CIBC is pleased to have this opportunity to provide commentary on the "additional significant financial services sector issues" raised in the policy paper entitled Response of the Government to Large Bank Mergers in Canada: Safeguarding the Public Interest for Canadians and Canadian Businesses and Competition in the Public Interest: Large Bank Mergers in Canada.

CIBC is in business to help our customers achieve what matters to them. Our position in each of the referred policy questions is based on this overarching consideration.

Canadian banks operate in a globally competitive financial services industry. Increasingly, Canadians have access to the services and products offered by those global competitors. This has been especially true for large corporate and institutional customers for decades. But it is increasingly the case as well for Canadian consumers in areas such as credit cards, mutual fund investments and many other areas. The most prominent competitors to the Canadian banks are foreign global conglomerates with world reach and superior scale. CIBC believes that domestic consolidation, whether in the form of a bank-bank merger, and or bank-insurance merger, which results in larger-scaled financial institutions, acts in the public interest of Canadians. Larger financial institutions with improved scale provide a wider array of capital markets options for small and large businesses alike. National champions, with global expertise, can better meet the needs of consumers and act as partners to Canadian businesses that compete abroad, providing them with a wider array of capital options as they grow. A larger balance sheet allows a bank to provide more capital without putting the financial institution at prudential risk. Finally, a strong financial services institution would represent a strong base for Canadian-based employment with Canadian headquartered institutions to better service Canadian consumers. In the long run, larger national champions would be better able to resist foreign takeovers, should ownership limits applied to Canadian financial institutions change in the future. Canadians have created one of the most efficient banking systems in the world, with interest rates spreads among the lowest in the industrialized world^[1], but that system needs to continuously evolve to meet the changing needs of Canadians in a global economy.

The Netherlands represents a historical precedent in which a government provided the regulatory framework that encouraged consolidation, including cross pillars, resulting in the growth of three prominent global financial institutions. This has resulted in significant domestic and foreign employment growth, which has provided a net positive benefit to the Netherlands' GDP. Canada is at a crossroads, challenged by the same opportunities and threats as we adopt more economic and trade unions. Canada must develop a financial services consolidation policy that addresses these challenges. One that can foster the growth of Canadian headquartered financial institutions to support the needs of Canadians, both consumers and businesses.

CIBC supports the removal of a unique policy that prohibits two large demutualized insurance companies from acquiring/merging with large Canadian banks and vice versa. As one large demutualized life insurance company will become the second largest financial institution in Canada, while the other is comparable in size to many of the large Canadian banks, we believe that these companies should be allowed to pursue broader financial services strategies. Further, a cross-pillar consolidation would not provide the same competition or employment challenges as a bank-bank merger, while providing the benefits of scale required for a Canadian headquartered national champion to serve its Canadian customers at home and abroad.

CIBC believes that the Competition Bureau provides a thorough and transparent analysis to ensure that access and competition for financial services remains at levels that are in the public interest. CIBC supports a 60-day window for the reviews of potential mergers in that such an approach would provide clarity and timeliness to the industry. However, we subscribe to a more transparent and efficient process in which public interest hearings conducted by the House of Commons Finance Committee and the Senate Banking Committee would not commence until all parties have received reports from OSFI and the Competition Bureau. This would serve to minimize uncertainty for all stakeholders.

On other matters, CIBC believes that Canadians enjoy one of the best deposit insurance systems in the world. We see no merit in redefining a "sophisticated investor" to below $150,000 per deposit. CIBC believes that lowering the level at which a foreign bank can take retail deposits without establishing subsidiaries puts retail customers at unnecessary risk, while not providing a new market to compete for retail deposits.

