FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 4, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone here this afternoon.

As you know, the finance committee is presently studying the report of the Task Force on the Future of the Canadian Financial Services Sector, which is known to many as the MacKay report.

This afternoon we have the pleasure to have with us representatives from Canada Trust, SNC-Lavalin Inc., Pixie Bigelow Productions Inc., Retail Council of Canada, and Alliance of Manufacturers and Exporters.

As you know, you have approximately five to seven minutes to make your introductory remarks. Then we will engage in a question and answer session.

We will begin with Canada Trust. Edmund Clark is the president. I welcome you.

Mr. Edmund Clark (President, Canada Trust): Thank you. We're delighted to be here. We submitted a written report, which I will skip over. The early sections of it talk about what role we play in the financial services industry today.

I will talk a little bit about some of the MacKay recommendations on ownership and regulation, which we think are important to focus on. I'll comment on the proposal to permit us and the National Bank to begin to sell insurance.

Since it seems to be the issue that people most want to hear about, I will read some of the remarks beginning on page 9. I don't know whether committee members have the document on the bank mergers. I seem to be spending most of my life answering questions on bank mergers. This is on page 4 in your text.

We support the report's emphasis on the importance of having the financial services industry built around a core of strong, Canadian-owned financial institutions. I think we recognize the forces of consolidation, which are sweeping all industries, but certainly the financial services industry.

We believe that some further consolidation is inevitable in Canada and in the public interest in order to ensure strong, Canadian-based institutions. We have no objection in principle to Canadian firms participating in this trend provided that the mergers do not significantly reduce domestic competition. We believe that conditions could be imposed on merger proposals that would allow the proponents to pursue their chosen strategies while at the same time preserving adequate levels of competition and choice in Canada.

Let me just look at the competitive landscape in Canada. The MacKay report seeks to foster credit unions and small institutions as a form of competition. They are currently a source of competition for the banks in some regions, such as Quebec and the lower mainland of British Columbia.

In time, they may well become significant national competitors for the banks. But they face real challenges not only in the scale and scope of their product offerings, but also in evolving their structures to allow them to overcome these challenges. As a non-bank, we at Canada Trust wish them well, but we think it would be dangerous for policy-makers to assume these institutions will be significant competitors to the banks in all regions in the near future.

Foreign banks are frequently mentioned as a great hope for comparative balance in the domestic system. But we do not believe they represent a real competitive threat to the heart of retail banking, which is the core banking of the demand-account business, where the banks' dominance is greatest.

The task force and policy-makers before them, back to the 1980 revision of the Bank Act, thought that if they built it, they would come. Well, they haven't come yet, and there's scant evidence that they will come with a degree of commitment and staying power that will provide a basis for making fundamental public policy decisions about the structure of our domestic financial services industry.

Apart from the Hongkong Bank of Canada, no foreign bank has any significant presence in the Canadian domestic retail market. The greatest impact from foreign competitors will be in certain product areas, such as credit cards, mutual funds, and selected areas of small business. MBNA, Capital One, Wells Fargo, ING, and others are focusing on discrete product lines through direct mail and telephone solicitations. None of these institutions has shown any intention of establishing a real presence here through a branch system.

Branches are important. We fundamentally disagree with the assumption by some commentators that electronic and other distribution channels are eclipsing branches. This is not our experience, and it's not the trend in the industry. We should know. Canada Trust has proportionately more Internet banking customers than any of the banks in Canada. In our experience, customers see electronic banking as a complement to branch transactions. You may be interested to know electronic banking customers use our branch system more intensively than our average customer. This is a startling fact.

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Proximity to a branch is paramount for core banking and small business lending. Virtually all new customer relationships originate through branches. Two-thirds of our customers reside within six kilometres of their branch. Interestingly, Schwab in the United States, a company famous for direct distribution, particularly in brokerage products, have been expanding their retail branch networks because they see it as vital to expansion of their customer base.

The proponents of the mergers assert that foreign competition is real and important. It is, and we at Canada Trust are taking it seriously. But this is quite different from saying the foreign competitors' entry into Canada is now or will soon be so substantial and permanent that we should make public policy decisions around them.

Given all these factors, we think the prudent course for policy makers in assessing the impact of the proposed mergers is to look at the existing players. They should particularly look at the players who have sufficient operating experience, capital strength, and synergy potential to be effective sources of competition nationally.

Now let's turn to our suggested framework for approving the mergers. The mega-bank proposals would eliminate two national competitors. Both of them are significantly larger than the remaining competitors in the market, except for the Bank of Nova Scotia. If customers walk out of a mega-bank branch because they have been turned down for a loan or because they are dissatisfied, we believe they should not suffer such a significant reduction in competitive choice of national financial institutions. This means public policy, to the extent that it's practical, should try to replace the lost competitors, given the importance of these institutions to the competitive structure today. We also believe the institutions that remain after the consolidation should, again to the extent practical, be balanced in size.

Having identified the players in the policy objective, how can the government achieve it in the event the mergers proceed?

We think one condition should be that the merged banks divest a significant portion of their customers and their related assets and liabilities, so neither of them will have excessive market dominance in any of their main products. The assets we mean are retail banking customer relationships, that is to say whole relationships, not individual products; credit cards; and brokerage—in properly defined local and national markets.

Doubts have been raised about the effectiveness of such divestitures. Will the customers consent? Will they gravitate or be pulled back to the old bank? This technique has been widely used in the United States for some time. No one knows how it will work in Canada. We have given some thought to this issue and would be willing to participate as a buyer on terms and conditions that we think should mitigate these legitimate concerns. There may well be others who would also be interested.

Exactly how much market share the merged bank should have in a fully competitive market is an area of considerable discussion.

The Competition Bureau guidelines are 65% and 35%. These tests are the first screens, and it is up to the Competition Bureau to look at the local markets and make a decision as to whether or not the test should be higher or lower. In fact, a research paper prepared for the MacKay task force suggested the Competition Bureau could seek a 25% ceiling on the merged banks' market share in certain markets, as was done in the Imperial Oil/Texaco merger.

Assuming such divestitures are commercially feasible, what would they have to look like to mitigate the merger's impact on competition and choice?

We believe the divestitures should be substantial, focusing not only on the market share left with the merger proponents, but also on the size and scope of the buyer after the transactions. The divestitures will not achieve their public policy objective unless the post-transaction buyer is of a size and scope relative to the merged bank that it can compete effectively and provide consumers and small business with choice. In effect, we should replace the lost competitors.

If the government is concerned about excessive concentration resulting from the bank mergers, it should seek a structural remedy such as divestitures, rather than seek to regulate prices and other terms of business, thereby imposing costs on all competitors. We support and understand the desire to protect the consumer, but we cannot be expected to freeze or cut our prices if we cannot share the merger benefits. The only way to lower prices in the long run is to ensure effective competition. The more conditions like price reductions are imposed as part of the merger approval process, the greater must be the divestment of assets of the merging partners to even out the playing field.

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A balance needs to be created between the consolidated and the non-consolidated companies to prevent massive market dominance by the two merged banks. However, if the government wishes to impose conditions such as employment guarantees, community reinvestment requirements, or small business loan guarantees, we believe they should only be imposed on the merging companies, not on the whole industry. We must distinguish between conditions and general policy.

In summary, the MacKay report is a well researched and well written document. However, we have a number of concerns, particularly about the risks that over-concentration will be permitted and an attempt will be made to mitigate its effects through over-regulation. We have suggested some alternatives that will permit consolidations to continue, yet would support a healthy and competitive banking market and meet MacKay's reported goal of creating competition and choice that will benefit consumers.

I'll be happy to answer questions.

The Chairman: Thank you very much, Mr. Clark.

We'll now hear from the Canadian Retail Building Supply Council and Mr. Stephen Johns.

Mr. Stephen J. Johns (President, Canadian Retail Building Supply Council): Thank you, Mr. Chairman.

On behalf of the Canadian Retail Building Supply Council, the CRBSC, I first of all want to tell you that we sincerely appreciate the invitation to appear this afternoon.

The issue at hand is of considerable importance to CRBSC's constituents, given their heavy reliance on the banks and the significant number of members' stores situated in smaller communities. Our members clearly value a branch banking system that provides them with accessible, personal service. Magnifying this importance is the fact that our members often find themselves having to act as quasi-banks for their contractor customers.

CRBSC is an umbrella organization speaking for all five provincial and regional associations representing Canada's retail lumber and building supply or building materials industry. These organizations and the demographics of our industry are described in the opening few paragraphs of the executive summary of our submission. CRBSC has worked diligently to ensure that our submission is widely endorsed by our industry, and I would be happy to provide an explanation of our consensus-building efforts if that's so required.

You have been provided with the English-language version of our brief, the document with the blue cover. We recognize that the French-language copy should also have been made available today, but the short period of time provided since our invitation to appear unfortunately precluded the necessary translation. Please accept my apologies for that.

I particularly draw your attention to the executive summary of our submission and to appendix A, which lists our various recommendations. Letters of support from several other business associations appear in appendix B.

At this point, I'll briefly touch on the main themes of our submission.

First, our brief deals initially with the proposed bank mergers. We urge substantial, additional due diligence by the government. As the MacKay task force aptly observed, once a bank merger has been approved, it cannot be unwound. An important element of the due diligence process involves the task force recommendation that the Minister of Finance call for public interest impact assessments from each merger proponent. CRBSC clearly urges that this step be taken.

CRBSC has reported its support for task force recommendations to provide a climate for enhanced competition in the financial services sector. The legislative framework for such competition should be enacted prior to implementation of any bank mergers. Our brief expresses concern about the pace at which increased competition in financial services could actually occur. For example, we wonder how quickly credit unions could assume an expanded role, as is hoped for by the task force.

Since the members of our constituent associations are overwhelmingly small and medium-sized businesses, they attach priority to the ability of Canadian financial institutions to serve their debt financing requirements. Our submission stresses that the standing committee has an important role to play in ensuring that attention to these needs is not neglected as the structure of Canada's financial institutions changes. Further, the support of the standing committee is sought to ensure that the pricing-for-risk process of debt financing is not abused by lenders.

We have also advocated in our brief that industry associations play a profound role in development in both the credit scoring profiles of companies in their sectors and the data-gathering activities that the task force recommends should be undertaken by both Statistics Canada and Industry Canada.

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Finally, our submission strongly supports the need for a federal ombudsman of financial services, somebody who would operate independently of the current regime of bank ombudsmen.

Again, I thank you for the invitation to appear today. I look forward to the upcoming discussion and questions.

The Chairman: Thank you very much, Mr. Johns.

We'll now hear from SNC-Lavalin, and we welcome Robert Racine.

[Translation]

Mr. Jacques Lamarre (President and Chief Executive Officer, SNC-Lavalin Inc.): Members of the committee, as president and chief executive officer of SNC-Lavalin, I thank you for giving us this opportunity to address you and share our viewpoint on the future of the financial services sector in Canada.

Our presentation, although brief, does present a new aspect which has not yet been raised before this committee and which is very important for Canada's export industry.

I will address the members of the committee in French and in English.

[English]

To start, I would like to say a few words about SNC-Lavalin in order to make sure everybody has some understanding about who we are. We are the largest engineering construction firm in Canada and are among the most important in the world. We have done work on thousands of projects all over the world. We have offices across Canada and in 30 other countries, with 7,000 employees working currently in 90 countries. In 1997, 60% of our revenue was generated outside Canada. We have expertise in power, mining, light-rail mass transit systems, oil and gas, petrochemicals, agrifood, and pharmaceuticals. We supply this expertise through traditional engineering, procurement and construction management contracts, and turnkey lump sum and concession-type agreements.

Because most of those projects are done outside of Canada, we need to provide the financing for most of them. The financing is becoming something as important as the technical aspects related to those projects. To put together this financing, we need a stronger Canadian banking system in order to keep us competitive and successful in the global marketplace.

I would like to give an example here that is not in our brief. I think it is very important, so I'll take two minutes to review a real case that will help you to understand the importance of what we have to tell you today.

