific numerical thresholds with mergers, particularly regarding the rural component, where we don't want to wind up with a monopoly situation. The oil industry is an example in some parts of the country, like Atlantic Canada. We don't want to see that happen necessarily. So what would you recommend for addressing particularly a rural or remote community situation? I'm thinking of northern Canada, where new entrants and foreign entrants are not necessarily going to go. How do we deal with that problem, from the public interest standpoint?

Mr. Wayne Nygren: In rural Canada, as the banks pulled out in the 1920s and 1930s, the credit unions and caisses stepped in to fill the void, and they've done a very good job. A lot of the communities are being served by financial institutions, especially credit unions. As the banks are pulling out of that, they've realized now that the better option for them is not just to shut down and walk away, it is to sell to somebody else. We found with the 72 branches the credit union system purchased from the banks, I guess a year and a half ago, that this is going to be a more prominent model for the banks now. And we'll be there. We have the ability to pick up these branches, pick up the staff, pick up the facilities, and the community has a financial service there. So I think in rural Canada, for the most part, the banks, when they merge, will not be a negative aspect, because there will be somebody there to fill the gap.

º (1630)

Mr. Bryon Wilfert: Mr. Nygren, can you provide an analysis very quickly to the committee, in light of what you've just said about the last 18 months, that might be of assistance in that regard?

Mr. Wayne Nygren: We bought 72 branches of different banks. In my province alone there are almost 40 communities now where the only financial organization is a credit union. A lot of those had just banks there, but we stepped in. This is not a money-maker for us. Obviously, that's why the banks have moved out: you're not going to make a lot of money in a small community. But at least we're there, we can cover our costs, we can meet our regulatory requirements, and the critical thing is that we can provide service in that community they would not have otherwise.

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

We'll now move to Mr. Cullen, seven minutes.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair, and thank you to all the presenters.

Mr. Ascah, would your organization be interested in opportunities only in the province of Alberta, or would you look to expand?

Mr. Robert Ascah: Under our legislation we can only establish branches within the province of Alberta.

Mr. Roy Cullen: Okay, thank you.

I think the intent of Bill C-8 was to try to create more competition; there was a lot of hope for the credit union movement, and it has been slow in coming. Help me understand better what role credit unions can play in a more competitive environment. Will this merger, for example, and some of the branches you picked up from the Bank of Montreal give you the platform you need to have for national products and services? I go back to Ms. De Laurentiis's point that credit unions, by definition, are locally based, locally responsive, locally owned. What is the scope for you to have national products and services that will provide the extra energy to create more competition and choice for Canadian consumers?

Mr. Jack Smit: We're different from the banks, in that our members are owners, shareholders of credit unions and we have local autonomous units. That gives us a lot of strength in the communities where we are. As Mr. Nygren pointed out, we're not necessarily driven by return on equity, but by providing services. Certainly, if we don't make a profit, we're not going to be in business, but we only need to do that in order for us to have a sound capital base and to grow.

Mr. Roy Cullen: Are you resigned to the role--it could be a very important role, I'm not refuting that--of picking off branches across Canada, or are you fixing yourself on the objective of being able to provide national products and services and really give it a lot of juice?

Mr. Jack Smit: We have a number of organizations that do provide national products and services and scope. We have the Credential Group, which is owned by the credit union system, that provides for mutual funds and brokerage services. We have an insurance company, CUMIS, that's a national company. We have the Co-operative Trust Company, a national company providing trust products and services. So we have a number of companies that have the ability to provide the products and services. The merger between Ontario and B.C., which we see other provinces joining, is another vehicle to have national products and services we can supply to the credit unions locally. So we can maintain this governance at a local level and have the strength of being local, being in our communities, and at the same time, have the vehicles in place for us to provide national products and services, as you indicated.

º (1635)

Mr. Roy Cullen: I was thinking more of the retail level, bank drafts, clearing cheques, all those sorts of things, where there's commonality. You'll be able to move in that direction?

Mr. Jack Smit: In fact, we are there, we provide all those services. This initiative is just an enhancement of those types of services. We have a wide ATM network. As a matter of fact, credit unions on a number of occasions have been first in providing different retail financial services.

The Chair: Mr. Seveny had a point, and then I'll go to Ms. De Laurentiis.

