Even at a time when they need to prove they have a heart, bankers still have a way of looking like bankers. The industry’s public relations machine has been revved lately: soft-focus television ads, barnstorming CEOs, speed-dialling lobbyists—all aimed at winning Ottawa’s approval for a pair of bank megamergers. But there has also been unwanted attention. Last week, the Bank of Montreal had to retreat from a proposed tougher policy on cashing welfare cheques in Toronto. And the Canadian Imperial Bank of Commerce had to scramble to explain why it was eliminating its student loans program in Manitoba. “It was a bad coincidence that it came out when it did,” sighed a senior CIBC official. Naturally, though, he had a sound, bankerly explanation: former students were defaulting at a rate of 20 per cent, and months of negotiations with the Manitoba government had failed to salvage the program. Still, he admitted: “The issue is timing.”
And it could hardly have been worse. Newspaper clippings
about the demise of the student loans program landed on the desks of Liberal MPs just as they were focusing on the politics of bank mergers. The banks’ track record for winning over those MPs in recent years reads like a bad credit history. Bank lobbyists have never forgotten how MPs leaped to their feet to give Finance Minister Paul Martin a resounding ovation when, in
his 1996 budget speech, he announced he was denying the banks’ bid to be let into the lucrative car-leasing business. The backbenchers were cheering again last week when Martin, pressed on the merger issue during a stormy Question Period, turned up the rhetorical heat. “The decision on the bank mergers will be made by this government, by this Parliament and by the Canadian people. It will not be made by any financial institution,” he shouted. “Anybody who has any doubt about that had better just watch us.”
Martin’s tough talk had financial industry insiders secondguessing the early buzz on Bay Street that the bank deals were simply too big to be blocked. Two mergers are awaiting regulatory and political approval: the marriage of the Royal Bank of Canada and the Bank of Montreal, with combined stock market value of $39 billion, and the $43-billion match between the CIBC and TD Bank. The chances of those deals going through unconditionally are growing slimmer. “The scenario that we would approve these mergers as presently configured is not on,” one senior Liberal adviser told Maclean’s last week.
The banks have not impressed many MPs
The Canadian bankers behind the mergers argue privately that Ottawa has little choice but to let them push ahead. The main reason: even bigger fish are swallowing each other in the American banking pond, with the planned mergers of Citicorp and Travelers Group, and NationsBank and BankAmerica. Those developments, they contend, have made stopping Canadian bank consolidation seem not only unwise—but downright unpatriotic. According to that logic, Canadians will want their own heavyweight contenders in a bulkedup international marketplace. “The American [mergers] have helped us enormously,” said one executive.
But even if the bankers asking for Martin’s blessing believe he cannot actually turn them down, they do fear the conditions he might impose— from job guarantees to a moratorium on branch closures. And bankers have quickly learned that their globalcompetitiveness argument is vulnerable—unless it is backed up with a positive message about the domestic
impact. “We know that an overwhelming number of Canadians want a strong, Canadian-based global bank,” said one executive. “But the way to sell it is to tell them that they are going to get better prices. That’s what we try to tell Paul.”
The shift from a “get ready for globalization” pitch to a more homey “we’re on your side” emphasis has already started. John Cleghorn, president of the Royal Bank, and Matthew Barrett, his counterpart at Bank of Montreal, kicked off the campaign to sell their merger with a strong theme about making it outside Canada. But when Barrett issued a schoolyard boast that a merged Royal-Montreal bank could “kick ass” in the big-league U.S. market—a remark that has haunted him ever since—it soon became obvious that the Canadian public and federal politicians were equally unimpressed. Chastened, the two bank chiefs retailored their message, and hit the banquet circuit stressing how the merger would help ordinary Canadians. Barrett took to explaining in his speeches that “bigger” in this case means more jobs and better services. Cleghorn hammered home the same theme in speeches he delivered in recent days in St. John’s, Nfld., Saint John, N.B., and Kitchener, Ont. He says the job losses at the new, merged bank would be “minimal”—while new hires could number as much as 30,000 over three to five years. Claims like those are a hard sell around Parliament Hill. “They’ve got a credibility problem,” said one senior Liberal official. “We know there will be branches closed down.” To counter that fear of reduced competition—especially in small towns— Cleghorn points to what he portrays as a thriving, increasingly competitive marketplace. Chartered banks, he notes, vie for customers with more than 40 foreign banks, 150 life insurance companies, 50 trust companies and 2,500 credit unions.
Ironically, it is from among those rivals that the banks may be finding their most persuasive allies in the fight for Martin’s blessing. Far from sounding the alarm over the mergers, other financial institutions say they expect to reap benefits. “Over the past three to four years, we’ve had a lot of corporate and personal customers of the chartered banks come over to us,” says Ole Sorensen, president of Prince George Savings Credit Union, which runs three branches in the forestry-based town of 76,500, 780 km north of Vancouver. “Now, with the merger announcements, we’ve had even more people tell us they will be looking for other options.”
Jonathan Guss, president of Credit Union Central of Ontario, points to a survey conducted for Canada’s credit unions by Environics Research Group after the Royal and Bank of Montreal
merger was announced. According to that poll, 23 per cent of Canadians said they would definitely or probably switch to another financial institution if the marriage occurred. (Another 66 per cent said they either definitely or likely would not switch, while 11 per cent had no opinion.) “It is one thing to affect people’s attitudes,” Guss says, “another to affect their actions. These mergers will make people switch. For us it is a powerful opportunity.” Similarly, Canada Trust chief executive Ed Clark—whose company is widely seen as a possible acquisition for Bank of Nova Scotia, the last of the five big banks left without a merger partner—said he expects to take advantage of the merger action to win over new clients.
