Ending Power Without Accountability 
Making Banks in Canada Better Before They Get Bigger

 CCRC Position Paper #6
(May 1998)

Table of Contents

I.  Background

II.  Canadian Bank Mergers and Takeovers: Unnecessary and Unwise

III. Royal Bank-Bank of Montreal and CIBC-TD Bank Proposed Mergers: The Truth Behind the Bankers' Claims

IV. The U.S. Bank Accountability System: A Model for Canada

V. CCRC Recommendations: Criteria the Government Should Use in Reviewing Mergers and Takeovers by Financial Institutions

"Canadian banks do not operate in an unregulated environment.  Over the years, they have benefited a great deal from the protection of the Bank Act.  And that is one reason why Canadian banks have been so stable and secure compared to American financial institutions.
 I believe it is time for the banks to give something back. . ."

"I think the large institutions have an obligation and responsibility to the country, and I think part of that is that they don't do things that lead to massive dislocation and job loss."

I.  Background
This position paper, the sixth in a series of CCRC position papers, responds directly or indirectly (by reference to the CCRC's five other position papers) to all six questions set out in the June 1997 "Discussion Paper" of the Task Force on the Future of the Canadian Financial Services Sector.  The paper also responds to the July 11, 1997 "Report of the Task Force on the Future of the Canadian Financial Services Sector in response to a request by the Secretary of State (International Financial Institutions)" and to the Competition Bureau Consultations in respect of the Preliminary Draft of the Merger Enforcement Guidelines as Applied to a Bank Merger.

The paper sets out the extensive protections and privileges Canada's big chartered banks have enjoyed for over three decades.  Market dominance and world-class profits have resulted from these protections and privileges, and the federal government has also given in to almost all requests from banks to let them into other sectors of the financial service industry (e.g. trusts, investment, and ownership of insurance subsidiaries).

Citing extensive evidence from other jurisdictions, and the poor level of service provided by the banks to many Canadians, the paper refutes the many false claims that bank mergers are necessary and advisable in Canada.  The paper also details the available, substantial evidence that the proposed mergers between the Royal Bank and the Bank of Montreal, and the CIBC and Toronto Dominion Bank are not in the public interest and should be prohibited.

In addition, the paper exposes the significant gaps in disclosure of key information needed to review fully the performance of Canada's banks in lending, investment, service and meeting the needs of communities across the country.  Finally, based upon a 21-year old, effective system in the U.S., the paper sets out 16 recommendations that will ensure our banks serve all Canadians better, and will ensure that we do not let them get bigger in the future if it is not in the public interest to do so.

(a) What Canadians Do For Our Banks
The basis of the assets of Canada's big, domestic chartered banks is the money that over 20 million Canadians deposit in the banks.  According to the Canadian Bankers Association, the deposit accounts of individual Canadians make up the largest single bank deposit category, both in number and total amount.  When individual deposits are combined with the deposit accounts of businesses, they total $760 billion and make up 93% of the total capital base of the Big Five banks at the end of January 1998.  In contrast, shareholders investments in banks total only $46 billion.

Without the capital base that these deposits provide, the Big Five banks would not have been able, at the end of 1996, to have developed the following asset base:

Also, without the capital base that depositors provide, the Big Five banks would not have reaped the following benefits in 1996:

(b) What Canada's Governments Have Done for Banks: Decades of Protections and Privileges
Canada has one of the most highly concentrated banking sectors in the world.  We have half as many banks as Japan, one-fifth the number of banks as Germany, one-seventh the number of banks as France, one-eighth the number of banks as Britain, and the United States has 200 times as many banks as Canada.

Canada's banking sector is so concentrated because, since 1967, our banks enjoyed legal protection from competition by foreign banks, and very high costs are an effective barrier to anyone trying to start a new bank.  Up until very recently, there was a 10% individual, and 25% collective, limitation on the foreign ownership of Canadian-controlled, federally-regulated insurance companies and trust and loan companies; a 25% collective limitation on the foreign ownership of chartered banks; and a 12% ceiling on the size of the foreign bank sector in Canada.  As a result, there are only 43 foreign banks in Canada.  Despite not facing these limitations anymore, foreign banks still have to raise millions in capital in order to open a subsidiary, need approval of the Minister of Finance to open branches, and no one person or organization can own more than 10% of a chartered, domestic bank (e.g. the Big Five banks and a few, much smaller banks).

As a result of these barriers to entry, almost all the foreign banks in Canada operate solely as investment banks specializing in financing large corporations. As their representatives stated in the May/June 1996 issue of Canadian Banker, the foreign banks feel that the costs of trying to compete head-to-head for personal and small business lending and service are so high as to make it futile.  This situation has changed little despite the World Trade Organization (WTO) agreement on financial services reached in December 1997 (See details below in section II(a) Global Competition: Not A Threat Despite Bank Claims).

In the area of lending and investment activities, Canada's big banks enjoy the privilege of a government-sanctioned key role in the creation of the money supply.  As in many other areas, this role has been subsidized in the past several years by federal government guarantees for small business loan defaults under the federal Small Business Loans Act (SBLA).  Since it was established in 1961, over 493,000 loans totalling over $20 billion have been made, and the current loan default rate is about 5.75%.  Since 1992, the total cost to the federal government of guaranteeing defaults under the SBLA has been $258 million (or 2.5% of loans) according to the federal Auditor General, who has criticized the program's poor cost to jobs-created ratio.  A similar system in Quebec (known as the Paillé), in place since December 1994, has resulted in a reported total cost of $116 million as the provincial government has covered loan defaults for banks and caisse populaires, mainly due to lax safeguards to ensure that the financial institutions were lending to viable businesses.

Under the SBLA program, the government currently guarantees up to $15 billion in small business loans by the banks, amounting to about 45% of total bank lending to small business at any one time.  While these government guarantees have also helped many small businesses by making it very easy for the banks to lend to small businesses, the question remains whether the guarantee is needed, or whether banks should simply be lending to small businesses as part of their overall business lending activity.  It is very clear that the banks have not proven that lending to small business is riskier for them than lending to big business  (See details below in section II(c) (c) Why Let Our Banks Get Bigger When They Provide Poor Service Now?).