Finally, CIBC believes that mandating ATM "full functionality" would result in the unintended consequence of a smaller ATM service base with diminished access, choice and competition. Studies of other jurisdictions demonstrate that the costs associated with ATM full functionality would make ATM usage uneconomical for Canadian consumers and would eventually lead to a smaller ATM service base. ATM full functionality also runs against the policy of "fairness". CIBC has invested in the largest ATM network in Canada as a vehicle to provide affordable, accessible banking services to millions of Canadians. It would be unfair to allow global conglomerates to gain unfairly from such an investment, as they have not shown the same level of commitment to Canadian clients. If ATMs are removed as a source of gaining competitive distribution advantage, we believe that banks would be more likely to focus their investment in other channels where they could attain competitive advantage - such as branches, telephone and internet channels. We do not believe that this is in the best interests of Canadian consumers if mandated by the government. To mandate ATM full functionality would be tantamount to "nationalizing" a major distribution channel of the Canadian banks. The introduction of a public utility mindset could have ramifications, such as the inhibition in future investment/innovation of any delivery service channel to the disincentive of future foreign investment in Canada.

1.0 Introduction

CIBC is pleased to have this opportunity to address the "additional significant financial services sector issues" raised in the policy paper entitled Response of the Government to Large Bank Mergers in Canada: Safeguarding the Public Interest for Canadians and Canadian Businesses and Competition in the Public Interest: Large Bank Mergers in Canada in this submission to the Government. CIBC is in business to help customers achieve what matters to them. Our position in each of the referred policy questions is based on this overarching consideration.

In advocating our positions, we have attempted to provide a public interest argument based on fact, while often referring to other jurisdictional comparisons for reference. We highlight Dutch financial sector policy and the results of changes in consolidation policy that took place from 1987 to 1990. In researching our positions on foreign banking and ATM full functionality, we examine jurisdictional regulations in Australia, U.K., and the U.S. This paper intentionally does not focus on shareholder value (which would provide a separate argument altogether), as we believe that the public policy considerations being raised should be addressed in the public interest context. CIBC made submissions in November 2002 and February 2003, respectively, to both the Standing Senate Committee on Banking, Trade and Commerce and the House of Commons Standing Committee on Finance on the public interest implications of a large bank merger. CIBC appreciates this opportunity to build on our previous policy positions. These submissions represent the priority we place as an active public policy advocate on behalf of all of the stakeholders of CIBC.

2.0 The Future Structure of the Canadian Financial Services Sector - The Public Interest Case for Scale

CIBC believes that financial services consolidation, whether in the form of a bank-bank merger, and/or bank -insurance merger, which results in scale for the new institution, is in the public interest. Large financial institutions with improved scale could provide a wider array of financing options for small and large businesses. A larger Canadian financial institution can better compete internationally, and assume more risks in support of Canadian clients who require significant capital to grow their businesses, without putting the financial institution at risk. A strong financial institution would represent a strong base for Canadian-based employment with Canadian headquartered institutions.

2.1 The Future of Canadian Capital Markets - Scale to Provide Service to Canadian Businesses

A larger capital base increases the chances of success in international competitiveness, providing a wider array of capital market options for Canadian businesses. Canadian-based financial institutions have traditionally been more supportive of Canadian businesses and take a longer view of the Canadian market than do their foreign competitors. National champions, with global capabilities, will be best positioned to work with Canadian companies as they expand internationally. At the very least, it would ensure a Canadian alternative.

A Canadian-based institution requires a market capitalization comparable to those of international competitors in order to have the ability to underwrite the financing requirements and satisfy the growing needs of Canadian businesses. Without scale, Canadian investment dealers lack the capital and distribution channels required by their very large corporate clients for global debt and equity placements. Canadian investment dealers are not able to compete with the major U.S. and European counterparts on a global scale due to the their lack of size, infrastructure, distribution, and product breadth and depth. This puts Canadian companies at risk, since U.S. and other foreign banks have traditionally abandoned their Canadian business clients during any downturn in the credit cycle.