This project was done in 1993-94, four years ago, not very far in the past. It was a $600-million project in Ankara, Turkey. When the time came to put it together, we were not able to find any lead bank in Canada. We went to London and we found a lead bank there. This lead bank in London succeeded in finding fifteen other international banks that were ready to be part of the syndicate. But they told us they needed at least one Canadian bank that knew us and our partner just as some kind of support, one that could at least confirm that we were a well-known Canadian enterprise. They said it would be good for all the other international banks to have such a Canadian bank. We went to see the six banks, but all of them said they did not want to be part of that financing. We went back to this lead bank in London and the guy said to try some more. This happened two or three times.

At the end of the day, we got one bank. We had to put a hell of a lot of pressure on it and give all kinds of commitments, all kinds of insurance. At the end of the day, we did succeed in having the name of a Canadian bank as part of that syndicate. At that point in time, we were able to sign that $600-million contract, which was a major contract for us. The project is now coming to an end, and it's a success story.

Right now, the Canadian banks don't have the expertise or the ability to accompany us in activities abroad. They don't have the international knowledge of markets. They may have some branches in Florida and in some other countries, and they may have some specific knowledge of some local markets elsewhere in the world, but they don't have the understanding of the global market when the time comes to put financing together.

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In Canada right now we think 50% of our GNP is exports, with 80% of those going to the U.S.A. If we want to go elsewhere other than the U.S.A., if we want to move outside of North America a little bit as a safety net—which would be a normal thing to do—we need to bring the financing with us. Right now, the Canadian banking system cannot bring that kind of financing.

When SNC-Lavalin came together in 1991, we did not have a very strong international network that would give us a chance to support the cost of this kind of undertaking. From my point of view, if we let the banks come together, they will have the size needed to develop that kind of expertise. They will have the size needed to support the costs related to that. They will have the size needed to become arrangers and lead banks. When you're an arranger and a lead bank, you have all the other industries that can come with it. You have all the legal people, all the accounting, and all that. In our case, we were obliged to retain all those people in London because the lead bank was saying it had to work with the people it knew. So I would say this is something we have almost no choice about, other than to let them get organized.

There is maybe one other aspect that I would like to mention before concluding. We have the EDC. The EDC is financing 85% of the Canadian content. When we need to finance the other 15%, the other goods coming from elsewhere, and the local costs, only a commercial bank can do it. EDC cannot do it because EDC's mandate is to do the Canadian content portion of a contract. For us, then, this is a very important aspect of the financial sector and it's something that should be addressed in the near future.

Thank you.

The Chairman: Thank you very much.

Mr. Racine, do you have a comment? No? Fine.

We'll next hear from Pixie Bigelow Productions. Pixie Bigelow is president and a documentary filmmaker.

Ms. Pixie Bigelow (President and Documentary Filmmaker, Pixie Bigelow Productions Inc.): Thank you very much.

I speak as a proud Canadian, a mother, a former high school teacher, a professional actor, and president and owner of my own production company, which specializes in producing documentary films on Canadian social issues. I am here today in support of the MacKay report and bank mergers.

Our most recent documentary, which I have left with you, is Women Entrepreneurs: Making A Difference. It premiered in prime time across Canada, to a standing ovation at the World Conference of Women Entrepreneurs, and at the Canadian embassy in Washington, D.C. It does celebrate the achievements of women entrepreneurs, but it also reveals the unique commonality of women, the unique way in which they conduct their own business with their own values and their concerns.

Who funded this research, the production, and the educational distribution? Canadian corporations and our Canadian government. Who was my major sponsor? The Royal Bank of Canada. Why? Well, women own 30% of all businesses in Canada. The number of women entrepreneurs is growing at twice the rate of men. Women-owned and women-led businesses provide 1.7 million jobs, as compared to 1.5 million jobs provided by Canada's top 100 companies. So it's an important market.

I do admit that the women were very disregarded by banks. Their business loans usually had to be co-signed by their husbands—I can recount an awful lot of horror stories—but the banks' attitudes changed because they recognized that women have a significant impact on our local economy.

Presently, we are researching, writing, and producing a documentary on young entrepreneurs, to be aired in prime time on Global Television. It's entitled Young Entrepreneurs: Making It Happen. With approximately 16.5% to 17.5% unemployment for youth as a result of corporate downsizing and government downsizing, our Canadian youth have been forced to provide their own jobs and be responsible for their own future.

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Our major sponsor once again is the Royal Bank of Canada, and this is because banks realize that entrepreneurship and self-employment is number one as a profession of choice for our Canadian youth.

I too am a woman entrepreneur and I like to compete on a level playing field with men. I like to compete on a level playing field. And thank you very much, because my telephone bills, my long-distance charges, have been reduced as a result of competition.

But from my understanding, banks in the United States are not as regulated as Canadian banks, and I don't quite understand how government can actually regulate a bank when so many business transactions and loans are being done over the telephone and electronically. So I think technology is requiring that banks change.

What concerns me is that if the banks are not allowed to merge but are required to fulfil their commitments, they're just going to discontinue servicing the less profitable areas, areas like the youth market and small businesses and entrepreneurs, and they're going to focus on the profitable operations like high-wealth individuals and your big mortgages and your big businesses. I do know the Bank of Montreal and the Royal Bank of Canada are the largest lenders to Canadian small business.

I am not here to talk financially—I'm not a financier—but it just seems to make sense that a merger means you have more capital, and that would enable the banks to provide more services and support more partnership ventures, such as documentaries on entrepreneurship in Canada.

So I really urge everybody to take this opportunity to support bank mergers when they have publicly committed to establishing a new bank for small business with a specially trained workforce of 2,500 specialized account managers. Having specialized account managers with the necessary training and experience to work with young entrepreneurs is so important—account managers who understand small business, who understand entrepreneurs, who understand their entrepreneurial sphere, and who understand their youth culture. Banks that don't just make loans based on physical assets but are able to invest in ideas of individuals are also important.

Entrepreneurs really need financial resources. Too often our young entrepreneurs are rejected by our Canadian banks because they don't have physical assets of security, and too often account managers don't have any ability to connect with an entrepreneur. But I really believe we must provide a user-friendly banking environment for youth and for our entrepreneurs—a bank for small business. The youth really need help in this country, and not just financial help but personalized, humanized support.

So let's take this opportunity to support bank mergers when the Royal Bank of Canada and the Bank of Montreal are publicly committed to doubling their lending to small and medium businesses from $20 billion to $40 billion.

I've discovered in the research for Young Entrepreneurs that we really do have a serious problem in this wonderful country. It's a brain-drain problem.

Aziz Hurzook and Bobby John are caught in the web we were profiling in our documentary. They're winners of the prestigious Business Development Bank's young entrepreneur award. They have a concern, and it's a brain-drain concern. How do they keep their highly skilled employees in Canada?

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I think if the Royal Bank of Canada and the Bank of Montreal are not allowed to merge, they're going to restrict all the scope of their activities, which means not into small business, and they're going to centre all their technological research and development on the high end. Once again, I just say the Royal Bank of Canada and the Bank of Montreal are committed to spending $1.4 billion on research and development in broad areas, which translates to a lot of highly trained jobs for Canadians who work for the bank or for their suppliers, for our youth who are being trained in our colleges and universities.

Of course, my very last concern is, who is going to fund the project? The film and television industry cannot totally depend on Telefilm and government agencies, and I am grateful for corporate funding when it doesn't interfere with my commitment to journalistic integrity. I do not produce corporate videos. I do produce inspirational, entertaining, informative documentaries, and as an artist I commend the artistic freedom that's actually been granted to me by the Royal Bank of Canada.

However, if there is no merger and they reduce their commitment to small business, I don't know if valuable documentaries that are encouraging Canadians to be financially independent are ever going to be funded. If they're not able to compete on the world stage, I really wonder if in fact Wells Fargo is going to fund a documentary that explores the youth culture in this country, the challenges, and the dreams.

I am a Canadian nationalist. I support Canadian business and I support Canada.

In conclusion, I really urge everyone to allow banks to merge, because they have made a commitment to small business and they've made a commitment to train account managers to service this market. They've even made a commitment to be more supportive to small business than they have been to date.

I think if banks are not allowed to merge, Canadians run a real risk that the Royal Bank of Canada and the Bank of Montreal may be forced, because of foreign competition made possible by technology, to adapt to changes and withdraw their support from small businesses. Then it's really going to become difficult for the small business person to get a loan.

I thank you so much for allowing me to speak and share my thoughts. I apologize as well for not having a translation in French, but once again, time did not permit.

Thank you ever so much.

The Chairman: Thank you.

We'll now hear from the Retail Council of Canada, Diane Brisebois. Welcome.

Ms. Diane J. Brisebois (President, Retail Council of Canada): Bonjour. Merci.

My name is Diane Brisebois and I'm president and CEO of the Retail Council of Canada.

If I'm not mistaken, you were given a copy of our submission, both in English and in French, as well as two studies that were done just prior to presenting the submission.

The submission itself is entitled “The Views of Canadian Retailers”. The second document is the Retail Finance Executive and Owner-Manager Survey, which is a survey that was undertaken in the industry. There were 350 small retailers who responded and there were 75 in-depth interviews with mid- and large-sized retailers across the country. The third document you have is a survey of retailers' experience with the payment system, and that was done late last year.

Highlights of the results of both studies, noted as document 2 and 3, can be found in the main body of the RCC submission, “Restructuring the Canadian Financial Services Sector: The Views of Canadian Retailers”, and I will at times throughout this presentation make some remarks about those studies.

For the purpose of these hearings, we will focus our comments and recommendations on the stability and soundness of the system, the competitiveness of our financial services sector as experienced by retailers, the market structure and regulations in terms of the implications for retailers, and, last but not least, the impact of new technology as it affects retailers and indeed their customers, the Canadian consumer.

Allow me very quickly to give you an overview of the Retail Council of Canada. We're a member funded, not-for-profit industry association. We represent more than 7,500 retailers and more than 65% of the value of retail sales in Canada.

Our industry employs over 1.4 million Canadians. About 90% of our members are small, independent retailers who own one or two stores in communities across the country. Our members represent every segment of the retail trade, including specialty stores, grocery, discount and mass merchants, gasoline, department stores, what we call category killers and big boxes, and independent operators in every community in the country.

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Allow me now to present the conclusions of our survey, as well as of our in-depth interviews, and those are included in the submission we've presented to you, on pages 30 and 31.

Retailers have an enormous stake in decisions that could significantly alter the competitive structure of the financial services industry and its services to Canadian communities. Making the right decisions could deliver sizeable benefits. Making the wrong decisions could blaze the trail towards less competition and higher prices for banking services and leave retailers in many communities without convenient access to the financial services they require.

As noted earlier, retailers operate in communities of all sizes across Canada and know how vitally important it is to have local financial institutions that appreciate the realities of their markets and understand their businesses.

They value the strengths of Canada's national banking system, the stability and financial soundness of banking institutions, and the presence of local bank branches providing a broad range of services. These are core attributes of the Canadian financial system that retailers believe must be maintained.

For several years retailers have expressed the need for more effective competition in the financial services sector. They have expressed concerns about deterioration in personal service from financial institutions that are shortening their branch hours, closing branches, and passing on to retailers a growing share of the cost of new consumer payment services.

I'd ask you to refer to pages 11, 12, and 13 of the English submission, where we show a chart of all the services that retailers depend on to run their day-to-day operations. I think this is an important chart, because it gives you a sense of how dependent they are on their branches in all the communities across the country.

If people generally believe that most of the small businesses can do their day-to-day banking electronically, then they are sorely mistaken. Pages 11, 12, and 13 come from the survey we did across the country with all our retailers to give this committee a better sense of how retailers relate to their bankers, the kinds of services they need on a day-to-day basis, and how they can access those services.

Realizing that there are a lot of submissions that you need to review, if it's the only thing you review in this submission, pages 11, 12, and 13 are extremely important documents because they give a better understanding of the concerns retailers have in regard to some of the recommendations in the MacKay report.

Retailers also understand the growing possibilities offered by technology. They also know technology is far from being a complete and adequate substitute for services provided by local branches of competing financial institutions, and again that is apparent on pages 11, 12, and 13.

