Date:January 6, 1999
To:Economic Development Committee
From:Joe Halstead, Commissioner of Economic Development, Culture and Tourism
Subject:Proposed Bank Mergers Update
Purpose:
Report on the decision of the Minister of Finance on the proposed bank mergers.
Funding Sources, Financial Implications and Impact Statement:
None.
Recommendations:
1.It is recommended that staff continue to monitor this issue and report to the Economic
Development Committee as required.
2.That Economic Development Committee establish an ongoing forum with the financial
services sector including all of the major banks in Toronto, to address the issues surrounding
the structural and technological changes occurring domestically and nationally in the financial
services industry. These forums will provide input to the City's Economic Development
Strategy Plan.
Council Reference/Background/History:
At its meeting on November 25, 26 and 27, City Council requested the Commissioner of
Economic Development, Culture and Tourism to prepare a more definitive position for the
City of Toronto respecting bank mergers, taking into account the most recent hearings on this
matter, and report thereon to the Economic Development Committee.
Comments and/or Discussion and/or Justification:
Finance Minister Paul Martin announced on December 14, 1998, that the bank mergers
proposed by the Royal Bank of Canada and the Bank of Montreal, and by the
Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce will not be allowed.
The Minister based his decision, in part, on information the government received from the
Competition Bureau and the Office of the Superintendent of Financial Institutions (OSFI), as
well as the MacKay Task Force report recommendations and input from parliamentarians and
public consultations.
The Minister said the mergers were not in the best interests of Canadians and will not be
allowed to proceed because they would lead to an unacceptable concentration of economic
power in the hands of fewer, very large banks; a significant reduction of competition; and
reduced policy flexibility for the government to address potential future prudential concerns.
"This is a decision," the Minister said, "that reflects the government's commitment to ensuring
strong competition in the financial services sector.
"Quite simply, allowing the mergers would further concentrate a very high level of economic
power in the hands of an even smaller number of very large institutions.
"Looking forward, we believe that our immediate priority must now be to focus on
establishing an appropriate policy framework for the financial sector for the 21st century.
"Whereas the merger proponents wanted the mergers to be allowed in order to change the
status quo, we believe the status quo must be changed before any merger can be considered.
"The government will not consider any merger among major banks until the new policy
framework is in place.
"But even then, new proposals will first have to demonstrate, in the light of the circumstances
of the day, that they do not unduly concentrate economic power, significantly reduce
competition or restrict our flexibility to address prudential concerns," he said.
Reading the Minister's statement, it is clear that in the Minister's view "banks are not like any
other business." As stated in the MacKay Task Force's, June 1997 Discussion Paper, "In our
society, it is accepted that ownership of a regulated financial institution is a privilege, not a
right." This position was unsuccessfully challenged by the Canadian Bankers Association,
among others, who argued that private sector financial institutions are businesses, not public
utilities.
Finance Minister Paul Martin states that his government is committed to ensuring that
communities large and small have access to quality services at an affordable price. His
government is committed to ensuring that consumers and small businesses have the range of
choice that they need and views issues such as access, service fees, technological innovation,
employment and international competitiveness as priorities.
The documents released on December 14, 1998 do not provide any further information about
the expected impact of the Minister's decision on the operations of the four banks that had
expressed a desire to merge. The reaction of the banks will only become evident over the next
months, and it is proposed that staff continue to monitor this issue and report to the Economic
Development Committee as required.
In the short-run, no impact is expected on bank employment in Toronto. In the medium-term,
the impact on Toronto will depend on the reactions of the banks. Some commentators have
stated that if the mergers are refused, the banks are likely to scale back their operations,
becoming niche players. For example, if one or more of the banks were to sell their credit card
business to a foreign competitor, this action could lead to large job loses in Toronto.
It is likely that refusing the mergers will have a negative impact on the value of bank shares;
therefore, the banks are less likely to pursue a strategy of growing by acquiring U.S. based
banks.
Other strategies that the banks could pursue, with varying impacts on jobs in Toronto, include
expanding in existing areas of strength (such as discount brokerage for the Toronto Dominion
Bank), or forming alliances with a foreign financial services giant.
In the long-run, the impact of Toronto as a financial centre depends on how successful our
banks will be in whatever strategies they adopt and on how effectively new entrants are able
to compete in the market for Canadian financial services. It is also possible that the decision to
not allow mergers may be reconsidered at some future date.
As indicated in a previous report, with or without the bank mergers, the financial services
sector in Canada is currently undergoing a period of change. These changes in the financial
services sector are being driven by technological changes; however, changes in customer
preferences are also a major factor. For example, the need for a branch network is no longer as
paramount as it was even five years ago, and it is easy to foresee a world in which bank
branches are only one way of delivering a wide range of financial services products. At the
same time, the banking industry in the U.S. is also rapidly restructuring, as a wave of bank
mergers there is creating ever larger institutions.
With all these changes in the market for financial services that are occurring around the world,
it is important that we do not allow ourselves to become complacent about Toronto's position
as a financial service centre. Toronto's financial services cluster is one of the ten strategic
clusters of economic activity in Canada, on which the prosperity of all Canadians depends.
Financial services are particularly important to the City of Toronto because of the industry's
high concentration in the City Centre. The sector is more heavily represented in the City than
is any other industry in the Province. Financial services is the second largest contributor to the
City of Toronto's GDP and represents the third largest direct City employer. Also, over 60
percent of the sector's GDP contribution emanates from the City - over $10 billion.
Financial services were directly responsible for $12.2 billion in regional GDP in 1995 (9.5%
of the GTA total). An additional $8.6 billion in GDP was injected into the GTA economy
through the sector's spinoff benefits, which included purchases of professional services,
telecommunications and computer specialists, etc.
The employment impact is equally significant: the finance sector directly employed 165,000
individuals (7.6 percent of total GTA employment). Secondary effects accounted for the
additional employment of 158,000 people in the GTA. In the City of Toronto alone, over
93,500 people were employed directly in the financial services sector in 1997. In total, the
financial services sector generated nearly $21 billion in GDP and was responsible for the
employment of more than 320,000 people, either directly or indirectly in the Toronto region.
As a result of structural changes occurring in the financial sector and the fact that Toronto is
Canada's financial centre, economic development must continue to dialogue with all sector
players and monitor and report industry changes.
Conclusions:
On December 14, the Minister of Finance, Paul Martin, announced that he would not permit
the proposed mergers of the Royal Bank of Canada and the Bank of Montreal, and the
Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce.
No new information is available yet about the impact of this decision; however, staff will
continue to monitor the situation and will report as required to the Economic Development
Committee.
Since the financial service sector has such a major impact on the Toronto's economy, forums
will be organized with this sector in seeking input to the development of an Economic
Development Strategy Plan for Toronto.
Contact Name:
Peter Viducis, Senior Economic Advisor, Tel.: 392-1005
Brenda Librecz, Managing Director, Economic Development, Tel.: 397-4700
Joe Halstead
Commissioner
Economic Development, Culture and Tourism
ECO-98-60