(c) Big Chartered Banks: A Result of Protections and Privileges
Through the decades of protection from competition, CanadaÕs federal governments have helped our banks become as big as they currently are.  Canada's Big Five banks are the largest corporations in Canada (based on total value of their assets, in order of size at the end of fiscal year 1997: the Royal Bank, CIBC, Bank of Montreal, Scotiabank, Toronto Dominion).  These assets include loans which borrowers have to pay back to the bank, government bonds, shares in other companies, buildings, property etc.

A comparison (set out below) of total assets, deposits and total loans of the Big Five banks compared to total revenues of Canada's federal, provincial and territorial governments gives a sense of just how huge our big banks are.  Each of the Big Five banks' assets, the Royal Bank's  deposits alone, and Royal Bank and CIBC's total loans are greater than the federal government's annual revenues.  And three of the Big Five banks' assets and deposits are greater than the combined annual revenues of all of the provinces and territories, as follows:

The federal government has also allowed the Big Five domestic banks to extend their operations into almost every area of the financial services industry, so that they now control many areas of the industry in Canada, as follows:

Taxpayer dollars totalling $4.5 billion facilitated bank takeovers of several failing trust companies in the past several years (especially 1991-92), so that banks now own over 15 trust and loan companies (the only large independent trust company left is Canada Trust).  Between 1984 and 1993, the total assets of trust and loan companies associated with the banks increased from $36 billion to $150 billion.  In one case, taxpayers (through the Canadian Deposit Insurance Corporation (CDIC)) underwrote the takeover of Central Guaranty Trust by Toronto-Dominion Bank, at a cost of $1 billion.

In addition, even though the federal government allowed banks unrestricted access to the mutual fund industry only a few years ago, the list of the 10 largest mutual fund companies in Canada already includes five banks and these banks control 30% of the total industry assets.

In the area of access to capital for business, the banks are by far the largest source of loans and other forms of credit (See CHART below).  At the end of September 1997, for example:

In contrast, the business lending and investment of all financial institutions other than the Big Six banks amounts to only about 36% of the banks total business lending ($175.1 billion), and almost one-third of this amount (about $58 billion) comes from trust companies which are bank-owned.  Federal government lending and granting programs, totalling at most $4.5 billion annually, and venture capital (at $5 billion) are not sufficient to close the gap left by banks not serving the capital needs of small and medium-sized businesses.

A Conference Board of Canada report ("What's New in Debt Financing for Small and Medium-Sized Enterprises" by Pierre Vanasse) greatly underestimated total bank financing by using Statistics Canada figures instead of the bank's own readily available figures.  Statistics Canada had as a total for domestic banks business debt financing only $159.541 billion, less than half the banks' own figure of $485 billion.  Given that 76% ($543.86 billion) of total business debt financing ($660.96 billion) is controlled by banks or their trust company subsidiaries, and that 94.3% of the Big Six banks' customers with business loans are small and medium-sized businesses with loans of less than $1 million, the Conference Board of Canada's estimate that the banks only provide 50% of total small and medium-sized business financing should be regarded as, at best, an inaccurate, low-end estimate.

It is clear that the total of potential non-bank funds available to business generally, and to job-creating small businesses trying to start up or expand, is minuscule compared to the financial resources of the chartered banks.  In order for Canadian small businesses to be globally competitive and to continue creating jobs, Canadian banks must be accountable to ensure that they are serving the needs of this key sector of the Canadian economy.

(d) World-Class Bank Profits: A Result of Protections and Privileges
The privileges and protections set out above, mainly the protection from competition they have enjoyed in the Canadian market, have also helped Canada's Big Five banks reach record profit levels in the past three years.  In 1995, the Big Five banks were amongst the seven corporations with the highest profits in Canada, their profits have more than doubled since 1993, and in 1996 the Royal Bank recorded the highest profit ever by a Canadian company ($1.43 billion).

The banks' profits for 1997 increased significantly, up 19% over 1996 to $7.5 billion, as the Royal Bank broke its own record profit level (up to $1.68 billion) and the CIBC and Bank of Nova Scotia registered the second and third highest profit levels ever (at $1.55 billion and $1.5 billion respectively).

Three of Canada's Big Five banks were among the most profitable banks in the world in 1996, as follows (Source: Fortune magazine, August 4, 1997):

In 1996, these three Canadian banks were more profitable than the largest bank in the world, the Bank of Tokyo-Mitsubishi (of Japan), and also more profitable than the 5th (GAN of France), 6th (Industrial Bank of Japan), 8th (Sanwa Bank of Japan), and 10th (Crédit Suisse of Switzerland) largest banks in the world (size based on total revenues).

As the profit levels of the three Canadian banks all increased in 1997, it is quite likely that they now rank even higher in terms of profitability as compared to banks around the world.  And given that their first-quarter results for 1998 show even higher profit levels, they seem headed directly into the top 10 most profitable banks in the world.

(e) Protections and Privileges Mean Greater Responsibility

"If you take a look at the history of this country, in every small town in Canada there has been a bank.  Most small towns are desperately fighting to hold on to those bank branches.  Obviously, the financial sector permeates every part of your life from your credit to your credit card."

Bankers like to characterize Canada's big banks as private corporations which should give priority regard to shareholder interests, with their employees and customers coming second and third.

However, given that the banks would not be as large or as profitable as they are without individual Canadians' deposits and the protections and privileges granted them by Canadian governments, banks are much more like public utilities.

Public utilities such as hydro-electricity, water, telephone, and cable-TV are granted the significant privilege of usually almost exclusive rights to generating and exploiting a natural resource.  Similarly, banks have been given the significant privilege of playing the major role in generating and exploiting a human-created resource, namely money.  Both utilities and banks are in a position of public trust with regard to the resources they manage.

The results of a national survey conducted by POLLARA in late 1997 (commissioned by the Public Interest Advocacy Centre and the Consumers Association of Canada) confirm that basic banking service is viewed by Canadians, like water and heat, as an essential service.  In response to a question concerning the necessity of having a bank account, 94% of Canadians stated that they feel it is necessary to have either a savings or chequing account in order to function in Canada.  In response to another question, a strong majority (68%) feel the government should become more involved in regulating the banking sector to protect consumers (compared to 22% who feel there should be less regulation).