Mr. Gary Seveny: I think we're talking here not just about products and services, but about channels and how to deliver them with consistency, and we're all working on national scope in such a case. There are numerous projects under way. This merger between the two centrals is going to give a tremendous boost to the capability for creating the channel to deliver standardized projects. Mr. Smit has given some very good examples of key products we do deliver nationally in the credit union system, but we're also striking alliances with other organizations that can actually provide distribution to all the areas you just mentioned and then some without incurring bricks and mortar delivery costs. So if we can strike those types of alliances--though we're under confidentiality on some of these projects--we will be able to deliver into the Northwest Territories or Nunavut, into Quebec and the north, into Newfoundland, into all the western provinces in remote areas. A very good distribution system is being worked on to deliver consistent national channel services of all types.

The Chair: Thank you.

Ms. De Laurentiis.

Ms. Joanne De Laurentiis: Absolutely, the credit unions are able to offer the breadth of banking services you would get at any branch. We want to make that point very strongly. But in addition to that, for example, the Interac network you're all familiar with, and the credit unions have an enhanced layer that is below that Interac system through which they do share deposits, a shared activity that the Interac system has not delivered to date. There are several enhancements like that within the system that offer any member of a credit union exactly what they might get at a branch and more.

The Chair: Thank you.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Again, welcome to the committee, everyone.

I'd like to ask something of the Credit Union Central. From looking at your numbers here, in Saskatchewan about 60% of our population belong to credit unions, I think in British Columbia it's about half the people of the province, in Manitoba around 45%. In Ontario it's only about 14%. Can you tell us why you aren't stronger in Ontario, what your plans are in Ontario for trying to expand the credit union movement, and whether or not mergers of big banks might affect this? You talked about buying up branches from banks, and I know the example very well in the prairies with the Bank of Montreal. If there are big mergers, how do you see the follow-up? How many branches might be available? And is Ontario your prime target? I know caisses populaires are not members of Credit Union Central, but how many Quebeckers belong to a caisse populaire? I'm sure it's a majority of Québécois. So Ontario stands out like a sore thumb in the credit union and caisse populaire movement in our country. Why is that, why the failure, why has the success not been higher, and what are the plans in the future?

Mr. Jack Smit: When banks had withdrawn in the 1920s and 1930s from some of the markets in western Canada, that's where credit unions built their market share, because people were very suspicious of the banks withdrawing from the markets. Ontario has always been a bank stronghold. The major competition of the banks has always been focused in Ontario, and that's why it's been the most difficult province to develop for credit unions. But we do have a growing market share, and I think, as you're pointing out, the opportunities are in Ontario. That's certainly part of our merger with Credit Union Central of British Columbia, which has a very large market share and has developed a lot of products and services for the credit unions. We hope we will thereby have the ability to expand our market share in Ontario. As I pointed out, the banks are getting larger, they're withdrawing from communities, they're withdrawing from communities in rural Ontario. I'm from London, Ontario, and in our district there've been a number of bank closings. Those are the opportunities that will be provided for us to fill those gaps and build our market share, particularly in the rural communities.

º (1640)

Mr. Lorne Nystrom: Mr. Nygren certainly knows a bit about my background. Like Bill Knight, I come from rural Saskatchewan and grew up with credit unions and the Co-op and the Saskatchewan Wheat Pool and the whole philosophy that entails. With expanding in Ontario, can you do this without becoming just like another big bank? You have a mission statement that says, put people before profits, service ahead of profits, and so on, but can you make that big breakthrough in Ontario and be true to your mission statement, not just becoming like another bank in how you service people? You do have that different culture in Ontario, with the banks having such an impact in the province.

Mr. Jack Smit: Certainly, the competitive environment, as you pointed out, is different in Ontario, but the democratic principles we're governed by and the values we use are not unique to any province, they're shared in all the provinces. I think those values will keep on driving us. We have the ability to remain autonomous, so that it's a community of owners, while at the same time, through vehicles like our centrals, like Opco, having the ability to enhance our competitive position through more economies of scale and more products and services on a national basis.

Mr. Gary Seveny: Mr. Nystrom, I'd like to respond, as we are an Ontario credit union that established a bank in October 2000 to move beyond our markets in Ontario. We have a good market share here in the national capital region, but we need to make it even greater. We compete very strongly with the major chartered banks, and our market share would be equivalent to about 18% in the national capital area by segments.