They need numerous services that are not available electronically, such as branch and night depository facilities to deposit cash and cheques, foreign currency services, financing, bank drafts, and certified cheques.

The report from the task force, although very comprehensive, did not address several important retailer concerns. There is a substantial focus on consumer and financing services, technology, and the possibilities for more competition. There is little mention of day-to-day banking services that retailers must obtain from a local branch.

The report is silent on how to ensure that all services needed by retailers, and indeed other small businesses, will continue to be provided at competitive prices. In the analysis of proposed mergers published so far, there are gaps in assessing the impact on individual products and possible legislative remedies that will be necessary to guarantee adequate competition.

For example, mergers involving the four largest banks will result in an enormous concentration of market strength in supplying Visa and MasterCard services to retailers. The question of credit card duality must also be addressed. Retailers encourage this committee, as well as the Bureau of Competition Policy, to address all financial services and products individually. They also encourage the bureau to insist on real evidence to show which services new competitors will be able to provide and in what locations and at what cost.

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Finally, our recommendations include that each of the recommendations pertaining to the banking services made by the MacKay task force should be analysed thoroughly in terms of the results each will produce for businesses and for consumers. Each potential new form of competition should be assessed in terms of how it will, in reality, bring benefits to the marketplace. This should include the analysis of what products and services each will provide, to which customers and in what location.

More effective competition is essential and cannot be left to chance. There may be a need to enact measures to manage the supply of services, particularly during the period while the market adjusts to changes, if changes do occur.

We also recommend that the Bureau of Competition Policy examine the whole issue of duality and the competition on a service-by-service basis.

Finally, bank mergers should not be allowed to proceed in advance of financial sector reforms that open markets to more effective competition and before having evidence that such competition will be a reality.

Thank you.

The Chairman: Thank you very much.

We'll now hear from Jayson Myers, senior vice-president and chief economist of the Alliance of Manufacturers and Exporters.

Mr. Jayson Myers (Senior Vice-President and Chief Economist, Alliance of Manufacturers and Exporters): Thank you. Merci, monsieur le président.

The alliance is very pleased to be able to contribute to this very important debate. My remarks are going to be very general, and they're going to be aimed more at an overall consideration of the recommendations of this report.

The 3,500 members of the Alliance of Manufacturers and Exporters and their 4,000 affiliates across the country represent all regions of the country, all sectors of industry, from financial services to forestry and software, telecommunications, aerospace, automotive, and agrifood. Our members contribute 75% to the country's overall industrial production, 95% of the country's exports, and 90% to Canada's R and D effort.

Of our members, 65% are companies with fewer than 100 employees, 35% have between 100 and 500 people on staff, and 10% are companies with over 500 employees, and frankly, some of Canada's largest companies—industrial companies, exporting companies, and financial companies. These companies are at the forefront of doing business around the world. They're at the forefront of exporting, of investing worldwide, of managing capital projects around the world, of adopting new technology, of working globally in research and development and business networks, of conducting innovative activity, of investing in soft assets. They're knowledge-based industries. They're services. The manufacturers, as well, are looking more and more at information-based technologies and at services.

Their financing requirements are very varied and they're very, very complex, but overall, they're expecting low-cost, high-quality service, with global access, local access to that service, just as any customer of theirs would expect from our members.

In the alliance we talk about world-class service provided by a company, and we say world-class companies are companies that position themselves as an integral part of their customers' success. I think that's what our members are expecting from Canada's financial sector.

In our view, that is what the discussion here should be about, and frankly, it's very difficult to engage our members on the issue of the bank mergers or on the issues raised by the recommendations of this report. We did poll our members; 542 responded. We asked them what they thought the impact of the bank mergers would be, and 7% said it would benefit their company, 10% said they thought it would probably be a disadvantage to their company, and the rest said they didn't know—on one of the most important issues we're facing in the financial services industry. Perhaps one of the reasons they didn't know is because this debate is not being addressed from a customer point of view, but what's best from an institutional point of view.

I would like to see the debate focus very much on not financial services but financial solutions, because that's what our customers are looking at. They're looking at the best way of providing a solution to their financing problem at a level of risk that they can afford to manage and take on, a level of financing risk, credit risk, that they can manage as well.

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In looking at the recommendations of the report, the views I'm hearing from our members are views of concern that the report does not really look at the needs of the customer. It doesn't express, for instance, the needs of the customer in export financing. Read the report and try to find very many references to export financing at all, or to international capital financing, or the requirements of companies—not only the knowledge-based enterprises, the start-ups, but companies trying to use, adopt, and invest in technology—and the problems they're facing. It just doesn't respond to that. Frankly, I couldn't tell you what the recommendations of this report mean for companies looking at financial solutions that way. I don't think the case has been proven one way or the other.

I don't think the report reflects the changing role of banks in providing treasury functions, for example, for intermediary organizations that do provide financial solutions to our members. I don't think it takes into account the niche market, the niche players in the financial solutions area. And I don't think it really addresses the key objectives we should be driving for, which are to build in Canada an internationally successful financial solutions industry, an international banking industry that provides financial solutions around the world for its customers and has a service to sell. I don't think it really looks at the problems, from a business point of view, of building a regulatory structure to encourage a world-class financial solutions industry here for Canadian customers.

We're in very general agreement with a number of points the report does raise. Certainly we agree there's a long way to go in providing a better financial solutions or financial services industry, a better way to do things in Canada. And we agree, let's focus on getting some of that right before we start restructuring the system altogether, or at least make sure the restructuring we're looking for as a result of the recommendations of this report actually does lead to better service.

We're of course in general agreement with many of the recommendations to encourage competition, to strengthen existing institutions—credit unions, trust houses, the trust industry, and other types of financial institutions in Canada—to allow for new entrants as well as foreign participation. We generally support the provisions made to enhance the competitiveness of financial institutions—for example, the removal of capital tax. We're in support of the recommendations for empowering consumers—providing more information, more transparency for consumers and business customers.

As I say, we have a number of concerns resulting from lack of customer focus. For instance, very generally, we're not sure if the merger would result in the closure of branches and the closure of someone readily accessible to assess loan conditions. We simply don't know yet. We're not sure the recommendations would lead to an increase in either the technical expertise or the global expertise that is necessary to run a world-class financial services industry.

I'm not sure if the overheads the current banking and financial services system experience, which make it so difficult to deal with small loans.... With most of our companies, one of the biggest problems is financing at a level between $50,000 and $200,000. We don't know if the recommendations would lead to an improvement in that type of service, or what the additional, general benefits of the recommendations would be. Specifically, we have a lot of questions about to what extent the recommendations would lead to an improvement in export financing, international capital financing, technology financing, or start-ups.

What effect would these recommendations have? The case hasn't been proven. I don't know, and a vast majority of our members simply don't know.

So our one recommendation is to make sure there is a public impact statement that does not come, at best, from an institutional point of view, but begins to ask the questions the customers—the manufacturers and exporters, the retailers, and other business customers—are asking about the impact of these mergers on their business. Look at it service by service and make that an integral part of any recommendations or any approval of these recommendations as they go forward.

• 1625

Thank you.

The Chairman: Thank you very much, Mr. Myers.

We'll now have a ten-minute round, beginning with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

I have one question and then I have to catch a plane. Mr. Solberg will share my time.

Mr. Clark, I wanted to ask you a question basically about where competition could come from. In your presentation you talked about divestitures as a suggestion to level the playing field subsequent to a merger. But one of the real concerns of Canadians out there is that mergers could tend to cause a decrease in competition, so they're really concerned about where competition can come from.

I appreciate your remarks about the foreign bank branching and the credit unions, but is there any kind of a specific area where we could expect competition from the banks?

Mr. Edmund Clark: That's a good question. What we're saying is, in the real world, with what's going to happen in the next three or four years, don't expect the foreigners to provide the competition; don't expect the credit unions to. That's not realistic.

You really have to look at the actors that exist today. Today, there are five large banks and then there is us, the Hongkong Bank, and the National Bank, who are smaller players. I think if you take out two competitors, which is what this proposal is—let's eliminate two of the five—you have to impose conditions on the mergers. So the mergers couldn't go ahead unless they transferred sufficient assets from the merging banks to the three remaining players so that in effect they replace the two competitors who are being lost. So in fact you restore the competition that's being lost as a result of the mergers. That's our position.

Mr. Dick Harris: Thank you.

Mr. Monte Solberg (Medicine Hat, Ref.): Just following up on that, if the foreign banks are allowed in, in a more substantial way, and can expand, my sense is that most of the expansion will be on the commercial lending side. Even if that's the case, wouldn't the increased competition at that level force the big banks to be more responsive or maybe try to find ways to produce more profit on the retail side?

Mr. Edmund Clark: Let me try to break that into two parts. There is no evidence that foreign banks have any interest in coming in and providing services across the nation to local areas with branches. There is no legislative barrier now. Citibank has been in Canada and has had branches. It is shrinking its branches, not growing its branches. The only difference between the current rules and the proposed rules would be to eliminate the $10-million capital requirement to set up an independent subsidiary. Bank of America is not coming to Canada because it can't afford $10 million to put in a subsidiary.

The foreigners want to come in and high-grade the market. Wells Fargo wants to come in and say, let's take a small niche, small business lending, which is very profitable. Let's not establish any employment in Canada; let's do it out of California. Let's do it electronically and we'll take that little part away from Canada. But we don't want to serve the broad small business market in Canada; we're not interested in doing that.

I think it is possible. You could say, if they high-grade, what will happen? There is a risk that what will happen is the Canadian banks will then say, well, if I'm going to keep my profit margins the same, essentially I have to get bigger profits out of the Canadian market that remains to me because it's been high-graded by foreigners. I think that's a theoretical possibility.

Our point is that if you take out two of the five banks, you will not find that foreigners replace them in most of the markets we're concerned about.

Mr. Monte Solberg: I missed the presentation, and I apologize for that, but I gather from what you were saying that your concern is partially timing. If mergers were allowed to go ahead in the short run but it took a long time for everybody else to come on stream with these other changes in the long run, there would be a big gap between the time the mergers happened and the time when there was more competition.

• 1630

Mr. Edmund Clark: I guess we have not received any of the focus in this debate because we've had a unique position. I guess we look at it as industry actors that aren't one of the big five giants. We're the only trust company that has survived in Canada as a result of all the consolidations. We say the reality is that consolidations are going to go on in financial services. That's happening across the thing. If Canadians stand up and say no consolidations at all in Canada, they would be making a mistake. That's one principle you look at.

On the other hand, are we going to permit consolidations that make no competition in Canada? I'd say no, as a Canadian, I think that would be a mistake.

I think the proponents of the two sides assume these two principles will never intersect; there's no position for them to intersect. We're saying no, we think they can intersect, that in fact you can go down two different routes. One, you could say you're not prepared to permit consolidations among the big five—they're too big, they're too important—but you are prepared to let other consolidations go on in the industry. Or, you're prepared to permit consolidation among the big five, but they're going to have to divest of sufficient assets that they restore the competitors they're eliminating and create other entities that are just as large as the ones they are taking out. If they choose not to merge on those conditions, then you say fine, don't merge, but if they're prepared to live with that condition, then you haven't undermined the other principle you're concerned about.

I think the debate has been that you either have to be on one side of this fence or the other. We're saying no, since we know there are consolidations, why don't we establish the principles? I think the principles should be that we don't want to reduce the large national competitors serving these local markets all the way across Canada from the big five we have now. Figure out how you can consolidate and accept that principle and I think you can consolidate down one of two routes.

Mr. Monte Solberg: If you took some of the recommendations MacKay made, the ones about foreign branch banking, credit unions, closely held banks under $5 billion, those sorts of things, and implemented them now and then visited the merger question later, would that be realistic? Now you've got this new environment established, and then you're better able to judge whether or not the mergers make sense down the road.

Mr. Edmund Clark: I think if you want to be realistic it is some time later. I think it's unrealistic. If you look at the co-op movement, in many senses co-ops are small versions of Canada Trust in their style and culture. But as I say, we are the only surviving company. National Trust couldn't survive; Montreal couldn't survive. So you have to have a certain degree of skepticism that you're going to take small institutions like that and grow them to the size where they will be surviving and competitive entities.

