Why Isn’t Paul Martin Looking Out for the
Real Shareholders?

A monstrous thumbs up for Peter Godsoe, the CEO of Scotiabank, Canada’s fourth largest bank. Mr. Godsoe has been at the forefront of opposition to the proposed mergers between the Royal Bank and Bank of Montreal, and CIBC and TD Bank. His vigilance and determination in opposing the mergers has paid off as the federal government has denied approval for the mergers, at least for now.

Mr. Godsoe’s sole responsibility as the head of Scotiabank is to defend his shareholder’s interests and maximize their wealth. In preventing the mergers, Mr. Godsoe has ensured that Scotiabank will be able to compete with its four main domestic competitors in the near term by preventing them from gaining a material cost advantage.

One of the principal catalysts for the bank mergers is technology. The dramatic increase in alternative delivery systems, specifically instant tellers, phone banking, and internet banking, has reduced the need for traditional branches. In 1988, there were 1.4 branches for every automated teller machine (ABM). By 1997, the relationship had reversed so that there were 2.4 ABMs for every branch. Similarly, there are some 5.9 million Canadians completing their banking by phone and another 1.6 million using the internet.

Merging provides a systematic method to rationalize a bank’s branches within an environment of new technologies. The Royal Bank and Bank of Montreal, for instance, obviously would not need two branches operating across the street from one another. Merging allows the institutions to reduce the number of branches while at the same time maintaining a presence in each individual community, providing the same level of banking services at lower cost.

Frank Mathewson and Neil Quigley of the C.D. Howe Institute estimated that merging institutions could save between 20 and 30 percent of non-interest costs through branch rationalization. The reduction in costs by the merged banks would create a substantial cost advantage over any non-merged institution, such as Scotiabank.

The cost savings allow substantial investment in new technologies. The Royal Bank and Bank of Montreal, for example, stated that they planned to spend $7 billion over five years on technology.

While Mr. Godsoe receives a thumbs-up for his defence of Scotiabank’s shareholders, Mr. Martin, the Federal Minister of Finance, receives an equally emphatic thumbs-down. Mr. Martin is charged with defending the best interests all Canadians. In denying the mergers, Mr. Martin has precluded badly needed savings to consumers, and tarnished the international view of Canada as a place for investment.

Based on the work of Mathewson and Quigley, The Fraser Institute conducted a study on the bank mergers which estimated that each Canadian would save between $1,000 and $3,000 over the next ten years if the market were open to greater competition, both foreign and domestic. In other words, competition would induce the banks to pass on the lion’s share of the savings to consumers. Equally important, Canadians would have benefited from investment by the merged banks in new, and more easily accessible technologies.

Perhaps more troubling than the loss of potential savings to Canadians is the view projected to external investors. The denial of the mergers signals to foreign investors that Canada is no longer a business-friendly place to invest, and that our commitment to the marketplace is not as steadfast as many have portrayed it.

For one reason or another, Mr. Martin has decided that while banks in the US and Europe modernize their financial systems and move forward, we will be satisfied with the status quo, even though everyone has agreed that the status quo is not acceptable.

For example, the Deutsche Bank of Germany and Citibank in the US have been permitted, and indeed almost encouraged to merge with new partners. As they begin to integrate their operations and make the transition to a single bank, Canadian institutions languish at home in a sea of regulation that effectively minimizes their ability to compete and modernize.

If Mr. Martin focused on the economics of the mergers rather than the politics, he would see that almost everyone gains from the mergers, especially the average Canadian. The mergers should have been approved and greater competition permitted by removing the remaining barriers to entry for foreign and domestic financial institutions. Mr. Martin should follow the lead of Mr. Godsoe and look out for the best interests of his “shareholders,” average Canadians, by immediately submitting revised criteria for approving the mergers.

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Last Modified: Wednesday, October 20, 1999.