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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, December 10, 2002

0935

The Chair (Mrs. Sue Barnes (London West, Lib.))

Mr. Gaston Jorré (Senior Deputy Commissioner of Competition, Competition Bureau)

0940

Mr. Richard Annan (Major Case Director and Strategic Policy Advisor, Competition Bureau)

0945

The Chair

Ms. Julie Dickson (Assistant Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions Canada)

0950

0955

The Chair

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance)

Mr. Gaston Jorré

Mr. Richard Harris

Mr. Gaston Jorré

Mr. Richard Harris

1000

Mr. Gaston Jorré

Mr. Richard Harris

Mr. Gaston Jorré

Mr. Richard Harris

1005

Mr. Gaston Jorré

Mr. Richard Harris

The Chair

Mr. Richard Harris

Mr. Gaston Jorré

The Chair

Ms. Julie Dickson

The Chair

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ)

Mr. Gaston Jorré

1010

Mr. Yvan Loubier

Mr. Gaston Jorré

Mr. Yvan Loubier

Ms. Julie Dickson

Mr. Yvan Loubier

The Chair

Mr. Yvan Loubier

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

1015

Ms. Julie Dickson

Mr. Shawn Murphy

Ms. Julie Dickson

Mr. Shawn Murphy

Mr. Gaston Jorré

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

1020

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Shawn Murphy

Mr. Richard Annan

Mr. Gerry Birks (Senior Competition Law Officer, Competition Bureau)

The Chair

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Ms. Julie Dickson

Mr. Nick Discepola

Ms. Julie Dickson

Mr. Nick Discepola

1025

Mr. Gaston Jorré

Mr. Nick Discepola

Mr. Gaston Jorré

Mr. Nick Discepola

Ms. Julie Dickson

Mr. Nick Discepola

Ms. Julie Dickson

Mr. Nick Discepola

Mr. Gaston Jorré

Mr. Nick Discepola

Ms. Julie Dickson

1030

Mr. Nick Discepola

Mr. Gaston Jorré

Mr. Nick Discepola

Mr. Gaston Jorré

Mr. Richard Annan

Mr. Gaston Jorré

Mr. Nick Discepola

Mr. Gaston Jorré

Mr. Nick Discepola

Ms. Julie Dickson

1035

The Chair

Mr. Yvon Godin (Acadie—Bathurst, NDP)

The Chair

Mr. Yvon Godin

Mr. Gaston Jorré

1040

Mr. Richard Annan

Mr. Yvon Godin

Mr. Gerry Birks

Mr. Yvon Godin

Mr. Richard Annan

Mr. Yvon Godin

The Vice-Chair (Mr. Nick Discepola)

Mr. Yvon Godin

The Vice-Chair (Mr. Nick Discepola)

Mr. Yvon Godin

The Vice-Chair (Mr. Nick Discepola)

Mr. Yvon Godin

Mr. Gerry Birks

The Chair

Mr. Yvon Godin

Mr. Gaston Jorré

Mr. Yvon Godin

1045

Mr. Gaston Jorré

Mr. Yvon Godin

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Richard Annan

Mr. Roy Cullen

Mr. Richard Annan

Mr. Roy Cullen

Mr. Richard Annan

Mr. Roy Cullen

The Chair

Mr. Roy Cullen

1050

Mr. Gaston Jorré

The Chair

Ms. Maria Minna (Beaches—East York, Lib.)

Mr. Gaston Jorré

Ms. Maria Minna

Mr. Richard Annan

Ms. Maria Minna

Mr. Richard Annan

Ms. Maria Minna

Mr. Richard Annan

Ms. Maria Minna

Mr. Gaston Jorré

1055

Ms. Maria Minna

Mr. Richard Annan

Ms. Maria Minna

Mr. Richard Annan

Mr. Gerry Birks

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

Mr. Gaston Jorré

Mr. Tony Valeri

Mr. Gaston Jorré

Mr. Tony Valeri

Ms. Julie Dickson

Mr. Tony Valeri

1100

Mr. Gaston Jorré

Mr. Tony Valeri

Mr. Gaston Jorré

Ms. Julie Dickson

Mr. Gerry Birks

Mr. Richard Annan

Mr. Tony Valeri

Mr. Richard Annan

Ms. Julie Dickson

Mr. Tony Valeri

Mr. Richard Annan

Mr. Tony Valeri

Mr. Gerry Birks

Mr. Tony Valeri

1105

Mr. Richard Annan

Mr. Tony Valeri

Mr. Richard Annan

Mr. Tony Valeri

Mr. Gerry Birks

Mr. Richard Annan

The Chair

CANADA

Standing Committee on Finance

NUMBER 032

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, December 10, 2002

[Recorded by Electronic Apparatus]

¿ (0935)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Bienvenue à tous. Good morning, everyone. The order of the day, pursuant to Standing Order 108(2), is a study on bank mergers.

We're very pleased today to start off with a set of two witnesses, a little different from the other witnesses we're going to be hearing from throughout this process, which will commence when we return in January.

Today, from the Competition Bureau, we have Gaston Jorré, senior deputy commissioner of competitions, mergers branch; Richard Annan, major case director and strategic policy advisor; and Gerry Birks, senior competition law officer. Welcome to you. I understand you'll be doing a ten-minute presentation, and you've distributed some materials.

From the Office of the Superintendent of Financial Institutions Canada we have Julie Dickson, assistant superintendent, regulations sector; and Paul Fecser, the senior director, registration approvals division. Welcome to you also.

The purpose of this meeting is to hear from the other groups that have roles in the process, to delineate what their processes and roles, in particular, are. So we will try to confine ourselves to that area, and will commence in the order of the agenda.

So from the Competition Bureau, who would like to lead?

[Translation]

Mr. Gaston Jorré (Senior Deputy Commissioner of Competition, Competition Bureau): Good morning. Thank you, Madam Chair. I apologize for the written text.

I want to thank you for this opportunity to appear before the committee. I have with me today Mr. Richard Annan and Mr. Gerry Birks, who are both senior officers of the Bureau with an extensive experience in the field of mergers.

I would like to present a few general comments, then I will ask Mr. Annan to make the presentation which will be very brief in order to stay within the allotted 10 minutes.

[English]

Mr. Annan prepared a deck for his presentation. To stay within the ten minutes, he won't go through all of it, but if there are questions that come out of that deck, we'd be happy to deal with them.

[Translation]

We have acquired an invaluable experience in the field of bank mergers in 1998 when we were called upon to examine multiple merger proposals.

Again in 1999, we had to review the acquisition of Canada Trust by the Toronto-Dominion Bank.

[English]

In reviewing these, the Competition Bureau used the merger bank enforcement guidelines as our evaluation template. These guidelines will form the basis of our analysis in future transactions. They're available on our website, and we have included copies in the package of material provided to the clerk.

It's important to note that the analytical framework used in evaluating bank mergers is basically the same as for any other merger review. The review is fact-based and must take into account the current structure of the market in question. This may mean that the result of any future analysis could be different from those arrived at in 1998 and 1999, based simply on the ongoing evolution of the industry.

It is also important to note that competition issues can often be remedied when they exist. Indeed, in the case of the Toronto Dominion Bank and Canada Trust transaction, our competition concerns were resolved by the divestiture of some branches, and the sale of most of the Canada Trust MasterCard portfolio.

¿ (0940)

[Translation]

Following last year's amendments to the financial sector legislation, two technical changes made to the Competition Act will have an impact on the Bureau's review process. The first change allows the commissioner to release information specifically required in writing by the minister of Finance and certified by the minister to be used exclusively for the purpose of making a decision on a merger or a merger proposal. Before the amendment, this was forbidden by section 29 of the Act.