Similarly, as I say, I greet with some skepticism whether you are ever going to find foreigners to really replace the five national banks in the totality of the role they play in the Canadian economy. I agree with you. It may be that if you did some of those things, I'll be wrong—I've been wrong before and I can be wrong again—and five years from now you could look at it again. But you're waiting five years. This isn't going to happen in one or two years, realistically.

Mr. Monte Solberg: Thank you, Mr. Chairman.

The Chairman: Monsieur Cardin.

[Translation]

Mr. Serge Cardin (Sherbrooke, BQ): First, I would like to welcome and thank all the participants.

I would like to use Mr. Lamarre's example at the international level. He's head of a major concern doing big business internationally. I understand full well what you need from financial institutions to be involved at the international level.

We're not against bank mergers, far from it. On the other hand, there are important things that must be respected. For example, we know that the bank mergers will limit the number of jobs. There are going to be jobs lost in the banking industry.

• 1635

Here, today, there are a number of people representing business associations as well as manufacturers and retailers but consumers are not represented. We would like to see a limit put on fees to consumers because we know that there are a lot of people who have to deal with high service fees. There were studies on that recently.

We'd also like to see aid to small business granted more easily than it is today. We know that the merger will probably mean the disappearance of a lot of branches in smaller centres.

Taking into account your needs at the international level, but also your more local needs, within Canada, how do you look at the MacKay Report, as a whole, as it also has consequences for the population and our small businesses?

Mr. Jacques Lamarre: I'm an expert in international sales of services and contracts. I know that when I sell internationally, I also create jobs. I know that sometimes there's a transfer of jobs but, at some point, it was decided that we'd have an open economy. A societal decision was made: we want a borderless economy as well as globalization. So, that decision was made. If we want to close our borders and if we think we can protect our jobs by raising barriers and restrictions, that's another decision society will have to make, but the decision is made in favour of globalization so we must organize and structure things in consequence.

In business, we have witnessed the policy of the government that wanted to go towards that globalization and that opening up of borders. We're watching what's happening everywhere on our domestic market. Businesses merge and people get organized to decrease costs and be competitive. Presently, we're alone on the international market because the banks are not walking along with us; they're not structured and they don't have the resources necessary to get themselves structured. They don't have the means to do it. We complain bitterly to them. We ask them why we always have to go to London and why no one in the Canadian banking system will come along with us. When the Canadian banking system comes along with us, it will be trailing a huge pack of people with it, all the legal and accounting services that go with this and we'll be creating new industries. There will be job transfers, but if we don't let them get organized, we're going to have to structure ourselves differently on a permanent basis. The fact that banks can't come along with us is a weak point in our industry.

So this is a decision which was arrived at by society and it would be difficult to backtrack.

Mr. Serge Cardin: I don't know if there is anyone else who would like to apprise us of their position concerning the problem of small business and the average Canadian consumer.

Ms. Diane Brisebois: It's an interesting subject. We represent international companies, but those companies depend terribly on the services provided at a local level in the smaller communities. When we talk about the retail trade, we get the impression that only small business uses those financial services, but when we interviewed our major players as well as our national chains, we saw that these big players, even though they're working on a world scale, also work at the community level wherever they are offering their products. So they need services which, at this point, are seen to be fragile. So there are two sides to it.

We quite agree that we have to be competitive on a world scale because there are advantages to that, but we must also acknowledge that most of our businesses, even if they are major, depend on local services and the relationship that exists at this specific moment between the branch and the store located in Rimouski, for example.

[English]

The Chairman: Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I would like to ask Ms. Brisebois a quick question.

You listed the kinds of stores. What was the category right before big box?

Ms. Diane Brisebois: It was category killer.

Mrs. Karen Redman: What is that?

• 1640

Ms. Diane Brisebois: A category killer is a speciality store that only sells a certain type of merchandise and competes in the marketplace on price. We see many of them in what we call the power centres, the new shopping centres that are enclosed, where there are just big stores and you literally go from one store to another. The majority of the products they sell are sold on the basis of competitive pricing versus value added.

I'm trying to explain it without giving specific examples.

Mrs. Karen Redman: You've done a very good job.

Ms. Diane Brisebois: Thank you.

Mrs. Karen Redman: My next question is to Mr. Clark. The MacKay task force proposes community accountability statements. I'm wondering if you would agree with these. Do you think we have to regulate them, or can we rely on financial institutions to publish these data on their philanthropic investment in the community on a voluntary basis?

Mr. Edmund Clark: I guess that's the part of a general set of recommendations of the MacKay report that worries us deeply. It's easy to think we can do a series of good things by putting in more regulation, but the reality, to put it bluntly, is it just means the Royal Bank will hire another 20 bureaucrats to add to the 400 bureaucrats they already have to do those things with a budget that's ten times mine. But if you ask me to hire another 20 bureaucrats to fulfil those needs, you put me in severe economic circumstances.

The reality of what we've learned is that regulation favours the large against the small, yet often the small is providing the competition that makes the consumer better off.

So we're deeply concerned that in a lot of this debate the answer will be to let them over-concentrate and pile regulation on it. My point to you would be to recognize the consequences because you'll put people like myself out of business. I will consolidate too, because the only competitive response we have is to load those up.

We operated in the United States, which has a far more regulated financial services environment than Canada, where there is the Community Reinvestment Act. We had to fill out pages and pages of forms. I'd say as a Canadian what bothered me most about that was by regulating it that way you remove the moral responsibility of the CEO to his community.

The attitude in the United States is “Once I meet my bureaucratic requirements, I owe nothing to this society because after I've done it society has set out in law exactly what I'm required to do and not do”. I would say, as we've seen today, the large corporations in Canada are run by people who actually genuinely believe they have a moral obligation to society. We're actors, we're Canadians, and it's important for us to act and do things that make society better off. It doesn't mean you can't find ways in which we should be more transparent about what we're doing, but I really worry about piling on more regulation and more bureaucrats to do that.

Mrs. Karen Redman: So as far as the community accountability statement, it's something you would suggest you should self-regulate, as opposed to having government regulations.

Mr. Edmund Clark: Yes, because once you start getting government regulations, you treat them as you always treat government regulations. Just tell us exactly what we have to do to fulfil this requirement and that's what we'll do. Instead, you should be telling us to explain ourselves to the community.

Mrs. Karen Redman: Ms. Bigelow has already talked about the Royal Bank and some of its involvements. I'd like to ask her a question. I'm sure Canada Trust has that kind of community involvement currently. Do you publish any kind of statement that would come even close to what MacKay is suggesting in his recommendation?

Mr. Edmund Clark: We do a little publicity. I have to tell you, it's interesting how the norms change. Canada Trust for a long time was led by people who believed that when you did something right you didn't tell other people about it, and real charity meant you didn't use it for marketing purposes. I think that atmosphere has now changed and that's probably an antiquated view.

We gave away $3.6 million last year. If you look at our income compared to other corporations, that's a very substantial amount. We did it in thousands of projects across the country. So we should probably spend more effort on making sure people know exactly what we did. But we were governed by a strong philosophy that said real charity means you keep it to yourself.

• 1645

Mrs. Karen Redman: You've referenced and illustrated that you see the community impact statement as an onerous suggestion. Generally speaking, are the regulatory burdens proposed by the MacKay task force too onerous? Please be specific if you feel there are some examples.

Mr. Edmund Clark: I'm not sure whether MacKay himself is so precise. Every time you impose another regulatory burden, recognize if the smaller companies will find this a bigger burden than the larger companies; then ask yourself who has actually provided the competition to the banks in the last ten years. I'd say firms like Canada Trust have provided that competition.

So if it isn't absolutely necessary to get the job.... I'd rather see a world in which people concentrated on how to get more competition in the system, because that's what causes people to do the right thing.

I was thinking about your question earlier, Mr. Cardin, on the international side. To put it bluntly, would anybody here be concerned about the mergers if the Royal Bank said they were only merging with the international side of the Bank of Montreal and they were going to sell 100% of the domestic retail business? You would get many of the things people who are in favour of mergers want, without any of the negative consequences.

So the ultimate issue we're debating about here is how much of the domestic retail business—and by retail I mean small business. We are small business lenders and only lend to people who need less than $250,000 a year.

When the mergers were originally proposed, it was in order to compete internationally. Well, if they're doing it to compete internationally, let them have the Harris Bank, let them have the Bank of Mexico, let them have their operations in London. Why don't you tell them to sell off their domestic retail business to other Canadians to restore the lost competitor?

Mrs. Karen Redman: If I could, I have a question for Ms. Bigelow as well.

You've illustrated it very well, and I've certainly seen evidence of the Royal Bank's support of young entrepreneurs in my own community. I was also on that trip to Washington. But you also state a case that very clearly says to me that banks need the support of entrepreneurs.

You talk about the growth rate of women-headed businesses, and they rival the Fortune 500 businesses. So whether or not mergers go ahead, is it not, from your personal experience and certainly from what the Royal Bank has illustrated, just good business sense to continue to invest in female entrepreneurs and young entrepreneurs, because they are the largest growing sector and the ones that are hiring Canadians?

Ms. Pixie Bigelow: That makes very good logical sense, so I have to sit and listen to you.

I think it's not as profitable as putting your money—and you have to understand I'm not a financier—into a large corporation. If I'm going to produce one documentary, it's almost as much work as producing a series. Producing a small film is almost as much work as producing a large one. Therefore, if I were a banker, I'd kind of like to be there with the big business because I'd have more profit. Is that not true?

I'm not a financier. Because I don't have the financial acumen to speak, Mr. Lamarre, I feel we have to be on the global stage. Entrepreneurs, and especially our young people who are so adept at technology, would disagree with the fact that technology won't allow foreign competition. That's not what I'm hearing from young entrepreneurs. They need so many more financial resources than they used to because it's taking an awful lot more revenue to become global.

I just don't believe they will be supporting the small businessperson. I think they're going to leave all that and get into all the big stuff and the high-end people. I think they're going to ignore all that.

Does that answer your question? I know what you're talking about.

Mrs. Karen Redman: Certainly from your perspective.... I appreciate the fact you've come and given us a real-life illustration, because sometimes it seems to me we deal with the intangible, and it's nice to hear about a personal experience.

I guess I find it a bit problematic when we look at the MacKay task force and some people say you need to deal with it in its entirety because it is well balanced and speaks to many issues. Then you hear other points of view that say it should be phased in and that logistically there are things that would have to be done through legislation. We've already heard today that we should let the competition proliferate before we would allow looking at bank mergers.

• 1650

I guess this is my final question to you. Would it not make sense to say to the banks that they should continue to support small and medium-sized businesses in a very tangible way, and then we'll look at maybe step B down the road?

Ms. Pixie Bigelow: From what I understand, they're going to do what Matthew Barrett says at the Bank of Montreal. I think they're really going to just go into high-profit areas, and I don't believe it's for the young entrepreneurs. They really need a lot of help. I believe that's really what our problem is in this country, as we have a 17% rate of unemployment.

I believe they're going to be into making money because they have to compete on the global market. I think they're charitable, but I don't know if they will be all that charitable in helping all the young entrepreneurs unless they're allowed to establish a bank for small business. I think they're just going to go into specific areas, and God help what's going to happen to Canada.

Ms. Diane Brisebois: Was this question asked of the panel or was it specifically for one person?

The Chairman: You can feel free to jump in.

Ms. Diane Brisebois: I just wanted to check the protocol. Thank you.

The Chairman: Would you like to jump in?

Ms. Diane Brisebois: I don't remember the question, to be honest with you.

The Chairman: Mr. Lamarre.

Mr. Jacques Lamarre: I would like to just make a comment on what Mr. Clark said before. When SNC and Lavalin came together, it was not thinkable that they would just come together for the international portion of the two companies, because in fact you need the resources of the full merger. It's not realistic. It's not even thinkable. People have to get organized and tackle new products. They have to adjust themselves to this new global position they will have in the world. They have to move good people here and there. It's something that would not be practical just to see internationally.

