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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, February 5, 2003

1535

The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.))

Ms. Ada Lee (President, Women Entrepreneurs of Canada)

1540

1545

1550

The Vice-Chair (Mr. Nick Discepola)

Ms. Monica Patten (President and CEO, Community Foundations of Canada)

1555

1600

The Vice-Chair (Mr. Nick Discepola)

Mr. Duff Conacher (Chair, Canadian Community Reinvestment Coalition)

1605

1610

1615

The Vice-Chair (Mr. Nick Discepola)

Mr. Andrew Jackson (Senior Economist, Social and Economic Policy, Canadian Labour Congress)

1620

1625

The Vice-Chair (Mr. Nick Discepola)

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

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

1630

Ms. Ada Lee

Mr. Richard Harris

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

Ms. Monica Patten

Mr. Richard Harris

Ms. Monica Patten

Mr. Richard Harris

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette (Joliette, BQ)

The Vice-Chair (Mr. Nick Discepola)

Mr. Andrew Jackson

1635

Mr. Pierre Paquette

Ms. Ada Lee

Mr. Pierre Paquette

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

1640

Ms. Monica Patten

The Vice-Chair (Mr. Nick Discepola)

Ms. Sophia Leung (Vancouver Kingsway, Lib.)

The Vice-Chair (Mr. Nick Discepola)

Ms. Monica Patten

Ms. Sophia Leung

Ms. Monica Patten

Ms. Ada Lee

The Vice-Chair (Mr. Nick Discepola)

Mr. Andrew Jackson

Ms. Sophia Leung

Mr. Andrew Jackson

1645

Ms. Sophia Leung

Mr. Duff Conacher

Ms. Sophia Leung

Ms. Ada Lee

Ms. Sophia Leung

The Vice-Chair (Mr. Nick Discepola)

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. Duff Conacher

1650

Mr. Shawn Murphy

Mr. Duff Conacher

Mr. Shawn Murphy

Ms. Ada Lee

1655

The Vice-Chair (Mr. Nick Discepola)

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP)

The Vice-Chair (Mr. Nick Discepola)

Mr. Lorne Nystrom

The Vice-Chair (Mr. Nick Discepola)

Mr. Andrew Jackson

Mr. Duff Conacher

1700

The Vice-Chair (Mr. Nick Discepola)

Mr. Lorne Nystrom

Ms. Ada Lee

Mr. Lorne Nystrom

Ms. Ada Lee

The Vice-Chair (Mr. Nick Discepola)

Mr. Roy Cullen (Etobicoke North, Lib.)

Ms. Ada Lee

1705

Mr. Roy Cullen

Ms. Monica Patten

Mr. Roy Cullen

Mr. Andrew Jackson

Mr. Roy Cullen

1710

Mr. Andrew Jackson

The Vice-Chair (Mr. Nick Discepola)

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Ms. Monica Patten

1715

Mr. Bryon Wilfert

Ms. Ada Lee

Mr. Bryon Wilfert

Mr. Duff Conacher

Mr. Bryon Wilfert

Mr. Duff Conacher

Mr. Bryon Wilfert

The Vice-Chair (Mr. Nick Discepola)

Mr. Bryon Wilfert

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

1720

Mr. Duff Conacher

Mr. Richard Harris

Mr. Duff Conacher

Mr. Richard Harris

Mr. Duff Conacher

Mr. Richard Harris

Mr. Duff Conacher

The Vice-Chair (Mr. Nick Discepola)

Mr. Duff Conacher

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

Mr. Duff Conacher

1725

The Vice-Chair (Mr. Nick Discepola)

Mr. Roy Cullen

Mr. Duff Conacher

The Vice-Chair (Mr. Nick Discepola)

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

The Vice-Chair (Mr. Nick Discepola)

Mr. Duff Conacher

The Vice-Chair (Mr. Nick Discepola)

Ms. Ada Lee

1730

The Vice-Chair (Mr. Nick Discepola)

Ms. Ada Lee

The Vice-Chair (Mr. Nick Discepola)

Ms. Monica Patten

The Vice-Chair (Mr. Nick Discepola)

1735

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

The Vice-Chair (Mr. Nick Discepola)

Mr. Martin Glynn (President and Chief Executive Officer, HSBC Bank Canada)

1740

1745

The Vice-Chair (Mr. Nick Discepola)

Mr. Richard Harris

Mr. Martin Glynn

Mr. Richard Harris

Mr. Martin Glynn

Mr. Richard Harris

Mr. Martin Glynn

Mr. Richard Harris

Mr. Martin Glynn

1750

Mr. Richard Harris

Mr. Martin Glynn

Mr. Richard Harris

The Vice-Chair (Mr. Nick Discepola)

Mr. Pierre Paquette

Mr. Martin Glynn

Mr. Pierre Paquette

1755

Mr. Martin Glynn

Mr. Pierre Paquette

Mr. Martin Glynn

Mr. Pierre Paquette

The Vice-Chair (Mr. Nick Discepola)

Mr. Bryon Wilfert

1800

Mr. Martin Glynn

Mr. Bryon Wilfert

Mr. Martin Glynn

1805

Mr. Bryon Wilfert

Mr. Martin Glynn

The Vice-Chair (Mr. Nick Discepola)

Ms. Sophia Leung

The Vice-Chair (Mr. Nick Discepola)

Ms. Sophia Leung

1810

Mr. Martin Glynn

Ms. Sophia Leung

Mr. Martin Glynn

Ms. Sophia Leung

The Vice-Chair (Mr. Nick Discepola)

Mr. Roy Cullen

1815

Mr. Martin Glynn

Mr. Roy Cullen

Mr. Martin Glynn

Mr. Roy Cullen

Mr. Martin Glynn

Mr. Roy Cullen

Mr. Martin Glynn

1820

Mr. Roy Cullen

Mr. Martin Glynn

Mr. Roy Cullen

The Vice-Chair (Mr. Nick Discepola)

Mr. Roy Cullen

Mr. Martin Glynn

The Vice-Chair (Mr. Nick Discepola)

Mr. Shawn Murphy

Mr. Martin Glynn

1825

Mr. Shawn Murphy

Mr. Martin Glynn

Mr. Shawn Murphy

Mr. Martin Glynn

Mr. Shawn Murphy

Mr. Martin Glynn

Mr. Shawn Murphy

The Vice-Chair (Mr. Nick Discepola)

1830

Mr. Martin Glynn

The Vice-Chair (Mr. Nick Discepola)

Mr. Martin Glynn

The Vice-Chair (Mr. Nick Discepola)

CANADA

Standing Committee on Finance

NUMBER 039

2nd SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, February 5, 2003

[Recorded by Electronic Apparatus]

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[English]

The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Pursuant to Standing Order 108(2), I'm pleased to continue the study on the public interest implications of large bank mergers.

I'd like to welcome today, from Women Entrepreneurs of Canada, its president, Ada Lee, and Dr. Friedman, a member of the board of directors; from the Community Foundations of Canada, its president and CEO, Monica Patten; and from Democracy Watch, Duff Conacher, who is well known.

Do you have a permanent chair here, Duff? We should probably offer you one on this committee.

From the Canadian Labour Congress, we have someone else who has also appeared before the committee often, a senior economist in social and economic policy, Andrew Jackson.

I'd like to welcome all our guests here today. The format, as you know, is a presentation of roughly five to seven minutes, in order to leave ample time for questions. We have another hearing at 5:30, so I'd like to be prompt.

I would welcome the Women Entrepreneurs of Canada to make their presentation first, please.

Ms. Ada Lee (President, Women Entrepreneurs of Canada): Thank you very much.

As the Women Entrepreneurs of Canada, we're very pleased to be submitting our input to the committee on the subject. Our brief will focus on the bank merger proposal and its potential impact upon businesses owned and operated by women.

Before we begin, we'd like to give you a little bit of background about our organization so you know the perspective from which we speak. The Women Entrepreneurs of Canada is a federally incorporated, non-profit organization. We were founded in 1992 to serve the interests of established women entrepreneurs, and we're also the Canadian affiliate of the World Association of Women Entrepreneurs, les Femmes Chefs d'Entreprises Mondiales, FCEM, which has 68,000 members worldwide in over 40 countries. We are active in the business community. We have monthly meetings happening in the Toronto area, and we have hosted three international events, with two trade missions to the United States. We are very much fostering international trade exchanges between women-owned businesses around the world.

Women-owned and women-run businesses are a growing force in the Canadian economy. The following statistics speak to this leadership.

Thirty-one percent of firms and one third of self-employed businesses are women-owned or -led. The number of women entrepreneurs is growing at twice the rate of men. Women generate approximately 40% of new start-up businesses in Canada, up from 30% in 1981, and roughly half of Canada's new companies are now started by women. Women-owned and women-led businesses provide 1.7 million jobs, compared to 1.5 million jobs provided by Canada's top 100 companies. The number of women with incorporated businesses more than doubled in the past 10 years compared to the number of men, which increased by one third.

So we are an important part of driving both our national economy and the role of Canada on the international business scene. Of course, an essential element of this business success is partnerships with the financing industry, and banking in particular.

The position of the Women Entrepreneurs of Canada is that we are in support of bank mergers in Canada that will help our economy grow and become a significant force in the international trade markets. However, our support is provided only if the following concerns and issues are duly addressed through legislative or other government initiatives. I'll quickly summarize them.

The first is that access to financing for women-run businesses, in particular small and medium-sized enterprises, SMEs, is strongly supported to ensure that availability of capital will not be further reduced; secondly, that access to choices of financial institutions at competitive rates continues to be made available to stimulate and support the growth of Canadian businesses; and thirdly, that service levels and offerings from banking institutions are further focused on meeting the needs of women-run businesses, in particular the SME segment, in all regions within Canada.

We're going to elaborate further on these issues and concerns right now.

The first one is in regard to the access to financing. While there is a continuous debate as to whether the demographic characteristics of business ownership would be a contributor to or inhibitor of access to financing, historically women-owned businesses have had difficulty raising the funds we need to start and grow our businesses. Current research indicates that other characteristics of a business, such as size and sector of operation, may be stronger determinants than gender for financing successes.

The stage of reported business development for SMEs in Canada is as follows: 58% of SMEs that are majority-owned by female entrepreneurs are in a slow-growth stage of development; and 9% of SMEs with majority female ownership report being in fast growth, significantly fewer than those majority-owned by males.

So it has been observed that women tend to own firms in slower growth and higher risk sectors, such as wholesale and retail, in which access to financing is relatively more challenging. Smaller firms have a higher concentration of female owners, and they would also have lower approval rates than larger firms. Therefore, a higher turndown rate for women business owners does exist for these reasons.

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This higher turndown rate is due to the fact that women-owned businesses are on the average smaller and younger and are concentrated in the risky service or retail sectors. We're not claiming that gender by itself is really a determinant, but the fact is, these are the statistics.

There is a serious concern, therefore, that small and medium-sized businesses run by women do not presently have the same access to capital and services as that provided to male-owned businesses. Access to financing for woman-run businesses, in particular in the SME sector, needs therefore to be strongly supported to ensure that availability will not be further reduced by the bank mergers.

We have a few recommendations. First, if bank mergers will help to better position the banking sector for international markets, the government needs to ensure that the banking institutions will continue to invest in and assist the local economy at home and that they become good Canadian corporate citizens. This could be achieved by setting and monitoring targets in lending to small and medium-sized businesses in Canada. This strategy should also include developing geographic requirements for loans provided to rural communities so we do have access to capital.

Another recommendation is to ensure that the public interest will be served as the Canadian banks merge and consolidate and are reduced in numbers; the barriers to foreign banks' entry or to alternative financing institutions need to be relaxed so we can promote access and choices.

The federal government has developed economic assistance programs such as the student loan program to encourage a skilled Canadian labour force that will improve our competitiveness in the global market. Also, the Canadian homebuyers plan supports first-time homebuyers and the construction industry. Similarly, if you recognize that woman entrepreneurs contribute to the Canadian economy, we want to see an economic assistance program to encourage and support the financing of small and medium-sized businesses, particularly those of woman entrepreneurs, because we believe this will also benefit the whole Canadian economy.

Another recommendation is to assist with the expansion and development of community-based financial organizations to promote competition and choice, particularly in smaller rural communities across Canada. Some of the examples, and this is not exclusive, would perhaps include virtual banks, credit unions, insurance operators, and other solutions in order to make sure that businesses in rural areas in particular have access.

Our second concern is about access to competitive rates. In addition to our concern about access to financing, we are concerned about competitive rates, because the survey on SME financing in Canada indicated that 58% of SMEs, a majority owned by women, are in a slow-growth stage of development. In order to assist these businesses to move to the next level of development, it is essential for us to have access to financing that will be affordable. The concern of the Women Entrepreneurs of Canada in this matter is that less competition among the financing organizations will lead to high interest rates, higher loan rejection, and interest charges to SMEs for financing packages.

With regard to this concern, we are recommending the following: that assistance be provided with the expansion, again, and development of community-based financial organizations to promote competition and choices, particularly in smaller rural communities across Canada; and that banks and all lending institutions be required to report to the federal government's watchdog on financing provided to SMEs, for example, concerning financing volume percentages and interest rates, particularly in those that are given to women's businesses. Economic assistance programs to encourage and support the financing of small and medium-sized businesses can set the interest rate at a fixed percentage above prime, which will also benefit the Canadian economy.

Our third concern is in regard to service levels and offerings in all regions within Canada. Women-run businesses also need additional banking services and offerings that are tailored to the needs of SME businesses.

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Some examples of these services would include flexible banking packages for chequing, NSF cheques, hold payments, returned cheques, lines of credit as part of a package of banking services, and investment vehicles for short-term cash that provide favourable rates of return based upon the banking relationship.

To ensure that these flexible services are available, we recommend the following. Again, assist with the expansion and development of community-based financing organizations located in smaller communities across Canada--for instance, alternative financial institutions such as President's Choice and credit unions--to ensure competition among financial institutions and to ensure that alternative, variable services and choices and flexible packages are offered to meet the needs of SME businesses.

Before we give our summation, we'd like to give you some examples of what's happening out there. This is a quote from the January 1, 2001, National Post. They had an article called “Little guys still rapped by banks: discriminatory lending”. The first example is:

When you see Irene Besse's record as a businesswoman, you would think a lender would be happy to see her come in the door. In 20 years as owner of Irene Besse Keyboards Ltd., she's built it into Calgary's largest keyboard and piano store, employing more than 50 people. She also owns Irene Besse Academy, where 34 teachers give lessons to about 1,000 budding musicians. But even as recently as three years ago, no bank Ms. Besse approached would give her a loan to build her businesses. On the other hand, if her husband would just co-sign for her, then of course she could have the money.

