WHEN IT COMES TO THE TOPIC OF MERGERS,
BANK CEOS ARE CAUGHT UP IN THEIR OWN
VERSION OF GULLIVER'S TRAVELS

By Arthur Johnson

Illustration by Zela Lobb

AS THEY WAIT for some word—any word—from Ottawa on the subject of mergers, bank CEOs must think they’ve blundered into some grotesquely Canadian version of Jonathan Swift’s Gulliver’s Travels.

Lemuel Gulliver, you’ll remember, was the fellow who journeyed first to the island of Lilliput, where he found himself viewed as a creature of monstrous size (and placed in restraints) by a species of humans six inches high. Later, he travelled to Brobdingnag, where he was menaced by beings many times his size.

So it is with the banks, which the average Canadian, in survey after survey, has judged to be so huge already that mergers are both dangerous and unnecessary. But the banks themselves watch uneasily as competitors in the United States, Asia and Europe become ever more sizable and formidable because they have been allowed to merge while Canadian banks have not.

It’s now seven years since Paul Martin, then-minister of finance, called a halt to two mergers by four of our largest banks. Since then, Martin and other senior Liberals have promised to revisit mergers, but only after the federal Finance Department has established ground rules for new combinations among the country’s largest financial institutions.

This was supposed to happen by last June, but don’t hold your breath. Martin, who was powerful enough to bring mergers to a screeching halt in 1998, now heads a minority government, and lacks the strength, support and political will to approve mergers, which are as unpopular as ever with the general public. So long as there is a minority government in Ottawa, don’t expect the banks to even so much as discuss the issue of mergers.

In fact, bank CEOs, outspoken on so many subjects, have been remarkably silent about mergers since 1998. That’s because the four banks that attempted to merge then—the Royal with Bank of Montreal and CIBC with Toronto-Dominion—came under such harsh criticism for what was seen as an attempt to serve up a fait accompli without first seeking the blessing of the minister of finance. What’s certainly true is that the banks failed miserably in making much of a case for the benefits that might arise from mergers for the average person. Instead, they chose to focus mainly on how their global counterparts were becoming immense through mergers and acquisitions, putting them at a competitive disadvantage. That’s persuasive to economists, but other Canadians concluded mergers would create banks that would be so powerful and remote they’d inevitably cut back on a lot of services and vastly increase their fees and margins.

Martin, for his part, acknowledged these fears in quashing the proposed mergers, saying they would “lead to an unacceptable concentration of economic power in the hands of fewer, very large banks.”

The reality is, of course, that bank mergers have been occurring in Canada for decades, as strong institutions absorbed weaker competitors. But Martin left banks unable to even use the argument of precedent in protesting his decision. He said that because mergers would result in fewer banks, the options for dealing with a failure of one of the merged institutions would be severely curtailed. “In other words,” he said, “the sheer size of the institutions that would result from these mergers would constrain the alternatives available to regulators and government.” To the banks, it sounded an awful lot like they were being penalized for being prudent and successful.

Privately, bankers will admit they did a lousy job of selling mergers. But the minority Liberals have put them in a tough position by delaying the release of ground rules for mergers. Until the government chooses to do so, no bank CEO dares to run the risk of campaigning for mergers, or even, for that matter, of making some useful observations on the subject.

It’s clear that the banks have put a lot of thought into how to make mergers more politically acceptable. Being allowed to merge offers such huge efficiencies, especially because so many banking services are highly automated, that CEOs have concluded that some guarantees about jobs and maintaining existing levels of services are a small price to pay.

They are all too aware that outside of Canada, banks have been able to achieve these efficiencies through mergers for the past seven years, and with each passing year, Canadian banks shrink in international standing. Most of the banks have tried to keep up by expanding in the U.S., and in the case of Bank of Nova Scotia, throughout Latin America.

But for now, they’re caught in a quandary: too big for their own good at home, and rapidly shrinking to insignificance abroad. It’s an absurdity that could only arise from a satirist like the author of Gulliver’s Travels—or the vagaries of minority government in Canada.

Arthur Johnson is a former editor of Canadian Business magazine and has written
extensively on the Canadian financial system.