If we had done that in SNC-Lavalin in 1991 it would have been a pure catastrophe, full of conflicts of interest. Everyone would have had their own agenda. They would have been trying to find this client for that operation in Canada. They would have been trying to please that client because he could have had that in Canada but not internationally. It would have been a full catastrophe. I just wanted to say that it's not even thinkable.

The Chairman: Thank you, Mr. Lamarre. You raise a very interesting point about having strong financial institutions in Canada. It can in fact allow organizations like yours to engage in global trade and global deals, which by the way is what many people talk about. Sometimes I wonder, though, whether there's a full understanding of what's required so as to make sure that happens all the time. As a nation that really should be promoting the many winners and trying to achieve our full potential, you certainly can't do it if you don't have the infrastructure in place. I think the point you raise today is something we really ought to reflect upon.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chair.

The Chairman: You'll be followed by Mr. Szabo.

Mr. Gary Pillitteri: Thank you for coming and making your presentations.

The Chairman: Then, Mr. Pillitteri, we'll have to go back to Madame Brisebois. Go ahead.

Mr. Gary Pillitteri: Thank you very much for your presentations. They were quite different, but they almost hit the same point.

Let me ask a question, Mr. Clark. Before I ask the question, I just want to say something. I don't have to tell you this, as you know it very well. In the field of international competition, it makes no difference that you're a multinational.

It's no different for the six large banks here in Canada. If individuals think around this table that our lending institutions, our banks, are not large enough, then by merging them, we're still only putting one of them in the top 25. But I heard the six chairmen of the banks say there has never been a deal so big in the world that they have not been able to handle it, so I don't really know how large they have to get.

As for your remarks, Mr. Lamarre, I would just like to say that if the deal for yours is too big, they'll syndicate it and put it together, because they'll take a piece of it.

• 1655

Mr. Clark, in your presentation, you said that if the mergers were to occur, they would divest some of their assets so their scope would be of a competitive size. I cannot understand how we would let a merger occur so that they would get big and then have to sell off something to get to a size for them to be more competitive. Of course, some other small lending institution like yours would be there to pick up parts of it and be bigger.

My question to you is, if that were the case—it's not that I have any doubts that this would happen—would you put in the infrastructure in place now for services? Would you fill in the gap where closures occur in other parts of the country in rural Canada?

Mr. Edmund Clark: I think the answer is absolutely yes. If we were the ones who were going to acquire the assets that were divested, I think it's clear that we would have to accept the full burden of doing that in the sense that the policy aim would be to replace the lost competitor. So it wouldn't be reasonable for us to say that what we want to do is high-grade it and not be prepared to, in a sense, represent the country nationally in the way the previous competitor did in terms of representing the rural-urban split.

I think the reality is that the public policy goal is to say that if you're going to eliminate the Bank of Montreal and the Toronto Dominion Bank, which is the proposal on the table, then you have to ask who's going to replace those competitors. Then whoever acquires the assets has to step up to the full role.

As for the question of why would they do it, take the CIBC and TD. Mr. Baillie has stated—the numbers are publicly available—that domestic retail only represents 40% of the income of the Toronto Dominion Bank, so it would only represent less than 20% of the income of the combined bank. If you said to him that he had to sell off all domestic retail business, you're still only saying he has to sell off 20% of the total bank. If he only had to sell off half, or whatever, then you're only talking about a 10% divestiture.

I'm taking their initial statements at face value. They said they're doing this so they can compete internationally. They need a capital base, a market cap, and the capability to go internationally. Also, they want to do that on the corporate side. It's not clear to me that you need all the TD branches in Moosejaw in order to fulfil that role. So if they don't need them, they can sell them off to someone who's going to be competitive, but don't shut them down.

Mr. Gary Pillitteri: Just to follow up on that, it has also been said that the changes that have occurred within lending institutions have been very few in Canada. If we take a look at the six banks and the trust companies, nothing has changed in the last 50 or 60 years. In terms of the business ratio between the Royal Bank, Toronto Dominion Bank, and CIBC, nothing has changed really. In the same line, no one has surpassed another. So for most of them, 40% of their total income today is from outside. I heard also that they have to get bigger. I also heard in here—I wonder who's going to answer this part—that mergers are occurring everywhere.

Tell me this, Mr. Clark. In the same conditions in the United States, they said there's less regulation there. What if the conditions under which these mergers were to occur happened in the United States? Could they happen in the United States with the deposit that's taken and the conditions in place there? That wouldn't occur in Canada, would it?

Mr. Edmund Clark: Absolutely not. I think everyone would accept that the proposals would never even be made in the United States. They're so far beyond U.S. competition rules, they just wouldn't be conceivable. On the other hand, the United States is a country that's ten times as large. I think that's a reality that Canadians have to deal with.

I rarely defend my banking competitors, but let me at least attempt one small defence. The reality is that the consolidations that have gone so far on the Canadian scene.... There have been tremendous consolidations, not between the big five, but the reality is that the big five have absorbed other institutions. They have absorbed all the brokerage businesses, except for Midland Walwyn. They have absorbed all the trust companies, except for Canada Trust. So there has been a tremendous consolidation.

• 1700

I'd have to say that, up to this point, this has been to the benefit of the consumer, not to the consumer's detriment. The Canadian consumer gets a better value package in retail banking in Canada, a dramatically better value package than they get in the United States. As I say, we operate on both sides of the border, and there is a dramatic difference in the value package Canadians get relative to those in the United States.

When it comes to consolidations, because of this intense competition you referred to, where everyone was afraid of losing market share because it meant a permanent altering of their strategic position in the industry, as they did these things the economies that came from the mergers were passed on to the consumer in a better value proposition.

I think the tough question we as Canadians are dealing with is how many more and how much more do you want before you reach the point where that ceases to be the situation. Do you want to permit mergers among the big five national institutions? I don't know that economics or anybody can give you a definitive answer on the question of whether further consolidation is a good thing or a bad thing.

We believe there will be some forms of consolidation. I think the issue is this. Should you permit consolidation among the big five, or is there a way of permitting consolidation of the big five that restores the lost competitors destroyed in the consolidation?

The Chairman: Thank you, Mr. Pillitteri.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Mr. Chairman, the discussion about the regulatory framework and environment is of interest to me, because the history of bank failures around the world has lately been a bit scary. There have been Crédit Lyonnais in France, the savings and loan experience in the U.S., the current Japanese situation with a $500 billion bailout. Even the U.K. has had very significant problems.

You can never forget that we have had a very secure and stable financial services sector, which has to be protected. I am a little concerned about easing up too much on the regulatory side, only from the standpoint that the Governor of the Bank of Canada and the Superintendent of Financial Institutions have indicated that bank failures, under an expanded scenario, become a higher prospect. Canadians will be on the hook, and this is something we can't forget.

But between Mr. Lamarre and yourself, Mr. Clark, there seems to be something to resolve here. It appears there is a complete service of the Canadian marketplace and that the appetite to increase the marketplace for the Canadian business and banking sector to grow doesn't seem to be a source of new business or major business. I think we've pretty well met the capacity requirements.

But Mr. Lamarre is saying, I think, that if we are going to be more active internationally, and if 45% of the bank profits are currently made internationally, if we want to be even more successful we do not need more business in Canada; we need larger financial institutions to have the presence abroad.

I think this is where you two disagree.

Mr. Lamarre, I know your firm SNC-Lavalin has been involved in at least 30 different countries. I know you have been involved in Taiwan, because when I visited there last January with a parliamentary delegation, the president mentioned your firm was held in very high regard, along with Bombardier. I think at the time it was the CKS light rail project.

We didn't get that job. We didn't get that contract.

Mr. Jacques Lamarre: No. We got some others, but this one we didn't get.

Mr. Paul Szabo: You therefore have some experience that maybe you can relate to us. Who was your lead bank there? What happened? Could it have been different?

It was a very significant project, and maybe Mr. Clark could comment if there is this resolution.

Mr. Jacques Lamarre: I would like to explain. To be a lead bank, you need to know what you are talking about. If you want to be part of a syndicate and trust a lead bank, you can buy without knowing, and when you buy without knowing, you can have big losses. The risk is always when you don't know something. When you know something very well, sometimes you can manage.

• 1705

Right now in Canada we don't have any banks that can be a lead bank. Nobody could understand what is the risk in Thailand, what is the risk elsewhere. They will do some international business in the States and in some countries in South America, but nobody can understand the risk they can take in some countries in different places in the world. That is what we are lacking. Right now, if I want to go and do megaproject financing in Thailand, the only place I can go is London or maybe New York. But no Canadian bank can put the kind of syndicate together that other banks would trust, and for me, I think it's a pity. It's a pity that the Canadian exporter would be there on the market and we don't have a Canadian bank that can offer that kind of service. For me, it's something we have to resolve.

On the other hand, it's something that is also expensive. I think that by having a bigger base, they will be in a position to make that kind of investment. When people like us are able to sell in Kuala Lumpur, Bangkok, or Ankara, we bring a lot of small suppliers. A lot of people come with us, and we take care of a lot of small enterprises. That is good for the overall economy. Not everybody can go because it takes a lot of resources to be able to export, and people like us really like that kind of support from the Canadian banking system.

Mr. Edmund Clark: I'm not sure we differ as much as it maybe appears we do. I'm not an expert in international finance, but if the statement is that we must allow the banks to merge in order to provide the export financing we need in order to produce internationally competitive firms in the domestic chain in Canada, I say, fine, let's agree to do that.

Now let's make sure the way we do that doesn't destroy domestic retail competition. So let's go back in and ask them if they really need to have 40% market share in core banking in chequing accounts in Canada in order to provide export financing for SNC-Lavalin in Taiwan. Maybe they don't need that degree of market share in order to be able to be internationally supportive. There's clearly a potential cost to Canadians of giving them that degree of market concentration. Do they need it in residential mortgages? So I think you go through and ask if they need it in small business or if it would be better to have the Royal Bank competing with the Bank of Montreal or some entity in small business rather than to have huge market shares in small business.

Do we need to have only Visa credit cards in Canada and to wipe out the MasterCard credit card? Do we need to have Nesbitt Burns and DS where they'll have 40% to 50% market share in individual cities in order to do that export financing? That is the question we should be asking, and we have a process to ask that question. We have a Competition Bureau that has guidelines that say, here are the tests we should apply. We applied them to Imperial Oil when they took over Texaco, so why don't we apply those tests to this merger and see what the result would be?

Mr. Paul Szabo: My assessment is that the Canadian marketplace is not large enough to allow one financial institution, no matter how it's consolidated, to be large enough to be able to address the international business requirements for Canadian banking to be a player and to support our Canadian companies abroad. That is a dilemma. Divesting is counterproductive to exactly that, having the critical mass we need in order to be able to invest in these countries around the world.

I know of at least three different countries where the starting point to do business in those countries is to first establish relationships and friendships. You have to be there, and you have to know the people, the businesses, and the players before you can discuss it. The way we do business here is, here's my product, here's our price, let's negotiate. You can't do that in, for instance, Taiwan. You have to know everybody, and you have to know how business is done.

I think for the first time this committee has heard from a player who creates jobs for Canadians, who we cannot get to where he has to be to be even better than he is right now, and I think this is a dilemma we have to work on. I'm not so sure if cutting off their legs and propping them up on stilts is going to help them walk better.

• 1710

Ms. Diane Brisebois: Mr. Szabo, I'd like to add, though, that while we certainly are supporting what Mr. Clark is saying and we certainly would encourage companies such as SNC-Lavalin to do business internationally and to hopefully find a lead bank that's Canadian, at the same time, while they are building their business internationally, we are also concerned about.... I'm not sure if Mr. Lamarre uses a debit card—I suspect maybe not; he doesn't fall in that...I was going to say that age group. I did say it, I'm sorry. Demographic is the word I was looking for.

However, our concern as well is to make sure there is a sound system in Canada so that a consumer who might not be employed by this company or suppliers to this company can go to a branch and be serviced, and that can also ensure that if that person is not happy with the service, there is enough competition for that person to choose from.

It's interesting to hear you talk about how competitive we must be internationally. I don't think anyone around this table disagrees, but that should not cost us good and competitive services in Canada. That's of great concern to us as well.

Mr. Paul Szabo: Mr. Chairman, I think this is an excellent discussion.

