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House of Commons
Standing Committee on Finance

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.


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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