[English]

I also wish to mention the length of time we will have to complete our review. Under the new process, the bureau will have five months to complete its examination of any proposed merger. We're confident that with the experience gained in 1998 and 1999, we will be able to work within this timeframe. However, I think it's important to remember that the clock does not start when the proposals are announced; it begins when the bureau has received a complete application and adequate supporting documentation from the parties.

As an independent agency, the bureau is charged with evaluating proposals in a fair, transparent, and predictable manner. It has to be emphasized that our review proceeds independently from those undertaken by OSFI, Finance, and the House and Senate committees.

Once completed, we forward the results of our analysis and our conclusions in a letter to the Minister of Finance and the merging parties. In turn, the Minister of Finance will have to weigh the prudential competition and public interest issues in deciding if the proposals will be allowed to proceed.

[Translation]

We believe that issues affecting public interest and competition are generally complementary since both are meant to improve market efficiency, reduce costs and provide a better service to Canadian consumers.

[English]

I'll now ask Mr. Annan to briefly describe the review process .

Mr. Richard Annan (Major Case Director and Strategic Policy Advisor, Competition Bureau): Thank you, Gaston.

As Gaston mentioned at the start, obviously we don't have time to go through the complete deck, so I'll do a very quick overview.

We've also provided the clerk of the committee with copies of the bank merger enforcement guidelines as well as the letters we gave to the bank chairmen in 1998. Those two documents together provide a pretty detailed road map of the structure analysis and our conclusions in 1998. So for those who are interested, I refer you to those documents, which are also available on our website.

The very first thing is, what does the Competition Bureau direct itself toward? The legal test for mergers under our act is whether a merger substantially lessens or prevents competition. Essentially, we're looking at whether the merged parties have the ability to exercise market power--that is, the ability to raise prices or lower quality and service below competitive levels for at least a two-year period.

There are three stages: an examination stage, a decision stage, and a remedy state if required. As you know, those are set out in the government's guidelines for large bank mergers.

In terms of the examination stage, we do very extensive information gathering. We get quite a lot of information documents and submissions from the merging parties. We talk to competitors, customers, SMEs, and consumer groups. We gather both internal expertise and external expertise, using various industry experts, economists, and the like. Last time we did a lot of evidence-gathering using the Canadian Bankers Association database, which we supplemented, to try to get an accurate picture of what the market position of each player was.

With regard to the elements of analysis, we look at market definition; concentration; market share; the number of key competition factors; and finally, efficiencies. On market definition, which is a fairly technical exercise, it is important for us to define appropriately what are the product markets. In this case we looked at things such as transaction accounts and residential mortgages. On the business side we looked at transaction accounts and related services and operating loans, with a particular focus on the SME portion of the business market.

In terms of geographic markets for banking services, particularly personal and SME product markets, we found that the markets were essentially local. Branch networks are still important. Even though there are alternative distribution mechanisms, we found that for many of the banking products the markets tend to be local.

In terms of market share and concentration, anything below 35% is a safe harbour, and anything above 35% requires further examination. We found that there are three classes of markets: those under 35%, which was not problematic; those between 35% and 45%, which required further detailed examination; and those over 45%, which raised competitive problems.

Market share in and of itself is an important factor, but it's not the only factor. We also have to look at such things as entry conditions, difficulty of expansion by existing competitors, and the like. In addition to that we look at the degree to which increased concentration and other factors lead to what we call increased interdependence or reduced competitive vigour by going to a smaller number of players and so on. We also look at barriers to entry; foreign competition; change and innovation, which could be important here; whether the competitor being removed is a vigorous competitor; and the effectiveness of those that remain.

So what did we find in 1998? We found that the barriers to entry or expansion were high. There is a need for a large branch network. They represent large sunk investments. Customer inertia is high. Market share does not change very much except by acquisition. The banks built up significant brand names through decades of advertising, which was reinforced by large numbers of branches throughout the country.

Technology is an important factor here, but we found that in some ways it was more of a complement than a substitute, and in some ways it can actually make changing banks a little more difficult. But this is an important factor, which, obviously, we would have to reconsider.

In terms of the effect of competition, at that time, given the four merging banks, what you had left was the Bank of Nova Scotia and some regional niche players, which were important to some parts of the country but not all. Foreign competition for the products we were most concerned about, personal banking and SME products, was minimal. Obviously, there was also the removal of two vigorous and effective competitors.

The final area we'd have to look at is efficiencies, and this is a possible defence. The efficiencies must outweigh the negative effects on competition, and to count they must not be obtainable by means other than a merger--i.e., through internal growth or joint ventures.

¿ (0945)

As I mentioned, once we get to the examination stage where we make a conclusion whether there's a problem or not, we would be writing a letter to the Minister of Finance and the parties. The bureau's findings would be made public. The minister would decide at that point if there are sufficient possibilities for remedies and whether it should proceed to a remedy stage. If it does, we'll be responsible for looking at the competition issues. This is what we've been negotiating with the parties.

Finally, I guess I would just leave with you the message that the analytical framework today is no different from what it would be or was in 1998. We'll obviously have to consider what changes have occurred in the marketplace since 1998, as well as the specific transactions.

With that, I guess we're open to questions. Thank you.

The Chair: Thank you very much.

Before going to questions, we'll hear from Ms. Julie Dickson.

Ms. Julie Dickson (Assistant Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions Canada): Thank you, Madam Chair.

My statement to the committee today pertains to the role that OSFI plays in Canada's financial system as well as what role OSFI would be called upon to play by the government in any merger review process.

We've divided the statement into two parts. First, we want to talk about OSFI's mandate and responsibilities. Second, we want to talk about how this mandate will drive what OSFI would do in assessing a merger of two large federal financial institutions.

Given OSFI's mandate, it would be inappropriate to comment on the public interest issues that may be created by bank mergers. Rather, our mandate drives us to focus solely on the prudential issues associated with mergers.

So, first, OSFI's mandate, our role in the financial system. We are the primary regulator and supervisor of all federal financial institutions. This includes all banks operating in Canada whether Canadian or foreign owned, as well as federal trust companies, life insurance companies, and property and casualty insurance companies. At present we supervise 130 deposit-taking institutions and 350 insurers.

OSFI was established by an act of Parliament in 1987 and we were given an enhanced mandate in Parliament in 1996. And that mandate requires us: one, to supervise financial institutions in order to determine whether they are in sound financial condition; two, to promptly advise an institution if we find that it is not in sound financial condition or complying with our requirements and then require that the institution take the necessary corrective measures to deal with the situation in an expeditious manner; three, we are to promote the adoption by financial institutions of policies and procedures designed to control and manage risk that they are taking; and four, we are to monitor system-wide issues or sectoral events that may have a negative impact on financial institutions.

Importantly, although OSFI can work to reduce the risk that a financial institution will fail, the legislation also states that boards of directors are responsible for management of institutions, financial institutions carry on business in a competitive environment that necessitates that they manage risk, and financial institutions can experience financial difficulties that can lead to their failure.

With that mandate, OSFI takes a risk-based approach to supervision in order to accomplish the mandate. That means that we pay very close attention to key risks financial institutions are taking, as well as the quality of the management programs and governance systems that they have put into place to manage those risks.

Financial institutions are required to file certain information with us on an ongoing basis. We also undertake regular on-site examinations of a financial institution's operations. So we send teams in on a regular basis to inspect.

In terms of OSFI's role in a merger proposal, the merger review guidelines, as you know, require that banks with $5 billion or more in equity wishing to merge with one another must apply to OSFI. OSFI must review any application received from a prudential perspective and then the superintendent is to provide the Minister of Finance and the applicants with a letter outlining the office's views on the proposed merger.

As I noted earlier, in reviewing a merger proposal OSFI would focus on prudential issues. We would not focus on matters outside of our mandate. So we would not base our review of a merger on the possible motivations behind it, or the possible impact on competition, and employment levels, or service levels, unless prudential issues were created.

