House of Commons Standing Committee on Finance
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Gordon
M. Nixon
President & Chief Executive Officer
RBC Financial Group
House of Commons
Standing Committee on Finance
Ottawa, Ontario
Monday, February 3, 2003
Thank you, Madam Chair and good afternoon
everyone. Joining me today are:
- Charlie Coffey, Executive Vice-President, Government
and Community Affairs; and,
- Anne Sutherland, Senior Vice-President, Client Segment
Strategies. Anne has recently returned from Vancouver
where she was responsible for personal and business banking
in British Columbia and worked closely with our small-
and medium-sized business clients.
You have asked for our views on the major
considerations that should apply in determining the public
interest elements of large bank mergers in Canada. At the
Senate Committee hearings last year we expressed the need
for greater clarity with respect to criteria used to evaluate
the public interest impact. We also urged that steps be
taken to eliminate duplication in the process concerning
the role of the public interest review versus the roles
of OSFI and the Competition Bureau.
Today, I would like to build on our previous
submission with some additional thoughts on how we can develop
a merger review process that properly addresses the public
interest, advances our country's prosperity and ensures
our nation's future financial sovereignty.
There seems to be a growing consensus
that the merger review process should address these issues
up-front, and the Government itself has stated publicly
that the public interest tests associated with bank mergers
need greater clarity. It is important to Canada's financial
system that the merger process be clear, efficient and timely,
and that there be some consistency between government and
industry objectives.
The alternative is a situation that hurts
our industry in ways that are not in the public interest.
A poor review process is not only disruptive to employees,
clients and investors - including more than one in two adult
Canadians who own bank stocks - it restricts the ability
of our financial services companies to make investment decisions
and maximize their potential.
The fact that we already have guidelines
in place that deal with issues like access to service, branch
closures and transitional issues such as employment, creates
additional ambiguity and leaves the industry struggling
with how to define public interest issues, let alone recommend
remedies. Therefore, in our view, it is imperative that
the government defines more precisely not only the concept
of "public interest" but also specific guidelines
and requirements for addressing the Public Interest Impact
Assessment.
Your deliberations should not be compromised
by time constraints or politics. Without a clear, transparent
and predictable process, the likelihood of formal merger
proposals being tabled and approved is remote and, if mergers
are proposed, they run the risk of being embroiled in a
politically charged process. This would not be in anyone's
interest, and is not conducive to the establishment of good
public policy.
I believe the public interest process
would be more productive if it had a clear mandate, did
not duplicate issues being examined by OSFI and the Competition
Bureau, and took into account existing federal guidelines
that banks must already satisfy around key areas of public
interest. I also believe that to be truly effective, it
must advance the debate beyond a simple re-examination of
old concerns, to one that actually addresses how merger
aspirants deal with public interest issues. If the government's
public interest criteria have clearly captured the key areas
of concern, and if banks have properly addressed them in
their Public Interest Impact Assessment, this Committee,
on behalf of the public interest, could review the assessment
of the merging parties, and call upon the banks, the Competition
Bureau, OSFI and the Department of Finance to testify as
necessary. In other words, if the public interest criteria
and policy objectives are clear, then the parliamentary
process can focus on ensuring that mergers are in compliance
with those criteria.
Broadly speaking, I believe the public
interest assessment should revolve around three key areas
that encompass much of what you were asked to consider by
The Honourable John Manley and The Honourable Maurizio Bevilacqua.
Impact on Canada's Prosperity & Standard of Living
First, mergers should be examined in terms
of their long-term impact on Canada's future prosperity
and standard of living. Opening the door to bank mergers
will, in my view, result in significant consolidation and
re-organization in financial services, impacting not only
the big Canadian banks, but also smaller institutions, foreign
banks and other non-bank financial companies. This will
impact the ability of our banks to compete globally and
the ability of other financial institutions to compete domestically.
There is abundant evidence that consolidation
within the financial services industry can be strategically
good for our country. It provides a greater opportunity
to develop national champions capable of competing in a
global marketplace. While size is only one measure of success,
if you look at the world's largest financial institutions
as measured by market value, most have grown through acquisition
and domestic consolidation.
Our country needs internationally competitive
industries - they generate the capital and jobs to support
ongoing economic vitality; they generate higher incomes
and pensions for Canadians; and they generate additional
tax revenues. Global companies with Canadian head offices
are critical to maintaining a level of investment and innovation
that keeps bright young people in Canada and generates the
overall employment creation that every country needs.
We do not have enough world-class companies,
and I am concerned that the trend has been going in the
wrong direction. According to recent data from UBS Warburg,
Canada has just one company in the top 200 worldwide and
ranks well behind a variety of smaller economies such as
Hong Kong with two, Spain with four, the Netherlands with
five, Australia and Italy with six each, and Switzerland
with seven. On a per capita basis, Canada ranks last in
15th place, behind countries like Belgium, Norway and Finland.