The decision in 1967 to protect Canada's banks from foreign competition was made because it was believed that Canadian banks could best serve the national market.  Even though this decision essentially gave the banks a monopoly on provision of banking services, they were not required in return to meet any standards of service or other formal regulatory obligations to serve Canadians and the Canadian economy well.  In contrast, public utilities are required to meet service standards, supply services across the country, and provide detailed statistics concerning their costs and revenues whenever they want to change the rates they charge customers.

Some commentators, the banks included of course, argue that if consumers are unhappy with banks there are other sources of banking services, including access to capital.  This argument ignores the fact that in the Canadian financial system banks are the major source of financial services, as detailed above concerning the banks' control of various sectors of the financial services industry.

Given that the banks have enjoyed extensive privileges and protections for decades, allowing them to gain a significant level of asset and market control of financial services in Canada, and placing them in a position of public trust, banks should face higher standards in many areas of their activities than do other corporations.  These higher standards should apply, among other areas, to the overall service provided by banks, and also to bank mergers and acquisitions.

II.  Canadian Bank Mergers and Takeovers: Unnecessary and Unwise

(a) Global Competition: Not a Threat Despite the Banks' Claims

"No country in the world has had foreign banks come in and open up extensive branching networks outside major metropolitan centres."

The banks justify the need to extend their powers and undertake mergers and takeovers as necessary to meet the challenge of global competition.  However, as detailed above, foreign banks have been excluded historically from the Canadian market at the retail level (as well as severely restricted in aggressively developing small business loan portfolios).

Canada's offer in the World Trade Organization (WTO) negotiations on financial services (finalized in December 1997) continues the historical protection the banks have received by not allowing foreign banks to take deposits of less than $150,000.  This position was supported by Canada's big banks, consistent with their efforts in the past to protect their domestic market, and will be implemented in legislation expected to be introduced in fall 1998 and enacted before the WTO agreement deadline of June 1999.

How protected will our banks remain under the WTO agreement?  In short, 85% of the banks' business and individual customers have less than $150,000 on deposit in a financial institution, which means that the vast majority of bank customers will not be able to use foreign banks, even under the WTO agreement.  As a result, most foreign banks won't even try to set up in Canada, because they will face high start-up costs and will only be able to try to win over a small percentage of depositors.  The extensive start-up costs will include, beyond all the costs of setting up branches or sales offices, acquiring market information, developing and testing products and services, installing equipment, hiring and training staff, and setting up distribution systems.

The conclusion that foreign banks will not enter the Canadian retail banking market, even under the WTO agreement, has been confirmed by the actions of the big U.S. banks since the North American Free Trade Agreement (NAFTA) was ratified.  Despite having almost all the barriers to entry lowered under NAFTA, none of these banks have entered the Canadian market in any significant way.

Other foreign bank activities also confirm that the barriers to foreign bank entry into Canada have been, and remain, very high.  There are now fewer (43) foreign banks in Canada than there were in 1987 (when there were 59) and their combined assets amount to only $92 billion, insignificant compared to the $1.1 trillion in assets of Canada's six largest banks.  In the key area of business lending, according to the Conference Board of Canada, the foreign banks' share of the market dropped from 11%  in 1994 to 7.3% in 1996 (in SME debt financing, foreign banks' share decreased from 5.1% to 2.8% over the same period), with our domestic banks correspondingly increasing their market share.  The only foreign bank with any branch network, the Hongkong Bank of Canada, only has $24 billion in assets (the next largest has only $8 billion in assets) and only has branches because it bought two failing Canadian banks.

And while Canada's banks raise the spectre of electronic banking operations threatening their existence, the two banks that have entered our market have had very limited success.  ING Direct, for example, only has 60,000 Canadian customers (out of over 20 million total customers in the Canadian market) and Wells Fargo & Co., is only offering loans of less than $100,000 through the Internet to small businesses which have been in existence for at least three years (which means that many small businesses are not eligible).

In addition, if the federal government allowed foreign banks to take deposits of less than $150,000 it would be difficult, and would cause problems for consumers, under the Canadian Deposit Insurance Corporation (CDIC) system.  Why?  Under the WTO agreement, foreign banks will be allowed to set up branches of their home operations in Canada.  Their home bank, in their home country, will not be regulated by the federal Office of the Superintendent of Financial Institutions (OSFI), or covered under the CDIC system.  Therefore, if the home bank became insolvent, OSFI would not be able to participate in the wind-up of the bank, and customers of branches of the bank in Canada would not be covered by deposit insurance, and would lose the full amount of their deposits.

As a result, it is highly unlikely that the federal government will ever allow foreign banks to take deposits of less than $150,000, which means that our big, domestic banks' market will always remain protected as 85% of financial consumers will have to deal with our banks.

As Paul Martin has concluded (See quotation at the beginning of this section), global competition is simply not a threat to our banks' domestic, and very profitable, market.  The fact that the CEOs of Canada's big banks continue to make the false claim that competition is a threat clearly reveals their lack of integrity and that they will say anything to get what they want.

(b) Our Banks are Big Enough to Serve All Our Needs
As set out above, 85% of the banks' business and individual customers have less than $150,000 on deposit in a financial institution.

Why is the amount on deposit in banks of the vast majority of Canadian individuals and businesses relatively low (less than $150,000)?  First, our economy is dominated by small and medium sized-businesses.  According to the Government of Canada, 98% of all businesses have less than 50 employees (88% have less than five employees), 53% of all Canadians working in the private sector are self-employed or employed by a business with less than 100 employees), small businesses created over 80% of all growth in employment in the past 15 years, and small businesses created 38% of Canada's gross domestic product in 1991.

