This article was originally published in Maclean's Magazine on September 28, 1998
McKay Report on Bank Mergers
When the federal task force on the future of financial institutions released its anxiously awaited report last week, there was no special delivery to the top floors of Bay Street's bank towers. The banks' representatives had to stand in line at the task force's temporary Toronto offices early Tuesday morning - like clients at the teller counter in one of their branches - to claim their copies. The rule was two documents per customer, a restriction that forced the Bank of Montreal to tear its copies apart into chapters so the right people could read them. The task force's refusal to cater to the bankers who, after all, had perhaps the most at stake in the report, was typical of its approach. Its chairman, Regina lawyer Harold MacKay, says he could not afford to be distracted by the particular needs of the banks. "We tried to look at our assignment entirely through a filter of what will benefit Canadian consumers," he told Maclean's.
If MacKay succeeds in turning attention towards the consumer perspective, his report will have radically altered the course of the debate over bank mergers. Up to now, the uproar sparked by the proposed mergers of Royal Bank of Canada with Bank of Montreal, and Toronto Dominion Bank with Canadian Imperial Bank of Commerce has been mainly about vested interests. The banks stress their need to combine forces to withstand new foreign competition. The Bank of Nova Scotia, the only big bank without a merger partner, attacks the deals for concentrating banking clout in its rivals' hands. Life insurance companies demand greater powers to vie with the banks - even if Ottawa decides to block the mergers. Federal politicians are deluged by well-funded lobbying campaigns from all camps. Whether the politicians can resist the pressure to tailor their decisions to suit one industry faction or another will be put to the test.
MacKay's report offers them a framework for holding consumer concerns above company squabbling. While MacKay recommends that Ottawa drop its unwritten policy of banning mergers between big banks, that key proposal is packaged with a raft of offsetting ideas designed to bolster alternatives to the banks. For example, MacKay calls for life insurance companies, mutual funds and investment dealers to be allowed access to the payments system, the network that allows banks to cash each other's cheques. Opening up the system could eventually allow a consumer to use, say, an automatic bank machine to make a withdrawal from a money-market mutual fund. As well, MacKay calls for more flexible federal rules on the ownership of smaller banks, both to encourage new banks to start up and let existing ones forge strategic alliances with other companies. "All these changes on the structural side are not driven by trying to find ways to help institutions," he said. "It's to provide better service to consumers."
No matter how many of his specific recommendations are accepted, MacKay urges a separate public review of each of the bank mergers. Finance Minister Paul Martin, who has the power to approve or reject the mergers, has already embraced that proposal. But first, the mergers must survive an investigation by the competition bureau, Ottawa's antitrust watchdog. The bureau now has about 100 experts combing the details to determine if they would give the new megabanks too much power to raise the prices they charge for financial services. Its findings, likely to be delivered to Martin in December, will mark the next turning point in the merger saga.
The bureau's director, Konrad von Finckenstein, told Maclean's he expects MacKay's analysis to have a major influence on his findings, especially in assessing the competitive impact of new technology. "The best view we have of some of the market developments, some of the pressures, is the MacKay task force," he said. But that does not mean von Finckenstein is bound to echo MacKay's call for allowing mergers. Unlike MacKay, von Finckenstein must apply strict rules. If either of the two merged banks would command more than 35 per cent of a certain local market for a financial service, such as credit cards in one city or home mortgages in another, the bureau's guidelines assume that competition might be seriously threatened. It would also consider a situation in which any four banks have more than 65 per cent of a particular market to be too much concentration.
Those key thresholds underlie an angry debate brewing between Bank of Nova Scotia and the four merging banks. In a recent speech, Scotiabank chairman Peter Godsoe said the two banks created by the mergers would control 66 per cent of Canada's domestic banking assets - too much to ensure consumers have real choice. But Royal Bank chief economist John McCallum shot back last week that Godsoe's statistic is irrelevant. The figures that matter, McCallum contends, are market shares that take into account all competitors, including foreign banks and leasing companies. By that measure, the four merging banks together command just 43 per cent of Canada's residential mortgage market and 36 per cent of small business loans, he said. In the latest salvo, playing on a key fear that the mergers would mean job losses, Warren Jestin, chief economist of Scotiabank, said 24,000 jobs in Toronto alone could be lost.
Blizzards of such statistics are in the forecast for the fall and winter as combatants in the battle shift to persuading politicians what's best for consumers. This week, the House finance committee and the Senate's banking committee launch hearings into the MacKay report. "MacKay's recommendations are on the technical level," one adviser to Martin told Maclean's. "Now, we need political scrutiny." There will be plenty of that, it seems, with Martin's ultimate verdict unlikely to come until well into 1999. Consumer interests are undeniably at stake, but whether consumers will stay interested through such a long and complex process is another matter.
Tough Guy, Tough Task
Few Canadians have heard of Konrad von Finckenstein, but he is no stranger to public controversy. As the chief lawyer in the federal government's trade office during the negotiations leading to the 1988 Canada-U.S. Free Trade Agreement, he was at the epicentre of one of the most ferocious political debates in Canadian history. Now, as head of the federal competition bureau - which must decide if the proposed bank mergers threaten to put too much power in the hands of new megabanks - von Finckenstein, 53, again finds himself doing delicate policy work in a most unsettled political atmosphere.
He is not the sort of bureaucrat to be intimidated by political turmoil. Gordon Ritchie, the second-highest-ranking Canadian negotiator of the FTA, lauded him in his 1997 book on the making of the trade pact, Wrestling With The Elephant, as "a tower of strength throughout the FTA saga." One lesson von Finckenstein took from that experience: what looks innocuous to experts often can be portrayed as alarming to the public. "I realize from having seen it firsthand how these issues can become political, how the press can become a very important part in the whole decision-making process," he told Maclean's last week. "One has to be very careful so that everything that is done cannot be used by opponents in a negative way."
The bureau's job is to analyze the mergers according to strict rules - any one company controlling 35 per cent or more of a market sets off alarm bells. But von Finckenstein vows that his report will amount to more than dry calculations of market share. "It is no good to use legalistic and economic jargon," he said. "We want people to understand what we are doing and why we are doing it." Still, von Finckenstein is not expected to seek the public spotlight. "Konrad is not particularly open with people," said one former senior bureaucrat who has worked closely with him. "He's mostly known for his rigorous, disciplined mind."
Von Finckenstein said he expects to deliver his report to Finance Minister Paul Martin in December - later than his original November target. "The minister will make it public, and he will presumably announce his concerns," he said. "Then, the parties can decide - always assuming we have concerns and the minister has concerns - do they want to address them or do they want to walk?" If the banks decide to walk, the story ends. If they decide to try to come to terms, they face a dual process in 1999 - satisfying the politicians and coming to terms with Konrad von Finckenstein.
Maclean's September 28, 1998