Mergers would help Canada's financial
sector build efficiency and profitability, which is good
for shareholders, clients, our international standing and
our reputation as sound and stable business partners. Economies
of scale and scope generate greater efficiency and lower
unit costs. This is supported by a number of academic studies
that clearly show Canadian banks would realize cost savings
from further increases in their size through consolidation.
There are no guarantees of success, but we should be creating
an environment that both encourages Canadian businesses
and provides them with the opportunity to aim for greater
heights.
Not only would consolidation create opportunities
for our large banks, it would result in new competition
and investment in the sector providing opportunities for
smaller Canadian banks, foreign banks and other Canadian
financial institutions. Both previous testimony and the
market activities of other financial companies besides the
major banks support this view. In addition, as a small bank
in the United States, RBC can attest to the fact that upper-end
consolidation provides significant opportunity to acquire
branches and customers.
Canada's Financial Sovereignty
Second, I believe mergers need to be considered
in the context of Canada's financial sovereignty. As a country,
we need to decide whether it's important to control our
own financial sector, and what public policy would best
achieve that goal.
Since the mid-1990s, there has been more
than $3.4 trillion of financial services consolidation worldwide,
with more than $1.1 trillion of that taking place in the
United States. Notwithstanding the goal of several Canadian
banks to expand their retail banking operations into the
United States, as well as the industry's strong competitive
position, our scale and market valuations have restricted
our ability to actively participate in this consolidation.
There is every reason to believe that this trend towards
global consolidation will continue, further marginalizing
Canadian banks in both a North American and global context,
thereby making future expansion and international acquisitions
even more challenging.
We need to ask whether it's better for
Canadians to control fewer, but stronger banks that have
the scale, efficiency, and capital to keep Canada competitive
in global financial markets. I appreciate that this is a
difficult issue at the local constituency level where the
tangible benefits of Canadian banks investing and growing
in foreign markets are less evident. However, it is a critical
consideration in determining long-term public policy governing
our financial services industry, and I passionately believe
that strong Canadian-based companies, regardless of where
in the world they operate, are essential to the long-term
economic competitiveness of our country.
There are many who believe that foreign
take-over restrictions on our big banks should be lifted,
and others who argue that they will eventually be eliminated
as a result of future trade negotiations. In my opinion,
the best defense of Canadian financial sovereignty is an
environment that facilitates stronger, Canadian-controlled
banks that are less vulnerable to foreign takeover if, as
and when existing restrictions are removed. Restricting
growth and consolidation only serves to disadvantage our
Canadian financial institutions as markets globalize.
Access, Choice & Transitional Issues
Third, mergers should be reviewed on the
basis of access to service, choice among financial service
providers, transitional issues such as impact on employment,
and improvements to service.
I will not suggest that bank mergers do
not need to be carefully managed. There are concerns relating
to implementation, short-term job dislocation, head office
reductions, service disruption, small business and impact
on our communities. These are real issues; however, we believe
these concerns can be managed in ways that serve the public
interest as well as deliver the long-term benefit of strengthening
the Canadian financial services industry.
For example, banks might pledge to keep
redundancies to a specific percentage of the combined workforce
for an initial period, to use attrition to deal with a percentage
of displaced employees and to provide outplacement counseling
for those who leave. Banks could give undertakings to move
carefully with integration, perhaps freezing branch closures
for a specific timeframe or providing longer notice periods.
Establishing a requirement to distribute or sell a percentage
of branches could be a means of ensuring compliance with
competition criteria and choice among providers. While we
believe our industry has done a good job in finding innovative
ways to ensure access to rural and remote communities, low-income
groups and people with disabilities, we will continue to
adjust our networks to meet these needs, and would encourage
discussion with this committee on ways to ensure we meet
the access criteria.
There has been much discussion about the
impact of bank mergers on the access Canadians have to financial
services and the availability of credit. This is especially
true for small- and medium-sized businesses because of the
critical role banks play in helping them to grow and enabling
some to become market and industry leaders.
It was in the interest of addressing this
issue that RBC Financial Group worked with Canadian Manufacturers
and Exporters, and the Canadian Federation of Independent
Business to study how Canada can help its small- and medium-sized
business enterprises prosper and grow. While we are not
perfect, small- and medium-sized businesses are well served
by the Canadian banking industry, and we all want to continue
to contribute to the growth of this important sector.
The study shows that loan availability
and competitive pricing in Canada is strong and that entrepreneurs
are accessing a wide variety of financial providers including
domestic banks, foreign banks, credit unions, leasing companies,
crown corporations, life insurers, trust companies, mortgage
companies and credit card companies. In fact, the domestic
banks have just 50 per cent of the small business debt financing
market.
