The Nation's Business

Banks are shut out of the action

Peter C. Newman May 10 1999
The Nation's Business

Banks are shut out of the action

Peter C. Newman May 10 1999

Banks are shut out of the action

The Nation's Business

Peter C. Newman

As the months drop away since Paul Martins fateful decision to reduce Canada’s banks to local rather than global players, the full impact

of his ruling is becoming clear. And it is this: we are bound to be the Manchuria of the 21st century, a marginal province within the globalized economy, providing useful resources, but exercising little economic clout.

It is not easy to make the case for Canadian bank mergers, as the chairmen of the doomed partnerships between the Royal-Montreal and the TD Bank-CIBC found out. But, then, there is very little about globalization that’s simple or pleasant.

It’s just inevitable.

The concept’s critics treat globalization like chicken pox, a nasty infection that will eventually go away. It won’t. It’s happening, baby. Even now, before the millennium’s acceleration of the process, only 21 of the world’s largest economies are countries. After that, a majority of the 50 next largest economies are multinationals. These corporations dwarf some fairly major nation-states. Wal-Mart is bigger than Greece; Ford is larger than Turkey; General Motors’ GDP considerably exceeds that of Denmark.

Size matters. To have a say in the world of financial giants requires a dimension we do not now possess. Canada does have a few corporate behemoths: Alcan, Seagram’s, Thomson Corp., Nortel Networks and Conrad Black. But we don’t boast a single world-size financial institution, and that’s mainly where the action will be in the next century. (It’s an interesting sidelight that Toronto’s municipal planning department came out for the bank mergers, strictly on the basis that any world-class city must house within its boundaries at least a couple of global financial players.)

There’s a sharp contrast between Canadas reluctance to recognize this chilly reality and what has been happening in other, less hidebound countries. Government-approved bank mergers have been making news in the United States, Germany, France, Switzerland and just about every other industrialized nation-state that recognizes that international survival is more important than village-pump politics.

Ever since Paul Martin took over Finance, most of his time has been spent trying to re-establish Canadas credit rating by balancing the budget. Whatever energy he has left over has been devoted to bashing the banks. Under his guidance, Ottawa has levied a special profits tax, not applicable to other businesses; abolished tax deductions for research that the banks had previously been granted; and blocked their entry into the profitable areas of selling car leases and

insurance at the branch level.

Canadians have an ingrained mistrust of power, especially when it’s expressed in monetary terms. There is a

bounty on bankers’ hides; we’re not comfortable with their inordinate profits and their chairmen’s lavish salaries. (The Royal made $1.8 billion last year; Charles Baillie of the Toronto Dominion Bank, the highest-paid chairman, added an extravagant $8.5 million in salary and cashed stock options to his piggy bank.) Already privately fuming about the finance minister’s obsession with putting them down, Canada’s bankers received another slap in the face last week, when Judy Steed in The Toronto Star reported on the activities of the Earnscliffe Strategy Group. According to the story, the Ottawa lobby organization advised Martin to bounce the banks’ merger application, strictly on the grounds that even the slightest hint of listening to their requests would harm his prime ministerial ambitions. This was always the suspicion; now it seems to be a fact.

The most devastating analysis of the impact of Martin’s determination to cut down the banks’ growth prospects is the report last month of the Toronto-based Dominion Bond Rating Service. “Clearly, the finance minister’s decision not to permit banking mergers has relegated the Canadian banks to spectator status, watching global financial services consolidation from a distance,” the document notes. “The key question now becomes whether the Canadian banks will become aggressive front-row spectators in the gold seats, or passive observers watching from afar in the ‘greys.’ ” It gets worse. Martin is allowing virtually unlimited access into Canada of foreign banks and other financial giants. Outside banks have already been permitted to set up branches here, based on their parent companies’ capitalization, as opposed to being required to set up separately capitalized Canadian operations, as was previously the case.

Foreign financial institutions are flooding into the country. They include such traditional banks as Wells Fargo; credit card companies, including MBNA, Capital One and Bank One; brokerage houses such as Merrill Fynch and Charles Schwab; electronic banks the likes of the Dutch-owned ING; and many others. To that impressive lineup has to be added the increased competition the banks will be faced with from demutualized life insurance companies, restructured credit unions, and the burgeoning growth of e-commerce on the Internet.

Readers of this column who may feel sorry for the banks should save their pity for Canada. The issue here is not higher bank profits, but a nation’s survival on a globalized planet, grown cold and brutal.