Our prudential review generally would include identifying and examining any material issues that would have the potential to impact negatively on the risk profile of the merged entity. Our assessment would be on a case-by-case basis because every situation would be different. And it would obviously depend on the characteristics of a particular transaction.

¿ (0950)

So from a prudential perspective, our review would include a review of the implementation and integration plans--that's the extent to which the financial institutions have considered integration issues--and the completeness and reasonableness of their integration plans, including the challenges posed.

Financial projections would be another key area we would look at. That would be the extent to which the financial projections they provide are reasonable, including business plan assumptions, earnings assumptions, and the impact on the merged entity's capital position. And that could depend in part on how the transaction is financed.

We would also look at potential changes to risk profiles and the capacity of the institution's risk management systems. That's the extent to which the risk increases or deceases as a result of the merger, and the merged entity's ability to measure, monitor, and manage those risks going forward.

Depending on the transaction that is presented, OSFI might impose terms and conditions. For example, we might subject the institution to increased monitoring above and beyond what we would normally do. We might require changes in the merged entity's portfolio or capital structure, or require that more resources be devoted to risk management areas of the bank.

Before concluding, I would note that OSFI's mandate, together with the powers that Parliament has provided to us, have helped to foster a safe and sound financial system in Canada. Last month, the IMF noted that Canada's strong supervisory and prudential framework has contributed to the banking sector remaining sound in the face of an economic downturn.

They also noted that systemic capital and risk management remains strong. In June 2000 the results of a financial sector assessment program carried out by the IMF and regulators from other countries showed that Canada earned high marks in financial institution supervision, which contributed to a stable financial system.

That concludes my opening remarks. I would be pleased to answer any questions. Thank you.

¿ (0955)

The Chair: Thank you very much.

As we have three opposition parties and one...and government here, we will go 60 minutes in questioning. So it's ten minutes for one round, starting with Mr. Harris. If the Bloc wishes to split that ten-minute time, please let me know.

Go ahead.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Madam Chairman, and thank you for your presentations.

I want to direct my first question to the Competition Bureau. On page 2, you note that the commissioner will now have the authority to communicate information that is specifically requested by the Minister of Finance. Prior to this change, that was not so, I assume. I want to ask, before this change, what was the reason the commissioner could not provide this information to the Minister of Finance, and what changed to enable this current allowance to be implemented?

Mr. Gaston Jorré: Under the Competition Act our inquiries are conducted in confidence, and section 29 has a series of provisions that protect the information we gather from disclosure other than to the extent needed to conduct our own inquiry. So it was the result of a general prohibition. The change was a legislative amendment.

Mr. Richard Harris: I see. In reviewing bank merger proposals, do you use basically the same criteria or a generic set of guidelines for banks that you would use for any other large corporation in Canada, or have you written a special set of rules for the banks?

Mr. Gaston Jorré: Conceptually, the framework is the same for any kind of merger review. You do have to apply it to the facts of the particular industry, because technologies vary, organizations vary, but it's conceptually the same. And we have written the bank merger enforcement guidelines, which show how the general merger enforcement guidelines, the MEGs, are applied in the bank context. I believe copies are in the package that was provided if you wish to consult it.

Mr. Richard Harris: Okay.

In talking to the banks, and in lieu of a statement made a few weeks ago by, I think, Mr. Nixon from the Royal Bank.... He was asking for sort of a carved-in-stone set of guidelines from the government so that they could integrate those guidelines or the rules of the game into any merger proposal that they may or may not have in mind.

Obviously you have a set of steps in the process for your department, and OSFI has a set of steps in their program for banks to look at. Do you envision that if the government--the Minister of Finance's department or the Secretary of State's department--would come up with a set of guidelines, those guidelines would vary much from what your entities lay out?

À (1000)

Mr. Gaston Jorré: Well, I believe Mr. Nixon was referring to the public interest issues--

Mr. Richard Harris: Yes.

Mr. Gaston Jorré: --and our mandate is limited to competitive issues. I'm not really in a position to comment on what would be appropriate public interest guidelines and whether they would add a great deal to what we do.

Certainly we think...and indeed, it's the basis of the Competition Act, the presumption that competition is in the public interest. But as to what other factors ought to be considered, I'm not qualified to answer.

Mr. Richard Harris: Okay.

When you're assessing a bank merger, do you look at factors that may be influencing the need for a merger, such as--and OSFI, of course, looks after the risk and the stability of banks under the regulation--risks to our domestic banks from external sources? You know, we're all aware that our banks, because of mergers and acquisitions around the world, have rapidly shrunk in size in comparison with their global competitors. Who would take that into consideration during any merger proposal process and ask the question, is there a need for banks to merge, and then try to analyze all the reasons that the bank has presented? Where does that need hit the process?

Mr. Gaston Jorré: Clearly in this process the overall conclusion is to be drawn by the Minister of Finance, but ours is a relatively limited one, and what is going on elsewhere--just to go to that part of your question--is only relevant to our analysis insofar as it will change the competitive marketplace here, but not otherwise.

Mr. Richard Harris: I guess the question is, there will be presentations of the upsides of possible mergers, and presentations of the downsides. I think everyone, even including those who would oppose bank mergers, has to agree that it's essential to our economy that banks remain in a very strong and stable position domestically.

Given the amount of business they do outside Canada, or they have the opportunity to do if they have the resources to do it, I see that their shrinking position globally could lessen their opportunity to take advantage of financing opportunities in the global marketplace.

I'm wondering, apart from the bank's own interest in it, exactly where this fits in. I asked the question before, but I don't know if I understand still where it fits in, where the need to merge that's presented by the bank fits into the process. Is it in the Minister of Finance's department as opposed to your department?

À (1005)

Mr. Gaston Jorré: As I said, our role is limited. Now, there is this whole public interest part of the process, and I would assume that's where any issues other than the ones we deal with at OSFI are to be dealt with.

Mr. Richard Harris: How much time do I have?

The Chair: A minute.

Mr. Richard Harris: This is the last thing. I might put you on the spot here, and you don't have to answer if you don't want to, both of you. Should a merger proposal appear satisfactory to the Competition Bureau and to OSFI from a practical and a compliance point of view, having passed the test with your departments from the political point of view, do you believe that your assessments of a merger should be the major influencing factor on the approval process? In other words, if it passes by both of your departments, should the finance minister have the arbitrary right to turn down a merger proposal?

Mr. Gaston Jorré: Well, all I can say is that the legislation has given him the responsibility of assessing all the factors, including the advice he receives from us and the advice he receives from OSFI, taking that into account and other factors into account, as to what is the appropriate decision.

The Chair: Ms. Dickson.

Ms. Julie Dickson: Yes. I would agree with that. From looking at what the legislation says, I would say that Parliament makes it clear that we do look at safety and soundness. The minister is to consider other factors and the Competition Act clearly indicates you consider competition. My answer would be that Parliament has spoken on this.

The Chair: Okay. Thank you very much.

Questions, Monsieur Loubier?

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Yes, Madam Chair. Thank you.

I understand that the Competition Bureau's mandate is to analyze the market, for example the impact of a merger or any other business decision on the performance structure of companies and of the market as such.

However, in the case of bank mergers for example, is it part of your mandate to develop scenarios?

Let me explain what I mean. When faced with merger proposals from the four big banks, as was the case in 1998, can you suggest market scenarios which would alleviate negative effects that you consider, for example in the fields of concentration, reduction of competition and increase of the cost of financial services?

A few years ago, we suggested that mergers be allowed because we supported those mergers as long as, on the consumer side, they were balanced by the opening of markets to foreign firms. In other words, we wanted banks to be allowed to merge since they are not as big on a global level as they are domestically, in order to be able to make efficiency gains. We knew from the MacKay report that Canadian banks had some work to do to improve their efficiency. At the same time, by opening our markets to foreign firms more than is presently the case, we can reduce the impact of an excessive concentration of the banking sector on prices.