On the point of a mission statement, people before profits, we've gained a lot of experience in our industry through the years, and we have had to put our members' security and safety first and foremost, which means we have to be first profitable, to put retained earnings on the bottom of our balance sheet, so there's a capital foundation for the strength of the credit union. We are extremely limited in raising capital in the public marketplace compared to a publicly traded bank. So we have to be profitable, but we don't generate the types of profits, even by ratio, the major chartered banks do. It's incumbent upon us, for our shrewd members and investors, that we be profitable; otherwise, they'd lose confidence in the institution.

Mr. Lorne Nystrom: I don't disagree. Of course, you have to be profitable. In fact, Wayne was saying that in the small branches a big thing is service to the people, but you have to be profitable to maintain that institution there. Maybe you misunderstood what I was getting at. I think one of the great missions of the credit union movement is that the primary thing is to serve your membership. You can have a very efficient organization that does make a profit, but it's not making excessive profits, as some of the banks do from time to time. There is a different philosophy there, and that's why the whole credit union movement originated many years ago. Obviously, you have to be profitable to stay in business, but it's a matter of what the real motive is, and I think the service of people is the basic motivation of a credit union.

º (1645)

Mr. Gary Seveny: I think we have earned a reputation that echoes exactly the terms you're using. Moreover, we've earned trust from our clientele in all the trading areas we're in. You hardly ever hear of a credit union anywhere extracting itself from a community. So we create a lot of confidence. Our marginal amounts of profit, compared to others, is something some people seek us out for, for sure.

The Chair: Thank you very much.

Now we'll move to Mr. Murphy.

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

I want to thank everyone for the excellent presentations.

Mr. Ascah. I enjoyed your brief. Your organization certainly has a long and rich history in the start of the social credit movement in Alberta. Alberta has an involvement in lending to a level you don't see in other provinces, through the Alberta Treasury Board branches, and I want to probe the reasons for that. When you have politics and men and money, it's generally a very unholy marriage, and the closer you let the politicians to the loan ledger book, the more trouble you can get into. I believe you've had some of your own issues in the last 10 years in that regard. A lot of people would say, why is government involved in lending money? I guess the answer is that you must see a need that's not being met by conventional financial sources. So that is my first question to you, sir. Why is the Government of Alberta involved in the business of lending money?

Mr. Robert Ascah: I really can't answer for the shareholder, the Government of Alberta. Of course, there has been speculation over the last number of years: what is a Conservative government doing with a private sector financial institution? As I said in my brief, there's a rich history of an agrarian protest movement, with foreclosures in the thirties, and this was a vehicle that allowed the government to provide some financing based on the deposits of Albertans. It's interesting to note that in the initial years they did not lend money, they were taking money on deposit, and there was an incentive system to bring in deposits. It wasn't until 1941 that they began lending money.

To come at your question in a different way, as I indicated in our brief, there is policy direction from the government that ATB is to act independently from the government on operational issues. So other than on broad, strategic issues dealing with our business plan, the government keeps its hands off. I can say quite unequivocally there's no role the government plays in our operations. Our credit adjudication standards are quite similar to those of credit unions and banks. We watch the bottom line very carefully. We're adding value, as I said earlier, to the government, as the shareholder. So it has worked out, I think, very well having a board of directors that are charged with high standards of stewardship and corporate governance. Our board follows TSX guidelines, and we operate the business on sound banking principles, as directed by the government.

Mr. Shawn Murphy: Do you feel, from your experience, you're filling a void that's not being accommodated in rural Alberta by the existing financial institutions?

Mr. Robert Ascah: We certainly are a very large player in rural Alberta. We're the largest agricultural lender in Alberta. We clearly meet the needs of our depositors and our borrowers. We carry on business in a prudent way.

Mr. Shawn Murphy: My next question is to Mr. Nygren, concerning this whole issue of competition and the availability of the credit union movement to fill the void left by the banks if and when they do merge, especially in rural Canada. I believe, Mr. Nygren, you hit the nail right on the head with your comments. We have two areas here, urban Canada, which I think is and will continue to be well served by our chartered banks competitively, and rural Canada. Our mandate is to come up with the proper public interest criteria based upon today's world. What you're saying is, if the banks merge, the credit union movement will be there. But how do we guarantee the public interest? With the part of the country I come from and, I think, the province of Ontario, I don't believe you're there now. What assurances are there that you would be there, and how does it serve the public if you're not there, for instance, when the banks do merge and pull out of certain areas and certain sectors? I'm very concerned about their abandoning a certain sector. When we look at public interest, aren't we going out on a limb to say the credit unions may be there to take up the slack? Because I can see the slack developing, as you can too.

