Status Quo Not an Option

A majority of the reports that emerged in response to the proposed bank mergers agreed on one thing: the status quo isn’t an option. The Minister of Finance has decided however, contrary to the MacKay Task Force, the House of Commons Finance Committee, and the Senate Committee on Banking, that the status quo is an option for now.

The push for consolidation in the financial services sector isn’t isolated to Canada. The international financial market has witnessed a wave of mergers. NationsBank and BankAmerica joined to form the US’s largest commercial bank, Union Bank of Switzerland and Swiss Bank merged to create one of the world’s largest banks, and Citibank merged with Travellers to create the world’s largest financial service company.

Neither is the consolidation trend restricted to banks in the same country. Deutsche Bank of Germany recently announced the purchase of Bankers Trust (the eighth largest US bank) to form the world’s largest commercial bank. Closer to home, Alan McNally, Chairman of Harris Bank (the Bank of Montreal’s wholly-owned US subsidiary) has stated in no uncertain terms that there are foreign banks interested in acquiring Canadian banks.

Our banks are at a competitive disadvantage domestically because they must maintain the current branch network, the so-called “bricks and mortar” of banking.

Foreign banks are already skimming certain niche markets. For instance, ING Bank offers a relatively high rate of interest on savings accounts, but maintains no branch presence. Another example is BankOne’s entrance into the lucrative credit card market by offering a pre-approved card with no annual fee and an interest rate of 5.9 percent. Like ING Bank, BankOne maintains no branch networks.

Foreign institutions are, therefore, able to provide similar services based on a much less expensive mode of delivery; by not providing a branch network they maintain a cost advantage over Canadian banks.

Domestic banks will be forced, due to competitive pressures, to focus more resources and personnel on particular market segments and discontinue the practice of cross-subsidization of other, unprofitable products. This may entail reductions in staff, closure of branches, and the elimination of certain product and geographical lines. Effectively, the prohibition against mergers will result in the very consequences (layoffs, branch closures, and reduced services) that opponents of mergers argued would occur if the banks consolidated.

The Canadian financial services sector risks being left behind by attempting to shelter itself from technological change and international competition. Indeed, the last decade has seen tremendous change in the financial services sector based on new technology. Over the last 10 years, the number of branches in Canada has declined by 8.5 percent from 6,192 to 5,665. At the same time, the number of automated banking machines (ABMs) increased 204 percent, from 4,373 to 13,291. By 1997 there were some 5.9 million Canadians banking by phone and another 1.6 million using the internet—two technologies that did not even exist 10 years ago.

As Mr. Martin has asserted, the MacKay Task Force provides “an appropriate policy framework for the financial sector for the twenty-first century.” Everyone, including Mr. Martin, understands that the status quo is not an option and that, with the MacKay Report, we already have an impressive report that lays the foundation for a new regulatory regime for the Canadian financial sector.

As our world-wide competitors maximize the common strengths of their new companies, our domestic firms have been forced to sit on their hands and wait for the elephant next door to approach. What is needed is action.

The solution: allow greater competition by removing existing barriers to entry, both domestic and foreign, and allow domestic consolidation, such as the proposed bank mergers.

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Last Modified: Wednesday, October 20, 1999.