But if the banks’ competitors are bullish on their own ability to compete, their customers are not so sanguine. “It is appalling,” says Henry Demone, chief executive of Lunenburg, N.S.-based National Sea Products Ltd. “Canadian banks are already less innovative and less aggressive than their U.S. counterparts.” Others agree. “Bigger is worse,” says Catherine Swift, president of the Canadian Federation of Independent Business, which represents 89,000 small firms. “Our members believe things are concentrated enough already.” A survey the federation conducted last October, before the seismic shifts in banking really began, showed that two-thirds of its members were against bank mergers. And Swift was everywhere last week, accusing the big banks of blindly following another trend that will lead to catastrophe—just as loans to Latin America, the Alberta oilpatch and commercial real estate have in the past.
Swift stresses that Canadian banks already have a competitive advantage—even if Ottawa, for example, grants foreign banks freer access to the domestic market. And she does not limit her critique to the market for financial services, putting just as much emphasis on the influence banks cultivate through donations to parties and other links to the political class. (Even Prime Minister Jean Chrétien served as a TD Bank director when he took a break from active politics in the 1980s.) “I’m concerned that further concentration will simply add to that clout,” Swift warns. “At some point, we have to ask ourselves, in a democratic society, do you want those guys to have that much power?”
But political power is not on the formal list of items up for consideration by the advisory body that will guide Martin’s
decision. Headed by Regina lawyer Harold MacKay, the Task Force on the Future of the Canadian Financial Services Sector was set up by the Liberals in late 1996, with a mandate to provide independent advice on bank mergers and other issues such as foreign ownership and electronic commerce. When Cleghorn and Barrett announced their banks’ betrothal in January, Martin was furious at their refusal to wait for MacKay’s report, which is expected by next September. “MacKay was our chance to look ahead, to take the future of banking away from the politicians and bankers, because
neither of us can sell anything,” said one Liberal official close to the finance minister. “And then, in the middle of all that, they put a merger on the table. I don’t know what their thought process is.”
One thing the banks may have been thinking: Ottawa’s decision-making process needed a jump start. And that view has at least some credibility. Along with the MacKay task force, at least two regulatory bodies must review any bank merger—the competition bureau and the office of the superintendent of financial institutions. The latter will conduct the final, formal review to make sure any merged bank meets the legal requirements for solvency. The role of the bureau, the federal antitrust watchdog, could be more pivotal. The bureau already has a growing team of more than a dozen experts investigating whether the mergers are likely to significantly lessen competition.
That means a meticulous look at everything from how major Canadian corporations borrow for international business deals, to the choices consumers have for home mortgages in small cities. ‘We’ll be breaking down the various services offered by the banks and asking what are the actual or potential sources of competition for each of those services for different classes of customers,” says Raymond Pierce, the bureau’s assistant deputy director of investigation and research. While Pierce cannot comment directly on details of the banks’ plans, the bureau has options ranging from rejecting the deals outright to asking the banks to sell off certain assets to avoid undue concentration in specific regions. If the banks resist, the bureau can take
them to the federal competition tribunal to try to have its orders enforced.
But even more important than clearing the hurdles raised by the bureau, the office of the superintendent and the MacKay task force, the banks will have to get their plans past parliamentarians. Government sources told Maclean’s that a special joint committee, made up of MPs from the House standing committee on finance and members from the Senate banking, trade and commerce committee, will likely be formed in the fall to hold hearings across the country. The strategy is to combine the MPs’ political instincts with the senators’ expertise—proven in previous influential studies, such as a report that formed the blueprint for reforms that allowed foreign banks to compete more freely in Canada. Even the Reform party—which has been
sharply critical of the Senate—seems anxious to take part. “Of all the Senate committees, the banking committee has the most credibility,” said Reform banking critic Dick Harris.
There is no guarantee, though, that Liberal MPs will sit quietly until the fall. Last week, even with the more immediate matter of compensation for hepatitis C sufferers demanding attention, the bank question grabbed its share of caucus time. But as the pressures increase, many MPs are becoming unsure
how far to push their long-standing sus-
picion of the banks. Windsor/St. Clair MP Shaughnessy Cohen said that after the Royal-Bank of Montreal announcement, most government MPs firmly opposed the deal. “But this new one [the CIBC-TD Bank deal] made some of us think maybe we should be taking a look at this.” Fears are strongest among rural MPs, who worry that their constituents will be the hardest hit if the banks start closing branches and scaling back services.
With the banks eager to avoid rural protests, some MPs may find they have new leverage. Last year, Ontario MP Susan Whelan launched a campaign to stop the Royal Bank from closing its branch in the tiny community of Comber, which would have left some constituents in her Essex riding driving a half hour each way to do their ordinary banking. Two weeks after announcing its merger plan with the Bank of Montreal, Royal announced it would keep the branch open. Whelan believes the influence of ordinary MPs on the debate will only increase as Martin nears his decisionmaking crunch in the fall. “Then,” she said, “the heat will really be turned up.” The political battle over bank mergers has just begun.
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