It is widely agreed, based upon both Canadian Bankers Association (CBA) and Canadian Federation of Independent Business (CFIB) surveys, that small businesses need at most $250,000 in credit (and medium-sized businesses need at most $1 million in credit).  In affirmation of this finding, and the Government of Canada statistics concerning the size of most businesses in Canada, the CBA's business credit report shows that the seven largest banks in Canada had (at September 30, 1997, the most recent statistics available as of May 1, 1998) the following overall loan size/number of customers portfolio:

Authorized credit under $25,000 311,156 (40.6%
of total customers)
Authorized credit under $100,000 505,007 (70.1%)
Authorized credit under  $250,000 653,893 (85.4%)
Authorized credit $250,000 to $1 million 76,106 (9.9%)
Authorized credit of more than $1 million 35,846 (4.7%)
Total Business Credit Customers 765,305

Of these customers, the following were the median amounts of credit by each size of loan category:

Authorized credit under $25,000 $7,941
Authorized credit under $100,000 $28,198
Authorized credit under $250,000 $49,549
Authorized credit  of $250,000 to $1 million $466,323
Authorized credit of more than $1 million $12,051,191
Median Business Credit for All Business Customers $653,125

(Source: CBA Business Credit Statistics: As At September 30, 1997)

As the above figures make clear, all of our banks, even the smallest of the domestic banks, are large enough to meet the needs of all Canadian businesses.

Some may say, what about big businesses, which have loans of more than $10 million?  In almost all cases, such large loans are split between the banks (called syndicated financing) to spread the risk to the banks, so again all of our banks are large enough to meet these needs as well.  Scotiabank, which is the fourth largest bank in Canada, recently boasted in a full page advertisement in The Globe and Mail that it had become the 10th largest bank in the world in syndicated corporate financings.  This achievement makes it clear that none of our banks need to be bigger to compete with other banks in the world in any area, including big business financing.

As well, it is very important to note that, on average, big businesses utilize only 29% of the amount of credit authorized.  This means that a business with a $10 million loan (or line of credit) is usually only using $2.9 million at any one time, again making it clear that all of our banks are big enough to meet the needs of all Canadians.  In contrast, for small businesses with credit of under $250,000 the utilization rate is usually 70% of the total amount loaned.  Given that big businesses do not utilize most of the credit authorized by the banks, it is clear that all our banks can easily meet the needs of big businesses in Canada, and also that the banks could easily shift more of their total business credit to small businesses without withdrawing needed credit from big businesses.

(c) Why Let Our Banks Get Bigger When They Provide Poor Service Now?
Some commentators have claimed that we have been well served in Canada by our financial institutions.  However, there is no evidence that consumers are satisfied with the current level of banking services.  The evidence that is available suggests that small businesses and consumers have several problems with banks, and the banks have refused over the past few years to disclose information which would refute this evidence, or to provide adequate complaint-handling services.

For example, if one compares studies by the Canadian Federation of Independent Business (CFIB) with its U.S. counterpart (the National Federation of Independent Business (NFIB), the inescapable conclusion is that American small business has easier access to capital than here in Canada.  In response to CFIB surveys, small business consistently ranks "access to capital" in their top 10 concerns, with the number of small businesses reporting problems with access to capital doubling from 20% in 1990 to 40% in 1996 (according to the June 1997 survey, access to capital was ranked as the 8th concern).  In contrast, in response to NFIB surveys over the past 10 years, the same concern has never ranked higher than 43rd (and in their 1996 survey it ranked 63rd).

A comparison of authorizations to small business at September 30,1995 with September 30, 1997 reveals that support for small business in the two-year period decreased, as follows:

In addition, other statistics currently provided by the banks reveal that between December 31, 1995 and September 30, 1997 there were decreases in lending to particular regions:

(Sources: CBA Business Credit Statistics: As At September 30, 1995; CBA Business Credit Statistics: As At December 31, 1995; and CBA Business Credit Statistics: As At September 30, 1997)

Overall, as of September 30, 1997 none of the Big Seven Banks in Canada loaned more than 10% of their total lending to small businesses (loans under $250,000), and none loaned more than 20% of their total lending to small- and medium-sized businesses (loans under $1 million).

Also, in contrast to the banks' ongoing claim that small business is riskier to lend to than big business, the banks' own figures show that for the one year that the banks have disclosed statistics, the banks lost more money to big business than to small business, as follows:

(Source: CBA Business Credit to Small, Medium and Large Customers, Specific Provisions on the Canadian Portfolio, Seven Bank Aggregate for the 12 Months Ended October 31, 1996)

The summaries of the CBA reports also do not provide an analysis of changes in big business lending.  Why not?  One main reason could be that the changes counter the banks' claim that they are focussed on serving the small business sector's needs for capital.  A simple analysis of the CBA statistics between September 30, 1995 and September 30, 1997 reveals that lending to big business increased disproportionately during this period.  Of the $99.8 billion increase in total business credit in the two-year period, $81.2 billion (81.3%) of the credit was loaned out in amounts in excess of $5 million (an increase in this loan category of 16.74%).  However, during the same period customers with credit in excess of $5 million declined by 13.66% (from 11,477 to 9,909 customers).

As a result, as of September 30, 1997 customers with credit authorizations in excess of $5 million represented only 1.29% of total customers, but received 86.42% of extended credit (compared to 1.72% of total customers and 74.57% of total credit as of September 30,1995).  In essence, the banks extended more credit to fewer big business clients over the two-year period while, as detailed above, decreasing the proportion of credit extended to small  and medium-sized businesses.

These statistics clearly show that the big banks are failing in their role as financial intermediaries because they are not providing capital where it can create the most employment and have the most positive impact on the Canadian economy.

Surveys in 1996 and 1997 by the National Quality Institute of over 8,000 Canadians regarding customer satisfaction with 21 different industries found banks ranked in the bottom five industries both years.  The Institute is an independent, non-profit organization that conducts public education, and audits and certification of business and government concerning provision of quality service.

On one particular issue, service charges and credit card interest rates, consumers across Canada have expressed their suspicions about being "nickled and dimed" for several years.  While several bank executives have acknowledged that this is a primary concern of their customers, the banks have to date not disclosed information to prove that they are not gouging consumers in these divisions of their operations (i.e. by disclosing their profit margins for these divisions and demonstrating that their profit margins are reasonable).  The federal government has not required them to disclose this information either.  Without this information, how can anyone determine whether the banks provide their services at a fair and reasonable price?