º (1650)

Mr. Wayne Nygren: If you look at the urban areas, whether the banks merge or don't merge, I don't think it's going to effect competition an awful lot, because that market is certainly serviced. There are all kinds of players, and there are probably more service providers than you need in the urban areas. It's the rural areas I worry about, and that's where we're trying to see if we can fill the gap. We filled the gap years ago, and as the banks pull out, we know we have the resources, we're financially very strong now, for the most part, across the country, so we think we will be able to step in and effectively provide the services that are needed in those communities.

The Chair: Ms. De Laurentiis.

Ms. Joanne De Laurentiis: I would go one step further and suggest that a lot will depend on the nature of the mergers, who's merging where, where the impact is. I would make a commitment, on behalf of the credit union system, to work with both the regulatory authorities and the parliamentary committee as the gaps are identified and to talk creatively and concretely about what we can do. Certainly, what you've heard today from all of us on the credit union system side is that there is an appetite to fill whatever void may come. There are certain structural reforms we need to work through. I want to say again that we are very encouraged by the assistance we are getting through the finance department and OSFI. So we are prepared to work with you as those gaps are identified, be they in the sector of small and medium-sized lending or in various rural communities, and come to the table with solutions.

The Chair: Thank you very much.

I will now go to Ms. Leung for seven minutes.

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

I want to thank all the presenters. You had very interesting presentations.

I'm very interested in your credit unions. You did mention the recent merger of Surrey Metro Savings and Coastal Capital Savings, and it's really becoming very large, with assets of $6 billion. Now you anticipate a coming merger. What kind of performance has come with the recent merger? Do you find it shows financial growth and efficiency? How have you improved the consumer services, another public interest criterion?

º (1655)

Mr. Wayne Nygren: We were at 20% to 22% poorer efficiency ratios than the banks about four years ago. We've really narrowed that gap. Part of that is because of mergers. We are becoming far more efficient. This is the real challenge we have. We have two credit unions in British Columbia now, and the two of them have more than 600,000 members, with almost $13 billion in assets. They expect to have a central that's strong. We can't supply their financial needs. They will have to go to a bank to borrow, because they're outgrowing us, unless we have the ability to go federally to merge the centrals, so we can supply the needs of the credit unions. Otherwise, they'll have to start borrowing from the banks and using some of the banking services, which they desperately don't want to do. They don't have an option, because they are merging, and we're hung up with this legislation issue about allowing the centrals to merge to handle them.

Ms. Sophia Leung: Okay.

You did mention you already have cooperation on the provincial side. I'd like you to clarify your working with the federal side. How will we try to facilitate how we can work with you?

Mr. Wayne Nygren: When Bill C-8 was drafted, the drafting didn't allow credit union centrals themselves to become an association and do this type of merger. That was possibly an oversight when the bill was drafted. They had never anticipated centrals merging, they dealt really with the credit union system. That's one of the issues where we have to redefine some of the terminology. The way Bill C-8 is drafted, it doesn't really allow, for example, an organization to be provincially regulated, like the credit unions, and their central bank to be federally regulated. There are a lot of technical issues, but they're very critical. The feds have to be comfortable, the province has to be comfortable that neither is stepping on the other's territory. That's what a lot of the issues are. Bill C-8 was designed to help us, it does help us, but there are a lot of drafting things we have to deal with that were never anticipated about putting this kind of merger together.

Ms. Sophia Leung: Did you express some of the concerns earlier?

Mr. Wayne Nygren: We have filed with Finance all the changes we need, and they are looking at them. There are sections of different acts we need changed, whether it's the Business Act or the Cooperative Credit Associations Act, and they are working very positively. They want us to do this deal, they know the importance of it if we're going to be a competitor in this country, which means having an infrastructure that'll support the credit unions across the country. They are working hard to try to solve this problem from a technical point of view, from a taxation point of view, and from a jurisdiction point of view. There are a number of issues that were never anticipated when Bill C-8 was put together.

