This article was originally published in Maclean’s magazine on April 27, 1998. Partner content is not updated.This time, Paul Martin kept his cool. Last January, the Bank of Montreal and Royal Bank announced plans to merge and create one superbank, with assets of $453 billion.
This time, Paul Martin kept his cool. Last January, the Bank of Montreal and Royal Bank announced plans to merge and create one superbank, with assets of $453 billion. One problem was that they didn't bother to tell the finance minister of Canada - who has the power to block them - until about an hour before they went public. Martin was apoplectic and immediately began talking tough. "Yeah," he agreed last week, "I wasn't thrilled." So when the Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce were preparing to make public similar plans last week, they were more careful. At 4 p.m. the day before their announcement, bank officials tipped off Jim Peterson, the secretary of state for financial institutions, and Scott Clark, the deputy finance minister.
Several hours later, CIBC chairman Al Flood and TD Bank chairman Charles Baillie spoke jointly to Martin, who was in Washington at a conference of finance ministers from the G-7 group of leading industrial countries. Their handling of relations with the finance minister may have been better, but in practical terms the outcome was no different. In a Maclean's interview, a blunt Martin insisted: "Just because they decided to get into bed together doesn't mean that I have to bless their union."
In short, Martin's message is that Ottawa - not the banks - will decide what comes next, and when. "There will be no mergers in the banking sector until we are convinced that is what is best for Canadians," added the minister, "and we will not be stampeded into making that decision." That message was reiterated by Prime Minister Jean Chrétien, who was in Chile for a meeting to discuss free trade. But despite such assertions, the consensus on Bay Street - and even among many of the government's own supporters - is that the banks are setting the agenda while Ottawa follows, however grudgingly. "The real issue," suggested a senior official at another bank, "is not whether the Liberals approve these mergers, but what conditions they will attach and how long they take to do so."
Privately, some Liberals agree. "At a certain point," said one backroom associate of Martin, "you need to accept the inevitable and make the best you can of it." The inevitable, in this case, likely means allowing the TD and the CIBC to join forces, becoming a single institution with about 74,000 employees and assets of $460 billion. At a Friday news conference, Flood said the proposed deal "ensures that jobs, investments, dividends and taxes generated by the new bank continue to benefit Canadians."
It also means that if both recent mergers are approved, Canada's two new megabanks will control 70 per cent of the country's banking assets between them. By itself, the CIBC-TD bank would have 10 million clients. Those numbers led to concern from critics - including Peter Godsoe, chairman of the competing Scotiabank, who observed that the two new banks would create a level of market share that would be "unacceptable" in many other countries. In any event, neither merger will happen until at least 1999. That is because the government is awaiting delivery of a report on reform of financial institutions this September, and then Parliament is likely to discuss the issue until at least the end of the year. Any merger requires the approval of regulators including Martin, the federal competition bureau and office of the superintendent of financial institutions.
The price for approval would almost certainly involve a variety of demands, according to federal government sources. For one, the Liberals could insist that merged banks commit to maintaining their payrolls and branch networks at existing levels for a specific period of time - such as three or five years. The Liberals are also preparing legislation that would ease the terms under which foreign-owned banks operate in Canada while widening the range of services they are allowed to offer. In addition, they could push the new megabanks to divest some or all of the holdings they have in brokerage companies. (Already, there are rumors on Bay Street that Nesbitt Burns Ltd., which is owned by the Bank of Montreal, will either go public or be sold to Merrill Lynch Inc. of New York City.) For now, Martin declines to discuss specifics, saying only: "We are studying two things - whether mergers are a good idea, and if they are, under what conditions to allow them."
What a difference a year and some financial wheeling and dealing can make. Last summer, Martin privately rebuffed a merger bid from CIBC and Canada Trust. His resistance seemed to harden after the clumsy and controversial fashion in which the Royal and the Bank of Montreal announced their own marriage plans. That announcement triggered loud grumbling in the Liberal caucus and opposition from many consumers. Martin later told associates that the reason he was furious at Bank of Montreal chairman Matthew Barrett and his counterpart at the Royal Bank, John Cleghorn, was "not that they didn't tell me in advance, but that they bloody well tried to jump the queue and break the rules everyone else was obeying."
But an air of inevitability began to set in earlier this month after two U.S. financial giants, Citicorp and the Travelers Group Inc., announced plans to merge. That immediately spurred talk of other mergers throughout Europe and North America. As a result, last week's agreement between the CIBC and TD - which had been rumored for months in financial circles - met with less overt hostility. And even though the merged entity would be enormous by Canadian standards, it would still only be ninth overall in North America based on its stock market value. "After Citicorp and Travelers, it became clear that the entire world of banking had just changed overnight," said Ted Neave, a business professor at Queen's University who specializes in the banking industry.
