The Bottom Line

Banking on change

After two years of study and months of intense lobbying, the bank bashers won the day

Deirdre McMurdy July 1 1996
The Bottom Line

Banking on change

After two years of study and months of intense lobbying, the bank bashers won the day

Deirdre McMurdy July 1 1996

Banking on change

The Bottom Line

After two years of study and months of intense lobbying, the bank bashers won the day

Deirdre McMurdy

In the end, it wasn’t about business at all. It was about politics. Last week, Ottawa released the long-awaited white paper reviewing financial services legislation. But after two years of study and months of intense lobbying, only one thing is clear: the bank bashers won the day. And the Liberal government gave them a leg up.

Forget about pushing briskly ahead with changes that would allow Canada’s chartered banks to evolve into competitive, global forces. Instead, they must wait for at least two years for yet another task force to meditate on the zen of bank mergers, entry into auto leasing and other key issues.

Weeks before the paper’s release, the writing was on the wall. Doug Peters, secretary of state for financial institutions, who tabled the legislation, strategically scolded the insurance, auto leasing and banking lobbies for aggressive campaigns that ignored the interests of consumers. Peters chastised the groups for taking such a narrow view of the issues that any consensus, any ability to forge meaningftil policy changes, was eclipsed. After all, the blame for such a wishy-washy white paper had to be laid somewhere. And the only thing easier than whacking banks is whacking lobbyists.

Unfortunately, the time for coy political games is quickly running out. Canadian banks are mired in a mature domestic market. They are blocked from extending their reach to new markets like insurance and auto leasing. And they are eating dust on the international banking circuit.

It’s no secret that the traditional, core business of retail deposit-taking and consumer loans is on the slide. Canadians with sizable savings don’t stick their cash in the bank—they buy mutual funds. That, in turn, has bumped up the cost of funds for the banks.

On the corporate banking side, technology and sophisticated capital markets have eroded the banks’ role as intermediaries. Increasingly, companies in need of financing can gain direct access to capital markets and at considerably lower cost. Alter-

natively, they can turn to a host of innovative, new non-bank lenders like Newcourt Credit Group.

On the international front, Canadian banks are beginning to look like mighty small potatoes. In Japan, the recent merger of Mitsubishi Bank and the Bank of Tokyo created the largest bank in the world, a monolith with $952 billion in assets. In the United States, the combination of Chase Manhattan and Chemical Bank has wrought a bank with assets of $408 billion.

In stark contrast, the Royal Bank of Canada, the largest Canadian bank, has assets of just $185 billion. In 1970, it was among the top 12 banks in the world. Today, it no longer ranks in the top 60. Global companies have global options when it comes to their banking needs. These days, there are too many banks with too much capital chasing too few deals. And the best companies aren’t likely to pick the runts of the litter as partners.

For a market the size of Canada’s, there’s no question that there is excess capacity and rampant duplication. The merger of a couple of banks would significantly lower administrative costs and improve economies of scale. Of course, it would create another political squeeze: massive job loss. And it would also exaggerate the negative public perception that Canadian banks are menacing hulks.

It wasn’t a great surprise that the banks were banned from the auto leasing business in last week’s white paper. It’s primarily a political document, and it’s bad politics to ruffle the Big Three car companies. Especially when there’s a whiff of election brimstone in the sultry summer air. The Big Three dominate the $9-billion-a-year auto leasing market. Furthermore, they are the largest employers in Canada and they have massive clout.

If the object of the exercise truly was to better serve domestic consumers, the white paper would have been a more concrete action plan. And it would not have deferred some of the changes—such as bank mergers—that must inevitably reshape the financial services sector.