Ms. Sophia Leung: You're planning this other merger for the B.C. Credit Union Central and Ontario. Is there any other obstacle you're facing? What is the process right now?

Mr. Wayne Nygren: The deal is done. The asset purchase agreement is put together, the investment lending policies are done, the corporate governance is done, the bylaws are written. Everything is done. The membership in British Columbia approved it 99%, Ontario was just under 98%. But we don't have the legislative environment now to do it. We've taken it as far as we can, and we're held up now by the legislation. Our province is going to introduce legislation this spring, the Minister of Finance told me last week. We're working now with the federal government, because unless they introduce it fairly quickly, we can't do this deal. But Finance is working to try to sort out these operational issues, these technical issues they never anticipated originally.

Ms. Sophia Leung: Thank you.

The Chair: Thank you.

Mr. Casson, five minutes.

Mr. Rick Casson (Lethbridge, Canadian Alliance): Thank you, Madam Chairman.

Thank you, all, very much for your presentations and your answers to the questions. It's encouraging to see that as the world changes and opportunities arise, there are people who are willing to step in and fill some of the demand that exists.

Mr. Ascah, I wanted to get a little bit into your comments on the agency initiative you've used. Your emphasis seems to be in the rural parts of Alberta, and I know that from experience. How do you establish an agency, and what are the criteria? Do you go into existing businesses, where the people who are operating those businesses become the bankers, and are they used as a feeder system into the main branches?

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Mr. Robert Ascah: By and large, they deal with cheque cashing, deposit taking, bill payment--teller services. But an important characteristic, of course, is that you're dealing with a human face, as opposed to a bank machine. We do take loan referrals for our customers from the agents. We were able to deliver the services in a cost-effective way through the agency network because it employs the infrastructure that's in place; it could be an insurance brokerage, it could be a gas bar, it could be a travel agency. And from both the individual entrepreneur's point of view and that of the ATB, it's a win-win situation. I should add that there is quite a wide variation in the nature of the agencies. They can be extremely busy, or they can have three or four or five transactions a day. They may not be open for more than a few hours a day in that particular function.

Mr. Rick Casson: You also indicated that 82% of ATB transactions are done electronically. That, to me, seems like a really high number. Maybe you could comment on how that came to be? Was there some kind of initiative? Was there advertising? I don't know how you would have got to that number. And maybe we could have comments from the other people here on how the electronic system and the Internet are becoming factors in their operations?

Mr. Robert Ascah: In the early 1990s ATB was one of the first institutions to establish a telephone banking system. We have, over the last two or three years, spent quite a lot of money on our Internet banking program, and that allows you to go in and look at different deposits, MasterCard balances, transactions, post-dated bill payments. So a lot of money has been spent on that initiative to make it very user-friendly. I think we are similar to other institutions in the drive for efficiency. Our shareholder does want a decent return on investment. And so we have, through different initiatives, encouraged people to use other electronic means, such as debit cards or Internet banking.

Mr. Rick Casson: Do any of the others want to comment on how much electronic banking is going to become a part of your business?

Mr. Gary Seveny: I'd be pleased to respond.

I don't have our percentages for you, but I can tell you that CS CO-OP has been in the business of accepting electronic transactions for many years, from before it became a popular means. We originated as a federal employee credit union, so we had salary deductions, and that was entirely an electronic transaction. All employers have now moved to what we call a direct pay deposit. So instead of cheque cashing, pay cheques are now directly deposited into financial institutions as electronic transactions. The vast majority of transactions are now direct pay deposit.

Through the Interac work we've all been participating in over the years, direct payment, which is at the point of sale, has become one of the most popular choices of transactions compared to cash or credit card. This has really driven up our electronic numbers.

Further, credit unions have been very much in the forefront of deploying automated teller machines to supplement branches. The take-up rate amongst credit union members has been extremely high.

And as Mr. Ascah indicated, we were also proponents of developing on-line banking systems and telephone banking systems early in the process, and they have taken up a great deal of transaction volume electronically.

In the clearing and settlement systems we've moved from paper to electronic as well. Through the Canadian Payments Association, new structures have been introduced to change from what we call a paper base system for pre-authorized cheques to an electronic exchange of debits and credits. There are still cheques, they're in the clearing, but we're looking at ways, in the broader scope of the CPA, of changing to more efficient systems all the way through.This is not to take us to virtual, it's a process to make convenience for our clients, and the credit union system and ATB have been very much in the forefront of those technological improvements.