Banks commonly ask for co-signers, hedging their lending risk by asking someone with a bigger income or more assets than the applicant to guarantee the loan will be repaid. But in Ms. Besse's case, asking her husband to sign seemed ludicrous because he has never earned more than she has. “It's just a gender thing. It's got nothing to do with my business; the banks never had any legitimate reason,” Ms. Besse says.

I can also say this because one of our associates has experienced it first-hand. I won't disclose the name of the business or the owner, but this business is owned by a woman in Harrow, Ontario, a rural area, and this is her story:

I started my business in February 2000 as an inspection house operating a CMM machine. After completing a Business Plan and the paperwork required for getting a loan to start my new business, the loans departments at the bank and credit union didn't even look at my file. They asked me questions where the answers were already in the file. No one took the time to understand my business or my CMM equipment and they didn't explain why they wouldn't give me a loan. I suppose it was because I didn't have the cash collateral and they wouldn't accept my farm.

The Canadian Bank was of no use because of the red tape required to get a government grant or loan. A broker found me a loan but the interest rate was over 20%. I ended up going getting a second mortgage on my house through the personal loans section of my Credit Union as a down payment for the CMM and financed the rest through GE Capital who knew about me because my husband leases his trucks through them.

Thank God this associate's business has been very successful, with non-stop work each year.

So I hope that gives you a taste of what some of the women business owners, particularly in the SME sector, experience every day.

In conclusion, women-owned and -run businesses are a growing force in the Canadian economy. We are an important part in driving both our national economy and the role of Canada on the international business scene. As our Canadian banks become bigger in size and more competitive in international markets, they need to remember that investing in the long-term growth of smaller Canadian businesses will be a good investment for them in the long run as well. More financial support to woman-run and led businesses and particularly to the SME sector will promote the growth of more Canadian companies in international markets. The Canadian banks will also need the support and partnership of successful Canadian-owned and -operated businesses to take them to the world market.

With this growing presence in mind, we support the merger of Canadian banks under conditions that will further support the leadership and dynamic nature of women-owned and -led businesses. A strong entrepreneurial business sector will lead a strong Canadian economy. The results will be more jobs in Canada and more resources with which to reach out to the world as well as a growing influence in the international trade marketplace.

We thank you for the opportunity to share our views with you.

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The Vice-Chair (Mr. Nick Discepola): Thank you, Ms. Lee.

I would now like to ask the Community Foundations of Canada to make their presentation, please.

Ms. Monica Patten (President and CEO, Community Foundations of Canada): Thank you very much, and thanks for the invitation to meet with you today.

I'm going to be commenting on the possible implications of bank mergers through the lens of a network of organizations called Community Foundations, a group that is deeply rooted in local communities, and through the eyes of what we know in this country as the voluntary or the not-for-profit sector.

I will start with community foundations, which are a bit like financial services. These public foundations, which are members of the association that I represent today, invest funds from local donors and turn the income into grants to support their local communities' priorities and needs. There are over 125 such community foundations in Canada, and collectively we enjoy about $1.7 billion.

The investments of community foundations are managed by Canada's financial institutions, including banks, and are often locally managed. The relationship between banks and foundations is very important. Both are working for the long-term prosperity of their community. Senior bank officials, for example, often advise community foundations on sound investment practices. In some cases, the bank actually manages the funds or acts as a custodian. Senior bankers serve on the boards of directors. They offer in-kind and sometimes financial support, and they stand with community foundations as stewards of the community's resources for the issues of today and the future.

While community foundations may, in fact, require and enjoy, because of the nature of their business, a particular relationship with banks, they are not the only organizations within the charitable or voluntary sector to do so. All voluntary-sector organizations have some kind of relationship with their local banks. This is, as many of you know, a very large sector. With annual revenues of about $90 billion--probably a little bit more now--the sector employs about 1.3 million people and is supported by over 6 million volunteers.

The obvious relationship is around the banking needs of voluntary-sector organizations, and with the kinds of numbers I'm talking about, those numbers are not small. But the less obvious ones matter just as much. Banks have long been recognized as active and good citizens in their communities, perhaps more so than any other business institutions. They give to good causes. They get their employees to volunteer. They sponsor events.

There is some evidence--and some research has been undertaken to demonstrate this--that when two businesses merge, the amount of community involvement that the two entities may have had separately is reduced to the equivalent of one. I fear that will be the case if banks merge. Both their local and their corporate good citizenship may be reduced considerably.

Organizations in the voluntary sector often seek to arrange lines of credit, reduced service rates, and advantageous investment strategies. Sometimes they are successful; more often they are not. Fewer banks will mean even less choice and opportunity for negotiation--something that will be very harmful to the sector over the long term.

At the very least, if bank mergers go forward, I would expect that they not have an inadvertent negative effect on the voluntary sector, and that this would be a moment to rethink the overall relationship. I would also expect banks to maintain and even enhance the requirement that if they have assets over $1 billion, they must publish their annual accountability statement.

Let me make one final point about the voluntary or charitable sector. We are a sector that is under siege, a sector that, like no other, has borne the burden of cutbacks and restructuring. We have been asked to do more with less under very difficult funding circumstances and we are struggling to do so in order to serve Canadians. Our work is always made easier when we can work with and are supported through partnerships with others, including the private sector.

As I said earlier, historically in this country some of our most successful partnerships have been with banks. This has been true in small towns and big cities. It has been true where there is a shared commitment to the success of that particular community, where decisions that are in the best interest of the community can be made by the people, the organizations, and the businesses of that community. We have lost much of that capability already. I fear that we will lose even more if banks merge. There will likely be an increase in bureaucracy, making it hard for the charitable sector to build those important relationships that help it get its work done. There will be less choice in identifying partners who have similar interests and commitments, and there may even be less choice in the way organizations actually interact with banks. The “one size fits all” mentality may well dominate.

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But these points are perhaps no more significant than the last one I wish to make. This has to do with the nature of community itself--that sense of being connected and rooted, of being in touch with real people and not only through technology. It's the sense of being a place that is welcoming to newcomers and accessible to all, where people have a say in how their community works, especially in a world where decisions are usually made far from main street.

That sense of community is being seriously eroded today, for a whole host of reasons, in our small towns and in our city neighbourhoods. Clearly it is not up to banks to single-handedly maintain a sense of community, but it is fair to say that it is the combined responsibility of business, including banks, governments at all levels, the voluntary sector, and citizens themselves to create the conditions in which prosperity and a good quality of life can be enjoyed; where services are reasonably conveniently located; where there are options to meet varying needs and interests; where transparency and accountability of community leaders, including businesses, is readily available; and perhaps most importantly, where trust exists.

It is hard to trust an institution that is so big and complex you can't figure out who to talk with to get good information or services, or that sees no need to be accountable because it's the only game in town. Trust in our communities, as we all know, is in short supply. All institutions, including our businesses, would do well to shore up trust, not break it down further. The links between social capital, formed through relationships that build trust and a desire for reciprocity, and economic success are well known, so it behooves us to build that kind of trust.

I've tried to offer a few comments about what mergers could mean for communities and for the voluntary sector that is at the heart of community life. These comments are not primarily economic ones, though I emphasize again the demonstrated link between social capital and prosperity. I hope these will be seriously considered, because the well-being of our communities and our country cannot be determined only by what appears to make good economic sense.

Thank you.

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The Vice-Chair (Mr. Nick Discepola): Thank you.

I'd now like to invite Mr. Duff Conacher from Democracy Watch to make his presentation, please.

Mr. Duff Conacher (Chair, Canadian Community Reinvestment Coalition): Thank you very much.

Actually, I am here on behalf of and as chair of the Canadian Community Reinvestment Coalition. It is a nationwide coalition of 100 anti-poverty, community economic development, consumer, labour, and small business groups. It represents in total over three million Canadians, and it has been advocating for increased bank accountability in Canada since the fall of 1996.

I hope that in its review of bank mergers and the review process the finance committee will take a much more realistic look than the Senate banking committee did very hastily this past November. We believe the Senate banking committee must have had difficulty seeing the public interest through the haze of ties many of the senators have had for years to banks and the financial services industry. As a result, the Senate banking committee's report failed completely to address the public's serious and valid concerns about bank mergers. We believe that in the future there should be full disclosure of all ties to the industry by those who are reviewing the issue of bank mergers and bank merger proposals in particular, including how much is owned in financial institution shares. In the coalition's view, the Senate committee made only one useful recommendation, and that is that other countries should be looked at in terms of their review process.

Right now the situation is essentially that the same banks that are losing billions of dollars in risky business lending, a $3 billion hit to their profits in this past fiscal year alone, are saying that they want to merge to do more big business lending. The same banks that admit they made many false claims about the need to merge in 1998 are now saying, trust us on mergers today and in the future.

I'm not going to go into detail on our concerns about mergers, as your focus, unlike the Senate banking committee, is on the process for reviewing any proposals that may be put forward in the future.

We have submitted to you a copy of the coalition's position paper from May 1998, entitled “Ending Power Without Accountability”, and I've provided further copies today. This is a submission we made when the two mergers were proposed in 1998, and we do not believe anything has changed significantly in terms of market conditions. Our conclusion at the time was that there was no justification for the mergers that were proposed in 1998.

The banks are claiming that they are having difficulty in the big business lending area. A quick review of statistics in the February 2003 Report on Business magazine shows that four of the big banks are in the top ten of mergers and acquisitions over 2002. They are doing far more deals than any of the foreign competitors, and the value of the deals is the same as for the foreign competitors. Similarly, the financial section of the National Post on January 27 had several useful charts in all sorts of different financing investment areas, and in every case you see either RBC Capital Markets or CIBC World Markets at the top and the others in the top four or five. There is no threat. It's another false claim.

It's similar to the false claims they made on the reasons for mergers in 1998, especially the claim that they will actually have cost savings. Every single study that has been done, including by the U.S. Federal Reserve Board, has concluded that banks that are larger than our Canadian banks have no economies of scale. They will not save any money, nor become any more efficient if they are allowed to merge.

Turning to the review process, we hope the committee will look at what the banks are actually doing in terms of serving Canadians.

We urge the committee to examine seriously the U.S. measures, which have been in place for over 15 years, and we recommend that the federal government enact similarly strong measures that are binding.

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The U.S. banking review system, which is under the Community Reinvestment Act and other related disclosure laws, requires banks and other financial institutions to track and disclose the number of applicants for various loans and investments, the number approved and rejected, with reasons for rejections, the default and loss rate for various loans and investments, all categorized by size of loan or investment and characteristics of the borrower, such as size, type, and location of a business, gender, race, and income level of a mortgage borrower.

In addition, the banks in the U.S. have for over 15 years been required to track and disclose details of branch openings and closings and their service record to customers. This data is disclosed community by community. Regulators review the data every year or two and require corrective action if a bank has a poor record in any lending or service area.

Turning to the issue of mergers, not just when a bank applies to merge with another bank but when a bank applies to expand in any way, taking over any other institution, opening new branches, in the U.S., the regulators hold public hearings. There's automatic standing for community groups and other stakeholders to testify, and a bank's application can be denied if it, or the institution it is taking over or merging with, has a poor lending and service record overall.

Canadians have a right to know all the details about what banks are doing with our money, and it is our money. The federal government must finally catch up to the U.S. and set up a bank lending and service disclosure and review system similar to the United States' time-tested measures to ensure that the government can hold banks accountable for a poor lending and service record and to ensure, as in the U.S., that banks with poor records are not allowed to get bigger.

Banks want certainty in the merger review process. So do Canadians. Right now there is no certainty about what a good standard of banking service is in Canada. Why? Because no standard has been set. Why? Because there has not been disclosure and tracking of how the banks serve people, so it's impossible to set a standard.

In the U.S. the standard is well established. It has been for years. When a bank applies to expand, or to take over another institution, or to merge, then the regulators know what the standard is of good service, and when a bank has poor service, it's not allowed to get bigger. It's a common-sense rule. Why would you let a company that treats people poorly get bigger? It's just going to treat more people poorly.

So despite repeated requests in 1999-2000 by the CCRC, then Finance Minister Paul Martin refused to undertake a Community Reinvestment Act-like review of TD Bank's takeover of Canada Trust. This is unlike the U.S., when TD Bank proposed to take over New York-based Waterhouse Investor Services in 1996. The U.S. regulators conducted a CRA review of Waterhouse and imposed legally enforceable conditions concerning improving the service and lending records, and those were conditions that had to be met or the takeover was not going forward.

A CRA review prevented Bank of Montreal's Illinois-based subsidiary, Harris Bankcorp, from taking over another financial institution in 1994 until it improved its service record and lending record, which it had to do over a three-year period.

Royal Bank owns Centura Bank in North Carolina. Royal Bank, TD Bank, and Bank of Montreal all have committees of their boards of directors that track the lending and service records of the American financial institutions they own. But in Canada they don't have to have a committee to track the lending and service records of the banks here in Canada.

It's ludicrous. We're years behind and this gap has to be closed. Otherwise, it's a blank cheque for banks now in terms of reviewing the mergers. You do not have the information to determine whether a merger is in the public interest and you won't have it until you implement a U.S. system.

The federal government has been negligent in tracking and reviewing bank lending and service. It has let institutions such as TD and Canada Trust merge and increase in size and power while doing nothing to ensure that they are keeping the public commitments that they made back in 1999 and 2000 to improve service.

There have been some steps taken by the federal government to set up a disclosure system. There are public accountability statements. Statistics Canada, combined with Industry Canada, has an SME financing data initiative under way where they're surveying both financiers and borrowers.

It should be strengthened, this disclosure system, by requiring, as in the U.S., much more detailed disclosure of loan and investment patterns broken down on a community-by-community basis and also a country-by-country basis.

The Bank of Nova Scotia is losing hundreds of millions in Argentina. Why? Whose money are they using? Are they gouging Canadians here at home to pay for those losses? All of this needs to be tracked, and disclosed, and reviewed.

º (1610)

In addition to the current information required on branch operations in the public accountability statements, the first of which will be disclosed in about two months, there should also be a listing required of all complaints received by all branches, by head offices, by the new ombudsman services that the financial industry is running itself, and by the new Financial Consumer Agency of Canada for each lending and service area. In addition, there should be a listing of the number of complaints that are resolved in favour of the customer versus in favour of the bank so that we track whether customers are making legitimate complaints against the banks and show whether the banks are serving many people poorly. The statement should also require a detailed listing of all changes to service charges, and credit card charges, and interest rates, and the reasons for the changes. including details of the revenues and costs for each service area. to prove that the institution's prices are fair and not gouging.