Is it part of your job to suggest such scenarios to the minister or perhaps to the Superintendent of financial institutions?

Mr. Gaston Jorré: There are two aspects to your question, and I am not sure I can give you a complete answer.

First, if there are problems, we can obviously try to negotiate solutions. We can suggest the sale of some assets of the merging parties to some other party in specific markets. This is a normal part of our job in case there are mergers.

The other aspect may be the following. We actually have a legislative framework -- which includes more than our Act -- and there are certain limits within that framework. Obviously, we must seek possible solutions within the framework. We can also make suggestions if we find things that can improve the situation, but these can definitely not be imposed under our Act. Perhaps we could, as advocates of competition, suggest changes that would increase competition but, in the context of a given merger, we would be limited to that first aspect, that is to say to the solutions that are possible within the existing framework.

À (1010)

Mr. Yvan Loubier: My question is a follow-up of Mr. Harris' questions. Mr. Jorré, where did the minister of Finance get the additional information that is outside of the present legislative framework when he made his decision to reject the mergers?

You said that you must work within the present legislative framework. I can understand that. However, the international financial market is changing at a very fast rate. Even the Canadian financial market has been changing very rapidly in the last 12 years. This is unprecedented since the technological advances, the advent of virtual banks, and so on.

Where can the minister of Finance seek advice in order to react to fast changes occurring on the international market, to the need for increased competitiveness of Canadian financial institutions on the domestic market, to the opening of markets which develop year after year and to the restructuring needs of the financial sector? Can he get this advice from you or from the Superintendent of financial institutions?

I have no doubt you're doing a good job but we also had a serious exercise with our debate on bank mergers. We invited to our caucus the boards of the four big banks, even those of the banks that were not involved in the mergers, in order to ask them about their views. At that time, it was about business decisions and anticipating future developments. Some were saying that the whole financial sector would be different in seven or eight years.

So if you are working within the present legislative framework, the present market conditions and the direct scenario of a specific merger that's being considered, and if at the same time the whole picture is shifting so that we'll soon need a legislative change and an adjustment to a new framework, where can the minister get his advice since you do not provide him with information on market developments?

Mr. Gaston Jorré: Development of financial policy is not part of our mandate. I don't think we're qualified to make general comments on financial market developments except if, by chance, something comes up while we're doing our job, because our activities are essentially reactive by nature. We try to let people know in advance how we work but our action under the act is mainly reactive.

Mr. Yvan Loubier: Okay. Thank you.

Would it be the Superintendent's job?

[English]

Ms. Julie Dickson: I think the Department of Finance would be the main source of advice to the minister on that.

That said, we would comment in part of our analysis on whether we thought the merger would actually result in a sounder institution, either because it was more diversified or it had access to a deeper pool of people, or it was going to be able to take advantage of more sophisticated risk management systems and that sort of thing. But as for providing advice to the minister about other arguments that might be presented, the minister would look to his department for that.

[Translation]

Mr. Yvan Loubier: Okay. Thank you, Madam Chair.

The Chair: Is that all?

Mr. Yvan Loubier: Yes, it's okay.

[English]

The Chair: Mr. Murphy, followed by Mr. Discepola, for ten minutes each.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chair.

I have a couple of questions for Madam Dickson of the OSFI.

Dealing with this whole area of prudential issues in the Canadian banking system, we haven't really had a lot of problems in the last...or I guess we never really had a lot of banking problems. I know you've dealt with a lot of trust company issues, some of them provincially legislated, that basically arose out of real estate lending.

But to take one's eyes off Canada and go to an international perspective, there have been countries where the whole banking system has gotten itself in trouble, perhaps the most notorious being Japan. Have there been any instances internationally where mergers have basically been the cause of the problem?

À (1015)

Ms. Julie Dickson: That's a good question. I haven't done the research on that, but my guess would be that to the extent you find examples of banks that have experienced problems internationally, every situation would have been different and it would have been the result of a number of different factors. It could be poor risk management processes within the institution, which might lead to a portfolio with a large percentage of bad loans in it. I do not know whether there are examples of a case where there has been a merger and people haven't paid attention to integration issues.

I do know that we have seen cases, this would be 15 years or so ago, where small institutions grew too quickly, acquired institutions without doing appropriate due diligence, and once they did acquire them they did not undertake the steps they should have to integrate their computer systems and things like that, which did lead to problems. So that kind of thing can happen in both small and large institutions.

That would be the kind of thing that we would focus on to a great extent when we review a merger, the extent to which the institutions involved are aware of the challenges and have plans in place that are reasonable to deal with those challenges.

Mr. Shawn Murphy: Dealing specifically with the TD-Canada Trust situation, did your agency conduct a very thorough examination at that time and were there any prudential issues raised?

Ms. Julie Dickson: We recommended to the minister that this merger proceed and we did do a full analysis of it along the lines of what I covered in my opening statement. So we did not have problems with that merger and it did proceed.

Mr. Shawn Murphy: Shifting gears to the Competition Bureau, dealing with your 1998 analysis, when the first round of bank mergers were announced, the Bank of Montreal and Royal, how in depth was your analysis at that time?

Mr. Gaston Jorré: Quite. I'll let Richard, who was there, tell you.

Mr. Richard Annan: As you know, there were actually two transactions. There was one that was announced two or three months after that. The total process lasted about 11 months.

We hired quite a lot of outside expertise. We had a very large group internally looking at this transaction. We went through with something like 400,000 or 500,000 pages of documents. We subpoenaed various banks to get information on market share. We had a very comprehensive market share database. It was by far and away the largest merger examination we've ever done.

Mr. Shawn Murphy: On page 10 of your book you've given the findings, but was there actually a determination made at the time as to whether or not the merger should go ahead through your department? I'm speaking about the Competition Bureau.

Mr. Richard Annan: Right. As you may recall, what we did do is we did an extensive examination and we drew conclusions from that. We put those in the context of a letter, which we sent both to the parties and to the Minister of Finance. The way the process worked then and the way the process is going to work in the future is the Minister of Finance then determines whether or not there's anything to negotiate.

And so, in that case, the minister decided for our reasons and other reasons that he didn't see a need to proceed to a remedy stage because that was his decision.

But the way it would normally work in a merger case is we would raise competition issues and we would try to have discussions and negotiations with the parties to see if we could remedy those concerns, short of seeking to block the merger. And the way this process works in relation to the banks is the Minister of Finance makes a determination whether or not we should proceed to a remedies negotiation phase or not.

À (1020)

Mr. Shawn Murphy: So I take it from what you're saying that in the 1998 experience after you did this very extensive examination and analysis you had some issues that in the process could have led to negotiations but you were not objecting to the merger itself.

Mr. Richard Annan: No, that's not quite accurate. Basically, our legal test is whether or not a merger prevents or lessens competition substantially. We came to the conclusion that in a number of product markets those mergers would do exactly that, and therefore we would be seeking remedies for those. And if the remedies were unsatisfactory, then we would be recommending that the merger be blocked.

Mr. Shawn Murphy: And because of what happened at the Department of Finance, we never got to the remedies discussions.

Mr. Richard Annan: That's right, there were no remedies discussions.

Mr. Shawn Murphy: From your point of view, dealing in an international context, are there any best practices or lessons learned out there on bank mergers?

Mr. Richard Annan: There's certainly a lot of bank mergers going on in the United States but of course they don't have the same banking structure we do. They have thousands of banks, we don't.

Nevertheless, economic learning has gone on in those cases--for example, with respect to efficiency gains--and we certainly look carefully at the extent to which bank mergers actually produce cost savings.

Mr. Shawn Murphy: Now, dealing specifically, again, with the Canada Trust-TD acquisition, you would have done the same process in that acquisition--

Mr. Richard Annan: Right.

Mr. Shawn Murphy: --and there were issues that had to be negotiated and remedied.