The announcement by TD and CIBC puts pressure on Martin and the federal government to decide not only their fate, but also the future rules that will govern all banks operating in Canada. One much-debated option would be for Ottawa to inject new competition into the industry by granting foreign banks more freedom to operate in this country. But there is no simple formula for boosting the presence of foreign banks. Although more than 40 American, Asian and European banks already do business domestically, most of their business is in commercial lending; with few exceptions, they are all but invisible in the retail banking field. A key reason for that is the maze of restrictive federal regulations governing foreign banks, all of which are now under review.
At present, foreign banks that want to do business in Canada must set up separate Canadian subsidiaries, each with its own pool of capital to back up loans. In place of that system, foreign banks want the power to set up branches that would be, in effect, direct offshoots of their parent companies. Last year, the federal government finally agreed to loosen the rules, but only to a limited extent. Under legislation that is expected to be tabled this spring, foreign banks would be allowed to open direct branches rather than having to create subsidiaries. But those branches could only engage in business lending - not consumer deposit-taking and related retail services, such as offering debit cards and chequing accounts. Now, some observers expect Ottawa to relax the rules in order to allow those activities as well. "At a minimum, they have to look at allowing foreign banks to accept retail deposits," said Julie Dickson, a former senior finance department official and now a financial industry consultant with the Ottawa-based lobbying firm Government Policy Consultants.
Martin confirms that is an option, but he points out that it presents several imposing problems. Chief among them is that branches of foreign banks would, in effect, be operating under the regulatory systems of their home countries, rather than having to obey Canada's rules. That, arguably, is a significant challenge to the notion of national sovereignty - par- ticularly given the fact that, as Martin says, "every major economic crisis that you can think of in the world in recent years has in some way involved the country's banking system."
As it stands, there are wide variations in the degree of protection provided to consumers by banking laws in other countries. The United States, for example, offers a much lower level of deposit insurance to bank clients than does Canada. That means that a Canadian who deposited money in a local branch of an American bank would, in theory, be taking a greater risk than someone who used a Canadian-owned bank. "In effect," Martin concedes, "we would be talking about a case of 'buyer beware' for such depositors."
For that reason and others, government officials are skeptical that regulatory change will in itself lead to a surge in foreign competition to the benefit of consumers and small businesses. In general, banks prefer to focus most of their efforts on services that offer the highest profit margins, including business banking and credit cards. The traditional banking services that involve the largest number of Canadians - ranging from home mortgages to lines of credit for small businesses - are likely to remain largely in the hands of domestic banks.
Despite the problems, a Bank of Montreal official told Maclean's that polls and focus groups conducted for the bank found that consumers were "persuadable" on the need for mergers. For the most part, the official said, respondents are resigned to the likelihood of fewer domestic banks, while looking to Ottawa to ensure that job losses and branch closures are held to a minimum. Perhaps significantly, Bank of Montreal officials and their counterparts at the Royal Bank refuse to release detailed results of their surveys. One Liberal insider said the government's main concern is not a broad-based public campaign against bank mergers, but a more narrow backlash from small-town residents who are in particular danger of losing their local branches.
In the meantime, the speed with which financial institutions worldwide are merging, changing and being overhauled has overtaken the fundamental question of whether bigger banks are necessarily better for consumers - or anyone else. Baillie once opposed a merger, but after the Royal-Bank of Montreal deal, he and Flood began meeting in Flood's family kitchen to work out the structure of a union. As for jobs, although Barrett has said none would be lost in the short term from a merger of the Royal and Bank of Montreal, even Royal Bank officials have estimated that the 92,000 jobs that currently exist at the two banks would eventually be reduced by about 7,400. Others suggest that the number of lost jobs could eventually be double that. For his part, the TD's Baillie predicts his new bank would cut its costs by 10 per cent annually - but actually increase the present level of 74,000 jobs after about five years. But he and Flood provided no guarantees that existing jobs will be protected.
Perhaps the only consolation for opponents is the knowledge that consumers in other jurisdictions share their fears and uncertainties. The Citibank-Travelers merger is not permissible under existing U.S. law, and faces hearings in Congress very similar to those likely to take place in Canada. A bill aimed at overhauling U.S. banking laws was recently withdrawn from the House of Representatives amid opposition from a variety of interest groups, including consumers and the insurance industry.