Over the last five years, we have seen significant consolidation within corporate Canada and this has changed the Corporate Canada-Canadian bank relationship. As these companies have grown, they have sought increasing commitments from their lead relationship banks, which have traditionally been Canadian. However, larger global institutions, such as the U.S. commercial banks with global investment banking capabilities, are often better able to meet these needs since smaller Canadian banks will reach maximum risk exposure levels more quickly relative to their capital bases.

If Canadian banks do not grow in parallel with the needs of domestic industry leaders, their ability to remain the lead financial services provider to these top tier Canadian companies is at risk. As a result, the overall share of financial services provided to these companies by the Canadian banks will decline, and credit and capital allocation decisions will increasingly be made in other countries.

2.2 Sound Canadian Financial Institutions

Larger institutions with more capital have the ability to underwrite and hold larger loans and absorb larger loan losses. As well, an institution with a larger capital base could have greater portfolio diversification, thereby reducing the impact of single name and industry sector exposure. A larger institution typically has a broader capital markets capability which it can use to mitigate underwriting risk with effective and timely refinancing and/or hedging of loans. As well, a larger, more geographically diversified institution is better able to match a client's global strategy. Finally, the scope of a larger institution's operations provides it with greater deal flow leading to better market awareness.

Canadian banks have been historically quite active in the loan syndication market given their unique relationship with Canadian businesses. This is more significant from a public policy perspective when a Canadian bank provides capital to Canadian businesses seeking growth opportunities outside of Canada, including the U.S. Unfortunately, Canadian banks are relatively small players in the U.S. market as U.S. banks have been allowed to merge. As a result of this dynamic, Canadian banks have had to take on bigger exposures in relation to their resources.^[2] Within wholesale lending, customer concentration is more pronounced and is becoming a greater concern of various rating agencies as significant exposures become risky during down credit cycles.

2.3 Strong Canadian-Headquartered Jobs In Canada

Large-scaled financial institutions provide a strong base for Canadian based-employment in Canada. A strong financial services sector with large-scaled companies ensures that head office jobs will remain in Canada and this in turn provides employee retention, stemming the flight of highly skilled employees to the U.S. Scale ensures that functions such as processing and call centers remain technologically innovative and stay Canadian-based. Further, the scale of a larger Canadian financial institution could potentially attract jobs to Canada in related industries that benefit from these larger companies. Finally, a large-scaled financial institution is better able to resist foreign acquisition, should the ownership limits applied to Canadian banks change in the future.

2.4 The Future of the Canadian Financial Services Sector -the Dutch Model of Building Global Financial Services Conglomerates

The Netherlands represents an historical example of a government that provided a regulatory environment that encouraged consolidation that resulted in the growth of three prominent global financial institutions.

The Netherlands, a strong proponent of closer European cooperation, wanted to preserve a strong domestic financial services sector, even though this could lead to more market concentration.

In order to achieve a strong financial services sector, the Netherlands government relaxed its position on mergers in 1987, allowing limited cross-pillar ownership between banks and insurance companies. The remaining restrictions were removed altogether in 1990. This cleared the way for financial services consolidation and as a result, the Netherlands today is home to three large global financial services conglomerates: the ING Group, Rabobank, and ABM Amro.

The growth of these global conglomerates has been to the benefit of the Netherlands' economy. In 1991, these Dutch institutions employed about 143,000 individuals in the Netherlands and its foreign offices. At the end of 2002, due to the organic growth and the acquisition of companies across the world, these three companies employ almost 280,000 employees in the Netherlands and in foreign offices. Please refer to Appendix A - Growth Indicators Comparison between ING, ABN-AMRO, Rabobank and CIBC for a breakdown of the employment growth for each of these institutions. As a result of the relaxation of merger and cross pillar policy, the Dutch government provided a regulatory environment that has allowed the financial services sector to thrive. A country, with half the population of Canada, is now the headquarters to three dominant international financial services conglomerates - major providers of jobs and proportional contributors to GDP.