Then, as the U.S. has for over 15 years, every couple of years the banks should be graded on their lending investment and service records, and fined and required to take corrective action if their record is poor in any area. There's no review process in Canada. Right now it is virtually impossible to be found guilty of violating the Bank Act. I urge you to launch a separate set of hearings on what banks are doing tying loans to medium-sized businesses to equity for those medium-sized businesses. We have heard rumours that medium-sized businesses cannot get a loan from a bank unless they also allow the bank to do the lead on the investment side, if they're financing. That's tied selling, and it's against the Bank Act, but no one is doing anything about it, no one is tracking it, no one is disclosing it, no one is penalizing them.

Finally, we believe there should be a moratorium on expansions, takeovers, and mergers until this detailed lending and service disclosure and review system has been in place for three years. Then we'll have a track record and we will have established what is the best practice in terms of serving Canadians with lending and service, as they have in the U.S. Then we can go forward and actually review whether a merger is in the public interest and whether an institution has a good enough service record to be allowed to expand, again as in the U.S.

The merger review guidelines should include, as they do now, public hearings. We urge you to keep yourself in this role and give automatic standing to every stakeholder that wants to appear. Again, as in the U.S., there should be a clear prohibition that any institution with a poor record should be prohibited from expanding, taking over, or merging. In other words, if you're looking at the criteria that are before you, service to Canadians should be the primary review factor.

The banks are big enough, and can, through merger takeovers in other countries, become larger and be able to serve Canadians in other countries. They're already big enough to do so. The Bank of Nova Scotia is in 65 countries. I can't imagine there is a Canadian company, except maybe the very largest, that can't get money as a bank from one of our banks as the lead financier. Even if they're not the lead, they always get to participate in the syndicate. They're doing just fine.

So I hope you will urge the government to close these key gaps in the merger review process. If you don't, you will be making a huge mistake, because you will be essentially trusting the bankers to tell you what their record is and why things would be better if they were allowed to merge. And these are not banks that should be trusted, based on their past record, nor based on the fact that they will be essentially, as they have in the past, putting forward information that makes them look good while hiding all the information that makes them look bad.

Thank you very much, and I welcome your questions.

º (1615)

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Conacher.

We'll now go to Mr. Jackson from the Canadian Labour Congress.

Mr. Andrew Jackson (Senior Economist, Social and Economic Policy, Canadian Labour Congress): Thank you, Chair, and thanks very much for the opportunity to appear.

I guess the bottom line of our submission is that we really support the public interest review process as it now exists, including that banks proposing to merge must file a public interest impact assessment, followed by a process of hearings by this committee. We think it's important that this public interest review process take place, that there's an open and transparent process in which Canadians have the opportunity to participate.

We don't really take a position that no merger should ever be allowed. I think it's conceivable that there are conditions in which mergers could be in the public interest. But I think the reasons for a review process, as set out in the MacKay task force and earlier by the government, still hold.

Just to repeat them, the merger review guidelines did actually make specific reference to issues that should be covered by the public interest impact assessment, which we say is reasonably comprehensive. There were impacts on the price, quality, and ability of services to customers and small and medium-sized businesses, possible bank closures, impacts on employment and the quality of jobs in the banking sector, and impacts on the overall structure of the financial services industry.

I think all those areas are important. There is some overlap with the other parts of the review process. It is important to flag that it's only the public interest review process that would have a mandate to look at impacts of mergers on employment and the quality of employment. Those wouldn't fall under the remit of the other reviews.

It's important as well to flag the point that was made quite strongly by the MacKay task force, that too much precision in specifying the public interest areas to be reviewed would be counterproductive, to the extent that specific issues are raised by specific merger proposals. In other words, it's rather difficult to generalize about mergers, because they'd be different in all cases, and otherwise, because the financial services industry is also undergoing in many respects a process of quite rapid change, and new issues are quite likely to emerge. So I think this idea that we can precisely specify the terms and conditions of a public interest review fails to grapple with the complexities of the evolution of the sector.

It is significant to draw attention to the fact that there are ongoing negotiations and prospects of negotiations on how financial services would be treated under the terms of international trade and investment agreements. The domestic regulatory environment could be quite significantly changed by the outcome of those negotiations, and depending on the evolution of those negotiations, it may or may not be particularly important to retain Canadian ownership of the banking industry.

One of the strong concerns we really have in this area is that if we allow mergers to go ahead in Canada, the next step of that process would likely be to invite in foreign banks, in a much bigger way than is currently allowed in the Bank Act. So the proposition would be, let the banks merge, but let's maintain competition by really opening up the system to foreign banks more than is already the case.

I think it's really impossible to spell out what would be the precise ramifications of that in a context where international trade and investment agreements are evolving quite rapidly. But I think some serious complications arise from that in terms of prudential regulation of the banks, and the ability to regulate lending practices of the banks, and regulate profitability, if we allowed foreign ownership to increase significantly.

So I see mergers as being very problematic because of the way in which the next logical step is likely to be this opening up to foreign competitions. We can't really see those issues separately.

I guess as everybody knows, and it doesn't need much repeating, we already have an extremely highly concentrated financial sector, and within that context, it is important that we have a very close review of the impacts of mergers.

º (1620)

It's not often said, but I think it's worth bearing in mind that there are both good and bad sides to the current Canadian banking system. It's really a classic oligopoly in a lot of ways.

On the good side--and it hurts to say it to an extent--we actually do have an extremely efficient banking system. I'm a little less enthused about the U.S. model, in many ways, than Mr. Conacher is. The fact of the matter is, the spread between interest rates on the borrowing and lending sides is much narrower in Canada than in the U.S. So Canadian borrowers have benefited to some degree from having quite a concentrated banking system, as opposed to an extremely competitive banking system.

Again, in contrast to the U.S., we don't see banks in Canada going under very often. Big banks do tend to be quite stable; since those small Western Banks went under, we haven't seen major banks get into difficulties. There are good reasons for that. With size there's the ability to maintain a rather diverse sort of lending portfolio.

Somewhat ironically, as Duff said, the fact of the matter is, the recent decline in profitability of the Canadian banks owes everything to their recent adventures in expansion in the United States, and almost nothing to their operations in Canada, which have remained quite consistently profitable. Our banks were exposed in quite a big way to Enron and other energy companies in the U.S. They seemed to have become rather bored with their Canadian businesses, got really excited about corporate lending in the U.S., and lost a bundle of money in the process.

There are studies I could refer you to that would show the impact of foreign direct investment by the financial sector abroad. There are very limited benefits to that for Canadians, in terms of employment and so on. So really, feeding the desire of the banks to become bigger players internationally doesn't make a lot of sense.

Most of the studies I'm aware of seem to suggest, as Duff said, that the big Canadian banks are big enough to realize almost all economies of scale that are available, in principle. There's a little bit of discussion of that around the margins, but where economies of scale do exist that they aren't big enough to undertake, there are avenues other than mergers by which those economies of scale can be reached. Banks are quite capable of collaborating on specific business areas through joint ventures. It's quite possible, when banks go out of one line of business, for another bank to expand. So a merger is by no means essential to realizing economies of scale.

I think I've touched on most of the major points I wanted to make. Just to conclude, a role for Parliament is still fully warranted in the current merger review guidelines with the public interest review process. Nothing prohibits the banks from making a case for mergers, but I'm somewhat skeptical that it's a good case.

Overall, our case is less that we need a much more competitive banking system than that we need a much more closely regulated banking system. The fact that we have quite a cartelized banking system has actually given us certain advantages in terms of stability and efficiency.

There are abuses of the system in terms of shutting out some small lenders and having extortionate interest rate spreads on some lines of operations, like credit cards, but for the most part we see those problems as being resolved through better regulation of the banks rather than through more competition.

º (1625)

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Jackson.

We have a lot of questions on the floor, therefore I will entertain seven minutes each. If colleagues are respectful of those seven minutes, including the answer, we'll be able to get everybody through.

Mr. Harris.

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Mr. Chairman. We get a prize if we're efficient in our questions and answers.

I appreciate your presentations. I would like to focus in on what this committee is all about in terms of possible future bank mergers and what impact they would have. We have in this process the Office of the Superintendent of Financial Institutions, OSFI, which looks after the prudential side of the financial services industry. We have the Competition Bureau, which looks after the competition side of it. Of course, they will be doing their jobs, we hope, if any mergers go forward.

What we've been asked to do is to sit down, as elected members of Parliament from all parties, to try to establish, through public hearings, which we're in right now.... We've sent out dozens and dozens of invitations for people to appear before our committee, either as individuals or as representative groups, and give us their input. We would in turn be able to ask questions.

Out of all of this, we have been asked to try to determine all the factors that make up what we call public interest. We have also been asked to try to determine, I believe, if there is going to be an impact on public interest by a possible merger. And what are the recommendations that we as a committee could put forward to mitigate those impacts that banks, for example, would have to comply with, in order for their merger proposal to pass through not only OSFI and the Competition Bureau but also the public interest section of the mergers?

Now, when we're done, we will present our report back to the government, to the minister, and I believe our report will form part of the criteria that would be laid out very clearly to banks that have an appetite to merge. And they would have to fit their mergers into the public interest criteria.

Notwithstanding what the gentleman from the TD Bank said last week, I think every member of this committee and the chairman, who is not with us today, are committed to doing as thorough a job as we possibly can to ensure that all the public interest concerns are clearly laid out. Indeed, there would be a demand that they be met if there were an impact on it.

So having additional hearings after we're all finished is not, in my opinion, a necessary part of this process, because we're going to do everything up front as a committee, under our mandate, and then that would be joined with OSFI and the Competition Bureau.

That said, I guess I'm responding to Mr. Jackson's comment. I read the brief by Ken Georgetti, the article in the paper today, and I don't personally believe another public review, after this is all done and mergers come forward, is really necessary.

Now, that said--

The Vice-Chair (Mr. Nick Discepola): Are you going to get to a question eventually?

Mr. Richard Harris: Yes. That was just a comment.

The Vice-Chair (Mr. Nick Discepola): Yes, I realize that.

Mr. Richard Harris: You do it all the time.

To Ms. Lee and Dr. Friedman, I really appreciated your presentation. I spent about 28 years in small business myself. I made it through the recession of the eighties in the west--I know you were a little later here in Ontario--but no one should have to do that twice in a lifetime.

Do I understand it right that you're suggesting that women and men of the same creditworthiness are treated differently by the lending institutions when they apply for a loan, when they have the same type of collateral? Is that really the case?

º (1630)

Ms. Ada Lee: We did the research, and we quoted sources for some of the references, but we can't demonstrate the fact...because I think the report prepared in conjunction with Statistics Canada and Industry Canada seemed to refute that gender by itself is as a problem, that people with the same type of information going to the bank...that there's proof that there's discrimination against women.

But the fact is, women do own smaller businesses where maybe the size and the type of business are certainly considerations. When we're in the field, because we are a mature women entrepreneurs organization, the one thing we hear constantly is that it's difficult for women starting a business to access capital. And we hear stories where, as in the stories I told you, a lot of times for no reason we are asked to bring in a spouse to co-sign, when the spouse would not have any more credit worthiness. As the gentleman said, there's no regulating factor.

So if you asked me if we could demonstrate it on paper, probably not. But if we believe what we hear, it is happening. It's probably a combination of gender and the size and type of business.

But if you look at it, it is probably more difficult for SMEs to get financing, and if you combine that with the fact that a good majority of SMEs are owned by women, then you can deduce that it is more difficult for us to access financing. We don't want to have the situation worsened.

Mr. Richard Harris: Okay, I have a quick question for Ms. Patten.

The Vice-Chair (Mr. Nick Discepola): You have 30 seconds.

Mr. Richard Harris: What would be the smallest town that would have a community foundation established, of all your network?

Ms. Monica Patten: There are 30 community foundations in Manitoba.

Mr. Richard Harris: Okay.

Ms. Monica Patten: So we're talking about populations of 1,000, and a few that are smaller.

Mr. Richard Harris: I was just thinking about the proliferation of retail....

Okay, Mr. Chair, thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Harris, you've been very punctual.

[Translation]

Mr. Paquette, you have seven minutes.

Mr. Pierre Paquette (Joliette, BQ): Thank you, Mr. Chairman. Firstly, I would like to address my comments to Mr. Jackson, because I too read Mr. Georgetti's letter with a great deal of interest. I have some difficulty understanding the position of the Canadian Labour Congress. I know that this isn't an easy issue, but at the end of his letter, he says: “ we do not say that bank mergers should be completely forbidden in principle.” He adds that mergers are necessary in light of considerations involving international competition.

This is the main argument the banks are putting forward at this time. The banks are telling us that they must merge because internationally they do not carry sufficient weight. From that perspective the CLC's position is not really different from that of the big banks.

From the outset, my premise has been that the banks want to merge in order to be able to make acquisitions internationally so that they can face the competition. However, where is the interest of the Canadian public in this? It seems to me that your last paragraph ought to have been the first and that you could then have provided further explanations.

In light of the situation, as parliamentarians, what guarantees should we obtain from the banks if we are to allow them to merge? Now that we are taking it for granted that the banks need to merge in order to be able to compete, I would like you to tell us what we must ask them to do in order to safeguard the public interest.

[English]

The Vice-Chair (Mr. Nick Discepola): Mr. Jackson.

Mr. Andrew Jackson: I think what the article was trying to say here was that we're extremely skeptical about the case for bank mergers on competitive reasons, on the grounds of economies of scale, and so on.

That said, I don't think it's up to the CLC, on the basis of the information available to us, to say all mergers and any mergers are bad. The way I understand the purpose of this committee, it's really about what process should be entered into to examine bank mergers.

It seems to me the really important point to come out of your report should be the need to maintain the public interest review process. I was trying to make the point that in a fast-evolving landscape, you really can't set out the precise criteria by which a merger should be reviewed in the public interest. Things change quite rapidly. It could be that we see a massive merger wave in the U.S., for example, and the banking system, the whole international competitive climate, can change.

On the whole issue of economies of scale, the way I understand it, the studies that were done for the MacKay task force found basically zero economies of scale. Some people will argue now that there have been some advances in technology, and so on, such that this is no longer the case. Where you used to have x million transactions to realize economies of scale, now it's y billion.

These are obviously very complex and complicated issues. I think we are deeply skeptical about the case for mergers. We are also very concerned that, as I said before, we'll get this two-step process. We will have mergers followed by a plea to allow foreign banks greater entry into Canada in order to maintain competition. I don't think we can look at mergers separately from the whole issue of how much foreign ownership we want in the banking system.

I guess the basic point is that the overall banking system in Canada isn't working that badly at the moment. There are flaws in it that need to be fixed through regulation. We need to take a really serious and very detailed look at any merger proposals that come forward.