The question would be, then, do we have sufficient choice and competition today? If we don't, then we obviously have to open up the banking system more, the payment system, the deposit insurance, the facility. I don't know where the competition's going to come from, though. I think, as Mr. Clark has suggested, it's just not going to happen, because somebody else has to lose. I don't think there's an unserviced segment here. There is a balancing act that's going on here. My only concern—and I'm hearing about it gradually from other sectors, and it has come again from SNC-Lavalin—is that you may not be able to support a critical mass to be an international player if you penalize them at the domestic level.

The other part, obviously, is the risk element. If the Governor of the Bank of Canada is correct and we're going to open it up and maybe we have to attract foreign bank capital to provide some of the additional choices and options you need, more Wells Fargo, more ING types, if that's going to help you, that's terrific. But I'm not sure if cultivating foreign banks in Canada is in the best interest of Canadian business in the long term.

Ms. Diane Brisebois: May I suggest that it's simply because we've asked that question so late. As much as we're talking about not institutionalizing banks, we have institutionalized banks, and we have protected that market for a long time. Thus, it's extremely difficult to say today—and I think Mr. Clark mentioned the whole issue—there is no way an American bank, for example, will come in and decide to open branches right across this country. I suggest that Mr. Clark presented some good suggestions with regard to how that can be done in an alternative way, which is maybe if the mergers are supported, the merging banks will have to divest themselves of some of the domestic services they are now providing and sell off some of the services they are now offering. So I suspect there are ways.

But the biggest challenge is that we're talking about this today versus 10, 15, or 20 years ago, and we all know how long it takes to get financial legislation passed. That's another challenge.

The Chairman: Thank you, Mr. Szabo.

I would like to get some reactions from the panellists on exactly what they see the future of the financial services sector to be. You spoke a lot about banks. Mr. Lamarre, of course, feels that the Canadian banking system as it is today doesn't provide the service necessary for him to go out there worldwide and try to win contracts and as a result generate jobs in Canada, which is extremely important.

• 1715

I guess it really comes down to what vision you have. Do you want large Canadian banks playing worldwide or don't you? Do you think we should have an international presence?

Secondly, if you look at the economic integration that is occurring between countries, what do you think is going to happen in the future? Do you think that, for example, when we entered into the free trade agreement with the United States...? I hope people realize, and I'm sure they do, that speaks to a sense of harmonization of the two economies in many ways. I think it also speaks to the fact that we're going to have to also share some structures. People who feel somehow the financial services sector can be foreign to that discussion perhaps lack the understanding of basic economics and finance, because you can't just forget about the economic inputs of any system.

So one of the things that's been extremely...that we've noticed as a committee, quite frankly, is many of the individuals who appeared in front of us have not engaged in a discussion about the future, which is, by the way, what we're discussing. If we wanted to talk about the present, it would be very easy. We'd just proclaim that the status quo is what it is, there are not going to be any changes, the world will stop, and Canada will still be the number one country in the world. But changes are occurring. Let's not kid ourselves.

Is it time to become a little bit more bold as a country, or do we have to remain as conservative as we have been in the past? That's a small “c” conservative, by the way.

Mr. Edmund Clark: Well, I guess I've spent my life speaking about and trying to answer this question. I'm not sure I can do it in two minutes, but let me try.

I guess if you asked in terms of our planning horizon, what we think is going to happen in Canada in the next 10 or 15 years, I would say if you contrast Canada versus the United States, you'll see we have already moved, as some of the speakers have noted, to a concentrated financial system in Canada. That has given us a lot of advantages in producing national banking institutions, as I said, and excellent services. I think it's given us some issues that cause people concern.

In the United States they've had a much more disaggregated system and have had legislation that prevented the aggregation going on. The result is that in the United States they created many mono-line institutions, specialists who were good in credit cards but not in banking, or good in mortgages, or good in mutual funds. They developed these highly specialized...what we call mono-lines.

If you look at Canada and ask what we think will happen in the next 10 years, I think you have to accept that we have opted for the universal bank model. Whether we did that advertently or inadvertently really is irrelevant now. We are going to be dominated by a universal bank model. The centre of that model might not necessarily be a bank. I could see a Manulife or a Sun Life being the centre of a universal bank model, but the reality is financial institutions today, such as little Canada Trust—we are tiny compared to these people—sells life and property and casualty insurance and does financial planning. We do one of everything already, and that's what our consumers want from us. So we are already a universal bank, and each of the financial institutions is going to be a universal bank.

At the same time, I think there are going to be further consolidations along that model until you have a set of major actors that are quite large and are the dominant universal banks, much more akin, in a sense, to what's going on in Europe. I think what you're going to find is that foreigners will enter in the mono-line form. So a Capital One is here, basically saying they've built the infrastructure to serve the U.S. market, but Canada is only the size of California, so they're going to come in and take a thin slice of it, one that they can do at a marginal cost basis, and that's the way they're going to provide competition.

• 1720

That's real competition to us. Let's not kid ourselves. MBNA and Capital One have taken a significant market share in the credit card market in just the last year. But it doesn't mean that the fundamental competitors.... When I look at my market share sheet every month, I don't have 25 competitors; I have five competitors, those big five universal banks. Those are the ones I take on every day across the country in every community.

I think what you're going to see is that we will see this further consolidation, we'll see all the actors get into every one of the financial services businesses, because that's what consumers want. And they will face, in addition to the five or six universal banks that remain, competitors from the outside who focus on particular customer segments.

As to electronic banking, just to come back to that, as I said, we are the leading electronic bank in Canada. We have four or five times the degree of penetration in telephone banking and electronic banking of any bank in Canada. So this is a business we know better than anyone else.

If I had appeared here five years ago, I would have said it will alter the whole structure of the Canadian industry, and we will show that direct banks will let us change this market share ranking that's gone on. I can tell you five years later that it hasn't done that at all. Quite the opposite. What electronic banking has done is in fact knit the consumer to the dominant player even more, because after you set up your bill payment on electronic banking, you do your web banking on electronic banking, it is tough to move consumers from one company to the other. So in fact I think you're going to see a continued explosion of electronic banking, but it isn't going to fundamentally alter the competitive set in Canada.

The Chairman: I want to go back to what Mr. Pillitteri said. Many people focus on the issue of competition. Mr. Pillitteri correctly pointed out that there hasn't been a real shift in the sense of the standings of the five banks. Is that a good thing for a country? Is it a good thing that there hasn't been much movement up there? Some people would call it stable, others would call it stagnant.

Mr. Edmund Clark: I don't think anyone can look at the Canadian banking system today and say we're stagnant in terms of the value proposition we're giving the consumer. Again, if you ask where we are in electronic banking versus the United States, we are way ahead of the United States in electronic banking. In fact we have been at the forefront of providing better services to the consumer.

I think in fact these stagnant market shares, as I said, reflect the fact that no one can afford to lose significant market share to their competitor, because they fear that's a strategic rebalancing of the industry. So in fact there's been ferocious competition going on in Canada among these sets.

If you take a look at what's happened to retail banking in Canada, I don't think you can say it's been an industry without change. It's breathlessly changing.

The Chairman: Nobody is saying that. Everybody understands the introduction of electronic commerce and all sorts of other changes. But the question Mr. Pillitteri asked about the standings is something we ought to really reflect upon, quite frankly. You may believe it's because of the great competition that exists. Some people might say it's really too bad that in 15 years we haven't seen any changes up there.

Mr. Edmund Clark: I think it clearly speaks to the power of the franchises that are there. I mean, there's no question—

Ms. Diane Brisebois: You're getting into a dangerous area.

Mr. Edmund Clark: Yes. There's no question that these top five banks have enormously powerful franchises and enormous customer loyalty. Pulling a customer out of any one of these large institutions is a difficult task. I spend my life trying to do it, and I can tell you how difficult it is.

The Chairman: So many happy customers, I gather.

Go ahead.

Mr. Jayson Myers: Mr. Chairman, it's certainly important to look at where banking and financial services industries are going in the future, but also where customers are going.

I think your reference to what has happened in the wake of free trade is particularly apt, because in our business that's where we see the most change of all. The number of companies that are doing business around the world today, the number of companies that are involved in major capital projects, major engineering projects, and doing business very successfully outside of North America has increased, but so has the number of smaller companies that are not only exporting, but investing as well. Take a look at manufacturing: 65% of the value of what is produced in this country is now being exported. The U.S. is market number one; they take 55% of the total value of what is produced in this country.

• 1725

Some key questions come out of that. What is the capability of our banking system not only to finance international deals but to keep the customer as the customer is moving offshore? What's the capability of our banks today to handle customers going to the United States and locating in the United States and wanting to bank in the United States, or going into Latin America?

I think when we look at some of the recommendations, particularly with respect to opening up the market to branches of foreign banks operating in Canada, that's something we have to keep in mind. This is a real service for companies who can deal with foreign banks operating here and through that can take advantage of their networks all around the world. That is something I haven't heard very much, if the discussion is solely on the level of competition in Canada.

There's another thing that's been happening over the past five or six years; we see it particularly in the development of new technology, but also in export financing. That is, the development of financial intermediaries, of groups that can put financial solutions together and can call on banks to help them in that but who offer all sorts of other solutions, through leasing or knowledge-based asset lending, cash types of lending, really neat companies putting solutions together that no bank can handle and yet they can step in as an intermediary. I haven't heard very much discussion about that. I haven't heard very much discussion about the future of EDC and how that relates to what we're talking about here either. In terms of the future of where our financing system is going in Canada and outside of Canada, those are the issues we should be talking about as well.

The Chairman: Any further comments?

On behalf of the committee, I'd like to thank you very much. It was an excellent panel.

Our responsibility is to of course study the MacKay report and make recommendations to the Minister of Finance as to what measures he should be taking to build a world-class financial services sector for the 21st century, knowing full well that the 21st century is just around the corner. The challenge we face is to try to maintain a vibrant domestic market, but we're also quite aware of the fact that we live in a global village, and that has to be factored in as well as we begin to get our heads around some of the recommendations we will be making.

On behalf of the committee, thank you very much.

We're going to take a two-minute break and we'll be right back.

• 1727

• 1737

The Chairman: I'd like to call the meeting to order.

I have the pleasure to welcome representatives from the Canadian Bankers Association: Mr. Gennaro Stammati, chair and CEO, foreign banks executive committee, and president of Banca Commerciale Italiano of Canada—I'm sure that will be a topic you will be talking to us about; Mr. William Randle, legal counsel and secretary to the foreign banks executive committee; Mr. Jeffrey Graham, lawyer with Borden Elliot. Welcome.

Mr. Stammati, you've appeared before us in the past. You know you have approximately five to seven minutes to make your introductory remarks and thereafter we'll engage in a question and answer session.

Mr. Gennaro Stammati (Chair and Chief Executive Officer, Foreign Banks Executive Committee, Canadian Bankers Association): Thank you, Mr. Chairman.

I'd like to start with thanking this committee for my second hearing. Maybe I will have a chance to make the third one the successful one.

[Translation]

Thank you, Mr. Chairman, and I also thank the committee for allowing us to make this presentation today.

I am Gennaro Stammati and I'm president and chief executive officer of the Banca Commerciale Italiana of Canada. I am also chair of the Schedule 2 foreign banks executive committee.

With me here is Mr. Bill Randle, as you have already indicated, Mr. Chairman, and Mr. Jeff Graham. Today, we're representing all foreign banks in Canada who are members of the Canadian Bankers Association.

[English]

If you'll allow me, at this point I'd like to turn to English, because when I speak in business I've been brainwashed in English and my French is a little weak. Of course I would be more comfortable if I could speak Italian, if you would allow me.

The Chairman: Regardless of what language you use, we'll be looking for content.

Mr. Gennaro Stammati: As I said, I will try to make my presentation very short. The document has been already given to you, and a second set in French will be sent to you as soon as possible.

I would like very quickly to tell you again that I was very fortunate to be in front of your committee. As you know, we support what the CBA, the Canadian Bankers Association, presented to you when Mr. Ray Protti, president of this association, appeared before you on September 24, 1998. We particularly endorse his support for a recommendation of the task force that there should be no restriction on corporate structures available to financial institutions, unless required by safety and soundness considerations.

