March 9, 1998
TO:Urban Environment and Development Committee
FROM:W. A. Liczyk
Chief Financial Officer & Treasurer
RE:Proposed merger of the Royal Bank of Canada and the Bank of Montreal
Purpose:
To report on the implications of the City transferring its banking business from the merged bank to other chartered
Canadian banks.
Funding Sources, Financial Implications and Impact Statement:
A decision by Council to cease its business dealings with the merged Royal Bank of Canada and the Bank of Montreal will
have negative financial implications on the City. Such a decision could also have negative precedent setting implications if
extended to future mergers in the financial services and other sectors of the economy.
Recommendations:
It is recommended that Council receive this report for information.
Council Reference / Background / History:
At its meeting of February 4, 5, and 6, 1998, Council referred a Motion moved by Councillor Moscoe to the Urban
Environment and Development Committee. That Motion identified a potential job loss of 9,000 - 28,000 employees as a
result of the proposed merger between the Bank of Montreal and the Royal Bank and requested that the Chief Financial
Officer report on the implications of transferring the City=s banking business from the merged bank. The Motion is
attached in its entirety as ASchedule A@.
Comments and / or Discussions and / or Justification:
The City of Toronto has four primary areas of business with the subject banks and their subsidiaries. These key areas
involve:
- Debenture issuance
- Investments
- Custody services
- General banking and payment processing services
Debenture Issuance:
RBC Dominion Securities, a subsidiary of the Royal Bank, is one of three lead managers for the City of Toronto and has
occupied that position since the inception of Metropolitan Toronto in 1954. Its underwriting commitment is currently 23%
of a debenture issue which is equal to that of the other rotating lead managers, CIBC Wood Gundy and ScotiaMcLeod. The
firm is extremely prominent and well-positioned in practically every government underwriting syndicate in Canada and has
excellent sales and distribution capabilities, in addition to providing the City with economic and financial research and
advice as to the timing of a debenture issue and recommending the optimum market for executing a successful transaction.
BMO Nesbitt, a subsidiary of the Bank of Montreal, is a participant of the City=s underwriting syndicate and has an
underwriting commitment of 9% of a debenture issue. While not in a lead manager=s role, the firm provides the City with
market coverage and institutional and retail sales for City of Toronto debentures. In addition, both firms trade the City=s
debentures and help to maintain liquidity in the secondary fixed-income markets.
The combined participation of 32%, representing almost one-third of the City=s underwriting syndicate, would have to be
replaced if the City was not allowed to deal with the merged bank. Due to recent mergers and consolidation in the financial
services sector in Canada, it appears that the City would have to rely upon foreign firms to substitute for the loss of the
Royal Bank and Bank of Montreal. While the other two lead managers in the domestic syndicate could increase their
participation levels, the City would have to add or expand a US firm=s role in order to maintain our ability to access
domestic and foreign capital markets in an efficient manner.
RBC and BMO Nesbitt also play a large role in providing advice and arranging other financial transactions such as
cross-border leasing and public-private partnerships and have a reputation for expertise in these areas in Canada.
It would seem that unintended results may arise if the City was no longer permitted to include the merged banks in its debt
issuance syndicate. The City would have to place a larger portion of its debenture issuance with foreign firms who do not
provide local employment or contribute to the City=s economy through the payment of realty taxes while excluding the
largest domestic financial institution - an institution that would still remain post-merger one of the largest employers in the
City.
In foreign markets, the foregoing comments would apply although there are a larger number of foreign firms to utilize and
more choices than in the domestic market for underwriting and distribution capabilities.
The Royal Bank and the Bank of Montreal, operating in London, England, are the City=s fiscal agents for its outstanding
Euro-Canadian debentures. If we are no longer able to deal with them, we would have to appoint another bank to perform
this function which would entail the incurrence of considerable staff resources and external legal expenses. Furthermore,
since there are no other Canadian banks who perform this function in London, the City would have to appoint a foreign
bank for the remaining term of the debentures which mature in the year 2004.
Investments:
The City invests its surplus, reserve and trust funds in both the money and bond markets. On average, the City purchases
more than $6 billion in money market instruments annually with average terms of 60 to 90 days. On the bond side, it is
expected that the volume of purchases will exceed $500 million per year.
In terms of volume, Royal Bank, through its subsidiary RBC Dominion securities, is the City=s top money market dealer
and one of our top two bond dealers. Similarly, the Bank of Montreal, through its subsidiary BMO Nesbitt, represents in
terms of volume, one of our top four money market and one of our top five bond market dealers.
The respective rank of these two investment dealers is in large part directly related to their ability to consistently offer the
City high yielding investments relative to other dealers. Needless to say, a decision to limit or restrict our access to
investments offered by these dealers will reduce the level of investment income otherwise attainable.
Custody Services:
Only three firms currently provide custody services in Canada.- the Royal Bank, Bank of Montreal and CIBC.
In late 1997, staff requested proposals from these firms for the City=s consolidated custodial and Note issuance service
requirements. Proposals were received, thoroughly evaluated and the Royal Bank was awarded our custody business on the
basis that it provided better services at a comparatively significant cost advantage.
In this case, if the City is precluded from dealing with the Royal Bank or the Bank of Montreal, only one choice will be
available for custody services. On the basis of the recent RFP, that choice entails significantly higher costs to the City.
General Banking Services:
At present, the Royal Bank provides banking services to three of the former municipalities, the Metro Toronto Zoo and the
Parking Tag Operations. The Bank of Montreal provides GWA banking and acts as a partner in the CIBS project.
The Finance Department is now proceeding with a request for proposals from the five major banks for general banking,
revenue collection, Parking Tag operations and the banking needs for the Homes for the Aged Division. The City is
seeking to consolidate the banking operations and revenue collections activities of the former municipalities into one.
Consolidation of these operations will in itself produce efficiencies and cost savings. However, these cost savings could
quickly erode if we are limited in choice of bankers.
Conclusions:
This report identifies the key areas in which the City has business dealings with the Royal Bank and the Bank of Montreal
and their respective subsidiaries. The report provides an overview of the potential impacts on the City arising from a
decision to limit or restrict these business dealings. Potential impacts of such a decision are likely to take the form of
increased costs in debt issuance, custody and general banking services and reduced investment income earning potential.
Many banking analysts predict further mergers in the domestic banking sector. In dealing with the proposed merger,
Council should consider the precedent setting implications of its decision on future mergers in the financial services and
other sectors.
Contact Name and Telephone Number:
Martin Willschick
392-8072
Joe Farag
397-6706
jfarag@city.north-york.on.ca
W.A.Liczyk
Chief Financial Officer & Treasurer