Basic access to banking service is another ongoing problem in Canada.  Amidst the hype about phone and virtual banking, a large group of Canadians has been totally left out: at least 400,000 adults with no bank account.  Surveys have shown that a major cause of the problem is that banks require identification for opening accounts and cashing cheques (even government cheques) that people with low incomes often lack.  The federal government and the banks claimed to have solved this problem by reaching agreement in February 1997 on a voluntary change in the policy on account-opening requirements.  However, a survey of bank branches by the Canadian Community Reinvestment Coalition (CCRC) in October 1997 revealed that five of our six largest banks were still requiring photo ID, maintenance of a minimum balance, or employment to open an account, all in violation of the February 1997 agreement (See the CCRC's Position Paper #2, Access To Basic Banking Service: Ensuring A Right to This Essential Service for details).

It is important to note as well, given the increasing cost of telephone service, the substantial cost of purchasing and operating a computer, and the costs of public transit, that if in-branch service is not available in many neighbourhoods and small towns across the county many people (especially people with low incomes) will still face significant barriers to access to basic banking services, even if banks lower the identification barriers they now maintain to opening accounts.

In the complaint-handling area, banks do not report the number of complaints they receive each year in their annual reports.  They have also set up offices of bank ombudsmen, all of which are selected, paid and directed by the banks and none of which can make a ruling on a complaint that binds the banks in any way.  In contrast, in Australia and Britain, the ombudsmen are independent and can make binding rulings on complaints (See the CCRC's Position Paper #1, Bank Ombudsmen: Why They Must Be Independent for details).

Clearly, we need an independent and effective system of compiling and addressing consumer complaints to determine the actual level of service banks provide to Canadians.  However, according to the available evidence, our banks provide very poor service and fail to meet the needs of many Canadians.  And we should not let any bank get bigger if it isn't serving Canadians well now.

(d) Bigger Banks Are Not Better

"I find it difficult to understand how a bigger bank will be more productive and offer better service to its clients."

"There is as yet no clear evidence that larger size in banking would benefit Canadian consumers."

All of the available evidence shows that bigger banks provide worse service to their customers, especially their smaller business and lower-income individual customers (which in Canada make up 85% of the banks' customers).  Canada's Big Five banks also have a worse record promoting women to the top ranks than smaller financial institutions in Canada (The Globe and Mail, April 24, 1998).

U.S. studies have found that mergers led to higher fees, closed branches, less customer service. Consumer Reports magazine reported in March 1996 that over 100 new types of bank fees have been created in the U.S., while existing fees have risen sharply, as mergers have occurred there.  And the U.S. Public Interest Research Group (U.S. PIRG) released a survey of 419 banks in 29 states in July 1997 that found that, nationally, bank customers pay about US$30 more annually for chequing accounts at big banks than at small ones.  A Federal Reserve study has confirmed the U.S. PIRG study findings.

U.S. studies also indicate that mergers and acquisitions have a negative impact on small business lending.  For example, Federal Reserve economists Allen Berger and Joseph Scalise, and University of Chicago economist Anil Kashyrap estimate that small business lending will continue to decline in the next three to five years as it has in the past five years (by about 33%), in large part due to industry consolidation and the disappearance of small banks.

Branch closures, especially in low- and moderate-income neighbourhoods, have also followed mergers in the U.S., according to a September 1997 Federal Reserve study that looked at the pattern of branch closures from 1980 to 1995.  A study by the National Community Reinvestment Coalition (NCRC) of the closure of a branch of Banc One in Indianapolis found that the closure would reduce lending in the neighbourhood by one-third, because of the lack of competitors and capacity of people in the neighbourhood to travel to other branches or shop the Internet for loans.

A 1994 report based upon the results of 39 studies of thousands of U.S. bank mergers and takeovers between 1980 and 1993 by U.S. Federal Reserve Board economist Stephen Rhoades concluded that "findings point strongly to a lack of improvement in efficiency or profitability as a result of bank mergers."  This directly contradicts the claims of the Royal Bank-Bank of Montreal, and the CIBC-TD Bank that both efficiency and profitability will improve if the banks merge.

In the Netherlands, according to a recent report on the CBC-TV show Venture, there were more than a dozen medium-sized banks 15 years ago.  Now, after several mergers and takeovers, only three are left and they control 85% of the domestic financial services market.  According to a study commissioned by the Netherlands government, the most recent merger of ABNO and Amro Bank, has led to the loss of 6,000 jobs and has cost consumers $280 million (Can.) in higher service charges.  A director of ABNO-Amro Bank, Michael Drabbe, publicly admitted that the bank increased its prices after the merger because they felt that the market would bear increased prices (as consumers had less choice).

As mentioned in the section above, surveys in 1996 and 1997 by the National Quality Institute of over 8,000 Canadians regarding customer satisfaction with 21 different industries found banks ranked in the bottom five industries both years.  Another finding of those surveys was that credit unions and trust companies ranked third and ninth, respectively, out of the 21 industries, and that other smaller companies (e.g. pharmacies, small retail stores, and restaurants) ranked high in customer satisfaction while larger companies and service deliverers (large retail stores, cable-TV, Canada Post, and the government) ranked at the bottom in terms of customer satisfaction.  Overall, this shows clearly that bigger companies (including the banks) provide worse service to consumers.

A March 1998 report by Bank of Canada economists Charles Freedman and Clyde Goodlet echoed the National Quality Institute survey results, concluding that profitability, not size, is the most important factor for the success of financial service providers.  As mentioned above, three of our Big Five banks are currently among the top 16 most profitable banks in the world.  According to the report, economies of scale and resulting cost savings do not increase beyond a certain size of financial institution (which all our banks have reached), and "It is far from clear that the global mega-institution will be best at providing the efficient, innovative, and flexible service environment necessary to maintain high profitability." (p.21)  Given that all the available evidence shows that bigger banks are not better in many areas, in terms of customer service, price of services, efficiency or profitability, why should we let our banks get bigger, especially when they provide a relatively poor level of service now?

III. Royal Bank-Bank of Montreal and CIBC-TD Bank Proposed Mergers: The Truth Behind the Bankers' Claims
"The reason that is put forward is the need to extend their global reach and the need for size to support the technologies that are required.  That case still has to be made."