• 1740

Therefore, because of this reason, we are glad to present to you our remarks.

In my remarks I would like to start with two quotations, if you will allow me, Mr. Chairman: They are:

...that foreign banks be entitled to conduct their Canadian banking operations directly through branches....

Direct branching should be allowed as soon as possible....

It would be reasonable for any one of you to conclude that these recommendations came from the task force report. While it would be reasonable, it would be wrong, because in actual fact they come from the report that was delivered by the House of Commons finance committee to the federal government a full two years ago, on October 31, 1996, for which I thank you very much, because it definitely seems that since that time you have been in support of our plea for branch banking status.

Now, if you move forward to the present and the recommendations of the task force report, you begin to appreciate the frustration and impatience of the foreign bank community with the lack of progress in allowing foreign bank branching. Unfortunately, this example of expectations raised and action deferred is characteristic of the experience of the foreign bank community in Canada over the last 30 years.

For brevity, I will not go through the historical background; however, it is contained in my written report to you.

As a result, we applaud the support of Mr. MacKay and his colleagues for foreign bank branching and note in particular the recommendation of the task force report that the federal government move expeditiously to allow foreign banks to operate through branches in Canada. Notwithstanding that, we remain wary, even though today we received a certain boost of morale when we had the news that the Ianno committee is also in support of these issues of ours, for which we thank very much the Liberal caucus and Mr. Ianno in particular.

Much work still lies ahead if the foreign bank community is truly to become a viable and competitive component of the Canadian financial services sector. I'd like to say that we are proud to say that we are equal contributors to the financial well-being of the financial sector in Canada, even though we are still small entities.

While the MacKay task force report recommendations can and would contribute to this process, it is vital that Canadian legislators and regulators stop frustrating the implementation of a more user-friendly environment for foreign banks in Canada.

Now let me look closely at the MacKay report in particular and the actual recommendations for foreign bank entry and evaluate them in the context of the Canadian experience.

The report asserts that it is important that the federal government move expeditiously to allow foreign banks to operate through branches as well as through subsidiaries in Canada. The operative word here is “expeditiously”. The federal government should clearly not delay any further in implementing foreign bank branching. It's almost impossible for a foreign bank to develop and implement a coherent business plan for its Canadian activities when the basic ground rules are constantly anticipated to change but never do. Indeed, it now appears possible that the federal government, despite the strong recommendation of the task force for foreign bank branching, might not so expeditiously introduce this document for which we are definitely very interested in the timeframe.

In our view, there is and should be no connection between the proposed bank mergers and allowing foreign bank banking. No matter what decision is reached on the proposed mergers, it is clearly sound policy to allow foreign banks to operate in Canada as direct branches of the parent institution. All sectors of the financial and business communities, as well as the major political parties, media, and general public strongly support direct branching by foreign banks and acknowledge that it will be very beneficial to Canada and Canadians.

There is a general recognition that permitting direct branching by foreign banks would increase competition within the financial services industry in Canada. All Canadians will benefit from a more competitive domestic banking sector, and accordingly, the federal government should move to implement, as the report says, expeditiously the necessary legislative change this fall to allow direct branching.

In particular, I'd like to focus on a couple of points. While we believe that allowing foreign branch banking will improve competition in the financial services industry, we are concerned that the practical result could supply the replacement of the word “subsidiary” in the Bank Act with the word “branch”. So we are very interested in seeing which kind of regulatory regime and taxation will be implemented for foreign banks. The two key points, of course, are regulatory regime and tax.

• 1745

Let me deal with the first. The task force recommends that where a subsidiary or a branch of a foreign bank does not engage in activities that give rise to prudential concerns, the lightest possible regulations should apply. This is but one of the many examples of common sense and wisdom that characterize the MacKay report.

The task force realizes that if foreign banks are simply permitted to operate as branches in Canada without at the same time dismantling the burdensome regulatory and fiscal framework now in place, then it will do little to change the current situation. Creating a new entry regime where foreign bank branches are subject to almost the same regulatory structure as foreign bank subsidiaries will not and should not be expected to revitalize the financial sector. Avoiding this outcome will require Canadian legislators, bureaucrats, and regulators to pursue a more open, permissive, and market-driven approach.

The task force explicitly rejects the notion that the interests of consumers or the efficiency of functioning of the Canadian economy are served by imposing prudential regulation on foreign competitors simply to level the playing field. Remember that Mr. MacKay, who comes from Saskatchewan, says that to level the playing field, Saskatchewan is the best place, because he can see his dog running for four days. We feel that while this is true on one side, in the task force's words, “prudential regulation should not be used where it is not required”. As the task force report notes correctly, the primary objectives should be the greater competition and the interests of the consumer.

I will not go deeply into detail today on the tax aspect. However, in the documentation I handed to you there are some attachments that particularly focus on four major tax issues that are of concern to the foreign banking industry.

In addition, the task force has made important recommendations with respect to the elimination of withholding tax on cross-border lending by foreign banks and greater clarity in the cross-border delivery of financial services other than retail deposit-taking. The schedule II banks support these recommendations of the MacKay task force report as well, with the proviso that the foreign banks that have made an investment in Canada will not be at a competitive disadvantage.

[Translation]

In conclusion, the task force's report provides a solid guide to ensure that foreign banks will play a more relevant, more effective and more competitive role in the Canadian financial services sector.

We share its vision of a solid, dynamic, innovative and competitive financial services sector. We're asking for the help of your committee to get immediate authorization to establish foreign bank branches in order to be fully competitive.

We hope our comments will help the members of your committee in their examination of the task force's report.

My colleagues and I will be happy to answer your questions and

[English]

noi siamo protti per le qualche domande que dovete fare; we are ready for you.

The Chairman: Va bene. Allora di siamo with Mr. Solberg.

Mr. Monte Solberg: I feel like I'm surrounded.

The Chairman: You are.

Mr. Monte Solberg: Thank you very much, Mr. Chairman, and welcome to Mr. Stammati, Mr. Randle, and Mr. Graham.

It's great to hear from you today. I take your point. I think you make an important point that foreign branch banking is really in no way connected to the mergers, and it has been a couple of years now, if I'm not mistaken, since the government first agreed to permit foreign branch banking. I think we signed an agreement a couple of years ago, and the minister has talked about it openly in the House.

My frustration is that we're still talking about it. I think there's almost universal agreement that foreign branch banking should go ahead, that all these impediments should be removed, and I think it's important.... I'm making a statement here, Mr. Chairman, instead of asking a question initially. At a time when there is concern about a global credit crunch, I think it makes tremendous sense to have more possible sources of credit for business in the country. For the life of me, I don't understand why the government is dragging its heels on this issue. We urge the government to move on this issue forthwith. I think it's true, if I can ask a question, that Canada and Mexico are the only two countries in the OECD at this point that don't allow for foreign branch banking. Is that correct?

• 1750

Mr. Gennaro Stammati: Yes, that is correct. If I may add, I believe the protectionism that is being shown in certain countries, and you mentioned definitely Canada and Mexico, is something that is not making their own markets very competitive. On the contrary, we say that the foreign banks' entry into a country makes for a sophisticated market, both domestically and also internationally.

We had the occasion to listen to some previous speakers, and they were underlining that one of the pluses we are bringing to this market is sophistication, an advantage for Canadians, and the possibility to be competitive internationally, not only domestically.

Mr. Monte Solberg: One of the things I know people ask about foreign branch banking is if foreign banks come into Canada, and obviously their parent bank is outside of the country.... Say they are in a country where perhaps they have been rocked by some of the economic turmoil that we face worldwide. They may grow concerned about the deposits and the safety of putting money in a bank like that. I wonder if you can address what kind of regulatory safeguards would be put in place to ensure that people's deposits would be safe or that doing business with a foreign branch bank would be a safe thing to do.

Mr. Gennaro Stammati: Let me respond to this question as follows. In the framework of the present proposed legislation, foreign banks are prevented from taking deposits from the public. Therefore, in a case of an international credit problem in any country, the interest of the consumer of Canada is already protected, because in this framework we will not be able to get deposits from them.

However, to amplify a little bit my response to your question, I would say that all countries in the world now are looking at regulatory regimes that go beyond their borders. You should know that in Switzerland...all the countries belonging to a certain category are witnessing what the Bank for International Settlements is doing, and they are already imposing year-end ratios on banks to make sure their performance is sound.

In addition, to address particularly the concern of those institutions that fear the Canadian consumer might be at risk because of the foreign banks' entry, I would like to say that the regulatory regime presently in place should also include a visit of the regulators of Canada with the regulators of the foreign countries. Any country that has a very strong central bank, like Canada, has a sound system.

I encourage, in my response, the Canadian authorities to make sure the regulators do talk internationally so the strengths of our parent can also be assessed fairly in Canada. I believe to the contrary that the regulatory regime that has been imposed presently in terms of checking on whether the performance is perfect can be further enhanced in opening the border, because there would be much more international knowledge of what other country is doing a specific kind of control.

Mr. Monte Solberg: I think there are about 40 foreign banks in Canada today, and they employ a number of people and provide a source of credit for a lot of business in Canada today, but we have, as the system works now, all kinds of impediments to coming into Canada and setting up.

You touched on the issue of capital taxes, and I must say, Mr. Chairman, that just the idea of capital taxes strikes me as being unfair. It has nothing to do with profit, and I understand that banks go through all kinds of gyrations to ensure their capital taxes aren't too high.

It seems like a very unproductive way for business to spend its time, and I'm wondering if you could maybe expand on that a little bit, because I think it is in the interest of everybody on this committee and people across the country that we have more sources of credit, more competition, more jobs being created by these foreign branch banks. I wonder if you could tell us what kind of an impediment those capital taxes are and what your recommendations are.

Mr. Gennaro Stammati: I would say that the subject of tax is of course a broad subject.

• 1755

Just to respond to the specific point you mentioned, capital tax is common to the banking system in Canada, so it's not something peculiar to our status of foreign banks. Those that are schedule I banks fear the same situation, and we are working together to see whether this point can be properly addressed to the authorities.

But we feel that, particularly for us, it's a little disadvantage. We have been asked to explore the possibility of investing in this country. And, of course, especially in the first stage of analysing and putting our capital into a new country, we feel that a favourable regulatory regime will encourage our possible investment even more.

Instead, it's like entering a country and not being received nicely by the customs officer or immigration officer. We are bringing our capital. We haven't even started working, and we are already being taxed on our capital, not our profit.

So we feel that these particular subjects should be revised in the interest of the industry. On this point I would say that I completely share the vision of the schedule I banks.

What kind of regulatory regime should be put in place? This is definitely a subject that requires an analysis of additional elements. At this very moment I do not have a complete knowledge of these, including taxes, such as the GST, and so on. So the subject is quite broad.

Mr. Monte Solberg: Thank you very much, Mr. Chairman.

The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Grazie mille, Senor Solbergo.

Mr. Stammati, one of the goals of this committee, as well as the other task forces I've sat on, is to try to foster an environment where we could really feel as a group that in the event the banks were allowed to merge, the vacuum they would create could be taken up by new entries. You seem to be one of the few groups that agree, and you welcome that challenge.

I still have an awful lot of reservations. If we take a look at one of the recommendations Mr. MacKay makes, you would still be barred from accepting retail deposits, and retail deposits are defined as under $150,000. Also, anything you were able to take above that wouldn't be guaranteed by the CDIC anyway.

The other thing is that foreign banks would not be able to carry on any banking business in Canada, other than taking the...as I said before. You'd also have to do it through branch offices of the foreign banks, as well as through subsidiary corporations.

So can you honestly say that you will be able to be...? And inspire me, because this is what I'm trying to get at. Can you really feel that you will be a source of true competition to the big mega-banks if they're allowed to merge?

Mr. Gennaro Stammati: Well, Mr. Chairman, let me answer the question as follows. I believe that in the present framework of the task force report, the recommendation is that foreign banks can enter Canada with a branch status. However, they must limit their activity in everything but deposit-taking.