Mr. Richard Annan: Yes.

Mr. Shawn Murphy: Do you ever go back and look at the thing after two years, two years post acquisition, and do an analysis as to whether or not there were mistakes made or something could have been done better from a competitive point of view?

Mr. Richard Annan: We've done that infrequently. I don't think we've actually done it in a bank's case, that I can recall, where we've actually gone back and looked.... We keep generally on top of what's going on, obviously, but as to whether we do a complete post mortem at a particular point after the transaction, we don't normally do that.

Mr. Gerry Birks (Senior Competition Law Officer, Competition Bureau): Excuse me, Mr. Murphy, I should let you know that in the context of Canada Trust-TD, we have--not in a formal process but in an informal process--gone back to the Bank of Montreal, which was the main acquisitor of assets, branches at that time, to see what they'd done with those branches, and they indicate that they're continuing to operate most, if not all, of them, and that they are running according to the business plan they had anticipated at the time.

The Chair: Thank you.

We'll go to Mr. Discepola, ten minutes.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

Does either OSFI or the Competition Bureau look at other types of mergers, or is it strictly banks? Do you look at mergers of life insurance companies, for example, or others? And are they quite similar?

Ms. Julie Dickson: Yes.

Mr. Nick Discepola: Could they even said to be identical, then? Do you look at soundness issues, competition issues?

Ms. Julie Dickson: Yes. Our legislation has a list of factors that the minister is to consider and those factors will be the same whether you are a life insurance company, trust company, or bank.

Mr. Nick Discepola: From a competition point of view, what factors govern your final decision? Theory would say that the more players in a certain marketplace, the better the competition. So if you're looking at it from a competition point of view, you should in essence be against any merger of anything because that should technically, theoretically, limit competition, right?

My concern is that if you go down from four to three, and then from three down to two, then why not two down to one? Is that feasible? If so, which of the first two?

You say you look at it on a case-by-case basis, so do you take the first two? And maybe the first two might be more of a hindrance than if, let's say, the government decided we're going to leave a window of opportunity of six months, and so bring in all the mergers that you want, all the players you want, and we will analyze not on a case-by-case basis but on what's in the best interest. So we may approve a merger of A with D and not B with C, for example.

Is that feasible, or do we have to limit it on a case-by-case basis, in which case my question is, when do you stop? And won't there be a race for who will be first in?

À (1025)

Mr. Gaston Jorré: The legal test is a substantial lessening of competition. So the act says we're not concerned with something that doesn't have a significant effect. And of course in any market you have to ask, is there going to be a counter-reaction?

Parties may merge and some market entry may be very easy, and other people may appear if it's a profitable market and entry is easy, and so on.

As to your question about timing, the legislation takes things as they come, so legally you have to deal with what is in front of you, and of course there obviously are some issues for institutions out there because of that.

But you have to take what's there and in 1998 there were two big transactions there.

Mr. Nick Discepola: Both you and OSFI are hiding behind that legislation. Let me ask you this directly. Should there be any changes in the legislation? Don't tell us that's what the legislation provides for. I'm asking you this. What should we be doing to manage the proposed future mergers in a comprehensible way?

You mentioned before that it took you 11 months to study the last merger. The legislation now says you have to do it in five months. Is that reasonable?

Mr. Gaston Jorré: It's not a legislated time period. It's a policy decision that we will do it within five months and we think we now can.

Mr. Nick Discepola: When you do it in five months, does OSFI start the time clock parallel, or do you wait until the Competition Bureau gives its criteria and then analyze it from then on? And how long would you take to analyze a particular merger?

Ms. Julie Dickson: We typically take four to six months. The merger review guidelines suggest five months, so we can work with that.

We would do our work at the same time as the Competition Bureau is doing their work. Referring back to the point that was made about the ability to share information with the Minister of Finance, since we report to the Minister of Finance, we are technically covered by that amendment.

So we would be interested in knowing from the Competition Bureau the extent to which they might be thinking about major remedies, because those remedies could have an impact on the analysis we do, because the transaction could be very different.

Mr. Nick Discepola: Technically, it could take anywhere from six months, seven months. What about the remedy stage, how long a timeframe could that take?

Ms. Julie Dickson: For us, it's very short. We typically know early on what kind of prudential issues would be created. We would be able to determine what we need in a short period of time. As I noted in my statement, we might have views on the structure of their capital and that sort of thing. For them to put those in place should not be time-consuming.

Mr. Nick Discepola: What about the Competition Bureau?

Mr. Gaston Jorré: It's very hard to say in advance how long it's going to take. It depends on the scope of the problem, the willingness of the parties to deal with them. It's really very hard. If the problems are not huge problems and the parties are willing to deal with them, it can move quickly, but it's very hard to generalize.

Mr. Nick Discepola: Well, my concern is that if I were a CEO of a major bank, to leave my shareholders exposed for upwards of seven, eight, ten months, it seems to me that would put me in a very vulnerable position as well as put the shareholders in a very vulnerable position. I'm wondering if part of our recommendations shouldn't be to reduce that timeframe.

I'd still like to come back to my first question, which nobody seems to want to answer. Do we do it on a case-by-case basis or do we allow everybody to come in and then choose the best optimal merger? Are there risks in just taking the first-come, first-served? And then, where do you stop? Should we say we will allow one merger out of the new four majors? Or do we allow two or three or four?

Ms. Julie Dickson: Our position would be that because of our mandate we have to examine the safety and soundness of each combination. I think we would not do anything different. Just as in the past we've dealt with a lot of mergers--Sunlife bought Clarica, TD bought Canada Trust--we deal with each of them as they come in the door because we are required to look at the safety and soundness of that particular institution.

À (1030)

Mr. Nick Discepola: What about the Competition Bureau?

Mr. Gaston Jorré: Let me just make one comment. Look at what happened in 1998. If more than one transaction comes in over the same period of time, where the other is outstanding, you're in effect going to have to look at them all together, ultimately, because they're both in front of you.

Mr. Nick Discepola: Excuse me, but I want to be clear on this. You said that you have to look on a case-by-case basis. Are you not now required by law to take the first one and analyze that and make your decision before looking at the second one?

Mr. Gaston Jorré: No, you're required to take what comes in. If you have one transaction in front of you and shortly thereafter another one comes in, you're in effect going to have to think about the possibilities if they were to both take place as well.

In 1998, the second came in not that long after the first, and so, had one gone further, one would have in effect had to deal with a world where potentially there were both transactions.

Correct me if I'm wrong, but the letter was on the same date for both...?

Mr. Richard Annan: Yes.

Mr. Gaston Jorré: The letters for both transactions...the Minister of Finance were on the same date. So in effect, they were both in play at the same time.

Mr. Nick Discepola: How would you choose which one you would approve or not approve, or would you approve both?

Mr. Gaston Jorré: If you have problems, you have to be able to resolve the problems with the transaction so that there are no competitive problems if you are going to allow it. If not, you would have to seek to block it. It's not choosing between one and the other; you have to be able to reach a solution that will eliminate whatever competitive problems there are.

I think it's worth pointing out that the problems were in specific markets, not all the markets that these institutions were in.

Mr. Nick Discepola: Do I have time for one last question?

On a more political angle, I guess, I don't feel comfortable with the final decision ultimately.... In view of the time delay that I see inherent in the current system, the decision ought to be coming back to the Minister of Finance and also to the House of Commons committees and the Senate committee, which will then take additional months.

In your viewpoint, should legislation be changed to just limit it to OSFI for soundness issues, the Competition Bureau from the competition angle, and if we have clear guidelines on a public interest perspective, that the Minister of Finance uses those and makes the ultimate decision?

My concern is that at the end of the day the ultimate decision will end up probably being political, and I don't think the banks or any other merger proposed can live on a political whim of any party or any government at that point in time.