"It's almost a mania, in my view. What's in it for us? I don't think much."

Currently, each of the Royal Bank, Bank of Montreal (BMO), CIBC and TD Bank's assets are greater than the federal government's annual revenues, and the Royal, BMO and CIBC each lend more than the federal government spends each year.

These banks are among Canada's most profitable enterprises (in 1997 the Royal Bank had the highest, and CIBC the second highest, profits ever recorded by Canadian corporations) and the Royal, BMO and CIBC are among the top 16 most profitable banks in the world.  These four banks have used their record profits over the past five years in part to increase their holdings in Canada from 113 to 326 subsidiaries, according to Statistics Canada.

These banks also already have a strong global presence. According to their 1997 annual reports, together the Royal and BMO have over 300 branches in more than 35 countries, and investments and operations in many more. CIBC operates in 12 countries through its private, commercial banking, and has 62 offices globally through its corporate and investment banking operations, while the TD Bank has subsidiaries in nine countries and operations in many more.  And these banks do very well in these international markets.  In addition to Scotiabank being the 10th largest bank in the world in volume of global syndication lending with subsidiaries in 19 countries and branches in many more, the CIBC, for example, ranks in the top 10 or better for all major industry and products in the international finance area, according to its 1997 annual report.  Clearly, these banks don't exactly face disaster if the mergers do not proceed.

Within Canada:

If the two mergers were approved, the two new megabanks would control 70% of the banking assets in Canada, a higher level of concentration than in any other G-7 country.  Each bank would be more than twice as large than the next largest bank in Canada, Scotiabank (with $210.7 billion of assets, 16% of total bank assets in Canada).

Overall, the Big Six banks and their trust company subsidiaries control 74% of business debt financing in Canada (See CHARTS above in section II).  If the banks were allowed to merge, the four largest banks would control about 72% of consumer loans in Canada.  CIBC-TD would have the leading market share (43%) of credit card purchases by volume, with the Royal-BMO holding 37% of the market, and CIBC-TD would have 70% of the Canadian discount brokerage market.  In all of these areas, the megabanks would exceed either the 35% market share threshold, or the Big Four financial institutions would exceed the 65% national market share threshold, set by the Competition Bureau as a basis for challenging any merger.  In other financial service areas, national market share would also reach levels that warrant concern, such as the 33.5% market share in business debt financing for CIBC-TD Bank, and the combined market share of about 30% in securities resulting from the combination of Royal's RBC Dominion Securities Inc. and BMO's Nesbitt Burns.  As the Competition Bureau examines market participants in 6,000 markets across the country, no doubt the banks' market shares will exceed legal thresholds in several local and regional markets across the country.

These banks (or at least their CEOs) want to lead multi-billion dollar investments in corporate mergers, takeovers and expansions in the global marketplace.  To do so, they claim that they need to have a larger capital base than either bank currently has, which leads to the proposed merger.  To push their point in announcing their proposed merger, Royal Bank CEO John Cleghorn and Bank of Montreal CEO Matthew Barrett highlighted global competitiveness, and how Canadian corporations doing business outside Canada "will be able to count on a powerful partner when they bid on the biggest contracts and the biggest underwritings" that will "help Canada punch above its weight."

However, as detailed above, and in sections II(a) and (b), there is no evidence that our banks need to be bigger to meet our needs in Canada or abroad, and it is also clear that they do not face significant competition from foreign or domestic banks.  Also, as set out in sections II(c) and (d), there is no evidence of any benefits for those who provide the banks with a substantial, inexpensive source of capital, namely the over 20 million Canadians who deposit their money in banks.  Indeed, a survey of small businesses found that in Canadian communities with four or more competing banks, business service charges increased 10.8% between 1996 and 1997, while in one-bank towns the increase was much greater at 16.4% (Source: The Toronto Star, April 18, 1998).

Given the lack of any evidence of need or benefit to consumers of the mergers, the banks' have adopted the classic "trickle-down" argument to push the merger.  According to the banks, it's better for Canadians if the banks get bigger to be able to focus on and become involved in larger, overseas operations and big business investments, because they will make a lot of money on these investments and it will trickle down to shareholders as higher dividends.

However, in making the "trickle-down" argument, the banks ignore several facts.  First, as mentioned above, Scotiabank, the fourth largest Canadian bank, has managed, despite its relatively smaller size, to become the 10th largest bank in the world in terms of big business financing.  Second, the evidence from the U.S. revealing that bigger banks charge more in service fees (which affect everyone and will decrease any benefit of higher dividends for those Canadians who own bank shares).  Third, the banks also ignore the risks of increased exposure to large investments abroad and the billions of Canadians' money they lost through their loans to Dome Petroleum, Olympia and York, and several countries in Latin America (even as the costs of the multi-bank, multi-billion dollar meltdown in Asia expand month by month and already total hundreds of millions of dollars in losses for Canada's banks).

Finally, the banks ignore the benefits of focussing on investing in job-creating sectors here in Canada, as opposed to big business deals abroad.  For example, the new mega-banks could invest $2 billion in a merger of two large foreign companies, and the banks would highlight the large amount of money they (and, indirectly, bank shareholders) would make on such a deal.  But what if, instead, the non-merged banks lent $100,000 to 20,000 small and medium-sized businesses in Canada (total $2 billion).  Estimating conservatively, each business would be able to hire two people, 40,000 jobs would be created, and all these working people would pay taxes, consume more, and, if they were on social assistance before, remove themselves from the public welfare payroll.  Clearly, investing the $2 billion in small and medium-sized businesses would be better for Canadians and our economy.

Some may say that increased investment in small- and medium-sized businesses (SMEs) would be too risky and not as profitable, but as detailed above in section II(c), for the one year Canada's big banks have disclosed statistics, the banks lost more money in big business loans than in small- and medium-sized business loans.  Also, the banks have not disclosed any statistics showing that SME lending is less profitable than big business lending.