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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.

First, I want to say that my comments with respect to the stability of some of the credit unions don't mean that I don't support them. I'm a member of a credit union, so I know it's a fantastic system. But I also know that in the eighties the Ontario Share Deposit Insurance Corporation went around Ontario and amalgamated and shut down quite a lot of credit unions, because they were just not viable or were in debt, were overextended. There were some major problems. I don't know what the situation is today in that environment. I'm talking about Ontario, not other provinces, because I'm not familiar with them. With that in mind, when a credit union is shut down, I'm not sure what happens to the clients.

More importantly, I have to come back to some of the things that have been said. I keep hearing, if there are bank mergers, we will pick up the slack here; we can provide the services in rural Canada, because we're there. Then we find out that in Ontario we have 14% using credit unions, and in Atlantic Canada it might be even more difficult. The central organizations aren't going to buy a branch if there are branches available. It's the local credit union that will have to decide whether or not they're going to pick up a branch somewhere in their vicinity, if there is a credit union there to pick up a branch. The question then is whether the capital would be available in that local credit union or not, and the extent to which it would increase the financial risk or what have you, because they are guaranteed by provincial bodies, not the national body. I find it difficult to square the structure of the credit union with the central bodies, yourselves, saying, we can do these things, when, I think, the actual activity and capital would have to come from the local credit union. If there isn't a credit union in that area where the branches are being amalgamated or shut down, you can't just go in and plunk down a credit union. Usually, they are a creation of the community, as I understand them.

So I'm trying to understand the impact it will have in respect of capital. What percentage of your credit union membership do you think can actually have the capital to pick up branches? Still, it doesn't answer my question about areas--or sectors, as my colleague Mr. Murphy says--where there are no credit unions. How do you create them? You can't just buy a branch in a vacuum.

The Chair: Ms. De Laurentiis.

Ms. Joanne De Laurentiis: I would just comment on the Ontario situation. The early eighties were the dark days for financial institutions. We had a bank failure in the west, in Ontario--and I was involved in the ministry at the time--three trust companies failed, and credit unions were not in great shape. Since then, however, the balance sheets of the Ontario credit unions are very strong. They've been growing by about 9% a year. So there's a great deal of strength within the system. There were structural changes made, so that it's a very different system today.

With respect to the question of purchasing branches, when we look at the 72 branches that have been bought, the centrals do play a role. And I'll turn to Mr. Nygren, because he can speak from personal experience on what they did in B.C.

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Mr. Wayne Nygren: In British Columbia, Saskatchewan, Alberta, Manitoba the centrals bought the deal. We bought all the branches from the central's finances, and if there was a credit union in the area, that credit union automatically got access to buy that branch. If there was no credit union in the area and there was just one bank branch in that community, the credit union that was closest to it had the opportunity to take it over as a branch. The customers of the bank were then signed in as members of the credit union. We took over the staff, the building, the premises, put our credit union sign on the outside, and came in and did whatever we had to do to renovate, to change it. We made it a branch of the closest credit union. The credit union then paid the central back.

Ms. Maria Minna: Okay, but in areas where the credit union system is quite sparse--and that's one of the concerns we have--the bank in merger may pull out of certain sectors, and then what happens?

Mr. Wayne Nygren: When we bought the branches, even if the credit union was 100 kilometres away or something, even in remote Saskatchewan or British Columbia, that credit union would just take the bank branch and make it a branch of the credit union.

Ms. Maria Minna: And they would manage it remotely?

Mr. Wayne Nygren: They would just take it over and make it a credit union. The members would take over the deposits, take over the loans, and effectively make it a credit union. The customers then would sign on, the credit union would pay the membership fees and would become a member.

The Chair: Mr. Seveny wanted to add a point.

Mr. Gary Seveny: Since we're speaking about Ontario and the prospects of acquiring opportunities in communities that might be distant from a credit union, CS CO-OP has some experience. We have acquired locations where other financial institutions would likely not go in. For example, Camp Borden, a very limited market, and Petawawa are two military areas where we served the federal government originally, but also we've moved into areas beyond that. We acquired a caisse populaire in Pembroke. We stretched our operations to where we didn't have operations, because we saw there was an opportunity of making an acquisition to expand our business into another market. Rather than starting with just one client to build the business, it was better to buy a pocket of business.

