As the megabank merger drive gathers steam, debate about the deal’s impact on the public is heating up. This debate is crucial, especially given that a clear majority of Canadians oppose the proposed merger, according to a new national poll.

The Royal Bank and Bank of Montreal claim they need to be bigger to survive global competition. However, they simply are not threatened by foreign banks. The combined assets of foreign banks in Canada total only $92 billion, versus $1.1 trillion in Big Six Canadian bank assets. And foreign banks continue to face significant barriers to setting up in Canada, even under a recently-signed international agreement.

The two "engaged" banks are already massive and very healthy. Each bank’s assets are greater than the federal government’s annual revenues, and each bank lends more than the federal government spends each year. Together they control 32% of total bank business lending in Canada. They are among Canada’s most profitable enterprises (in 1997 the Royal Bank had the highest corporate profit ever in Canada) and among the 16 most profitable banks in the world. And they already have a strong global presence. Together the two banks have branches in more than 30 countries, and investments in many more. These banks don’t exactly face disaster if the merger does not proceed.

In fact, it is more likely to lead to disaster for bank customers and employees. We already have one of the most concentrated banking sectors in the world, and the merger would reduce already limited choice for consumers and small businesses. With $452 billion in combined assets and 17 million customers, the new megabank would have close to double the assets of the next largest bank, and control almost half the total assets of Canada’s big five banks. As a result, it would be able to drive prices and services in whatever direction it wished. And, according to the banks’ reported estimates, over 9,000 people (10% of the two banks’ total staff) could lose their jobs.

There isn’t any evidence that the merger would benefit consumers. Indeed, a recent study of thousands of U.S. bank mergers by U.S. Federal Reserve Board economist Stephen Rhoades concluded that service to customers did not improve as a result of any of the mergers.

Other U.S. studies have found that mergers led to higher fees, closed branches and less customer service. Consumer Reports magazine reported that over 100 new types of bank fees have been created in the U.S., while existing fees have risen sharply, as mergers occur there.

Perhaps most importantly, Canada’s banks do not need to be bigger to serve the vast majority of Canadian businesses and individuals. Eighty-five percent of businesses and individuals in Canada have loans or investments of less than $250,000, and all of our banks are big enough to meet these needs.

The federal Competition Bureau will examine whether the proposed merger will harm competition. In the past, the bureau has assessed mergers only based upon whether a merged company would control more than 35 percent of a market for a particular product or region, and effects on price and choice for consumers.

However, the preliminary report of the federal government’s task force on financial services urged Ottawa to also assess the effect of a given merger on access to bank services and to loans for small businesses.

Finance Minister Paul Martin has publicly stated that he will require the banks to reduce consumer charges, guarantee no job losses, and ensure that small businesses and small communities benefit from the merger.

In effect, Mr. Martin is calling on the banks to show accountability to the country and the customers which have provided them with enormous benefits. Banks have enjoyed protection from competition for decades, something which, combined with the deposits of over 20 million Canadians, has allowed them to dominate the financial services market and reap record-breaking profits. It’s about time, before we give them any more power, that banks proved that they are serving Canadians and the Canadian economy well.

How should we judge banks’ level of service in Canada?

Time-tested models are at hand. Mr. Martin should back up his tough words with bank accountability laws similar to those which have worked well in the U.S. for over 20 years. The U.S. Community Reinvestment Act (CRA) requires deposit-taking financial institutions to help meet "the need for credit services as well as deposit services" of communities in a manner "consistent with the safe and sound operation of the institutions."

Financial institutions’ performance in meeting needs is revealed by requiring them to disclose detailed data about their loans, investments and services. The U.S. government reviews the data and grades each institution’s performance. If a financial institution receives a failing grade, it can be required to take corrective action, and any expansion, merger or takeover of the institution can be denied.

For example, the Bank of Montreal and Toronto-Dominion own U.S. financial institutions that have to comply with the U.S. laws. 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.

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 $353 billion in these communities to correct their poor performance.

Much of the unease about the proposed merger reflects 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 merger 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.