While mergers would reduce the number
of domestic banks serving small business, it would also
widen the scope for other providers - including foreign
banks -- to enter the market or to expand their existing
market share. For example, National Bank, HSBC, credit unions
and others have already confirmed their interest in buying
bank branches and acquiring a greater share of the small
business market. I would also point out that the small business
sector is a priority area of growth for RBC with or without
mergers, and we are aggressively trying to increase our
market share.
While the availability of credit will
always be a lightening rod for criticism, it is ranked well
down the list of barriers to growth behind such issues as
management skills, the availability of skilled labour, and
venture capital. RBC Financial Group is making a real effort
to address these challenges through a variety of initiatives
including our support of women entrepreneurs, our sponsorship
of the National Angel Organization, our work with the Queen's
Centre for Enterprise Development, and our provision of
free planning resources to small business clients.
In terms of access, our industry, and
RBC in particular, has a solid track record of finding new
ways to serve those clients with special needs, such as
people with disabilities, low-income Canadians and those
in rural areas. We are committed to these initiatives, and
in some cases, we are obliged under federal guidelines to
provide them, which means a merger proposal would do nothing
to diminish this access.
Over the past few years, we have demonstrated
significant flexibility in serving clients at times and
locations that are convenient for them. Mobile sales forces,
Internet banking, telephone banking and banking machines
help provide service to clients who might find coming to
a branch less convenient. In fact, almost 95% of transactions
now occur outside our branch network where we have invested
and will continue to invest in alternative distribution
channels.
However, we also know that despite the
dramatic increase in alternative banking channels, 70% of
our clients still visit our branches at least once every
three months for advice, to handle more complex transactions
or to resolve issues. Here too we have shown flexibility
by recently investing $35 million to improve branch service
and find alternative ways of serving lower-income Canadians.
For example, our "Cash & Save" location in
Toronto's Parkdale neighbourhood was developed to meet this
need in partnership with the local community.
We understand that branch access is important
to Canadians, and believe this access would be maintained
under Competition Bureau and public interest guidelines
that could require merging banks to sell a minimum number
of branches as going concerns, thus ensuring choice is maintained
in most communities. As the Senate Committee noted in its
report, "properly regulated mergers can enhance competition."
In summary, we recognize that issues around
access, service, employment and credit must be key considerations
in any merger initiative. Our industry's track record is
strong, however, I don't believe that anyone in the industry
would be against a constructive discussion of additional
remedies to deal with these issues in the face of consolidation.
I believe it is your role to determine the transitional
issues that need to be mitigated, and what thresholds are
required to meet the public interest.
Undertakings should not prevent banks
from realizing the efficiencies and cost savings available
to them from consolidation, and they should recognize the
competitiveness and quality of our current system. However,
the undertakings should require banks to outline how they
will mitigate key public interest concerns, particularly
during the early stages of a merger when stakeholders need
time to adjust.
Conclusion
I'd like to close with a request of you
and your colleagues in Parliament.
The time has come to provide Canada's
financial services industry with clear direction on the
government's policy and expectations with respect to bank
mergers and the restructuring of the financial services
landscape. We need a process that is more predictable and
more transparent than it is today, and public policy that
aligns the interests of government and the industry.
As the CEO of a large financial institution,
I have a responsibility, along with the bank's Board of
Directors, to our employees, clients and shareholders to
make a considered assessment of our ability to successfully
complete a transaction before we consider the work, disruption
and risk associated with a proposed merger.
Without clear criteria for the Public
Interest Impact Assessment, including how the cost and benefits
are to be weighted to arrive at an overall result, banks
proposing to merge will be uncertain of the outcome.
Therefore, our request is for greater
clarity around the government's policy, process and applicable
criteria with respect to mergers. In particular, we ask
for public interest criteria that do not include issues
that will be addressed by OSFI and the Competition Bureau,
and one that is clear, transparent and consistently applied.
From a prudential standpoint, we do not
believe that an open-ended process in which there is no
ability for the industry to predict the outcome is in the
public interest. Nor is it in the public interest for transactions
to be approved or turned down in "one-off" deals
that don't anticipate the need for the industry to restructure
and enhance its global competitiveness.
The government has acknowledged that mergers
are a legitimate business strategy for banks. However, the
merger review process can have the effect of discouraging
banks from pursuing this strategy. In fact, merger proposals
can be rejected on the basis of public interest concerns
before they are formally submitted and fully reviewed. This
discrepancy between policy and process needs to be addressed.
I urge the government to clearly state
on what basis it is prepared to accept and endorse mergers
and to ensure that the public impact review process is applied
equally to all merger proposals. You have the opportunity
to accomplish this and it is my hope that you will do so.
Thank you for the opportunity to present
our views. We would be pleased to answer your questions.
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