I would be very surprised if a merger proposal came forward that we would be very excited about. We just didn't want to sound dogmatic by saying “no” to any merger ever.

º (1635)

[Translation]

Mr. Pierre Paquette: My next remarks will be addressed to Ms. Lee. In your brief you say that it would be good to liberalize the regulations that keep foreign banks or other types of financial institutions out of the market, in order to preserve access and choices.

Recently, in 2001, we passed Bill C-8, the objective of which was to increase competition in the financial sector. We still have not seen its effects. Do you think that as a preamble to any study involving bank mergers we should first ensure that credit will indeed be accessible at affordable interest rates, as well as diversified services? Should we make sure of that before allowing the merger of large Canadian banks, or should we trust the market?

[English]

Ms. Ada Lee: Thank you for your comments.

Just from some of the comments that you have heard today, the fact is, I don't think we have good statistics on what the benchmark is. I'm not sure whether it's a chicken-and-egg thing. It would be really nice for both of the initiatives to go hand in hand.

On the one hand, when you are considering mergers, we want to ensure that there are safeguards that would be in place. As to whether you do it in advance or do it concurrently, the bottom line is, we want to see, for instance, access to competition and alternative banking services made available in the Canadian marketplace.

Our position is that we don't necessarily say “do this first, and then this”. We would trust that enough safeguards would be in place so that if the bank mergers happen, they would be there. It would be good, because we don't know the exact timetable as to when it would happen, if there were some lead time for it to be in place, to put some safeguards in. That way, when it happens, we would have some comparative data to go by.

[Translation]

Mr. Pierre Paquette: Do I still have a little time left to put some questions to Ms. Monica Patten?

The Vice-Chair (Mr. Nick Discepola): Yes.

Mr. Pierre Paquette: In the same vein, we know for instance that the credit unions and caisses populaires in Quebec say that they are not opposed to the bank mergers because they will offer the services that the banks will eliminate. They see it as an extraordinary business opportunity. But we also know that these credit unions and caisses populaires are in a restructuring or reorganization process.

Yesterday, Mr. Roy, a professor at HEC, told us that even if there were caisses populaires mergers in Quebec, service points were being opened. However, about 30% of people are functional illiterates and those people make very little use of automatic teller machines; they want counter service. We also know that there are some reservations concerning the elderly and the types of services offered.

Do you think it is sufficient to guarantee the creation of service points, or must we also ensure that counter service will be available to all communities?

º (1640)

[English]

Ms. Monica Patten: Thank you for the question.

Yes, I absolutely think, wherever that is possible, and I would expect that would be in most places, service over the counter should be available. This is about accessibility and about having resources and options that are available in local communities to all parts of the population.

The Vice-Chair (Mr. Nick Discepola): Thank you.

I'd now like to ask Sophia Leung to ask her questions, please.

You have seven minutes.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.

I want to thank all the presenters. Each of you has given a very good presentation of your opinion.

Some of the experts told us yesterday that, in the banking world, the Canadian bank rating of 41 is quite low, and we all know it's their position that they cannot compete at all.

Ms. Patten, you expressed some concern. You feel that the merger will perhaps affect your partnership or relationship with banks, and I wonder why that is for you.

Mr. Conacher, you expressed a lot of concern about public interest. There's a certain amount of insecurity that you express. Is it speculation, and we really don't know? I want to know how much is factually based.

In the meantime, I hear Ms. Lee express a lot of positiveness. I think it's good, and I want to express a welcome to the Women Entrepreneurs of Canada. It's terrific, because my riding consists of a lot of SMEs, and at the same, a lot of women, and I think it's very important that they should have more assistance in terms of 58% of SMEs being owned by women. You have a lot of encouragement.

So I'd really like all of you to have the chance to give us a little more of your point of view.

The Vice-Chair (Mr. Nick Discepola): Good. You have left plenty of time for them to do just that.

Who'd like to go first?

Ms. Patten.

Ms. Monica Patten: I'd be happy to begin. Thank you very much.

I would offer you just one example, because I think others will be presented as well.

I cannot cite the actual title of the study, unfortunately, but there has been some work done in Alberta to look at the result of mergers--I'm not speaking about mergers of banks, but mergers in other private sector organizations--in terms of their partnerships, sponsorships, and charitable giving to the voluntary sector, to the charitable sector. There is plenty of evidence that those mergers have in fact reduced the overall value, if you will--the quantity, the amount that has been given by the merged institutions. So where we had two institutions and you'd hope that one plus one would equal two, it doesn't. It becomes one, and it stays that way.

Ms. Sophia Leung: Do you mean the size of donation?

Ms. Monica Patten: Exactly. That would be one illustration I would offer to you.

The Vice-Chair (Mr. Nick Discepola): Ms. Lee.

Ms. Ada Lee: I don't have additional comments at this point.

The Vice-Chair (Mr. Nick Discepola): All right.

Does anyone else have a comment?

Mr. Andrew Jackson: I have one very quick one. You mentioned that Canadian banks are ranked number 41 in the world. If you go down that list, I think you will find some of the biggest banks in the world that are actually in very deep financial trouble. Most of the big Japanese banks are at the top of that list. They're teetering on the edge of insolvency. Some very big U.S. banks have gone broke. So there's no reason to think that size above a certain level is hugely important in terms of doing well as a bank. For that matter, some small banks can do very well by specializing. I don't think we should make a fetish of size.

Ms. Sophia Leung: Mr. Jackson, I just used that as a means to start the discussion.

Mr. Andrew Jackson: Well, it wasn't a shot at you. It's just that the banks use that argument all the time, that unless you're big you just can't make it.

º (1645)

Ms. Sophia Leung: I was thinking of the competition, and that it could be easily reversed. Maybe a lot of the foreign banks could come into Canada and easily take over some of the banks. We know that could occur.

Mr. Duff Conacher: But it hasn't happened in years.

Again, our overall point...and we made this point quite clearly back in the spring of 2000. We did a review of the records of TD Bank and Canada Trust on access to basic banking, lending, branch operations, and operations overseas. We did a review of the TD Bank/Canada Trust takeover, because the government refused to do it.

The public interest review process, as it stands now, does not look at the banks' lending and service records. How can you judge their predictions as to whether their lending or service will improve or get worse when you have no idea what their current record is? You have to add, as the U.S. has for over 15 years, a tracking of their lending and service record and take it into account, and review it, when reviewing the bank mergers.

For example, if a bank proposed to merge and said, we'll do all sorts of things, and it listed a whole bunch of service things they would change, you have no idea whether they're even already doing them. It would be pretty easy for them to keep those pledges if they were already doing all of those things. You'd say, oh, this is very impressive, you're going to guarantee all of these things. In fact, though, they were doing them all already. They didn't have to change anything. So they'd get to merge even though they would not have improved service at all.

It's simply a huge gap not to be looking at their lending and service record as part of the public interest review process.

Ms. Sophia Leung: Mr. Chair, I just want to mention something to Ms. Lee and Dr. Friedman.

You perhaps have already heard that the Prime Minister has appointed a women entrepreneurs task force. They will go around collecting input from the women concerned. I urge you to get in touch with this task force.

Ms. Ada Lee: Thank you very much. We are well aware of it. In fact, Sarmite Bulte is one of the founding members of the Women Entrepreneurs of Canada. It is our intention to make sure that a copy of our report does go to the task force.

As entrepreneurs we represent businesses of all sizes. Some are very mature, and they compete in the international marketplace. We also have a more rural type of membership.

Our position is that if it strengthens the competitiveness of banks to merge for that reason, we want to make sure it doesn't erode the service level at home.

Ms. Sophia Leung: Thank you.

Thank you, Mr. Chair.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Shawn Murphy, please, for seven minutes.

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

Thanks, everyone, for the excellent presentations.

My first question is to you, Mr. Conacher. I just want to go over the mandate of this committee. Basically, we're mandated to recommend to the Minister of Finance criteria that would be applied should two banks come forward with a merger application. There's a three-test process: the prudential issues, the competition issues, and of course the public interest issues.

After listening to your presentation, it seems to me that you really don't talk about the public interest. You're basically saying that the merger should not take place under any circumstances. You're saying that it's not in the public interest to allow or discuss mergers at all. Is that correct?

Mr. Duff Conacher: No, not at all. We're saying that we do not believe market conditions have changed significantly since 1998 in ways that make the case for mergers. In fact, the banks have dropped a lot of the arguments they were making in 1998, and are relying solely on the international competitiveness argument now even though there are other ways for them to be internationally competitive.

Again, they're making this claim, but where are the stats to prove that they actually need to be bigger to serve the needs of Canadian businesses abroad? Have they provided you with any statistics at all? Have you tracked overseas lending at all by the number of applicants for investments, or the number of applicants for loans by Canadian exporters and entrepreneurs who are operating in other countries? Have you tracked the approval-rejection rate by the banks? Have you tracked their record on being part of the lead syndicates, either leading or being part of syndicates in lending?

You have no information at all. You're just taking the banks' claim that, oh, we need to be bigger, because Canadian businesses, some of the big ones...we can't be the lead lender to them overseas.

Require that they prove it. Require that they prove here at home that they're serving people well, as the U.S. has done for 15 years.

All we're saying is, yes, we're talking about the public interest. We're talking about how you determine whether a merger is in the public interest. The review process, as it stands, does not look at all at the banks' lending and service records.

We find that a bit ridiculous. Why would you want a bank with a poor lending and service record to get bigger? It's only going to serve more people poorly.

º (1650)

Mr. Shawn Murphy: If I can summarize, you're saying that one criterion that ought to be used is the lending and service records of the merging entities.

Mr. Duff Conacher: That's right. They are going to provide a public interest impact assessment. If you look at the guidelines, the public interest impact assessment looks forward to how the proposal would do something in the future and to the impact of it in the future.

How do you judge whether the impact is positive or negative when you have no idea what the current situation is?

Let's say, for example, that they say they will increase small-business lending to women entrepreneurs as a result of this increase and increase it by 1,000 loans a year. If they're doing zero now, 1,000 may not actually be a best practice or a good standard. It may be still a very poor record compared to the best banks.

You have no idea what they're doing now because it's not tracked and it's not disclosed. It's certainly tracked by the banks, but it's not disclosed and it's not regularly reviewed.

You can't measure a negative or positive impact when you don't know the baseline you're starting from. It's a basis of statistics. You can't say things are getting better or worse unless you know where you are. That's what we're saying.

Prove the disclosure and tracking so that we know where we are. Then we'll know whether we want to go in one direction or another.

Mr. Shawn Murphy: My next question is to you, Ms. Lee.

It seems to me that in your brief you hit the nail right on the head. A lot of the issues that we hear on this committee are about access to lending, similar what Mr. Conacher has said, based upon sector and regions, which your membership has difficulty with.

You've identified the problem, but I invite you to go one step further and recommend the solution. If we're trying to recommend criteria to the Minister of Finance, I don't for a minute propose getting into recommending a quota system where they make this many loans to this region and this many loans to women. It would be overregulation of the banking sector, in my view.

I agree with you 100% that they've abandoned certain sectors in this country. They've abandoned certain regions. You make the point that the banks should “continue to invest and assist the local economy at home”. People more cynical than I am would say they should start to do so.

Is there any specific recommendation that your organization can make to this committee that would form part of the criteria that we can recommend to the Minister of Finance?

Ms. Ada Lee: We haven't gone into the next step. I certainly will go back and invite our members to come up with tangible examples.

One of the things we thought was that if indeed some of the Canadian banks think they want to go into the international segment and become larger and are not as interested in the local segment, then allow other alternative organizations, including foreign banks, to go into that segment. For us in business, as long as the choices are there and as long as the rates are there, it does not impede our own business to grow. Does it have to be Canadian? If the Canadian banks are not interested in that business, then let's not make it too difficult for other alternatives and options to be done.

We're saying encourage it. Don't put a lot of red tape in--i.e., our Canadian banks have to become bigger, but, for instance, the insurance segment would love to get into some of the banking services...or be too protective. After all, women have businesses, and we will flourish on our own. Some businesses will want to go international.

For those reasons, we're not saying that Canadian banks are large enough and that they shouldn't go international, because this is free enterprise. If they think they wish to go into that segment, as long as we ensure that enough choices and alternatives are there, let's be a more open market.

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The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Murphy.

I think we might have time for additional questioning.

Mr. Nystrom, please.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Mr. Chair,

There was a comment made by Mr. Conacher about the bigness of banks and efficiency, and I think Andrew Jackson was saying the same thing. I have here the report from Standard & Poor's of April 2002. They say here in part:

Standard & Poor's is not convinced, however, that mergers, which will create larger financial institutions in Canada, will necessarily benefit the banks from a global perspective.

So here is Standard & Poor's saying that bigness is not necessarily better. I think that's an interesting comment. It comes from different sides of the political spectrum.

I want to ask Mr. Jackson questions about some comments made by a witness who was here yesterday, a former minister in the federal government and a former economist with a major bank, Mr. Doug Peters. He was concerned about the wide ownership rule. He was concerned also about the dollarization that might be coming down the chute, and that the mergers of banks might even expedite this along the way.

I wonder, Mr. Jackson, or anybody else, if you'd like to comment on Mr. Peters' advice to us. I think a lot of us are very concerned about losing our currency, about losing the wide ownership rule. Our banks are probably undervalued, in terms of their capital value, by American standards, and if the wide ownership rule changes, where the 20% limit is no longer there, they may be bought up very quickly by American banks. Does this expedite us down the path towards losing our monetary sovereignty in this country?

I'd like some advice from all of you, if you could, on that one.

The Vice-Chair (Mr. Nick Discepola): I think you've raised an awful lot. I'll allow the question.

Mr. Lorne Nystrom: Mr. Peters was a very respected member of the Liberal government, and in charge of financial institutions, so....

The Vice-Chair (Mr. Nick Discepola): Right, but we're discussing the impact assessment, the public impact.

Mr. Andrew Jackson: I'm not sure it's really seriously on the agenda for too many folks other than a handful of academics, but it does strike me that what we really have in Canada is five big banks, Canadian-owned, with pretty widespread ownership. I actually thing that's been a pretty good deal for the country.

We shouldn't forget, there are 220,000-odd jobs with those banks. There are an awful lot of head office jobs and back office operations. When you see the kind of gutting of corporate Canada that's gone on over the last few years as foreign ownership has shifted, banks really are.... Take Toronto; they're just a huge mainstay of the downtown Toronto economy. They mean a lot of jobs, and a lot of good jobs as well.

