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Better banks, not bigger banks

By Duff Conacher, Coordinator of Democracy Watch, Chairperson of the Canadian Community Reinvestment Coalition (CCRC)

Taking a leap of faith is tough. It's especially difficult when Canada's big banks are urging you to jump. While racking up record-breaking profits in recent years, the banks remain highly unpopular among Canadians due to excessive service charges and credit card costs, branch closures and obstacles faced by small businesses in obtaining loans. Surveys by the National Quality Institute of over 8,000 Canadians regarding customer satisfaction with various industries found banks near the bottom of the heap.

Now four of Canada's five biggest banks want to merge into two colossal banks. It's little wonder that polls reveal widespread public opposition to the proposed mergers, given that they will result in reduced competition, lost jobs and even poorer service, based on the experience of mergers elsewhere.

As shown by recent Globe articles by Royal Bank CEO John Cleghorn and his bank merger fiancee, Matthew Barrett, the merger-seeking banks are asking for something from Canadians which they would never grant to their own customers, namely a blank cheque. That's what the banks' merger proposals boil down to. Trust us. Take the leap of faith. Let us merge so we can fight off those threatening foreign banks. You will get better service, more jobs in the long term, no loss of bank branches in rural communities.

Yet the banks' claims fly in the face of bank merger experience in other countries and in the face of the banks' response to longstanding complaints by their customers. Moreover, the banks' soothing pro-merger arguments rest on that leap of faith.

Their commitments sound good, but we don't have a system that ensures there is no gap between bank rhetoric and reality. In other words, if the federal government approves the mergers, there is nothing to stop the merged banks from telling Canadians that cost pressures from competitors require closure of hundreds of bank branches and thousands of lost jobs.

Can we believe Mr. Cleghorn's claim that the mergers will improve banking service, when his bank and other major banks have steadfastly refused to accept proposals for service improvements? They oppose establishment of an independent banking ombudsman to address customer complaints (current bank ombudsmen were selected and are directed by the banks, and can't make binding rulings).

The banks also oppose another proposal that would greatly benefit customers, namely participating in the establishment of a Financial Consumer Organization (FCO) to advise bank customers. The banks have been asked to facilitate creation of an FCO by including an FCO flyer in their customer mailings, but have refused.

And the banks' exaggeration of the foreign competition threat makes it likely they will break their promises on local branches and jobs, if they get their way. There are fewer foreign banks operating in Canada now (43) than in 1987 (59), with a lower market share, only 7% of total bank assets in Canada. Foreign banks continue to face significant barriers to setting up in Canada, so it is highly unlikely that they will ever provide significant competition to our big banks.

In his Globe article, Mr. Cleghorn tried to downplay the market dominance resulting from the mergers. The two megabanks would control 75% of small and medium-sized business debt financing and 70% of credit card purchases by volume, to cite two examples of how they could abuse their majority control of the market. Also, the cost savings and technological developments the banks claim as key merger benefits can be obtained through joint ventures, without the negative impacts resulting from megamergers. In fact, all Big Five banks have cooperated on ventures to reduce their backroom operating costs in recent years.

Given what's at stake -- a drastic restructuring of Canada's banking system -- we shouldn't just swallow the bankers' rhetoric. Instead, the federal government should do two things. First, it should disallow the proposed mergers since there are no convincing reasons to allow them. Secondly, the intensity of Canada's bank debate underscores the need for measures to ensure that the citizen agenda of better banks comes before the corporate agenda of bigger banks. We need a system for determining whether banks are meeting customer needs, so we can better assess the impacts of mergers, takeovers and other industry changes.

As in the U.S., the government should enact legislation to allow for a detailed review of banking performance. The U.S. Community Reinvestment Act (CRA), enacted over 20 years ago, allows the public to find out detailed information about how banks are serving customers, such as how many people apply for loans, how many are rejected and why. If this review reveals poor service, a bank's application to merge or take over another institution can be denied, as happened to Bank of Montreal's U.S. subsidiary, Harris Bankcorp of Chicago, a few years ago.

To their credit, Canadian bank CEOs have shown a growing willingness to agree to CRA-style measures. But until these and other accountability measures are in place, we lack key information and a process to fully assess service standards and changes in banking. We also need time to determine whether bankers' claims about a growing threat of foreign competition are true. Polls show that Canadians clearly want better banks, while it is far from clear that they want bigger banks. So until our banks serve us better, why are we even considering allowing them to get bigger?