The Nation’s Business

When the banks lost, Canada lost, too

Paul Martin’s harsh edict has reduced our banks to minor spectators in the trillion-dollar global playground

Peter C. Newman December 28 1998
The Nation’s Business

When the banks lost, Canada lost, too

Paul Martin’s harsh edict has reduced our banks to minor spectators in the trillion-dollar global playground

Peter C. Newman December 28 1998

When the banks lost, Canada lost, too

The Nation’s Business

Peter C. Newman

Paul Martin’s harsh edict has reduced our banks to minor spectators in the trillion-dollar global playground

Paul Martin's decision to nix the bank mergers is one of those watershed moments that will, in terms of Canada's economic future, rank with such monumental historical turning points as the invention of the wheel, fire, silicon chips and hotel room service.

It certainly was politically correct. There was no way the leading candidate to succeed Jean Chrétien (once the PM finally realizes he has become a satire of himself) could grant Canada’s banks even more power than they already have. Ranking in popularity somewhere between the neighbourhood abattoir and the local tax collection office, the Big Five banks deserved to lose.

Not because they had a poor case to make, but because they made it poorly. From the start of their campaign 11 months ago, the bank chairmen treated Ottawa’s politicians as a troublesome faction to be placated, instead of negotiating how to arrive at a politically acceptable deal. In the vital arena of public opinion, the bankers committed the cardinal error of selling the solution—mergers—without first selling the problem: that on their own they cannot remain competitive in world markets.

That happens to be the uncomfortable truth. Martin is dead wrong (and his nonpolitical self knows it) when he rants against the power of Canada’s banks. In fact, they rank between 70th and 80th in the world. In mutual funds, the fastest-growing Canadian financial sector, the banks account for only onequarter of sales.

While they appear huge and omnipotent on the Canadian landscape, the banks have, by Martin’s harsh edict, been reduced to regional branch-plant operations, minor spectators in the trillion-dollar global playgrounds where the Big Boys cut the megadeals. The main reason the Royal Bank’s John Cleghorn, point man of the bankers’ pro-merger crusade, failed to conquer the hearts of the Canadian people is that the image he presented obscured the kind of man he is. Sensitive, intelligent and contemporary in his thinking, Cleghorn came acroás as a statistics-obsessed Bay Street banker, a broken-record lobbyist on behalf of size for its own sake. He is much smarter than that, but he refused to believe that even though his cause was just, its implementation required a revolution in Canadians’ thinking. He could not switch from being an advocate to becoming a revolutionary. He thus became a sort of Garibaldi without a horse. Indeed, the bank chairmen believed in their case so strongly that two of them—Matt Barrett of the Bank of Montreal and AÍ Flood of the Canadian Imperial Bank of Commerce—were willing to take the number 2 position if they were allowed to merge with their respective partners.

Despite the resultant advantages for playing on the international stage, the mergers would have been tough to implement. Unlike most businesses that develop distinctive corporate cultures, banks operate more like cults. Each institution has its own traditions and quirky agendas. The Royal, for example, takes great pride in having been “quick to the frontier” by establishing British Columbia branches in 1897 before venturing to Toronto from its original home base as the Merchants’ Bank of Halifax. The Toronto Dominion has always regarded itself as the slightly roguish outsider—in the Big Bankers’ club, but not of it. Scotiabank’s recent priorities have taken it so deeply into Latin American finance that its chairman, Peter Godsoe, once told me his successor would have to be bilingual—in English and Spanish.

The banks’ case was fatally weakened by the fact that near the end of their campaign they reported 1997 net profits of $7.5 billion, setting new Canadian earnings records at the very time they were pleading that only by merging could they become competitive. The explanation is simply that short-term profits say nothing about long-term prospects. Size does matter. So many American banks have been merging that five years ago the gap in market capitalization between our largest bank, the Royal, and the average of the top 15 U.S. banks has widened to $23 billion from less than $3 billion. “As this global drive for consolidation gathers momentum,” Cleghorn told me before Martin checkmated his plans, “huge, low-cost competitors, using their economies of scale and expertise developed in their home markets, are entering Canada, cherrypicking profitable niches. They’re taking this business away from our Canadian bank branches, one piece at a time. And they’re not making nearly the same investment in Canada that we do.”

That’s the cardinal point. By opting to keep Canadian banks at their present size, the finance minister has gambled on their ability to survive in a constantly narrowing environment. It was no coincidence that the very day the mergers were quashed, Charles Schwab Corp., a U.S. discount broker with 5.4 million active customer accounts worth $710 billion, moved north by grabbing Bay Street houses Porthmeor Securities Inc., a full-service brokerage, and its discount arm, Priority Brokerage Inc. That will cut deep into the TD’s Green Line Investor Service. Other competitors that will now launch frontal assaults on Canada’s banks include ING Direct, a Dutch-owned virtual reality financial institution with no conventional branches in Canada, which is more than twice as large as any of our banks. Other rapidly growing competitors are such forward-looking enterprises as Toronto’s Newcourt Credit Group Inc., which sells and manages loans and is attracting a growing slice of what was traditionally banking business.

The day Paul Martin scuttled the banks’ merger dreams may turn out to be the beginning of the deconstruction of Canada’s banking system.