Canadian pension funds are huge investors in bank stocks, as are other institutional investors. It seems to me that to go on a slope where we really opened up that sector to foreign ownership in a big way as the quid pro quo for mergers, which I see as the road we're heading on, would really be a bad idea in terms of maintaining control of this sector in public policy terms. Ultimately you have five big banks. The Minister of Finance can call in the presidents of those banks and have some kind of suasion and impact on what they're doing—which he wouldn't if there were a lot of foreign ownership or a much more dispersed system—in terms of jobs in Canada, in terms of the stability of tax revenues we get from the big banks. Those are important things not to jettison.

I see the need for quite a bit more regulation of the banks to fix some problems, but to just blow the whole system up seems to me to be rather misconceived. That's what I think another merger would do now.

I guess I also don't see how you could do one merger without doing two. You'd be left with three banks and one left out in the cold. Then you'd really be in trouble, I think.

Mr. Duff Conacher: The coalition's position is that the 10% limit on what one shareholder could own of the big banks should have been maintained. It should never have been moved. It should be returned to the 10% limit. There's no reason for it.

It would open up a key industry, the banking industry, which unfortunately is financing a lot of the takeovers of Canadian corporations by foreign companies. So they're not really serving Canadians' interests in this and in a lot of areas. In other key areas for our economic sovereignty, they've actually facilitated their takeover by foreign corporations.

If you allow the banking industry to go, then I agree with Mr. Peters, surprisingly, as we didn't agree on much when he was junior minister of finance, that you might as well let the country go. So the 10% rule should be re-established.

There should be much more tracking of what the banks are doing with our money. If you allow any foreign takeovers or foreign ownership to increase, you're then just dealing with absentee landlords. We already have enough trouble with the economic power of our banks and with regulating them properly. We're missing lots of key regulations. If you allow the owners of the banks to be absentee landlords, regulations will just increase, as will transfer pricing, the shifting of profits out of the country, tax avoidance, and everything.

So it's a very dangerous move. The first step of allowing the 20% limit is already dangerous.

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The Vice-Chair (Mr. Nick Discepola): You have another minute, Mr. Nystrom.

Does anybody else want to comment? If not, I've got some eager Liberal members who want to ask questions.

Mr. Lorne Nystrom: I wanted to ask Ms. Lee about the banks and business lending. The charts show that the Royal Bank and the CIBC have been lending a lot less of their loan portfolio to small and medium-sized business in this country. The credit unions have been going up.

From a small business point of view, I just wonder if you have any advice for the committee on access to capital.

Ms. Ada Lee: Sorry, you were saying the Royal Bank...?

Mr. Lorne Nystrom: The CIBC and the Royal Bank have been lending less and less money to the small and medium-sized business community in the last few years. We have all the charts with us. We had the CFIB before us making that claim and the claim that, if bank mergers occur, the merged banks would be less likely to have a sympathetic ear to lending to small business.

Would you agree with that position of the CFIB? If you have bigger and bigger banks, will it be more and more difficult for a small business to access capital from those banks?

Ms. Ada Lee: Yes, one of our major concerns is access to financing. That's why we're saying we need some government regulations to ensure access is not eroded any further. This could include reporting of lending done in that segment.

Also, if one sees the statistics going down and the government is concerned, what action is being taken to remedy it? Tracking the statistics is great, but unless there is going to be agreed-upon intervention....That's why we said in our brief that if we really think the Canadian government's priority is the student loan program, for instance, and we recognize that if we do not invest in education by encouraging access to money for people to get educated, then it would hurt Canada. If the Canadian government is aware of this and sees it happening, then I would suggest that some corrective action be taken, either coercion of the banks to see an improvement or loosening up and creating this access for us.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

Mr. Cullen, please.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman. And thank you to all the presenters.

Ms. Lee, I wanted to ask you about microcredit. I'm curious, because in my dealings with the European Bank for Reconstruction and Development, it's quite well acknowledged that microcredit for women is a very positive program. Microcredit for men is not so positive; we joke about it being a kind of sexist discussion. But the reality in eastern and central Europe seems to be that women will take microcredit and they will buy some sewing machines or whatever and make it work, whereas the men will take the money and go and buy some booze, or whatever. I'm stereotyping and generalizing.

But what are your experiences in Canada with the chartered banks with respect to microcredit? Is there a big take-up? Is it well supported by the banks?

Ms. Ada Lee: I'm not familiar with microcredit, so I'm not really in a good position to answer that question.

One of our members in the construction business is very passionate about this subject. Until a business--construction or otherwise--reaches a certain size it is very difficult for women to access capital. So I don't know how well it is working in Canada, but I will go back and consult with her. Perhaps we can respond to you on this later.

» (1705)

Mr. Roy Cullen: If you could I'd appreciate it.

Micro-lending basically involves small loans, but any observations you have on that will be helpful.

Ms. Patten, I think it's pretty well acknowledged that in terms of philanthropy the banks are very much at the top of the chart. I didn't hear it in your brief, but do you think if banks merged that would impact at all on their community involvement? Are they targeting their philanthropy in the right places? Would a bank merger affect that negatively or positively?

Ms. Monica Patten: I hear two questions in there, so thank you. Are they targeting in the right places? In many instances they are; however, one overarching concern we have in general about banks, and frankly about others in the private sector, is that there really has been no increase in philanthropy at all. There's been a greater increase in sponsorship, which is really tied to the marketing and the marketing dollars of businesses rather than the philanthropic dollars.

A criterion we would ask you to put forward is that the level of philanthropy and involvement with the voluntary sector in the variety of ways demonstrated be at best enhanced and at worst stay the same. Our fear is that mergers would contribute to a significant reduction in that because two would become one in this instance, and they would do it as one rather than maintaining the commitment they had when they were separate entities.

Mr. Roy Cullen: Okay, thank you.

Mr. Jackson, I may have missed some of the discussion, but in terms of the public interest criteria, one scenario on the table is that this committee would spell out in some detail the public interest criteria, a bank merger would then be on the table and it would go to the OSFI and the Competition Bureau, and they'd have the public interest tests as enunciated by this committee and the Senate banking committee. I think I heard you say you'd prefer more generalized criteria and consultations through this committee at that time, as opposed to more detailed criteria and then not having consultations at the time of the merger.

I'll throw out just one little question, if you could deal with it. On the timing of a bank merger, if one does appear, there has been a lot of discussion about having a cumbersome process where people would be in limbo for 12 or 18 months. On consultation by this committee, I'm not saying it shouldn't happen; I'm just curious as to why you think it should happen in terms of the process you've described.

Mr. Andrew Jackson: I think you're right in your interpretation of what I was saying. The committee could play a useful role by expanding on what was pretty sketchy in the merger review guidelines about what the public interest is. For example, the area of employment wouldn't be covered by the other reviews at all, and I think that's an important area. There are issues about Canadian control of the financial system that go far beyond what OSFI would look at in terms of prudential regulation.

The bottom line for me, though, is that we have a process now, the way I understand it, whereby the banks proposing a merger would have to come up with some kind of public impact assessment, and then it would be open to Canadians to look at that, raise concerns, and appear before you. You as parliamentarians would come to a judgment as to whether that merger was in the public interest or not and make a recommendation to the Minister of Finance.

That might be cumbersome, but I think it's kind of important. I don't see any great reason why that couldn't be done in a matter of weeks rather than months. You guys can work fast, can't you?

Mr. Roy Cullen: No, maybe I miscommunicated. I'm not arguing that this committee has a role to play in terms of defining what we see as the public interest criteria. But we could spell that out, and then a merger proposal in the public interest document would hopefully address those criteria without the need for, again, another set of public hearings, that's all. It's a process.

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Mr. Andrew Jackson: I was trying to make the point in part that the whole world is rapidly changing, and particularly I think of the whole area of international trade and investments agreements and where that's goings in terms of what's going to happen in the GATS negotiations around financial services or what is going to happen in the U.S. financial sector over the coming years. Will there be big mergers there? I think all of those really bear on the whole issue.

So I think this idea that somehow on five pieces of paper or less, you can lay down...you have merging banks, check, yes, yes, yes. Frankly, I think Duff's point about not having an information base relative to which to judge the promises is well taken.

The Vice-Chair (Mr. Nick Discepola): I'd like to now go to Mr. Bryon Wilfert.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Mr. Chair, and thank you, witnesses.

First of all, I certainly want to see--and I know my constituents do also--a continuation of a very strong banking system in Canada. There's no question we have one that is the envy of many countries. For instance, you can look at the state of Japan at the moment in terms of its situation, or at the United States. Mr. Jackson mentioned bank failures. There were no bank failures in Canada in the Great Depression, but hundreds in the United States.

At the same time, we want to balance that need for a strong banking system with the public interest. We want to make sure it is served and the priorities of the public are dealt with. We have talked about the public interest impact assessment, the key eight guidelines that are presently on the table.

Mr. Conacher--and I make this comment not as the parliamentary secretary of the finance minister, I'll step out of that to say this--I certainly concur with you on the issue of the Community Reinvestment Act. That's the one thing in the banking system in the United States I would support. I don't support a lot of things, and I thought the comment by Mr. Jackson about the interest rate spread, etc., was very good.

But it wouldn't be new for our banks. I believe the Bank of Montreal and the TD, when they were doing acquisitions in the United States, went through that process. I think it also dovetails in very nicely with a number of issues that we've heard about from the small business community, that is, around the issue of lending, the ability to acquire lending.

We have the women entrepreneurs here, and I'm very pleased that my colleague Sarmite Bulte is chairing the Prime Minister's task force on women entrepreneurs and that they'll be coming to my riding in a few weeks. And I can say that not only women, but obviously anyone in the small business sector, has issues with regard to lending. I think that making it as transparent as possible is a reasonable approach, and it's one that, at least from the reading I've done on that U.S. Community Reinvestment Act, I think merits some attention by this committee.

To the Canadian Labour Congress, your president made the comment in the article that mergers must be shown to be in the public interest. I couldn't agree with you more, and I'm certainly wanting to make sure we have strong Canadian-owned banks. As you know, at the moment, whether you're a foreigner or a Canadian, you can't own more than 20% of the voting shares or 30% of the non-voting shares; I want to make sure this is maintained so that we maintain financial sovereignty in this country.

We have heard arguments that they need to expand, they need to merge because of international pressures, and that leads to questions in Canada about the second tier.

I wondered if people, particularly the women entrepreneurs and the volunteer sector, might have issues with regard to that particular concern, about what would happen. I know some of this would be covered by maybe the Competition Bureau, but in terms of access.... Some of you mentioned about how technology isn't necessarily the be-all and end-all, and I would concur with that, particularly in terms of the business sector, or seniors, or others who may want to have human contact.

Maybe you can make some additional comments in that regard, in terms of the impact you see for your particular members.

Ms. Monica Patten: Maybe I can start. In terms of the access, it certainly is about individuals, and individuals who are served by voluntary sector organizations. They do provide, as you know, very many services to groups such as seniors and disabled Canadians, and so on.

The other side of the coin is that the organizations themselves need to have access. The voluntary sector organizations themselves need to have access to a choice of banking services. They need to have some way in which they can, in a conversation with banks in their community, or however that may take place, have access to a range of services as well.

As I said, I think the notion of choice is actually quite important for the voluntary sector, which has a long history of trying to negotiate--because they are not-for-profit or charitable--not always successfully, particular kinds of favourable arrangements, if you will, with banks. I would be very anxious if that were to disappear. It's about access of individuals as well as the organizations that serve those individuals.

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Mr. Bryon Wilfert: Before you answer, Ms. Lee, you mentioned also foreign banks. One of the things we've been finding is that the foreign banks that have come into Canada have been niche bankers. They haven't really come in and provided full-service banking, which is a concern that I've heard. Could you comment on it as well?

Ms. Ada Lee: We're certainly not promoting foreign banks. I think that, on the one hand, if the Canadian banks become bigger they're not going to be as interested, for instance, in the SME segment. We need to have other choices.

In our brief, we have talked about the fact that we would hope to see an expansion of development of community-based financial organizations, which would mean a Canadian bank partnering up with maybe a different type of service delivery in the community. Because we've heard of a lot of hardships, particularly in rural areas. In a rural area, if you only have three banks to go to, and that is reduced to two, what other choices are there?

So we are promoting coming up with a lot of creative ways on choices. That's why, in any type of reporting, even if we can get down to a micro level, is it possible to track.... In certain geographic areas, the banks are committed to improving the financing of that geographic area. We don't want to see, as they merge, that right now there's not a lot of competition, or there's so little competition that we will see a hike in the interest rates, or all these, which would also affect our competitiveness in the marketplace.

Mr. Bryon Wilfert: Can I ask Mr. Conacher a very quick question?

The Vice-Chair (Mr. Nick Discepola): Go ahead.

Mr. Bryon Wilfert: I have your 1998 brief, but I believe you commented on two occasions about the Canada Trust-TD merger and about an analysis that was done. I don't have that, and I don't know if the committee has that. If you have anything you could provide to us on that analysis, I would find it very interesting.

Mr. Duff Conacher: Yes. Actually, what we sent in to the clerk were the links to the coalition's website, to both the position papers, the one from 1998 and this one from 2000. I brought along five copies of the 2000 analysis of the TD-Canada Trust in English and French, and left those with the clerk. He does have those. The title is “An Unjustifiable Takeover: A Performance Evaluation of Toronto-Dominion Bank and Canada Trust Based on the U.S. Community Reinvestment Act Process”. The clerk has five copies, and as well, I believe he's forwarded to you the link.

Mr. Bryon Wilfert: Anything in that regard would be helpful.

Mr. Duff Conacher: Yes. Could I make one other point that I hadn't mentioned before? I think also these guidelines, as in the U.S., should be made part of the law, as a regulation, not something that would have to go through Parliament when it was changed. These are just guidelines.

You often see reported in the media that when the Bank Act was changed, part of the legislation was these guidelines. They're not part of any legislation. They're not binding on anybody, not even the minister or the committees. That's just another small thing that I think should be part of the process of strengthening this whole review process.

Mr. Bryon Wilfert: All right.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Wilfert and Mr. Conacher.

Mr. Bryon Wilfert: Thank you, Mr. Chairman.

The Vice-Chair (Mr. Nick Discepola): We have just a few minutes. Our next guests have yet to arrive; therefore, I'll entertain three small questions. I underline the word “question”.

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

The Vice-Chair (Mr. Nick Discepola): One or two minutes. We only have about seven minutes.

Mr. Richard Harris: Mr. Wilfert took my first choice, my question. Thank you, I got that answer.

I'll go to my second one, Mr. Conacher.

During your presentation, you made the comment that a number of our big banks admitted they made many false claims during the 1998 merger exercise. I'm wondering if you could share with me specifically which banks admitted they made false claims, and what they were.