In this particular regime we will not really be able to have an opportunity to serve the consumer because we will not really be in the deposit-taking business. However, we feel that in this structure we will still be able to compete and to offer chances to Canadians, because, of course, we will serve customers internationally. We will be an alternative source of financing for corporations, small, medium and large, because only these are related to deposit-taking.

The Vice-Chair (Mr. Nick Discepola): When banks close branches in the rural communities of Canada, are you going to go and open one up?

Mr. Gennaro Stammati: Now, to open a branch in a community, in a rural community where we will not be able to take deposits, is already not an issue. On the one hand, the report is requesting that we might consider that, but on the other hand it is preventing one of the major activities.

So I would say that instead of cherry-picking, foreign banks will be given the chance to pick the leftovers. So I would say that you should consider the reverse.

However, I would like to say that in the present framework, where foreign banks already do operate with retail branches in schedule II environments, we are looking for niche markets. For instance, my bank institutionally is looking for the Italian market flow. We are already providing a certain interest to consumers through the structure of a subsidiary. But, of course, the question is, what do we do now, and this is not the branch status we are talking about today.

The Vice-Chair (Mr. Nick Discepola): I think you'll agree with me that on the core banking issues we won't be able to give the mega-banks a run for their money. They'll just be too big for you.

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Mr. Gennaro Stammati: No, I would say the following. Of course, I still believe that the two items are not connected. I still believe that the merger between the domestic banks and the foreign banks is not connected. But for the sake of discussion, let me say that if the merging banks do indeed put up some branches for sale, the question is whether or not foreign banks might be interested. My answer is maybe yes, maybe no. It depends on many things. For instance, if the branches are going to be sold and are sold in environments that are empty because the two merging branches shift deposits from one side to the other, it turns out that we are going to buy a shell, not a branch.

Also, in all honesty, I believe that we have to look for particular areas of interest for us, for instance, as we say, the technical environment. If I have to go into an area, such as a rural area, where there is no edge for me to properly serve the customer, then I would say that it is definitely not convenient for us.

My answer to you is maybe yes, maybe no, but the two things are not connected.

The Chairman: Thank you very much, Mr. Stammati.

Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you, Mr. Chairman. Forgive me, I was going to ask the question in Italian, but I'm afraid the translators would have some problem.

The Chairman: I agree with you.

Mr. Gary Pillitteri: Mr. Stammati, I just wonder if you should have not been sitting at the table prior to the other group that was here. I recall a presenter from Canada Trust saying that if we allow them to merge, they should divest some of their assets.

I didn't have enough time on this. I call this another type of cherry-picking. I didn't have enough time to say, well, in other words, what you're saying to me is that the banks would be best merging, but then there will be change in their scope, in their size. It will be smaller in size to divest some of their assets.

So they're saying they were ready to buy them, as you also pointed out. In other words, it's too costly to put in the infrastructure and go and compete head on, rather than the easier way of buying some of the assets at a lower price. It would be too costly to put in the infrastructure from the start. But that's not my question.

You made presentations here before regarding the entry of foreign banks. What is it that you would want other than branch banking? I understand you're talking about the elimination of the 5% deposit, the 5% guarantee, that you have to put in now. You will want that eliminated. Under what terms would you want to enter into the Canadian banking system?

Mr. Gennaro Stammati: Well, Mr. Chairman, I would say that one of the reasons the foreign banks would like to enter Canada with a branch status is that we feel the present structure of subsidiaries is costly, particularly because of the absorption of capital.

As I was mentioning before, due to the Bank for International Settlements, the more assets we put in the books.... These assets are weighted based on the risk we are talking. Whether it's government, whether it's a company guaranteed by someone else, the end is that the total assets have to be in a ratio with capital that is now 8%. But we have an indication that we might go as high as 10%. So it means that the more business we like to put on the books, the more capital we have to bring here.

Don't forget that we are not just a bank born yesterday. We are an international bank with activities around the world. My bank only has activities in 44 countries of the world, and we employ more than 30,000 employees around the world.

So I believe that in order to make sure the investments are proportional to the size, we suggest that the status of branches gives us the opportunity to utilize the capital of our bank. That is still capital of the bank. In this way we would be able to put more assets, more money, into the Canadian market. The cost for us is cheaper and the benefit will be felt in the market.

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There is a debate on how big the capital should be in the case of branches. We understand that Canadian authorities know this subject has not yet been put into a document presented in Parliament, but it is my understanding that a certain nominal capital amount will still be required to be brought to Canada. I don't know whether the figure you quoted, 5%, is correct or whether it should be less, as banks of course push for, or whether the Canadian authorities are looking for something more.

We feel that, one, it should be in line with the possibility of offering services in a better competitive environment, and two, it should be flexible. We would like to avoid...if for overnight lending our assets are increasing, we'd have to take more capital and then distribute the capital, divide the capital the morning after. So there should be a system that is flexible and able to be followed. It should be simple.

So my answer to you is that the framework of the regulatory regime, which is exactly the point I was mentioning before, should be clarified, together with the tax aspects, to give us really a fair possibility of being competitive in this market.

I don't know whether this completely answers your question or not.

Mr. Gary Pillitteri: Partially, but let me follow up on that. I want to leave this kind of question and go into the bank merger.

They say there is so much competition coming into Canada from outside banks. Wells Fargo was mentioned, as was Capital One, and so on. I see those individuals coming in with no infrastructure in Canada, and of course anyone taking loans from those companies, which are nowhere regulated in Canada—it's almost like buyer beware, because we cannot say that at least they are here in Canada.

Some have restrictions. You've been talking about more availability to capital here in Canada, but as with Canada Trust, before they have a regulation or are regulated by...they could only lend so much commercially. The limit was $250,000.

I understand they're cherry-picking. Wells Fargo, Capital One, and all of them are coming here and saying they're providing a service, but I see no bricks and mortar.

Do you have any restrictions? Since you've been dealing in wholesale capital here in Canada in commercial loans, do you set a limit? Is the Canadian government imposing a limit on you? Are you prepared to fill the void within the commercial lending, which is so much needed for small and medium-sized business in Canada?

Mr. Gennaro Stammati: Mr. Chairman, it is my understanding that the report of the task force for the future of Canadian financial services is a step ahead for further liberalizing the market, not for restricting the market. When foreign banks entered Canada in 1981, we were limited in our growth because there was a ceiling on our assets. Practically, we were not able to offer an alternative to Canadians, because when our so-called deemed capital, which was a fictitious capital assigned to us with a certain multiplier factor...it limited our assets and we were not able to grow any more.

It is my understanding that this report that is in front of us is instead setting the rules for a much more flexible and open regime. I believe that, provided the authorities are comfortable with the standing of the parent company—and I understand they put a limit on total assets and total capitalization for banks to enter Canada—we should be allowed to freely offer chances to Canadians rather than limit us to minimum lending for customers or for particular categories.

We are very eager to continue to provide chances for small business loans for small and medium-sized enterprises. Our bank, in the restrictive environment of a subsidiary, is still creating possibilities, having already established the division called IB, Independent Business. As I understand it, the other banks—and I will take the liberty to mention some of them because they gave me clearance—such as Deutsche Bank, the National Bank of Greece, and Sottomayor Bank of Canada are already lending to the small and medium enterprises. The branch status should make these ones easier, more friendly. We still remain here. So in other words, we are in a different category from those that like to do business in Canada without having a physical presence.

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Mr. Gary Pillitteri: Mr. Chairman, could I have just a moment?

Thank you Mr. Stammati, for the answer you've given me. I really had another question in mind, which was the question of the protection and guarantees the Canadian government provides to the six chartered banks. Although I wanted to ask that question, you answered me in reverse, because these banks here have a captive market, they are protected by legislation, and it really is very hard for competition to come in here to Canada. Thank you very much.

Mr. Gennaro Stammati: Thank you, Mr. Pillitteri.

The Chairman: Thank you. Final questioner, Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman. This may be just a macro question, because now all of a sudden we have some foreign expertise. In the previous panel there was a discussion around the assertion that Canada's banking system needed a larger player, a larger institution, to be able to be more supportive of our Canadian businesses that do business internationally, because it was necessary to invest in more branches abroad, just like you are coming to Canada to invest, hopefully, in branches. Does it follow that you need to have a critical mass to be able to grow internationally and have a presence in a broad range of countries to be able to support business? Is it a logical strategy?

Mr. Gennaro Stammati: Mr. Chairman, I'd like to say this is a very interesting question with a little, if I can use the word “trap”, because I'd like to give testimony on foreign branch banking. I would like to stay away from whether or not Canadian banks should be allowed to merge or not. I would like, if you allow me, Mr. Chairman, to say that following the words of Mr. Protti, whom I quoted before, it seems to me the report of the task force gives a yellow colour to the mega-merger. I understand there are some banks that interpreted this as a green colour and others as a red colour. We foreign banks are just colour blind.

My answer to you is I would like to speak to you in terms of our own experience as an international bank. Perhaps if you would like to derive from my answer the answer to your question, well, I would say that I will present the facts to you.

Our bank, and I talk about Banca Commerciale Italiana of Canada, was born more than 100 years ago with the intention of offering to the Italians, whose society was transforming itself from an agricultural society into an industrial one, a possibility of financing themselves locally and internationally. As a matter of fact, our location was an international location. We started immediately opening branches outside of Italy.

I don't know whether the words “critical mass” can be used in this sense. I would say it's much more the kind of services you can provide—the quality and the ready availability of credit—in countries that are far away. We took that step, and that's the reason we opened branches in London, New York, Tokyo, and so on. At present, we are very strong also in South America, a country that of course is the booming market of the years to come. So I can tell you the reverse is true in that we felt to assist our customers in Italy internationally, we had the need to have a physical presence.

Then of course, when we arrived as a physical presence in those countries, we were also able to serve the local market, sophisticating it for the benefit of the host country.

Mr. Paul Szabo: The last issue area I would like to explore with you has to do with the level of competition in Canada at present. As I understand it, your description is that your banking institution can provide niche services, particularly for the Italian-based communities, which means we're looking primarily at urban centres.

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Is it fair to say you cannot necessarily provide better service or more cost-effective service or better choices than the current banks, but what you bring to the table is a cultural dimension, which gives you a slightly competitive advantage on a cherry-picking or niche basis?

Mr. Gennaro Stammati: No. I would say the answer is to be structured this way. If we talk of the present legislation, the one that we are in this very moment experiencing, while banks are only able to come to Canada as a schedule II, we have to see the situation in a certain environment.

At this moment I am speaking as president of the BCI, not as the chairman of the foreign bank committee. We started our activity as an ethnic bank. But we felt that what really counts is customer service. We felt we had products in a niche market that were available to be offered to Canadians, starting with Italians, because this was our initial market. But you should know that recently we opened a branch in Kitchener-Waterloo, where there are practically no Italians. We are already offering services to non-Italian, German, second-generation Canadians.

So we felt in the present environment we were not really able to cherry-pick in a certain niche, but we were able to offer at large a service that was based on quality and on a direct relationship with the customer.

We feel our strategy should be a boutique bank where we do not have more than one product that can really satisfy the market, and a supermarket where we have a large base to satisfy the market.

If you talk instead on the other side, on the legislation we are contemplating, the legislation of branches, I would say that under the branch scenario, staying away from the deposit-taking environment, we will continue to offer what we are already offering. These are services to the industry, from the small business to the large corporation, with the same philosophy. The only difference would be that it would be a friendlier environment because there will be less assumption of capital and therefore a better possibility of offering services to the customers, because it will be cheaper for us.

Mr. Paul Szabo: I interpret your answer as saying you believe you bring a new competitive component that isn't currently there.

Mr. Gennaro Stammati: Yes, definitely. We are also sophisticating the market, challenging the market, bringing our experience here into this market.

The Chairman: Thank you very much, Mr. Szabo.

Are there any further questions?

Seeing no further questions, On behalf of the committee, I'd like to thank you very much for your presentation. I'd also like to take this opportunity once again to thank you for the briefing you provided us earlier on as we were getting ready to criss-cross the country to hear input on this very important issue.

Mr. Gennaro Stammati: Grazie. Arrivederci.

The Chairman: The meeting is adjourned.