This article was originally published in Maclean's Magazine on June 26, 2000
Martin's New Banking Regulations
An optimistic banker might call the new federal regulations on bank mergers an approval process. But there aren't many optimists left in Canada's big banks after the battering they took when two such marriages were rejected in 1998. So the rules set out by Finance Minister Paul Martin last week were greeted by the unhappy lords of the vault as a disapproval process. To say Martin erected hurdles is putting it mildly. What banks aiming to merge will face is more like the regulatory equivalent of an extreme-sports obstacle course: two sets of technical reviews, public hearings run by what would be, in all likelihood, a hostile House of Commons committee, and, in the end, the finance minister himself reserving the power to say yea or nay. "This process means you want to tread really carefully," said former Canadian Bankers Association president Helen Sinclair. "You want to consider whether, in the political world, you are really thought of as a top priority."
Any bank president who still imagines that his merger aspirations rank as a top priority in Ottawa would have to possess an unshakably sunny disposition. But after Martin tabled his mind-numbing 897 pages of financial-sector legislation, the view from the corner offices was distinctly overcast. Of course, most of the big banks - accused in the past of displaying a haughty disrespect for the finance minister - issued carefully worded statements accepting the new regime. It was left to outsiders to voice the sharpest criticisms about how Canadian banks will continue to face political constraints unknown to their bigger, faster-consolidating foreign rivals. "Deliberately leaving such a heavily politicized ingredient in the merger-review process," chided William Robson, director of research at the C. D. Howe Institute, a business-oriented Toronto think-tank, "looks like a shortsighted step."
Martin insisted that, far from shackling the banks, his reforms set the ground rules for a more agile financial-services sector. Once his law is passed - likely late this year, assuming no fall election - banks will be allowed to spin off lucrative niche businesses, such as credit-card units, into subsidiaries that would be less heavily regulated than their main deposit-and-lending operations. As well, banks will be able to form bigger strategic alliances, with a single investor allowed to own up to 20 per cent of a major Canadian bank instead of the previous 10-per-cent limit. David Moorcroft, the Royal Bank of Canada's vice-president of public affairs, predicted some will seek out investment links with Internet service companies. "That's where I see it going outside the traditional financial sector," he said. "The delivery network of the past was bricks and mortar; the delivery network of the future is going to be information technology."
While the banks get new manoeuvring room, so do their smaller competitors. Credit unions will be allowed to link up in new national ventures, and the barriers to launching new banks will be lowered, which could entice major retailers into starting their own lending operations.
Taken together, these changes gave Martin a solid argument that his package is about a lot more than making it tough for banks to merge. "This legislation recognizes that strong, efficient and profitable financial institutions are vital to Canada's economic well-being," he said. In fact, Martin denied that the merger question was even a central concern. Still, no other issue in banking policy generates so much controversy, and it was on this issue that Martin found himself under attack - from both left and right. Conservative MP Scott Brison said Martin has given himself "unfettered power," while the NDP's Lorne Nystrom said he is "making himself a banking czar." But Martin was unrepentant about holding onto the hammer when it comes to mergers. "Ultimately the government of Canada has the right to make the decision," he told the House. "And, obviously, that voice is expressed through that of the minister of finance."
Bank officials, though, privately complained that there is no obvious need for a political judgment on whether two banks should be allowed to join forces. In the United States, a major new financial services law was passed last fall, retaining a merger review approach that involves no public hearings and no explicit political input. In fact, a recent wave of megamergers has reshaped the U.S. banking sector. The unpredictable political component in Ottawa's system makes it far less likely that mergers will be tried. That, said C. D. Howe's Robson, says the new law is at odds with the politically neutral measures that govern most of the Canadian economy. "The rule of law, as opposed to the rule of individuals, is one of the things that distinguishes Canada from a lot of less-fortunate countries," he said. "It enables us to make policy according to clearly delineated regulations - even when popular prejudice might lead you somewhere else."
A popular uproar over bank mergers fuelled a political backlash against the deals proposed in early 1998 between the Bank of Montreal and the Royal Bank, and, soon after, the Toronto Dominion Bank and the Canadian Imperial Bank of Commerce. Liberal MPs rose up against the deals, and the backbenches celebrated Martin's rejection of them in December, 1998, as a victory for the little guy. But Frank Graves, president of the polling firm Ekos Research Associates Inc., says the mood of Canadians was never that clear-cut. His firm's polling at the time showed opinion was about evenly divided, with many Canadians inclined to support the mergers if they were needed to make homegrown banks more internationally competitive - even at the cost of branch closures and job losses. But, Graves says, the banks failed to effectively wrap their deals in the Maple Leaf. "There's a tendency," he observes, "for people in the banking sector not to understand the importance of emotional, ideological, nationalistic factors."
Could some future merger win popular - and political - approval on the strength of Joe Canada's hankering for a banking heavyweight to cheer against the U.S., Japanese and European behemoths? Despite the tough new process, some seasoned observers think a deal could be navigated through the federal labyrinth. Harold MacKay, a Regina lawyer who chaired the federal task force whose report laid the foundations for Martin's reforms, predicts the new rules will be tested within five years. "I don't believe bankers will throw up their hands and say, 'No one can get through those hoops,' " he told Maclean's.
MacKay also defended the role of politicians in merger reviews as essential "given the profile and importance of banks in communities." Perhaps only when that position looks diminished - by the wave of growth Martin hopes to foster from smaller competitors - will Canada's big banks take a chance on testing Ottawa's appetite for mergers again.
Maclean's June 26, 2000