» (1720)

Mr. Duff Conacher: Well, during the testimony to the Senate committee, a number of them said that it's been shown that they clearly didn't need to merge; they've survived the past five years and things are going just fine. They have said, well, really the only reason we want to merge and we're putting it before you now is that we want to be bigger so we can do more big-business lending.

Mr. Richard Harris: They weren't specifically admissions of false claims, just general statements that maybe they didn't need to merge back in 1998.

Mr. Duff Conacher: That's right.

Mr. Richard Harris: The next quick question I have concerns a statement you made earlier that if banks treat their customers poorly, they should not be allowed to expand. Would you extend that rule to other large corporations in Canada as well, such as Bell Canada, Rogers Cable, Bombardier, Sears, Canadian Tire, or Loblaws? You see, in the real world the market usually determines whether business can get bigger or not. In the case of the banks, they are so regulated that if they give bad service, customers will simply go to another bank. Would you apply that to other large corporations?

Mr. Duff Conacher: When you're talking about competition, first of all, the Competition Bureau showed that people don't switch, that often they are stuck, especially in smaller centres with one bank.

Mr. Richard Harris: But would you apply that rule to other large companies, that if they're treating their customers badly, they shouldn't be allowed to grow?

Mr. Duff Conacher: Every poll that's been conducted in the past decade has shown that Canadians believe fundamentally that banking is an essential service, like health care, heat, and electricity. In those areas there are regulations on service, and that's what we're asking for, regulations. They are not regulated on their lending and service record. They're not tracked, and it's not disclosed when they want to raise their service charges. They don't, unlike electricity and heat utilities, have to justify that the service charges are fair prices; there are no hearings on them, and they can do whatever they want. They've just doubled their service charge if you're a customer and you use another bank's machine. It costs you three bucks. There's no justification at all, no proof that it's not gouging. They're essential services, so regulate them as essential services.

For essential services, utilities can't make a move without having to prove that it's in the public interest and that they're serving people fairly and well, and that's the same--

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Harris.

So, Mr. Conacher, you wouldn't regulate the five mega food chains that are in Canada, then.

Mr. Duff Conacher: I don't know that industry. If I took a look at it and saw that they had the control and the stranglehold the banks do, then as they've done in the U.S., I would say, well, that's a pretty essential service. And as the U.S. has done for the past 15 years, I would regulate it as an essential service and ensure that the businesses that serve people poorly are required to take corrective action and that they aren't allowed to get bigger, because then they'll just serve more people poorly. It's a common sense rule the U.S. has applied for over fifteen years, and Canada should apply it as well.

The Vice-Chair (Mr. Nick Discepola): If I can, I'll get the other questions in. It's just like question period: you don't always get the answer you want.

Mr. Paquette, please.

[Translation]

Mr. Pierre Paquette: The banks had committed to making low-cost accounts available to the most vulnerable clienteles. I don't know if your organization followed up on that commitment on the part of the banks. I have not heard anything about it since that commitment was made.

[English]

Mr. Duff Conacher: That commitment is not yet law. The government has been negligent by delaying passage of that regulation on access to basic banking services and cheque cashing. It's still not law. We're hoping that in the next couple of months it finally will become law. The bank's commitment is a very empty commitment right now, and unfortunately the Financial Consumer Agency of Canada, the new regulatory agency, is not doing enough to enforce that voluntary code commitment right now.

There have been lots of complaints, thousands of them, to the Financial Consumer Agency of Canada, not necessarily all on this issue but some of them on this issue. The agency has yet to find a bank guilty of breaking that commitment even though there's lots of evidence that they're still discriminating against people with low incomes, this according to the groups we hear from in the coalition, groups that work with people with low incomes.

Hopefully, that will soon be made law, and then the Financial Consumer Agency will start tracking and disclosing the banks that are continuing to turn people away. They have committed themselves to a low-cost account, but you have to be able to open an account first, and there's still no regulation requiring them to open an account for you if you provide basic ID. It's a voluntary code, and voluntary codes don't work, as has been shown by Industry Canada's own studies.

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The Vice-Chair (Mr. Nick Discepola): I will take two questions, one for Mr. Cullen and one for Ms. Minna, and then the answers to both.

Mr. Roy Cullen: Thank you, Mr. Chairman.

Mr. Conacher, I don't think we have time to get into this now, but I'm always amazed that in the U.S. economy, which characterizes a market economy, we have in certain sectors some regulatory regimes that seem to surpass anything we would even contemplate here in Canada.

In this regime, in terms of the community reinvestment or takeovers, when a bank is acquiring another bank, the bank being acquired would have to show that they lived up to certain lending practices or norms, or benchmarks, and so on.

In Canada, often when the banks show us their lending approval rate, it's quite high, but anecdotally, we hear from a lot of constituents who say they go into the branch and they don't even get past the first screenings. They don't even bother to fill in applications. So how do they deal with that in the United States when they're looking at lending practices?

Mr. Duff Conacher: It has been a difficult problem to deal with.

The Vice-Chair (Mr. Nick Discepola): Keep that thought.

We'll ask Ms. Minna for a question, and then I'll ask you to wrap up.

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

Sorry. Unfortunately I was in the House and missed the exchange, so I'm not sure if I'm being redundant here, but I want to ask Ms. Patten and Ms. Lee about different issues but similar things.

We've heard from witnesses that if bank mergers were to take place, there are a lot of other smaller banks and credit unions, and so on, that would be able to pick up the slack with respect to the small and medium-sized businesses. With women, I wonder if you could give me an idea to what extent your organization or the membership relies on the existing banks and whether or not you believe there in fact is enough competition out there to be able to pick up the slack should the banks drop the ball as a result of merger.

With respect to charities, would that be, again, the same thing? What's your analysis of the lay of the land at the moment?

The Vice-Chair (Mr. Nick Discepola): That's a second question, Ms. Minna, but we'll go to Mr. Conacher and then give them a chance. Thank you.

Mr. Conacher.

Mr. Duff Conacher: First of all, they look at, actually, the marketing practices of the banks to see whether they are just target marketing to wealthy individuals in a particular community and ignoring the other side of the tracks, so to speak.

They also look at the number of loans that they have in each category. So if they're systematically turning people away without even letting them apply, it will show up in the number of loans. So they're able to track that as well.

What it has shown, despite the banks' rhetoric.... Every year they say, oh, no, we treat everyone fairly; everyone who is creditworthy gets a loan. That is the basic requirement; if you're creditworthy, you'll get your loan. Then the statistics come out and show that if you're black or Hispanic or live in certain neighbourhoods, you're two to three times less likely to be approved, even if your income level is the same as a white person's, even if you're buying a house of the same size, even if you're operating a business of the same size in the same sector.

So the statistics close the gap between the rhetoric and the reality, and if you don't close that gap in Canada, you're just going to be dealing with rhetoric and you're not going to know the reality. If you don't know where we are, how are you going to know what direction to head in, in terms of a merger application?

That's why, when we were looking at TD-Canada Trust, in a lot of the areas we had to say there was insufficient information; we can't grade them. Why? Because it's not available.

I urge you to ask Mr. Clark, when he's here tomorrow, what he thinks of the system in the U.S. Waterhouse, which TD owns in the U.S., has to comply with it. There is a board committee of TD-Canada Trust that reports regularly to the full board on how Waterhouse is complying with this in the U.S. What is the problem with having it here? There's no problem at all.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Conacher.

Ms. Lee, please.

Ms. Ada Lee: In answer to your question, if you look at our brief, we are very concerned about the access to financing, particularly for SME enterprises. A lot of them are women-owned, and so our recommendation is perhaps to set targets for lending to small and medium-sized enterprises in Canada, including developing geographic requirements as to loans that are provided particularly in rural areas. Any further restriction to access to capital and at competitive rates is definitely a concern of ours.

» (1730)

The Vice-Chair (Mr. Nick Discepola): But the question was more related to whether you think other than non-major banks could pick up the slack if the larger banks were allowed to merge.

Ms. Ada Lee: We would have to have a crystal ball in front of us for me to answer that, but we are concerned enough that if the government does not put in some requirements to loosen it up by encouraging the expansion of services, it probably will not happen by itself. So we're looking for maybe an intervention to make sure that would happen.

The Vice-Chair (Mr. Nick Discepola): Ms. Patten, do you want to add anything?

Ms. Monica Patten: Yes. I can answer very quickly. It varies across the country. In some parts of the country, for example, charities and community foundations would have closer ties with credit unions.

Our analysis of our own membership, which is that of public foundations, would suggest that it is currently the major banks that provide the financial services.

I would like to have the same crystal ball in terms of the future. My guess is that we would be not well served. It would be my best guess, at this point, if that's correct.

The Vice-Chair (Mr. Nick Discepola): All right. Thank you very much.

If you do have any further ideas that you feel would provide input to the committee, I welcome you to forward it to the clerk over the next few days by mail or e-mail. You have our address.

I would like to thank you on behalf of the committee members for your input. I think, as you've realized, the decision and the report that we have to render is not an easy one because of the complexity of the issues. You've made the task a little bit easier. I thank you once again for appearing here.

We'll adjourn for exactly two minutes while we welcome our next witnesses.

» (1735)

The Vice-Chair (Mr. Nick Discepola): I'd like to now continue with our next guests. I would like to welcome, from the HSBC Bank Canada, Mr. Martin Glynn, as well as someone else whom he will introduce.

[Translation]

Mr. Pierre Paquette: Mr. Chairman, I have a point of order.

The Vice-Chair (Mr. Nick Discepola): Yes, Mr. Paquette.

Mr. Pierre Paquette: I simply want to point out that the document which was given us is only in English and I find this regrettable. That being said, I will not object to the document's distribution.

The Vice-Chair (Mr. Nick Discepola): I am told that this is only a reference document and that there is already a motion covering your point of order.

Mr. Pierre Paquette: Thank you.

[English]

The Vice-Chair (Mr. Nick Discepola): I'd like to welcome Mr. Glynn again.

I'll ask you to make your presentation. We have approximately an hour, so I encourage you to make your point, but leave enough time for members to ask their intelligent questions, as they always do.

Thank you and welcome.

Mr. Martin Glynn (President and Chief Executive Officer, HSBC Bank Canada): Thank you. Merci beaucoup.

It's my pleasure to be here before you this evening. I'm the president of HSBC Bank Canada. We are the seventh largest bank in Canada. We are by far the largest international or foreign bank in the country. I guess there are the big five, then National Bank is number six, and we would be seventh in size. I'm based in our head office in Vancouver, so we are different in the sense that we have a head office in western Canada. We're about 21 years old in Canada. We now operate from coast to coast, with 6,000 employees and 160 offices from Newfoundland to Vancouver Island, and we've grown quite rapidly from our start 22 years ago.

HSBC is one of the largest financial service companies in the world, in 80 countries and territories, based in London. I think it ranks number two in market capitalization. I think it's of interest to the committee to know that we have a large sister bank in Mexico as well as one in the U.S., and we consider ourselves a candidate to be the number one NAFTA bank, which is not typically something that HSBC is characterized with. But we feel that NAFTA and U.S.-Canada are of vital importance to industry and people in this country and we feel we can play a very big role there.

We've just announced an acquisition of Household Finance, which gives us another 110 offices in Canada. It's a U.S. company, in the consumer finance world, so subject to regulatory approval, we will be even bigger in the country.

I think we've been reasonably successful. We are a banker to ethnic Canada, particularly on the retail side, which we're very proud of. We consider ourselves, generally speaking, the alternative to the big five. We say that if you want competition, if you want an alternative, try us.

Canada is a very international country, and we are a very big financier of Canada's trade with the rest of the world. We are the largest issuer of letters of credit, which I think is very important for Canada.

As far as our comments about this process are concerned, we are not directly involved, because we're not in a position to merge, so we are in a sense unbiased. On the other hand, we consider ourselves in an opportunity to fill a competitive void that might exist if there are concerns about competition that would be constrained by mergers. So we're very much putting up our hand and saying we want to grow, we want to fill a void, and if there are branches, if there is market share across the country in various businesses, we'd like to play a role.

As far as the process is concerned, we think time is important because a protracted process would be only negative for all the participants involved. And of course clarity is important.

I think one of the wonderful things about this committee's meetings is that you're providing clarity to the process.

I would like to take the minority position that mergers may not hurt competition. In fact, I think there's an argument to be made that mergers might help competition. Essentially, in a mature market like Canada and a mature industry like banking, there's not a lot of wiggle room to grow. We've managed to acquire a number of entities and grow, by both organic growth and acquisition, and now it's to a point where there's very little wiggle room. I think if there were some scope for growth created by mergers, you might find it would create opportunities for new entrants to the field.

And I think it's fair to say, at least from our perspective, that the flavours of banking in the world are different. The big five, so to speak, from many perspectives look similar, have similar products. I think Canada would benefit from different flavours, different perspectives that could be provided by other competitors who would be given the opportunity to come in if mergers occurred.

As far as issues affecting foreign banks are concerned, I would say the most important public policy issue that people should keep in mind is U.S.-Canada economic integration. The U.S. economy is a very important economy that is growing in terms of being integrated with Canada, and banks have to play a role in facilitating that economic activity.

» (1740)

Therefore, I encourage people to think about how Canadian banks can help with the U.S. activities, but also how U.S. banks may play a role in Canada.

Of course, one of the issues affecting foreign banks is foreign ownership restrictions. Reciprocity issues are relevant, I think, for this committee and for government. Canadian banks want to acquire U.S. banks and grow in the U.S. That's one of the arguments for mergers. Yet the reciprocity isn't always there.

Another issue that affects the interests of foreign banks in this country is capital taxes. I think that's a fairly well-known issue.

I have just a couple of final comments, Mr. Chairman. One of my colleagues, a CEO of one of the major banks, has indicated that they may be prepared to consider remedies around competition issues as they relate to mergers.

I'd like to highlight two of them for the committee. One relates to branches. I think it's very much a possibility that there will be too much concentration in some markets. I would recommend that government and the House committee consider the sale of branches along with employees and customers, similar to a process that exists in the U.S., in order that competition and employment can be preserved in a number of communities.

The second and more important issue I want to highlight relates to the ATM network. I think ATMs are more important as a barrier to competition than branches, because if we have two mergers and three banks in the country control 95% of the ATM network and you have surcharging taking place, then there's a huge disincentive for new players, such as retailers who want to operate electronic or virtual banks.

New entrants who don't have a massive branch network will still need a location where money can be deposited and withdrawn easily through the ATM network. I would strongly recommend that we look at that. When mergers take place, there's a perfect opportunity to get commitments to open access to electronic channels, such as ATMs, for both deposits and withdrawals.