Credit unions are businesses. We view our growth into markets as business opportunities. If we can make a business work in a smaller community, we will, and credit unions have the reputation for making things work in the smaller communities. That doesn't mean we don't go after the heavily populated areas. We have done so. CS CO-OP was originally a National Capital Region organization, but we branched out to Toronto quite some time ago, an extremely difficult market for somebody who's headquartered in Ottawa, and even for somebody who's headquartered in Toronto. It's a highly competitive city, a bank on every corner, four banks at every intersection. It's very difficult to compete in those types of markets, but we do compete, and we compete well. We compete on the commercial side. We've expanded our business with small and medium-sized enterprises such that it now occupies 25% of our assets, and we've done that in a three-year period.

What we have delivered, the network of credit unions across Canada, speaks volumes about what we do. Our reputation is on the line, and we do not try to extract from a community if we can avoid it, because that's damage to our reputation.

Ms. Maria Minna: Thank you

The Chair: Mr. Grose, five minutes.

Mr. Ivan Grose (Oshawa, Lib.): Thank you, Madam Chair.

Actually, Ms. Minna got into the area I was questioning. Chartered banks have shareholders and depositors. Your depositors are your shareholders. That limits your access to capital, and from what I've heard here today, you're getting into markets chartered banks have got out of, for one reason or another. I'm wondering if you're going to have a lack of capital. My experience with a credit union was many years ago, and they were forever in debt to the chartered bank. That's where they got their money, and really, they were recycling the chartered bank's money. No matter how many credit unions you put together, it's not going to assuage that capital problem, I don't think. Please assure me that you've already considered that.

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The Chair: Mr. Nygren.

Mr. Wayne Nygren: I think your question is a good one. We're always aware of it. We have built mechanisms over the last number of years where we can get capital. Credit unions can issue shares. The credit union system, for the most part across Canada, has been extremely profitable. At the Credit Union Central of British Columbia we have the same credit ratings the big banks do for our short-term paper and a strong A-plus for our long-term paper. We've been able to borrow almost $1 billion on the open market because of this. Our retained earnings in the system have become very strong. Our BIS capital is well above industry standards. So we have, for the most part, been able to expand our business as a result of our retained earnings. Our profitability has grown just as fast and been fairly strong in British Columbia, where the economy has been extremely slow, and we've been able to put a fair amount of money into retained earnings to make sure we have the capital.

Still, that is a real concern for us, and we try to deal with that issue all the time. If we had a phenomenal growth spurt, it probably would outpace our ability to generate enough retained earnings. That's why we're looking at our cost side, to bring our expenses down, and we have the ability to issue membership shares in our system. A lot of credit unions haven't chosen that option, but at least it's there, it's available to them, and if they need to go to the market, they can. Our system is extremely strong. We don't have a problem with closing credit unions down, and if we have, we've just had another credit union take them over, and our stabilization fund just takes the credit union over and subsidizes the new credit union to come in and take the business over.

Mr. Ivan Grose: Thank you very much. Those are the figures I wanted to get on the record.

Thank you, Madam Chair.

The Chair: Mr. Cullen.

Mr. Roy Cullen: Thank you, Madam Chair.

I'd like to come to the process of bank mergers in a moment, but with Bill C-8, it seems to me that prior to that there was an initiative under way with the co-op movement to try to create more opportunities, then one of the big co-ops, VanCity, I think, dropped out, then we got close to Bill C-8 and that couldn't be done, and the merger created a lot of jurisdictional issues. But I hope this committee sees fit to support your efforts to get that going, because if banks do come in and merge, we want a strong and broadly based cooperative movement.

Mr. Seveny, I don't want to get into this right now, but I think a co-op bank is different again. There were some governance issues at time, and hopefully, they've been squared away.

