Ending Power Without Accountability Making Banks in Canada Better Before They Get Bigger Summary of CCRC Position Paper #6 (May 1998)

Canadian bank mergers and takeovers are unnecessary and unwise for many reasons. First, our banks are already big enough to serve all our needs. Secondly, since consumers and small businesses are dissatisfied with banking services, as shown by national surveys, there is no reason to allow the banks to grow larger. Thirdly, all the available evidence from other countries shows that bigger banks provide worse service to their customers, especially to lower-income individuals and small businesses, than smaller banks.

In addition, a March 1998 report by Bank of Canada economists Charles Freedman and Clyde Goodlet concluded that profitability, not size, is the most important factor for the success of financial services providers.

Nor is foreign competition the threat bankers claim it is. They are now fewer (43) foreign banks in Canada than there were in 1987 (when there were 59) and their combined assets have decreased to only $92 billion, insignificant compared to the $1.1 trillion in assets of Canada's six largest banks. As Finance Minister Paul Martin has said, "No country in the world has had foreign banks come in and open up extensive branching networks outside major metropolitan centres." (Globe and Mail, May 5,1998).

Moreover, the four merger-seeking banks (Royal Bank, Bank of Montreal (BMO) TD and CIBC) already have a strong global presence. For example, the Royal and BMO have over 300 branches in more than 35 countries, and investments and operations in many more.

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, and would control an excessive market share of many financial products and services. Each bank would be more than twice as large as the next largest bank in Canada, Scotiabank (with $210.7 billion in assets, 16% of total bank assets in Canada) and among the 15 most profitable banks in the world.

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, cutting an estimated 65,000 jobs, according to industry analysts. In terms of service to consumers and small business, the mergers would substantially reduce already limited choice -- and Canada already has one of the most concentrated banking sectors in the industrialized world. Overall, there is no evidence that the mergers will benefit the over 20 million Canadians who deposit their money in banks.

Based on all of the above reasons, the CCRC recommends that the federal government prohibit the proposed Royal Bank-Bank of Montreal and CIBC-TD bank mergers, for the following reasons:

• these banks do not serve small businesses or people with low incomes fairly or well;
• the available evidence clearly points to negative impacts from the mergers on consumers, small businesses and the Canadian economy overall;
• there is no evidence that foreign banks or other competitors will provide significant competition to the megabanks in the next several years; and
• U.S. studies of thousands of bank mergers have showed that bank mergers do not increase efficiency or profitability, so even bank shareholders will likely not benefit from the mergers.

In addition, the CCRC recommends that the government prohibit mergers and expansions of banks' powers until two years after the government changes its process for reviewing mergers and takeovers. Reviews of mergers and takeovers by financial institutions should take into account likely job losses, negative impacts on competition and consumer choices, and the increased ability of big financial institutions to abuse their market dominance. As part of the review process, the federal government should enact information disclosure and performance review based on the U.S. bank accountability system that has worked effectively for 20 years, as detailed in the CCRC's fifth position paper, An Accountability System for Financial Institutions in Canada.

These measures would ensure that banks and other financial institutions meet a high standard of service in serving the needs of consumers, small businesses and communities across Canada, and that mergers and takeovers of other financial institutions are not allowed to get bigger if they are not serving their customers fairly and well or if a proposed merger would have negative impacts on the Canadian economy overall and is therefore not in the public interest.

Canadians have shown clearly that they want better banks, not bigger banks.