It's the same as when you're trying to encourage competition in the provision of long distance telephone service. You don't ask telephone companies to build new wires that duplicate the existing ones. You simply have economically sensible access for new entrants to take advantage of existing infrastructure.

Those are a couple of remedies I would suggest.

On that note, those are my formal comments, Mr. Chairman.

» (1745)

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

Mr. Harris, please, for 10 minutes.

Mr. Richard Harris: Thank you very much.

As a fellow British Columbian, I'm well aware of the success HSBC has had not only in B.C but across Canada, and we're happy that you're here. I understand that the weather is beautiful out in Vancouver. You're probably not too happy to be here.

Mr. Martin Glynn: I came from Chicago this morning, and it was cold.

Mr. Richard Harris: Picking up on what you said near the end about ATM machines, are you talking about a multibank ATM where a customer that dealt, say, at HSBC could go to an ATM that was owned by another bank and make a deposit, and it would end up back in their bank? Is that what you're talking about?

Mr. Martin Glynn: Yes. We have a network now called the exchange network, which includes a majority of the credit unions, National Bank, and HSBC, where we in fact allow that. Deposits can be made at the ATMs of any of those organizations, and your account will be credited. We also don't surcharge. So if you went to a National Bank ATM and took out $100 from your HSBC account, you would not get charged $2 or whatever the surcharge is.

If you prevented that from happening, you can imagine how difficult it would be for a new entrant to engage in banking when you have that level of punitive positioning vis-à-vis machines.

Mr. Richard Harris: So if I deal at National Bank, I can make a deposit in an HSBC ATM, and it'll go into my account. But only the three players are part of that right now. If I deal at BMO, for example, I can't make a deposit there.

Mr. Martin Glynn: No.

Mr. Richard Harris: I like that idea. It's very interesting and certainly would add a lot of convenience and access for consumers.

Yesterday, we had an interesting day. We had the credit union people, the ATB from Alberta, and the credit union people from B.C. and Ontario. The day before, National Bank was here. They expressed a lot of excitement about the opportunity that could be presented to their institutions should mergers go forward, and should some legislation housekeeping that's required be cleaned up.

Some of them, like the credit unions, have already done some branch buying from others. Has HSBC actually taken over any branches yet where there was another bank in there previously?

Mr. Martin Glynn: As far as the big five are concerned, we've only taken over branches that have been essentially closed by them and we have opened, in strategic locations, an HSBC one.

I can tell you that there are too many branches in the country as it is. It's very difficult economically to justify spending all that money. You have no customers. You have to start from scratch. The ability to do that, for us, is limited.

It would be more competition-positive if, in the branches that we took over that were next door to one of their existing ones, we could actually have the customer-base and employees. It's what I think is needed in a merger type of situation. We have done it, but only for empty branches.

» (1750)

Mr. Richard Harris: I have one final question. I hope this isn't too much of a hypothetical question.

This committee is charged with, I guess, the public interest criteria package that we can recommend to the minister and to the government.

Are you optimistic that we can do it and, at the end of the day, be able to establish some very clear and predictable guidelines for the use of any banks seeking to merge? Are you optimistic that we can actually determine what the public interest package should look like?

Mr. Martin Glynn: I think your question is, basically, can one find a suitable compromise that deals with competition issues, and other public policy issues, allowing banks to merge?

I think a middle ground can be found. I'm not sufficiently knowledgeable about this process and what other people have said. I would say there's a reasonably good chance that you can find a set of conditions that would allow you to recommend the merger process to proceed.

Mr. Richard Harris: Yes. Okay. Thank you very much.

That's all I have, Mr. Chair.

[Translation]

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Paquette, please.

Mr. Pierre Paquette: Thank you, Mr. Chairman.

Thank you very much for being here. My question will be in the same vein as that of as the person who spoke before me.

You were talking about clarity as an important condition in the examination of public interest. I conclude that you agree with the current procedure. The Senate committee which tabled its report last December proposed the elimination of the public examination step and recommended that the Competition Bureau and the Office of the Superintendent of Financial Institutions do the technical work; it would then be up to the minister to decide.

I conclude from your reply that you agree that parliamentary committees should hear citizens, and citizens' associations, on the nature of public interest and the way in which potential bank mergers may affect it.

[English]

Mr. Martin Glynn: If I understand your question, do I agree with the public interest process being relevant to the decision, and the fact that the minister has asked both the House and the Senate committees to review this? I certainly think it's within the purview of Canada to do that. It's a different process than exists elsewhere, but it's a perfectly legitimate one.

I actually think, given the uniqueness of Canada and the issues around banking, that the government should establish whatever criteria it feels are appropriate. The public process, in my view, is a positive one.

[Translation]

Mr. Pierre Paquette: I want to go back to a question that was already raised, because you are an ideal witness in this regard.

Yesterday, the cooperatives and credit unions seemed very optimistic or very enthusiastic about the fact that after a bank merger, certain services offered in some communities would be eliminated by the new Canadian mega-bank, as they said they were ready to take over those market shares.

The presence of foreign banks is another means to ensure that services will be available, and also that competition will continue. According to you, are foreign banks interested in coming to Canada to provide these services to consumers, or is it, rather, bigger investors who are encouraging them to settle here? I note that aside from your bank there are very few foreign banks who have taken up the opportunities given them by the Minister of Finance and the legislative changes made during the past few years.

According to you, is it possible or probable that foreign banks will come here to offer a certain number of services that the large merged banks will abandon?

» (1755)

[English]

Mr. Martin Glynn: Thank you.

I have two comments. One is that I'm not privy to the secrets of the banks that are plotting to merge, so I don't know if it's true that one can assume they're going to abandon any particular areas of business or any regions of the country or any towns, because in a sense one could argue that if you're bigger it's justified to be in more businesses and in more communities than if you're smaller. So I'm not quite there in assuming there'll be abandoned towns.

But as far as the interests of foreign banks are concerned, I would say that as Canada and the U.S. become more integrated—and 90% of Canada's trade is with the U.S.; we're the largest trading partner, very close to Mexico, but still the largest from a U.S. perspective—of the 10,000-odd U.S. banks there will be some who have a great deal to offer to the Canadian market. The ones that came before, that may have come and gone, I think maybe didn't have the right model. They didn't maybe focus on retail banking or a fuller service model, whereas I think today the times are different. There's less dependency on branches. ING has proven that. You can create a branchless organization.

I think foreign banks would be interested under certain circumstances. There are issues around capital taxes, issues around ATM access, and so on, but I would say we should expect that foreign banks would be interested in Canada.

[Translation]

Mr. Pierre Paquette: In fact, the law already states that American banks are considered on the same footing as Canadian banks. So, we will see in the coming months whether they will take up this challenge to come and compete in Canada.

I would now like to ask one last question, out of curiosity. I read in the statement you made to the Canadian Club that you had branches not only in large cities, but throughout Canada; for instance, you mentioned Chicoutimi.

I would like to know how a bank like yours decides to open a branch in Chicoutimi rather than in Joliette, for instance, which is another financial hub, but only for the Lanaudière region.

[English]

Mr. Martin Glynn: Thank you for your question.

We're not big enough in Canada. We're 22 years old. We're still a young adolescent. We'd like to grow. We'd like, in a sense, the freedom to grow—the room to grow—so mergers present one opportunity where I think we can leap forward.

We are very happy, as we are in many other places in the world, to be in small cities and big cities. The choice, quite frankly, of some of our locations has come through acquisition. We bought the Bank of British Columbia in 1986, and we bought Lloyd's, which was Continental Bank, in 1990, and they were in Chicoutimi. They chose Chicoutimi. They chose Timmins. But we've also chosen other cities as well, and so it's a combination of opportunity and creating from scratch.

[Translation]

Mr. Pierre Paquette: Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Paquette.

Mr. Wilfert, you have the floor.

[English]

Mr. Bryon Wilfert: Thank you very much, Mr. Chairman, and Mr. Glynn, I thank you for coming.

We've talked a lot about the second tier issue and the vacuum that might be created if there were mergers in Canada. It's interesting to hear some of your comments with regard to the role HSBC has played and obviously will continue to play in Canada. I want to talk about that issue, but unfortunately I will digress for a bit.

You raised an issue near and dear to my heart, and that is the issue of integration, foreign banks, and the controls, which I am very concerned about, though maybe not in the same vein as you are. In my view, Canada offers a very liberal environment for foreign banks and many other financial services. Certainly your bank is a product of that, and all sorts of financial establishments can be introduced. You've mentioned some of the virtual banks that have come in, and unfortunately, because they didn't maybe provide...and you made an interesting comment now about providing full service, which is something that we're hearing, from SMEs in particular, would be needed if in fact mergers were to go ahead.

Obviously there are foreign ownership controls, but the foreign ownership controls apply to Canadians as well in that only 20% of the voting shares and 30% of the non-voting shares can be held by anyone. That, I think, is with a bank of $1 billion in equity or more.

The Canadian banking system is very strong. It is to be envied when you compare it to some, including the Japanese system, where bigger isn't necessarily better in their particular case.

We're charged here with establishing how the public interest is to be evaluated through an impact assessment. We have eight criteria currently, and we're looking at others. We've heard some suggestions. Obviously I'm interested in making sure that if foreign banks want to compete, they will certainly be able to enter the marketplace, which is already allowed under the legislation, the former Bill C-8. I could certainly spend a lot of time talking about ownership issues and my concerns about where that may be going. There are pressures from some who may want to see some loosening of that, something I of course would personally be vehemently opposed to, but the current situation obviously hasn't precluded your bank or other banks from entering the marketplace.

What is important to me is some of the innovative things you were talking about. For example, we heard earlier about ATMs and their role. Part of the problem we're hearing from the SMEs is that some of the foreign banks that have come in have not provided that full service; that technology is not a panacea, so there is a problem.

I was interested in some of the comments you made. What type of framework do you think we should have in place in terms of the second tier? In other words, the urban communities are going to be dealt with, presumably even in mergers, but in rural and remote areas there are concerns that these areas will in fact be left to their own devices and will therefore lose out.

I know your bank because we have one of your branches in my own community. I know that they are very good at dealing with the small business community. Certainly, why a lot of the small businesses in my community say they deal with your particular bank is because of the personal contact.

I'm interested in some of these bricks and mortar issues because some of the others, quite frankly, have not invested in Canada. You mentioned ING Bank. How many ING branches are there? There aren't any, and that's a problem in my view because they're not investing in Canada to the degree our Canadian banks are or the way you are.

¼ (1800)

Mr. Martin Glynn: You have raised a few issues. If I can, I'll just briefly cover a couple.

First of all, we don't consider ourselves to be in the second tier. You can add all the Canadian banks up together in size and you'll find we are actually larger. We are a major bank in the world, and what we say to our customers is that we can give them the best of both worlds. We can give you very strong Canadian banking, which Canadians expect and which you're trying to make sure they have, and we can bring you the world. We see ourselves as a bit of a different entity from--

Mr. Bryon Wilfert: Sorry, I wasn't saying that you were second. I'm saying, about the second tier, how would you respond to that issue because of the nature...? You're different, in my view, from some of the other foreign banks in terms of your physical presence. How would you see this opportunity if it were to arise?

Mr. Martin Glynn: We're convinced that the best formula for the SME market in retail banking for most is a combination of bricks and clicks: high-touch, high-tech. People want both. They want all the access to the world electronically and they want to be able to talk to a person.

Your question is leading very much towards what we agree on, that we need to have personal contact. There needs to be a certain number of branches. The right number is probably not 2,000, which is probably what's going to result from any merger that might take place; it's more likely a smaller number, but it's larger than what we have, which is 120.

We very much believe in that and it works for us. We see our market share growing. I just saw the SME statistics today. Our market share grew in 2002. In that area we have the number one customer service ratings in the SME market, according to the last survey we saw, and we're a foreign bank. I think there are biases about foreign banks that are actually incorrect. We can come into this market, provide something different, and provide a very good service, and because there is a certain level of management based in the head office here, it doesn't have to be a lesser service than exists elsewhere.

It's the same with credit decisions. When people think of foreign banks, they immediately think of credit decisions being made far away. That is certainly not the case with our bank. Every conceivable SME loan and personal loan you could possibly think of in that sector is made very much in Canada, so there are some misconceptions. Foreign banks can play a significant role in the SME business in retail, in real banking in Canada.

¼ (1805)

Mr. Bryon Wilfert: Very briefly, can you explain to us why your bank took that approach particularly in terms of the bricks and mortar aspect? Why did you find that advantageous versus, say, the methods of some of the other foreign banks, which did not take that approach and for whatever reason either didn't stay or maybe aren't doing as well?

Mr. Martin Glynn: It's hard to compare our strategies. We're an old-fashioned organization in the sense that we think you should raise deposits first and then lend them out. Deposits are critical to success at HSBC around the world. We started very much by building a retail business, which in those days required branches and still does today. Convenience has to be part of it, so we developed a full-service model right across the country and took advantage of every opportunity to grow by acquisition or by organic growth.

I think that's proven to be the right strategy. Going only one way, electronic, has its issues and limitations, and being only dependent on bricks and mortar and so on has its limitations too. I don't think it's brilliant strategy, it's just good old-fashioned banking. We started down that road and it worked for us, and we kept pushing and pushing. That's how we've ended up where we are.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Wilfert.

Ms. Leung, please.

Ms. Sophia Leung: Thank you, Mr. Chair.

Welcome from Vancouver, Mr. Glynn. I've really watched your bank, HSBC, very closely. You have developed really well in 22 years. As you say, you are truly an international bank.

I'm also very interested in the fact that you are really a U.K. bank, and in the meantime you invest heavily in various countries such as China, particularly in Hong Kong and Shanghai. You started in Shanghai way before 1949 and then you came to Canada in 1981. You certainly followed the Asians in coming to Canada, if you don't mind my saying so, especially the Chinese. I think they're your major--

The Vice-Chair (Mr. Nick Discepola): They're major depositors.

Ms. Sophia Leung: Yes, I'm getting there—especially the ones who came from Hong Kong, I think.

It's very interesting. You're very smart in that way, because the Asians from Hong Kong—the Chinese—really feel very trusting towards your bank. They even move to a new country, but your bank comes with them, and quickly. They just go, especially the Cantonese-speaking. That's really very interesting. Those from Taiwan do not really respond as much, though.

Anyway, I want to ask you a question based on your success. We are in this committee very concerned about the public's interests, how mergers will affect them. Another aspect involves competition; that is why I made the introduction. I think you certainly are faced with competition in Canada. You have made quite a success. Last time your colleague Youssef Nasr gave a very strong speech. I remember he said that for the purpose of competing in the world, Canadian banks should consider merging. Do you support that? Can you give a fuller reason for why you feel right now that different banks cannot compete under present conditions?