So if we do our job correctly and make proper recommendations from the public interest point of view, which is what the minister has asked us, should it not be sufficient, and then let the mergers come as they may?

Ms. Julie Dickson: I would agree that speed is of the essence. We deal with hundreds of applications every year from our financial institutions to do various things, whether it's to merge or acquire something, or do something else that requires an approval under the statute. They are very, very concerned if we do not deal with those applications in an expeditious manner.

A great deal has been done at OSFI to ensure that whenever we get an application, it's dealt with expeditiously. Typically, in a large transaction, the institution is setting the timeframe for us. They're walking in and saying, this is the application; we want to close at such and such a date. That typically, for a large transaction, would be four, five, or six months. It really does depend on the amount of work that the institution itself needs to do in that period to get ready for that closing date. So from a safety and soundness perspective, I would agree that time is of the essence. We can't leave institutions dangling in the wind as we take our time. We have to be very focused.

That said, these are important transactions. From my perspective, we need to do the safety and soundness review very quickly. The Competition Bureau presumably wants to do their work very quickly, and I think the Minister of Finance and Parliament have to decide how quickly they want to do their work.

À (1035)

The Chair: Thank you.

Monsieur Godin.

[Translation]

Mr. Yvon Godin (Acadie—Bathurst, NDP): Thank you, Madam Chair.

First, I would like to ask the committee for its support. When we chose the witnesses to be invited to come before the committee, we selected about 25 of them. As everyone knows, Mr. Nystrom is busy with the leadership race and he did not attend the meeting. The NDP is of the view that the witness list is almost exclusively comprised of people in favour of bank mergers.

I would like to suggest to you another list of names--

The Chair: Just a moment, please.

[English]

There are two other witnesses I was hoping to deal with as long as we had 10 people. It was my hope that after we had suspended and allowed our witnesses to leave at the end of their testimony, we would go in camera for five minutes, hoping that we would have 10 people. There are two others. We'll deal with that at that time, but not right now, in courtesy to the witnesses.

So we will suspend, clear the room, and have a five-minute in camera meeting on witnesses.

[Translation]

Mr. Yvon Godin: Thank you, Madam Chair.

I wish to welcome the witnesses.

Here are my questions. Frankly, I'm a little nervous when the subject of bank mergers comes up because every time something becomes bigger, it means less service. Companies say that when they become bigger, they can provide more services but it seems to me that it's always the opposite that happens.

Take Air Canada for example. They said it would be privatized and become bigger but what do we have now? All airports in rural areas of the country are being closed down.

In the case of banks, Toronto-Dominion purchased Canada Trust. I have here some comments in this regard that I would like to read to members of the committee and to our witnesses.

A gentleman from Surrey, B.C., who agreed to giving his name, had this to say:

[English]

I have banked with Canada Trust for about 30 years and been happy. Since its merger with the TD bank, I am very unhappy. I live in Newton, Surrey, BC. The local TD branch was closed after the merger, and the Canada Trust branch simply cannot handle the increased load.

I have complained a number of times. I am told that I should use the ATM. In fact, as I point out, I pay all my bills on the TDCT website, and I pay in all checks and make all cash withdrawals with the ATM.

But sometimes, as this week, I need a teller. I wanted some Canada Savings Bonds and a US money order.

I have been in three times, at different times of day, and every time there has been a long line-up.

I have written to the Vancouver Sun and the Globe and Mail with this complaint. Short letters. The letters have not been published.

R. J. Baker

How many people in our country complain like that? What is the result of the Toronto-Dominion buying Canada Trust that they're now crying that they're not making money? Is a follow-up done after that type of thing takes place?

What are we getting ourselves into if we get into those mergers? The insurance companies merge, and after that there's no competition at all. They say that insurance for your car is not going to cost $900 any more, it will be $4,000, like it or not. Park your car. Is that what we're going to get ourselves into?

What is your responsibility? Are you there to protect the bank so that they can make money or are you there to protect the consumer?

Mr. Gaston Jorré: We're there to protect competition and to see that there's no substantial lessening of competition. In doing that you look in any given market at the effect of a proposed transaction, the remaining competitors, and the impact if the transaction goes through. For retail banking, for example, we examine that geographic market by geographic market, and one of the things you look at is how many other players are left and whether those players will offer an adequate level of competition in the market. That's the way we work.

À (1040)

Mr. Richard Annan: The purpose section of the Competition Act does direct us to ensure the process of competition, with the objective of ensuring competitive prices for consumers and customers and opportunities for small business and the like. Those are the outputs of a competitive process. You would expect competitive prices and competitive levels of service.

[Translation]

Mr. Yvon Godin: Yes, but at the same time, the Royal Bank wanted to merge with the Bank of Montreal. We were told it would be terrible because of the lack of competition, that it would be really bad for consumers since foreign banks would invade Canada though information technology, take over the credit card market and so on.

Today, consumers say that credit card interest rates have not gone down. People receive all kinds of credit cards in the mail. They only have to dial a 1-800 number, register and then, in no time at all, they can run up a debt of $16,000 with a high interest rate. Nothing has changed for consumers.

[English]

Mr. Gerry Birks: I'm sorry, Mr. Godin, I didn't really understand. I thought that the fact that you had many choices in your credit card opportunities is probably a good thing, in as much as that gives you the opportunity to choose what is the best card for your particular purposes.

Mr. Yvon Godin: Yes, but maybe you have the opportunity to choose, and you have lots of people choosing, but the interest rates still stay up. You surely get along together, very good. I'm speaking about what I hear from the consumer from home and also what we hear in the House of Commons too. What are they doing for that 125 every time you use your little plastic card?

What are you saying to, or do you have any responsibility to say anything to, those banks that are crying they don't make money because from $1.5 billion they made $1.4 billion and they feel they lost money? I don't know, if I made $1.4 billion, I'd say I had made money.

Mr. Richard Annan: Obviously, our job is not to ensure the share prices of banks or the profitability levels. It's to ensure the level of competition in the market.

Mr. Yvon Godin: Then my question is this: For the consumer? We're here as parliamentarians. We are here to represent the people of this country.

[Translation]

The Vice-Chair (Mr. Nick Discepola): Mr. Godin, you should address these questions to banks executives, when they come before us.

[English]

Mr. Yvon Godin: No, I feel they're answering right. They're giving me what is their responsibility.

[Translation]

The Vice-Chair (Mr. Nick Discepola): Please proceed.

[English]

Mr. Yvon Godin: It's my 10 minutes. Thank you.

[Translation]

The Vice-Chair (Mr. Nick Discepola): Sometimes they can't give an answer on specific cases.

[English]

Mr. Yvon Godin: To follow on what I was saying, you let the competition in that, right? When I say Toronto-Dominion bought Central Trust, you people have made a study. What is your analysis today of what has happened?

Mr. Gerry Birks: When we looked at the Toronto Dominion acquisition of Canada Trust, we looked at the impact of competition across the country. What we determined was that there were essentially three markets in southwestern Ontario where there were competition issues. That was in Paris, Ontario, Port Hope, and then in Kitchener.

As a consequence of those competition issues, we negotiated remedies with the parties whereby the TD agreed to sell 13 bank branches--one in Port Hope, one in Paris, and then the remaining 11 in the Kitchener-Waterloo area.

As a consequence of those asset sales, as a consequence of those branch sales, we determined that the competition equilibrium would be maintained in those markets.

The Chair: One minute, Mr. Godin.

Mr. Yvon Godin: As the member across from us asked, the time it takes to make a merger is what--nine months before, or looking at it now, five months? What do you think would be the best in terms of the time that it needs to be done?

Mr. Gaston Jorré: I'm sorry, I'm not sure I understand. What would be the best time...?

[Translation]

Mr. Yvon Godin: It was mentioned earlier that it took time to go through the process. After, I think it went down to five months.