I'd like to come back to the process. Some would say that after this committee has spelled out the public interest criteria we would see, if banks do come in to seek a merger, those criteria are on the table, the Senate committee's criteria are on the table, and we don't really need to have consultations. There are others who are going to argue the opposite, and we'll thrash that out at committee and have a report that will deal with that. But I'm just thinking about the process. The banks come forward with a merger proposal. They have to go through the Competition Bureau. The bureau will say certain branches will have to be divested. When the banks come forward, I'm sure the government and the members of Parliament will want something more from the banks than, there are a lot of people around, and they're going to pick up some of these, especially the rural branches. Will it be a question of the banks then coming forward with, we have agreements in principle that the credit union or this tier-two bank, subject to due diligence, will pick up these branches? What level of specificity is reasonable, given the timing, all the logistics, and the need for parliamentarians to have more than, don't worry, be happy? How do you see that process working?

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The Chair: Mr. Seveny.

Mr. Gary Seveny: Maybe I can take a shot at two elements, first an update on the cooperative banking. We are advocating, obviously, cooperative banking. A paper was released by the federal government in April of last year, and all filings were submitted by October 4. There were 14 filings, all supportive of the cooperative banking principles. The Department of Finance should be releasing in a matter of a couple of weeks or less a position as to whether they're going to develop the proper legislative framework.

On the issue of this process, I don't think it's within our ability to design that process, the cart before the horse or the horse before the cart. I would think smart parties to a bank merger would know what the Competition Bureau is going to get back to them on, and they would line up their ducks by going to alternative organizations, such as ourselves, and determining what the appetite is for certain areas. That's what I think a smart group of two banks would do. I don't think you're asking for something legislated, just what is logical.

Mr. Roy Cullen: Yes, I think that makes some sense. What if there's a credit union movement, but the HSBC might be interested? They'd have to try to work that out, and I think you're right, a smart bank would come forward with those ducks lined up.

Mr. Gary Seveny: The reason, I think, is that they want to get best price, so they want to shop the competition.

Mr. Roy Cullen: Yes, exactly.

The Chair: Mr. Nygren.

Mr. Wayne Nygren: As to how we're approaching Bill C-8, as you recall, we've had a couple of false starts with the community bank, a national service entity. We weren't going to go through that again, and that's why we got our membership approval beforehand. We put the deal together and said, this is the deal. We're not saying, can you put in the legislation, and we'll put the deal together? The deal is done and approved.

I think the banks' strategy is somewhat different. I've been actively pursuing the banks, the head offices, to sell branches to us across the country. There was a real appetite about a year, a year and a half ago, there was a lot of talk with us, and all of a sudden, it just died out. It probably died out for a couple of reasons--I'm just supposing now. One was that they're looking at the mergers: the logical thing to do is to see who our merger partner will be, and maybe, when we start merging, we won't have to close these branches, because there may be another bank we're merging with that has a branch in that area. So I think they'll probably look to see where the cards fall with the big merger of the banks, see where the branch distribution is of those banks, and then say they have these branches to sell because of the merger. When they've done that, we'll be able to activate our process again in saying we'd be interested. We've identified a number of branches we feel we could buy from them across the country.

The Chair: Mr. Ascah.

Mr. Robert Ascah: I just want to make a general observation to give some context for this discussion. If you look at two very large banks merging to create a $500 billion or $600 billion Canadian bank, it would not be unreasonable to assume that the Competition Bureau may wish $50 billion to $100 billion in deposits to be divvied up, so if you take a premium to deposit of, say, 5% to 7%, that's $5 billion to $7 billion. That's a tremendous amount of money, capital, that would have to be raised. To amplify my earlier comments, it's important for financial institutions to have critical mass in their operations, and so if any solution is going to take place that'll involve a lot of different players, the credit union system, foreign banks, entities like ATB, entities from the commercial retail sector, like BC Financial, that have more access to capital, I think capital is going to be a major issue here.

The Chair: Ms. De Laurentiis.

Ms. Joanne De Laurentiis: With respect to the branches and the sale of branches, I think it is legitimate for this committee or the government to expect some conditions on those sales. I certainly have heard anecdotal evidence, not concrete evidence, that if they are left to their own devices, there may be some creaming off of the good business and putting it elsewhere. So I think it would be legitimate to put certain conditions on how that sale and transfer will take place, to ensure that whoever is picking up the slack is starting off with a good base.

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The Chair: Okay.

On behalf of all the members of this committee, thank you for preparing your briefs, taking the time to come here today, and answering our questions. We will continue for the rest of the week to hear from the rest of our witnesses.

We go, committee members, tomorrow afternoon from 3:30 to 6:30, because we have the addition of one bank in the afternoon.

We are adjourned for today.