The second part involves the public interest. We're very concerned. We have heard so many presentations. We all know a merger would affect a lot of branches and involve closings. Then again, of course the job loss would have a deep effect, and from community to community. In the meantime, also, I think the public interest is involved even earlier. The Community Foundations of Canada will feel the effect right away in their donations and support activities because of the merger.

So I want you to comment on the question of competition in the world for Canadian banks and, second, on how mergers would affect the public interest.

¼ (1810)

Mr. Martin Glynn: Thank you, Sophia.

I'm not sure I should comment on whether Canadian banks should merge or not. It's up to them—

Ms. Sophia Leung: No, I'm not asking you that. Just say how a merger or no merger would affect these two areas. I know you're neutral. You're supposed to be neutral.

Mr. Martin Glynn: Taking your second question first, whether from a public interest point of view having fewer banks is going to affect community activity, donations, and so on, I think there are two answers.

One is that it's a dynamic world, so there are new entrants; we shouldn't just assume there is a gap, because other people will fill the gap. Typically, donations and community involvement have some relation to the bottom line of the organization, and it strikes me that the CEOs of the major banks in Canada would only merge if it helped their bottom line. I would say they would therefore be more able to be even more significant in the community than they are today. So I would say one shouldn't worry about that aspect.

The issue of employment that relates to the public interest and that relates to mergers can, I think, be dealt with partly by how aggressive the government is in allowing the sale of branches and so on, so that new entrants can appear.

As regards their debate about mergers, certainly it's a legitimate strategic focus. We know that having higher technology budgets gives us some ability to do things that, if we had a smaller technology budget, we couldn't do. We know that being in 80 countries and being the eleventh largest bank in the U.S. gives us an advantage with some customers who value that geographic access. In that sense, I think they see benefits to their own strategy in looking at getting bigger.

Ms. Sophia Leung: Yes.

Also, I want to say your bank has certainly played a very active role in the community. I think that's another factor really contributing to your success. Literally at any big event you are always there as a sponsor, with a big sign so that people cannot avoid it. Again, I'm saying in a positive way you have done a great deal for the community. That's important for other banks to learn.

Thank you.

Mr. Martin Glynn: Thank you, Sophia.

The Vice-Chair (Mr. Nick Discepola): Thank you. That's a nice way to end a presentation, with a good compliment.

Let's go to Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chair.

Thank you, Mr. Glynn, for appearing.

I'd like to get into the process of bank mergers and how we can make the process not too cumbersome but still deal with the public interest questions. You alluded to this notion of potential cherry-picking at the branch level, and we heard a bit of that yesterday from the credit union movement, that they want the customers intact and what have you.

Before I do that, though, I'd like to get a better handle on this whole issue of bricks and mortar, because banking is changing. Right now there's nothing to stop you from, let's say, building a branch in Cambridge, Ontario. Is that correct?

¼ (1815)

Mr. Martin Glynn: Yes.

Mr. Roy Cullen: Right.

So in your growth strategy you've probably had some of that, but it's been more through acquisition, and if you could, you'd pick off some branches from a major bank merger that would fit into your strategy. In other words, we also hear from some of the foreign banks that they've stayed out of Canada because of the dominant position of the major chartered banks as it relates to retail banking, bricks and mortar at the local level.

How does your whole strategy fit all that into the equation, how important are bricks and mortar?

Mr. Martin Glynn: Well, first of all, every year that goes by, bricks and mortar are less relevant because there's more and more Internet use for bill payment and banking. That's why I'm focusing this committee on the fact that the barrier to entry is more the ATMs than branches. At HSBC, we think branches are important, and we do open them; we're opening three or four a year. That's important to us, because we know we need more. And we can't just wait for mergers or something else to happen.

But I can tell you it costs three-quarters of a million to a million dollars to open a branch--that's before a customer walks in the door--and three to five years to break even. It's so hard when there are so many branches just down the street. So I'm saying, if you want to accelerate competition, you have to free up branches that are in good locations and have customers in them, which is exactly the U.S. style of dealing with bank mergers in concentrated areas. But we still open de novo branches.

We do get calls from realtors saying X bank has closed in, for example, Forest Hills in Toronto, would we like to have their branch, and we say yes, because we've always wanted one there and we're prepared to wait because it's so vitally important that we're there.

Mr. Roy Cullen: What about the rural-urban split? If two major banks came in with a merger proposal, and let's say the Competition Bureau said you'd have to divest of certain branches, you'd be interested in both urban and rural--depending on the branch, of course?

Mr. Martin Glynn: The answer is yes.

We have more of a concentration in B.C. We're very large in B.C., so we have a geographic need to grow in Ontario and Quebec--actually, east of Alberta, because we'd like to be bigger in Saskatchewan and Manitoba as well as in Ontario, Quebec, and east.

I'll give you an example. In the TD-Canada Trust merger, the Competition Bureau required that 13 branches be sold in the Waterloo-Kitchener area, but the deal there was that one bidder had to bid on all 13 branches. So instead of saying how can we get three or four banks to emerge with a presence there, one bank had to buy 13. We had a Kitchener branch already, so we said we'd be happy with three or four, but not 13, and we weren't allowed to engage. That would be, I think, a very destructive process because it would cut out many potential buyers who aren't interested in that many.

So if mergers were allowed and there were bank sales, it would have to be done in a way that would make sense to a buyer.

Mr. Roy Cullen: Well, that's a useful segue to my next question in terms of the process, because there's a desire to truncate it as much as possible.

But let's say we have two banks that come in with a merger proposal. They'd have gone through the Competition Bureau, and it seems to me that would be necessary before you could look at the public interest test. I think a major public interest test will be access to service and customer choice, etc. The banks then would come in with some proposition in terms of any branches that would be declared by the Competition Bureau to be redundant.

In doing that, though, they'd want to test the waters, you know, the credit unions, banks like yours, and people like you would want to make sure that the customers were intact, and the employees, etc.

So without making it such a burdensome process, how do you turn it into a process that gives you and the banks a chance to work out something that makes sense for you, to make sure there's not a lot of cherry-picking going on, without getting into a huge, laborious due diligence process right up front?

Mr. Martin Glynn: I guess it's up to the merging entities. As you know, we're not initiating anything. So I would say that it would make sense for merging entities to understand the likely hot buttons of the Competition Bureau and deal with those issues in advance, pick up the phone and say, how would you like to meet to discuss this or that.

It's up to the merging banks to decide their tactics, but it would seem to me that some pretty obvious things could be arranged in advance, before the visit to Ottawa occurred.

¼ (1820)

Mr. Roy Cullen: Yes, I would hope so, because I'm sure the public interest test that this committee will come up with would probably go beyond the banks saying they're going to do their very best to find homes for these redundant branches. I don't know what the test will be, but I expect it will be more than that.

How do you deal with the business of any competition, or peeling off some of the major businesses, and that? Is that something this committee should even be worried about?

Mr. Martin Glynn: I think the Competition Bureau is fundamentally expert at dealing with competition issues. I would imagine what I've just described, they're thinking about as well, but there may be other things that this committee and other parts of government can add to the equation. But as long as there's a clarity to the process and the timing is somewhat limited, so there's a reasonable amount of time, I think you'll get the best result.

Mr. Roy Cullen: Yes.

Just coming back a moment.... I've had 10 minutes already?

The Vice-Chair (Mr. Nick Discepola): This is your last question.

Mr. Roy Cullen: That wasn't my question.

On the question of rural and urban, we've heard some testimony that said, if two merging banks came forward and said they had a deal on the rural branches, but on the urban branches it didn't really matter, because in the urban centres there's so much choice and people are doing a lot of computer banking, and so on, is that a reasonable scenario for us to accept in terms of the public interest? The flip side of that is, would banks like yours, given that the branches made sense, be interested in urban branches as well?

Mr. Martin Glynn: Yes, very much so.

For example, in Ottawa we have two branches, one in Kanata and one downtown. We should have more. In Toronto we have 30 branches; we should have 60.

So we definitely want urban branches, but what we want is a spread that reflects the Canadian population so that they have easy access, so that as close to 100% of Canadians as possible have easy access to HSBC. That is our goal.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Murphy, please, for seven minutes.

Mr. Shawn Murphy: Thank you, Mr. Chair.

Thank you very much for appearing, Mr. Glynn, and thank you for your presentation.

I don't want to be seen to replicate or emulate the United States' system, but your bank is big in the United States. Is there any dealing with this issue of mergers and the criteria to be used in the public interest? Are there any best practices or lessons learned from your experience with the States? What practices do you see there?

Mr. Martin Glynn: There are some lessons to be learned in the U.S., because banks are merging every day. They have 8,000 or 9,000 of them, so there's a long way to go.

They don't have national banks. We should be very proud of our national bank system here and the quality of banks.

The merger process in the U.S. is rolling quite rapidly, and there are going to be some very big banks, far larger than Canadian banks, and that's the danger. I think that's the danger the Canadian banks feel, that U.S. banks are consolidating and getting bigger, and so on.

The biggest thing, I would say, is that there is a process that is limited in time. The Federal Reserve and other entities have to declare an interest, and there's a process that has a time limit to it. I think that is one we should reflect on. In other words, we should define the process so that, at the end of x time, it's over. That's what I think the U.S. financial services industry understands.

We're just in the process of buying Household Finance. We know that you do this, you do that, and five, six, or eight months later it's a yes or no, and it's over.

Secondly, they've really developed the process of dealing with concentrations of competition and the sale of branches. It's a routine, priced process. There's no anguish. Banks don't scream and yell. They know, in a concentrated area, they have to go through that. It works very well, and new banks emerge. You ask, how did that bank get into that market? Well, they got in there because someone else merged and they had an opportunity to buy 20 branches.

So there are lessons to be learned.

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Mr. Shawn Murphy: Do you deal with any issues such as access to lending capital and access to capital?

Mr. Martin Glynn: They have a Community Reinvestment Act process that I think you're familiar with. I'm not sure if it has the same relevance here in Canada, but they do have issues around it.

It's not on the merger itself, but more on the “merged”. The acquiring entity goes through a sort of beauty contest where you ask how good they are as corporate citizens. It's part of the U.S. process.

Mr. Shawn Murphy: Let's probe that a little deeper. Isn't it a relevant issue that we should perhaps be dealing with?

You talk about the Community Reinvestment Act in the States. We don't have one here, and you say it's not relevant. Perhaps we should be considering it.

Do you have any thoughts?

Mr. Martin Glynn: I'm familiar with this. I don't think the Canadian financial industry has had any real criticism in that area. I think there's a lot of access. I don't think the issues related in the U.S. are here to such an extent that would require it. That's my own personal observation.

Mr. Shawn Murphy: There was a witness who appeared before us yesterday, I believe, or before yesterday. He indicated that this issue is really an urban-rural issue and that urban Canada is well served by intense competition. There are too many branches, as you've indicated. It's a mature market.

The same cannot be said of rural Canada, where the banks are making strategic decisions to close banks. They find, for strategic reasons, that it's better for their bottom line to get out of rural Canada and concentrate capital into either urban Canada or foreign markets. These are the five Canadian chartered banks, not your bank, of course. You are already big in the foreign markets that they're entering.

I notice that your bank made a relatively strategic decision, at least in its earlier years, to concentrate in urban Canada. Do you see yourself branching out into the cities and towns of 10,000 or 12,000 people at some point in time in the future?

Mr. Martin Glynn: I think, as we get bigger, we will naturally spread our wings. When we were a very small bank, we were in Campbell River, Penticton, and Lethbridge. You may not call them tiny towns, but when we were small, proportionately it was a big investment for us in small towns.

We feel that we're very much community oriented. I don't actually see the fear of rural Canada being abandoned. I don't see that as much as you see it. I see there are problems in rural Canada in justifying hospitals and schools. It's happening everyday in the public policy arena, but I don't see a banking issue there, personally.

Mr. Shawn Murphy: Thank you.

The Vice-Chair (Mr. Nick Discepola): I'd like to get two points of clarification. You brought up some interesting “barriers to entry”, as you called them, that I never envisaged.

On the question of ATMs, I too find it an irritant. I can go across the street and be charged $1.75 to $2 because I'm not using the same branch. Yet I can go almost across the country or anywhere else and, as long as I use their branch, I'm not charged.

I didn't view it as a barrier to entry, but is it feasible for us to make the recommendation that the surcharges must be waived at all times?

I guess the banking industry will say that the infrastructure that had to occur is costly and has to have a certain payback. My fear would be that if we do impose such a penalty on them, they will try to increase prices elsewhere to cover the cost of it. I'd like you to elaborate on that.

I'm wondering also about your second recommendation. Gee whiz, I think if I were to have such an offer, I may be tempted to buy a branch too.

In the case of divestitures, I agree that we should maybe look at other ways of allowing people to buy x branches. To take over the employees is probably not a bad alternative. To buy the branch is probably not a bad thing. To actually ask them to sell you their client base also, is it feasible that we could put that restriction in also?

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Mr. Martin Glynn: That's the model. In the simplest terms, let's say that two banks are merging, and they are the only two in the community. They're forced by the Competition Bureau to sell one branch. If they take all their customers with them, they start out with 100% of the market. So the competition hasn't been improved. That is the U.S. model. It's just taking the branch with the people in it and the customers and moving it over. Suddenly the market share drops for the merging bank. That's the model. It's very feasible. It has been done a thousand times before.

As far as ATMs are concerned, it's a mature market. There's an ATM on every street corner. You can't possibly justify putting on a new one. I'm talking about the ones that are in the branches, not the new white label ones that are being put in all kinds of places. They've been there for 15 years. Because of debit cards, ATM use is not actually growing. It's just like wires. The telephone companies have put wires everywhere. It's not really growing.

Having that access on a very cost-effective basis for new entrants, avoiding that surcharge, and having what we call full functionality, the deposit as well, to me are very easy things to do. It would actually give those banks that are merging, which would have to agree to this as part of their conditions, more business, because in theory an HSBC customer will go to them. They'll be treated like an HSBC ATM. I think it actually is in their interest. But because it's a barrier to entry, if they weren't forced to do it, they wouldn't.

The Vice-Chair (Mr. Nick Discepola): I concur. I don't think there's an incremental cost. The infrastructure and overhead are there.

Thank you. I think those are very good recommendations.

I want to wish you a safe return back to windy, rainy Vancouver.

Some hon. members: Oh, oh!

Mr. Martin Glynn: Thank you very much.

The Vice-Chair (Mr. Nick Discepola): Thank you.

We're adjourned until tomorrow, colleagues.