À (1045)

Mr. Gaston Jorré: We plan a period of five months to carry out our examination, determine if there are issues and present our report to the minister of Finance. Then the minister makes a decision. If there are remedial measures to be negotiated, this is done later.

Mr. Yvon Godin: Thank you.

[English]

The Chair: Merci beaucoup.

Mr. Cullen will be splitting his time with Ms. Minna, five minutes each.

Go ahead, sir.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair.

Thank you to the witnesses for your presentations. I have a couple of questions for the Competition Bureau.

Following the merger activity last time, the government introduced Bill C-8. One of the objectives of that legislation was to create more competition in financial services. There were foreign banks, giving more opportunities to create new banks, the Credit Union's access to the payment system, foreign life insurance companies, etc.

Now, Mr. Annan, you said that you tracked the world of competition in this sector. I know you only deal with transaction-specific information. But is there any traction that has occurred that is creating more choices for consumers, more competition, so that if a merger request does come in, it will create the circumstance that would be more favourable to a bank merger?

Mr. Richard Annan: Well, clearly, we're going to have to look at that closely if there's another proposed transaction. I guess our general take on Bill C-8 was there were a number of measures in there that were helpful and were going in the right direction. But we still think there are significant economic barriers despite the easing of regulatory barriers that are going to be coming into play. It's clear that we're going to have to look at, for example, the degree to which the credit unions have grown and become competitors and so on.

Mr. Roy Cullen: The last time around as well some of the remedies that were proposed by the Competition Bureau involved divestitures. And of course from the point of view of members of Parliament representing citizens in terms of choice and access to services, that runs counter to the kind of objectives that we would like to see in play.

The banks seem to have picked up on this, and when they come forward next time, we're just guessing, but it seems to me that they might have taken care of some of the branches that otherwise would have to be divested and they may line up another bank or another financial institution to pick up the branches that they'd otherwise have to close.

I know that you only deal with transactions' specific details, but do you think that is going to help your job? Is that going to do it for you in terms of the competition aspects?

Mr. Richard Annan: The whole point of divestiture in fact is to create more choice, not less. So that's what we're trying to do. And to the extent to which the banks have in advance identified potential new entries in the market and are willing to sell those branches, clearly that's going to be helpful. And we'll have to get into detail as to whether that is sufficient or not.

But we have an anti-trust thinking that says if you can actually identify in advance some problems you think you might have and come up with solutions early in the process, it's going to be better for everybody.

Mr. Roy Cullen: Can I carry on for a second.

The Chair: Yes.

Mr. Roy Cullen: Thank you.

Mergers are going beyond just banks and banks; there are insurance companies also involved. We've seen recently Manulife and Canada Life. It could be a bank and an insurance company. What does that do to the state of play in terms of competition? And if you can deal with this conceptually, does that make things more complicated from a competition point of view, or does that create more competition if there's a lot of cross-merging with banks and insurance companies? Some of it I know is prohibited, but there is some provision for some of that to proceed.

Mr. Richard Annan: Our analysis actually isn't in a sense bank specific, or insurance company specific, in the sense that we look at product markets. So if an insurance company and bank are competing for loans, for example, or some type of mortgage product or something like that, we look at who can provide that product whether it be a bank, trust company, insurance company, whatever, it doesn't matter. We're just saying, who are the competitors in that particular product market? So to the extent that there are cross-mergers that may increase competition in product delivery that would be good.

Mr. Roy Cullen: Do I have time for one quick one?

The Chair: Yes.

Mr. Roy Cullen: On this business that my colleague raised about the first in, first out, or first come, first served, it seems to me that this still will be a challenge. When you look at a transaction, if there's no other transaction in the pipeline would you actually broad-brush it and look at scenarios--and maybe my other colleagues across the table already asked this, I'm not sure--to say that if this bank merges with that bank, even though we don't have a transaction on the table, there's likely to be more merger activity, and try to paint a picture?

I remember the last time, if the two mergers had gone through I think something like 78% of the deposit-taking capability in Canada would be in the hands of two major banks. But do you only look at transactions that are on the table, or do you look at the whole competitive structure of the industry and what might happen following that?

À (1050)

Mr. Gaston Jorré: Well, in looking at the transaction, obviously you're looking at the whole industry, but if there were one or two that were currently active, that's what you would look at. You wouldn't hypothetically imagine, “For the purpose of assessing this, what if A and B were also to merge?”

But that's why I'm saying there is a strategic issue for the institutions, because they know that there is an effect, and if you come in later rather than earlier you're going to be assessed in a rather different market.

The Chair: Thank you.

Ms. Minna, five minutes, followed by Mr. Valeri for the last ten-minute round.

Ms. Maria Minna (Beaches—East York, Lib.): Thank you.

Some of my questions actually reiterate some of what's already been asked on this side.

From what you said earlier, your tendency--and I may be wrong here--is to look at a situation and analyze a merger that's come forward and look at issues that you think need to be addressed before allowing it. Is your tendency to try to find solutions and fix the things that you think would be problematic if the merger took place, and then allow it? At what point would you say, it's just not feasible to even approve it? What would have to be in place for you to say no rather than to fix?

Mr. Gaston Jorré: We try very hard to find solutions that work and that allow transactions to proceed. Our purpose is not to interfere with what is otherwise going on in the marketplace. As long as we can satisfy competitive concerns, we're quite happy to find solutions that will allow that to go forward.

And it's relatively infrequent to reach a position where the only alternative is to block a transaction. If there are possible ways of solving it, and if the parties are willing, we prefer that.

Ms. Maria Minna: In your presentation, I think you said that over 45% of market concentration was problematic. In the last merger we dealt with, there were full two banks coming together, and that would have left the Scotiabank and....

In that instance, would it have exceeded the 45%?

Mr. Richard Annan: Yes. If you look at the letters we produced to the four merging banks, we specified where we thought the competitive problems would be. There's an appendix to those letters that lists all the various markets where those guidelines were violated. There was quite a number of them.

Ms. Maria Minna: Were there enough to have advised not to go ahead? Which ones would you have chosen not to go ahead?

Given that you had four banks, it goes back to the issue of how you decide. Would you have recommended the approval of two banks and not the others? How would you have chosen them?

Mr. Richard Annan: It's hard to answer that question in the abstract, because we never got to a remedies discussions.

Ms. Maria Minna: No, but you may be facing that again.

Mr. Richard Annan: If we were faced with that again and the minister decided he wanted OSFI and us to go the negotiations phase, obviously we'd do that. It's hard for me to prejudge how those would go without knowing what the facts were and what the transaction was.

All I can say, as Gaston has mentioned, is that we do this all the time. We identify problems and we try to find solutions.

Ms. Maria Minna: My other question is similar to Mr. Discepola's. Let's say two banks come forward, as happened recently, and somehow we deal with the issues that arise out of the mix. We're satisfied they've been addressed, they go through, and they're approved. Then the next two come along, and you treat them on a case-by-case basis. At that point are you still trying to address their issues, or is there a point at which you say, this is over 45%, so nothing more moves?

Mr. Gaston Jorré: You obviously have to look at what the new market is. If the new market is a more concentrated one, there will probably be much bigger problems. There may be a point at which it's hard to see a solution.

It may be worth mentioning that in the bank letters, there were whole areas where there were not issues. There were issues in retail banking, for example, but there were other areas, like large corporate loans, where there weren't issues. So there is potentially a lot of room for solutions in many things.

But you're quite right that as a market gets more concentrated, there may be a point where there is no solution.

I want to emphasize--and I'm sorry if I'm repeating myself--it's not first in, first out; it's what you have in front of you at the time.

À (1055)

Ms. Maria Minna: There was a discussion the last time the mergers were being discussed--when the four were up--about foreign banks and making the system more competitive; that as there were more and more foreign banks active in Canada, it would create a much more competitive environment.