In addition, the banks' claims of increased profitability from the mergers are based, according to the banks' own estimates, upon being able to shut down branches in communities where both banks currently operate (in 155 communities with populations of less than 20,000 in the case of the Royal-BMO merger) and by cutting over 9,000 jobs (10% of their total combined workforce).  According to Larry Wynant, Associate Dean of the Richard Ivey School of Business at the University of Western Ontario, a minimum of 20% of the banks' combined total of 2,552 branches will be shut down, while Phillip Phan, Professor of Business at York University's Schulich School of Business, predicts that half the branches will be closed (Source: The Globe and Mail, January 24, 1998, p.A8).

Of course, closed branches will only be one reason for massive job losses resulting from the mergers.  The CEOs of Scotiabank and National Bank, joined by industry analysts, estimate that, in contrast to the merging banks' claims, up to 65,000 people could lose their jobs (or experience "involuntary departures" as Royal Bank CEO John Cleghorn phrased it at the bank's annual shareholder meeting).  This would match the job loss rate of about 30% that has resulted from past bank-trust company mergers in Canada.  It would also be a significant loss of jobs at a time when Canada's unemployment rate remains high and the poverty rate is the highest since 1981.

Not surprisingly, given the arrogance the bankers have shown toward the federal government and the public, bank CEOs John Cleghorn and Matthew Barrett changed their estimates of branch shutdowns and layoffs at their annual shareholder meetings, with both making the new claim that no branches would close and no jobs would be lost.  The only thing made clear by these statements is that bank executives will say anything to get what they want, even if it directly contradicts their previous statements.  And despite all their claims about improved services for customers, the only positive effect of the mergers for which there is clear evidence is in the area of executive compensation.  For example, nine top executives of CIBC and TD Bank would reap, as of April 1998, paper profits of $142 million from increased bank stock prices resulting from bank merger proposals and rumours about other mergers.

The so-called "economies of scale" the banks claim would be created by the mergers have already been created as the banks have launched joint ventures to handle many areas of their banking activity.  For example, in July 1996, Royal Bank, Bank of Montreal and TD Bank announced a joint venture that combines their items processing (cheque-processing etc.) while CIBC and Scotiabank announced the formation of a joint subsidiary that will handle most of their backroom operations.  The banks predicted savings of 15% on their costs for these operations, or $60 million for the first joint venture and $100 million for the second (The Globe and Mail, July 25, 1996, p. B1.  Not surprisingly, the job losses created by these joint ventures have not been disclosed by the banks, although at the time of the announcements they were estimated to be 30% of the total jobs involved.

In terms of service to consumers and small business, the mergers would substantially reduce already limited choice (Canada already has one of the most concentrated banking sectors in the industrialized world).  As mentioned above, many branches will be shut down, limiting consumer choice in these small, local markets.  As well, the two megabanks would have double the assets, and more than double the number of customers of the next largest bank in Canada.  As a result, the megabanks would be able to act unilaterally in driving prices and services in whatever direction they wished, likely to the detriment of consumers and small businesses as has occurred in the U.S. and the Netherlands.

The mergers would also substantially lessen competition by encouraging and facilitating interdependent activities between the megabank and other banks, and between other banks and other financial institutions.  Many of Canada's domestic banks are already cooperating in various "backroom" operations which, along with the existence of the Canadian Bankers Association, price transparency in the Canadian banking industry, relative stability of underlying costs, frequent product sales, and multi-market participation by the banks, only increases the likelihood of anti-competitive cooperation, according to the Competition Bureau of Canada.

The Royal-BMO and the CIBC-TD megabanks would be able to use their size (they would both be among the 25 largest banks in the world) essentially to force other Canadian financial institutions to cooperate with them in offering products and services, and other banks would also seek agreements with other financial institutions to protect their market share.  And given the protected domestic banking market, there is no likelihood that new or increased competition from foreign banks will be able to counter this consolidation and interdependent activities at any time in the near future (and certainly not within the next five years).

Finally, both banks are underestimating the complexity and costs associated with the merging process.  As past merger experience shows, it would take several years to work out the proposed bank mergers in Canada.  Doug Peters, former Secretary of State (International Financial Institutions) stated recently that when he joined the Toronto Dominion Bank in 1966, the bank was still working out problems caused by the merger of the Toronto Bank and Dominion Bank 12 years earlier.  In 1997, Wells Fargo bank of California paid back depositors' money it put in the wrong accounts as a result of computer problems caused by its merger with another California bank, First Interstate.

While the available evidence shows clearly that the proposed Royal Bank-Bank of Montreal and CIBC-TD Bank mergers are not in the public interest and should be prohibited, key information is lacking to fully assess many aspects of the mergers, including the current performance of the two banks in meeting the needs of consumers and small businesses in communities across Canada.  The U.S. system of bank accountability, set out below in section IV, provides a very compelling and workable model for gathering this key information, and reviewing the level of service provided by banks and other financial institutions.

IV. The U.S. Bank Accountability System: A Model for Canada
It is essential that performance of financial institutions, particularly in the context of any expansion of powers of a financial institution, or transactions such as mergers and takeovers, be reviewed with regard to access to services for people with low incomes, availability of capital to small businesses, service to community needs, and other consumer issues.  Otherwise, how is it that anyone will be able to prove that such increased powers or transactions provide benefits to customers, the key issue about which we should all be concerned?

In the U.S., under the federal Community Reinvestment Act (CRA), when a bank wants to expand in any way (through a merger or acquisition, or by opening a new branch or setting up a new automatic banking machine), the bank's record of lending, investment and providing service is reviewed by the regulators.  The performance of many financial institutions in these areas is also regularly reviewed by regulators.  Citizen groups are given standing in these reviews to present their views on the bank's record in these areas.  Importantly, the regulators can refuse to grant the expansion application if they determine that the bank's performance record is poor.

The criteria used in the U.S. evaluation process are appropriate benchmarks for the Canadian approval process.  The U.S. evaluation is based on information set out in a disclosure statement to the regulators.  Unfortunately, Canadian chartered banks are currently not required to disclose the same level of information as their U.S. counterparts.  Ironically, however, the Bank of Montreal and the Toronto Dominion Bank are both very familiar with the U.S. requirements through the process they had to comply with leading up to their acquisition of U.S. financial institutions.  Both the Bank of Montreal and TD Bank have projected healthy profits from their U.S. subsidiaries, which raises the further question as to why they would resist, as they have to date, similar requirements being enacted here in Canada.