Ironically, Martin spent much of last week in Washington exhorting his G-7 counterparts to join him in pushing for the creation of a global banking watchdog. The proposed body would have no enforcement powers, but would provide advice to national regulators and sound warnings where needed about banking problems within specific countries and on an international scale. "What we are talking about," says Martin, "is not the creation of another edifice on Pennsylvania Avenue, but rather some form of mechanism to ensure that we all see the rules the same way." So far, he has won qualified endorsement of the idea from both his G-7 counterparts and officials at the International Monetary Fund.
The creation of such an agency, says Martin, "would do a lot towards solving our own dilemma." But for now, that is more of a wish than a probability. In the meantime, there is even more merger speculation swirling around banks and trust companies. The latest, at week's end, involved Scotiabank and Canada Trust. "Our timetable is one the banks agreed to," Martin insisted wearily. "We will decide in our own good time." Never mind a good time: the banks are hoping it won't be a long time.
If the proposed marriage of the CIBC and TD Bank goes ahead as planned, the new bank would adopt the CIBC name and TD Bank colors, and would have:
A market value of $44.6 billion, making it ninth largest in North America and 21st in the world
$460 billion in assets
10 million customers
2.1 million discount brokerage clients
$104 billion in personal deposits
$33 billion in mutual fund deposits
74,000 full-time employees
SOURCE: CIBC AND TORONTO DOMINION BANK
HOW THE MERGERS ADD UP
Share of deposits held by Canada's domestic banks
Royal Bank/Bank of Montreal 40.9%
CIBC/TD Bank 35.9
National Bank 5.6
Laurentian Bank 1.2 Canadian Western Bank 0.2
SOURCE: CANADIAN BANKERS' ASSOCIATION
We will not be rushed
Finance Minister Paul Martin was in Washington for a meeting with his G-7 counterparts when he learned of the planned merger. After the conference, he spoke with Maclean's National Affairs Columnist Anthony Wilson-Smith. Excerpts:
Maclean's: You appeared visibly annoyed when the Bank of Montreal and the Royal Bank announced their merger plans in January. How are you feeling this time?
Martin: I am not angry at anyone. But everyone should understand that just because a merger has been announced does not mean it will take place. We [in Parliament] have to decide if it is a good thing, and we will not be rushed. Just because they decided to get in bed together doesn't mean that I have to bless the union.
Maclean's: Were you surprised by the announcement?
Martin: No. Perhaps by the players involved, to a certain degree, and perhaps by the timing. But it has been clear ever since the first announcement that there would be more, and I suspect we have not seen the last of them.
Maclean's: Is there not increased pressure now to speed things up in Ottawa?
Martin: No. The planned reform of financial institutions is our most important restructuring ever. We must do it properly. The banks agreed to this timetable and they must understand we will follow it. We will receive a report in September, we will debate it in Parliament, and they'll have as long as they need to debate.
Maclean's: Do you subscribe to the notion that for banks, bigger is better?
Martin: No, not as such. We understand the importance of size and the ability that gives to spend on new technology. But we also understand the importance of giving Canadian consumers and bank employees adequate protection.
Maclean's: One option is to allow a bigger role for foreign banks in Canada. How do you regulate them?
Martin: You basically have to rely on the banking regulations of the country where the parent bank resides. If those regulations meet Canadian standards, great. If not, that is where the problem begins. One problem for retail banking with foreign banks in Canada is that it's not the lending that counts, but the deposit. And the rules protecting depositors are made in the bank's home country, so for Canadians in that event, it would be 'depositor beware.'
Maclean's: Is there any way to reconcile those different rules?
Martin: That is the same problem countries face around the world. It is why I am proposing the need for an acceptable form of regulatory body internationally. In a global economy, nations cannot allow ourselves to be sideswiped economically by small countries having difficulties without warning, such as happened in Asia last year.
Maclean's: Do you see any reasonable hope for such a body in the near future?
Martin: Unless we all focus on the need, it will never happen. Everyone accepts Canada's analysis of the problem. Some countries, such as Great Britain, seem to agree with our solution. We will raise this again at another G-7 meeting next month, and I am hopeful.
Maclean's: Why is there suddenly such change going on in the banking sector?
Martin: If you look back at banking five years ago, you might as well look back two centuries. Just a few years ago, you didn't have things like on-line banking, instantaneous transfers, banking in supermarkets, and ATMs everywhere. Now, those are facts of life. Everything has changed.
Maclean's April 27, 1998