If airlines may merge, why not banks?

Peter C. Newman October 11 1999

If airlines may merge, why not banks?

Peter C. Newman October 11 1999

If airlines may merge, why not banks?

Peter C. Newman

There’s a raging inconsistency in Ottawa’s mishandling of its airline policy. By temporarily suspending its antimonopoly regulations and allowing Gerry Schwartz to take a run at merging the country’s two major airlines, Ottawa sent out an unmistakable signal: in the globalized economy, it’s in the national interest to allow essential businesses to grow larger and stronger.

That’s always a risky policy option, but what’s really troubling is Ottawa’s inconsistency. Only 10 months ago, the Chrétien government decisively turned down two merger applications from four of our Big Five banks. The banks’ objective was to become world players in an industry where only giants need apply. When countries are only 21 of the 50 largest economic entities—-and the balance are multinational corporations—there’s no other way to compete.

In retrospect, Paul Martin’s decision to condemn our banks to secondary status among international financial institutions makes less and less sense. The comparison that leaps to mind is the Diefenbaker government’s fateful 1959 killing of the Avro Arrow, the superb delta-winged jet that had no rivals. The brutal impact of that retreat from world-class competition was the abrupt layoff of 14,000 of Canada’s best technicians and scientists. Many found their way to Cape Canaveral, where they played key roles in another country’s quest for greatness, helping the Americans reach the moon.

Both edicts sentenced Canada to being an impotent spectator instead of an active player in key 21st-century industries. The parallel is real. Global banking isn’t just about bulging balance sheets. It’s also about technology and research—establishing instant communication links, devising e-cash accounting programs and new ways of handling currency swaps that now total $1.9 trillion per day.

Martin’s decision to limit the size of Canadian financial institutions runs counter to what’s been happening not only in the United States, but in Europe and other continents. The most direct approach was that of the governments of Singapore and Malaysia, where each government called in the CEOs of its largest banks and ordered them to amalgamate. As well as a continuing wave of mergers in the United States, Italy and Belgium, two of the largest banks in Spain, Banco Santander and Banco Central Hispanoamericano, recendy married, as did Switzerland’s secondand third-largest banks, forming UBS AG. In France, Banque Nationale de Paris and Paribas, two of the country’s three largest financial institutions, have joined hands.

The most unexpected development is the decision by Germany’s largest (Deutsche) and third-largest (Dresdner) banks—both of which date back to Bismarck’s days—to

marry their retail operations as a prelude to full amalgamation. The changed attitude of that country’s notoriously cautious bankers was best expressed by Dresdner CEO Bernhard Walter, who declared: “The only option we don’t have is to do nothing.” Approval of the move by the German government meant a quantum leap in that country’s concentration of corporate power. Unlike North American banks, Germany’s large banks hold big blocks of shares in domestic industrial giants and openly influence corporate decision-making. The Deutsche Bank, for example, holds industrial assets worth more than $23 billion, including a 12-per-cent stake in DaimlerChrysler. Even more dramatic has been the coming together in Japan of the Fuji Bank, the Daiichi Kangyo Bank and the Industrial Bank of Japan to create a behemoth that will be the world’s largest banking alliance with $1.87 trillion in assets. In approving the merger, the Japanese government declared that it was the only way to avoid further encroachment by foreign financial groups into the country’s domestic banking system.

That, of course, was precisely the point at the heart of the push by the four Canadian banks to form two larger entities. As Charles Baillie, chairman of the Toronto Dominion Bank, put it recendy it: “We have to get scale. With national borders breaking down, to be a major factor in Canada, you have to become a major factor in North America.”

John Cleghorn, the Royal Bank’s CEO and chief architect of the other failed merger initiative, goes even further. He maintains that unless Canada’s banks are allowed to join in the consolidations that are sweeping the industry, they will become progressively weaker franchises, leaving Canada an easy mark for larger foreign financial institutions. “Canada,” he says, “has to determine if it wants to have financial service players that are world leaders. What we’re really in is a financial services war, and the large banks are likely to win that game because of the huge investments required.”

One banker who isn’t suffering because of the aborted Canadian mergers is Matthew Barrett, the former chairman of the Bank of Montreal that was supposed to become part of the Royal Bank. As the new head of Barclays Bank PLC, the second-largest bank in Britain, he is being paid $5.9 million in his first year—plus stock options that could be worth $8.2 million in three years—on top of his $1-million annual pension from the Montreal, which also awarded him options worth more than $25 million.

So don’t cry for the bankers. Just shake your head about Ottawa, yet again, standing in the way of allowing this country to join the 21st century.