]For example, before the Bank of Montreal could expand its subsidiary, Harris Bank of Chicago, in 1994, Harris Bank had to correct its poor lending and service record, which was revealed by disclosure of data under the CRA. It did so by pledging $327 million in credit and assistance over five years for affordable housing and small business loans and to meet other needs of communities in the Chicago area.  In 1996, when the Toronto Dominion Bank applied to acquire New York-based Waterhouse Securities and its subsidiary, Waterhouse National Bank (WNB), the takeover was challenged because Waterhouse was not serving low or moderate income people at all. TD Bank was required to set out a five-year plan for WNB to correct its lack of fair service to all consumers.

Across the U.S., thanks to the CRA, poor performance by financial institutions in servicing some communities has been revealed, and the institutions have invested over $435 billion in these communities to correct their poor performance.

Much of the unease about the proposed Royal Bank-BMO and CIBC-TD Bank mergers reflect a sense that banks are not very accountable to Canadian communities, small businesses and individual customers, and ample evidence that they are providing poor service overall.  In a time of continuing high unemployment in Canada, the loss of thousands of jobs as a result of the mergers is also a serious matter of concern.

It's time for the federal government to enact a disclosure and review system, based on the 20-year old U.S. system, to ensure that we can hold our banks to a high standard of service.  In particular, as in the U.S., such a system should ensure that no bank be allowed to get bigger if it is not meeting the needs of the communities in which it operates, or if the expansion will have negative impacts on customer service and the Canadian economy as a whole.

V. CCRC Recommendations: Criteria the Government Should Use in Reviewing Mergers and Takeovers by Financial Institutions
In order to determine whether Canada's banks serve Canadians and the Canadian economy well, and particularly to prevent expansion of the power of banks, and financial institution mergers and takeovers that are not in the public interest, the CCRC makes the following 16 recommendations.  These recommendations are based upon the U.S. system outlined above, which has worked effectively for 20 years (See the CCRC's fifth position paper, An Accountability System For Canada's Financial Institutions: How To Ensure They Meet a High Standard of Performance (released December 1997) for more background on the system).

Finance Minister Paul Martin clearly agrees with the principles of the U.S. system, as he challenged the Royal Bank and the Bank of Montreal "to lower consumer charges, to guarantee that there will be no job loss, to guarantee that small and medium-sized business and that small towns in this country will benefit from this [the merger]" (The Globe and Mail, January 27, 1998, p.A1).  All of the factors he listed are considered under the U.S. system.

It is only appropriate that Minister Martin endorse the principles of the U.S. system, given that at the Liberals' national policy convention in October 1996 in Ottawa, priority resolutions proposed by three provincial party associations were passed by over 2,000 delegates from across Canada.  Reinforcing the statements by Minister Martin and the quotation from Prime Minister Chrétien at the beginning of this Position Paper, the resolutions proposed enacting legislation in Canada based on existing U.S. system (the U.S. legislation was specifically mentioned in one of the resolutions).

The Liberal's 1997 election platform also states that, beyond increasing the capital base and lending capacity of Crown financial institutions such as the Business Development Bank of Canada and the Farm Credit Corporation (which focus on small business lending), the Liberals will "facilitate a dialogue between the non-profit sector and financial institutions on concrete ways to promote community economic development, including support for micro-lending initiatives."

Aimed at addressing the same concerns, the Conservatives' 1997 federal election platform pledged to require banks to publish detailed records on small business lending on a regional basis to "enable Canadians to compare the performance and commitment of their financial institutions to the creation of loan capital for new and small businesses."  The NDP's and Bloc Québecois' election platforms also contained similar proposals concerning disclosure of data on bank lending patterns and practices, as well as pledging to enact requirements for banks to reinvest in communities and job-creating businesses if the data reveals that banks are not meeting their legitimate demand for capital.

This broad-based support for the enactment of a disclosure and review system based upon the U.S. system is particularly appropriate now given that the performance of the U.S. subsidiaries of the Bank of Montreal and TD Bank will be reviewed by the U.S. government as a result of the proposed mergers with Royal Bank and CIBC.  This review will reveal the stark difference between bank accountability in the U.S. compared to Canada, as the U.S. subsidiaries will face a detailed review of their past lending, investment and service practices as disclosed to the federal government, while the Canadian banks, if the current system is used, will face a cursory review based upon the very limited amount of information they currently publicly disclose.

The recommendations set out below are also based upon the results of the two independent, national polls that have been conducted in the past few months concerning the proposed bank mergers.  A February survey by POLLARA of 1,200 Canadians found that only six percent of respondents completely supported the merger of the Royal Bank-Bank of Montreal, while 55% were against the proposed merger.  A survey of 2,306 people conducted by Environics Research Group in March-April found that 35% of respondents said that there would be no benefits to the Royal -BMO merger, and 76% said that there would be negative results.

Taking into account all of the above evidence of increasing power of Canadian banks, with no increase in their accountability to Canadian consumers, businesses and communities, and taking into account the opposition to the mergers and broad base of support for the enactment of a bank accountability system in Canada (especially for reviews of proposed increases in the powers of banks or mergers and takeovers by banks of other financial institutions), the CCRC recommends the following:

 In addition, as detailed in the CCRC's other position papers, banks and other financial institutions, including foreign financial institutions operating in Canada, should be required to:

These measures generally reflect processes that are undertaken in other jurisdictions, including jurisdictions where Canada's banks have holdings, and many of these measures are based upon a U.S. system that has worked effectively for 20 years.

When combined with the overall disclosure and performance review system set out above, these measures are reasonable ways to require banks and other financial institutions to meet a high standard of performance in serving the needs of consumers, small businesses, and communities across Canada, and to ensure that expansions of the powers or banks, or mergers and takeovers of other financial institutions are prohibited if they are not in the public interest.


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Canadian Community Reinvestment Coalition
P.O.Box 1040, Station B, Ottawa, Canada K1P 5R1

Tel: (613) 789-5753
Fax: (613) 241-4758

Email: cancrc@web.net

Copyright 1998 CCRC