Has that changed now? My understanding at the time was we were looking for more diversification, in order to have the kind of competitive environment we wanted, especially for small and medium-sized businesses, in terms of getting loans and what have you. There have been some major problems with banks. We don't have to go through history, but has that environment changed at all?

Mr. Richard Annan: Clearly that's something we're going to have to examine very carefully next time. There haven't been significant changes in the market since 1998 in those respects, from what I understand.

Ms. Maria Minna: There haven't been changes in that respect since then.

Mr. Richard Annan: No.

Mr. Gerry Birks: I think it's very difficult for foreign banks to come into Canada and try to compete at the retail and small business levels.

The major institutions have a significant market share and a significant presence. As I recall, a number of years ago Citibank tried to come into Canada. They opened about 30 branches, but they eventually withered. They weren't able to do it because despite the fact Canadians complain about their banks, they tend to be very loyal to them.

So it is very difficult for foreign banks to come into Canada and actually compete unless they can come in a fairly substantial way.

The Chair: Thank you.

We're in the final part of this round. Mr. Valeri is next for ten minutes, please.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair.

If you disagree with this statement, please feel free to put it on the record, but I think mergers in the financial services sector are a valid business strategy. It's been said before, although I haven't heard it said this morning, so far.

I've heard from CEOs that essentially what is missing here is certainty in the process. I think they've gone on to say that certainty exists with the Competition Bureau and with OSFI, and there is predictability in that aspect of the process.

Given that OSFI deals with prudential issues, and the Competition Bureau with market competition, in your opinion would the public interest be addressed in the review process if the public interest impact assessment component were not there?

Mr. Gaston Jorré: You're really asking us what should be considered, and I—

Mr. Tony Valeri: I'm asking a very specific question, because that's why we're here. We're here to define and bring clarity to the public interest impact assessment part of this whole merger process. So I need to hear from the other two components, whether you can in fact serve the public interest by performing the job as you perform it.

Mr. Gaston Jorré: We certainly serve a part of it. We think there's a public interest in competition, and we certainly deal with it. I'm sure OSFI considers there's a public interest in ensuring the financial stability of institutions, and they serve that. Whether there are other issues, we're not really qualified to answer. I mean, that is for the Minister of Finance, this committee, and the Senate committee.

I can only tell you we think our part of it is an important part of the public interest. But what else should be considered is not really something we're qualified for.

Mr. Tony Valeri: Does OSFI have something to add?

Ms. Julie Dickson: I think we would agree with that statement. It's definitely in the public interest to have a safe and sound financial system.

Mr. Tony Valeri: Okay.

I just want to go back to a statement I think Mr. Jorré made in response to a question asked. I think the question was put by Mr. Harris. I'm just paraphrasing here, and just want some clarification. I think you said that whatever is not dealt with prudentially, or from a market concentration standpoint, would be dealt with from a public interest standpoint. Okay?

So I go back to the question...and I'm not asking you to pronounce on an outcome of what is or is not in the public interest, outside of your responsibilities within the Competition Bureau. But I guess what I am asking you is, given what you know is the public interest or what public interest is being served within the Competition Bureau, what other areas of public interest should we be looking at? What are you not servicing or not responding to in terms of the public interest?

Your answer would help us define more clearly the public interest impact assessment component of this merger process.

Á (1100)

Mr. Gaston Jorré: Well, perhaps I could help you simply by saying that some of the issues I've heard raised, but I don't think we're the appropriate people to decide or—

Mr. Tony Valeri: No one's asking you to decide. I'm asking for your opinion.

Mr. Gaston Jorré: Well, I'm not sure we're the appropriate people to provide an opinion to you on whether that should be in it. But some of the issues people have raised, for example, are issues about the position of Canadian banks in the world banking industry, and whether this is a factor that should be considered. Other people have raised issues of employment, and whether it is a factor to be considered. I'm sure there are some other issues people have raised. Branch closures are another issue raised by people, which may be outside the issue of a competitive market as such.

These are all issues that perhaps should be considered. I'm not sure we're uniquely qualified to suggest whether or not those are things that should be considered as part of the public interest assessment process.

Do you want to add anything?

Ms. Julie Dickson: When I read the merger review guidelines, part 8 talks about the contents of the PIIA, the public interest impact assessment. There is a list of factors in it, and as I go through them I can't think of any other factors I've ever heard raised that are not on this list.

Mr. Gerry Birks: Mr. MacKay also made a number of recommendations with regard to what might be considered a public interest issue, and are clearly outlined in his report.

Mr. Richard Annan: I should just mention a concrete example, not in this industry but in the airline industry. In the Air Canada-Canadian transaction, the Minister of Transport had public interest to think about. The way the process worked was that we identified the competition issues and negotiated undertakings with respect to these. The Minister of Transport negotiated undertakings with respect to the public interest, which didn't include competition issues. So the two particular issues he had undertakings on were relating to employment and access to communities.

These are obviously issues we don't deal with. If these are important, then they are something the committee should be considering.

Mr. Tony Valeri: Okay.

Some CEOs have said our merger review process is more complex, more difficult, or time-consuming than what many of their foreign bank competitors face, at least in their own countries. Is this a true statement? From a Competition Bureau standpoint and an OSFI standpoint, are we being more onerous with our banks than what their foreign competitors face in their own countries?

Mr. Richard Annan: I don't think that's the case. I know the Department of Justice does a very thorough examination of bank mergers as does the Federal Reserve Board, and Australia also does a very extensive analysis. So I don't think by any means we're outside the international norms on that.

Ms. Julie Dickson: The same would hold true for the OSFI analysis. I think our analysis would be equivalent to the type of analysis that other major international regulators would do.

Mr. Tony Valeri: So they must be referring to the public interest impact assessment part of the merger process.

Mr. Richard Annan: Ask them that question.

Mr. Tony Valeri: Sure.

Mr. Gerry Birks: Can I just do a little advertising for the bureau here? Every one of the bank chairmen who went before the senate committee a week or so ago said that they understand very well the Competition Bureau process. I don't think their problem is with us or with OSFI. I think they're concerned about other than that. And that's where their uncertainty lies.

Mr. Tony Valeri: And I referred to that earlier in my question, because I do believe that to be the case.

Mr. Annan, in your deck you talked about when you looked back to the 1998 merger review, or the mergers then, you indicated that one of the analyzes that came out of that was that technology would not replace the need for a physical presence in the next five to fifteen years. Has that changed for you over the last little while?

Á (1105)

Mr. Richard Annan: As I said, this was something that we found in 1998. That was based on experts we hired, and actually some of it came from their own experts that the banks had, but clearly progress has been made. Alternative distribution mechanisms have continued to grow. That's an important issue for us to look at again. I can't say more than that on this point.

Mr. Tony Valeri: Except that, I guess from a general sense or a general comment, obviously there has been progress in technology in that more and more Canadians are using the technology rather than the bricks and mortar approach of—

Mr. Richard Annan: That's true. But on the other hand, the banks haven't closed hundreds of branches either and replaced them with technology.

Mr. Tony Valeri: I guess that would be a question to ask the banks.

The other question I would have has to do with the TD-Canada Trust. Given the way that the TD-Canada Trust merger took place, is that a potential model to look at all mergers? It seems to have gone fairly well--and correct me if I'm wrong.

Mr. Gerry Birks: You're quite right. But you have to recognize that we used exactly the same process in TD-Canada Trust as we did in 1998 with the other bank mergers. The only difference was that we did get to the remedy position. We were able to negotiate remedies to problems that were confronting us from a competition perspective.

Mr. Richard Annan: Clearly the scale and scope of the transactions in 1998 were quite a bit different from the Canada Trust transactions.

The Chair: Thank you very much to our witnesses today. I think it has been useful for us to get your perspective on your particular role in a process that's going to engage this committee in the new year more fully with our role. Thank you very much.

We are suspended, and we will come back non-televised, in camera.

Thank you.