2.4.1 A Closer Look at the Evolution of ING - Building a Bank Assurance National Champion

The growth of ING into a Dutch global financial services powerhouse was a direct result of regulatory relaxation on consolidation. Dutch legal restrictions on mergers between insurers and banks were lifted in 1990. On November 5, 1990, Nationale-Nederlanden, Netherlands largest insurer (28% market share in life) and NMB Postbank, Netherlands third largest bank, announced an agreed merger. The merger was completed in 1991 and the transaction was structured through the incorporation of a new holding company, Internationale Nederlanden Group (ING). The strategic objective of the merger was to become Netherlands' integrated financial services market leader by providing access to a wider range of distribution channels for Nationale's insurance products and strengthening NMB Postbank's base for further expansion at home and abroad.

The new entity, ING, would have greater strength in the European market, working from a position of domestic strength, while pursuing international expansion. ING grew organically with key acquisitions in the U.K., U.S., Belgium, Germany and Poland. This growth expanded not just its geographical reach, but also provided it the scale and knowledge to offer a wider array of products and services it provides to its customers at home and abroad. The size of ING would allow it to further develop international banking business with leading positions in specific products. The growth of ING as a Dutch-headquartered international financial services conglomerate, in the fields of banking, insurance, and asset management in over 65 countries is well documented:

Employment within ING grew from 48,744 full time employees in 1991 to 115,815 employees in 2002, a compounded annual growth rate of 9%;
Market capitalization grew from $7.8 billion in 1991 to over $52 billion in 2002, a compounded annual growth rate of 19%;
Revenues grew from almost $10.3^[3] billion in 1991 to almost $114 billion in 2002, a compounded annual growth rate of 24%;
Earnings grew from $482 million in 1991 to almost $6.7 billion in 2002, a compounded annual growth rate of 27%;
Assets under management grew from $29 billion in 1991 to over $666.2 billion in 2002, a compounded annual growth rate of 33%.

The Dutch example provides the Canadian Government with a precedent policy conundrum. It must weigh the same issues that confronted the Dutch government. If the Government would like strong Canadian-headquartered institutions to be strong service providers, leaders of community development, and a major employer of Canadians in a knowledge-based sector and a major source of GDP growth, then it must show the same leadership and vision as the Dutch government demonstrated in the late 1980's by liberalizing rules on consolidation, including removing the policy prohibiting cross-pillar consolidation. The same policy constraints of economic, currency and trade unions that confronted the Dutch in the late 1980's are confronting the Canadian Government today.

3.0 Cross Pillar and Large Insurance Companies

CIBC supports a policy that would allow large demutualized companies to merge with each other and/or with large banks providing fairness and consistency in ownership and merger policies for all large insurance companies. CIBC believes that a cross-pillar transaction provides an opportunity to create a national champion, but would not raise the same public interest concerns as a large bank merger.

3.1 Cross Pillar Mergers would not raise the same

public interest concerns as a bank-bank merger

A cross-pillar merger would not trigger the same public interest challenges as a merger between two large Canadian banks. A cross-pillar transaction would be a case in which a Canadian financial institution could achieve scale but would not raise the same public interest concerns as a bank-bank merger.

CIBC believes that a cross-pillar consolidation would actually improve access to financial services products for Canadian consumers with a broader product mix and geographic platform while enhancing points of service. Access to financial services by rural and low-income communities, and individuals with special needs would not be negatively affected.
The scale of a cross-pillar institution would enable it to meet the growing financial needs of Canadian small businesses with a wider range of financing options and services. A cross-pillar transaction would not result in a decline of financial services or capital for small businesses. In fact, the new financial institution would allow it to provide more capital with a larger and more diversified lending portfolio from its banking operations.
A cross-pillar institution would result in a stronger Canadian-based institution. The primary focus of such a transaction would be meeting the needs of customers and creating value through revenue growth and not cost savings. The main opportunities for revenue growth are global opportunities outside of Canada by offering a broader mix and larger geographic platform that enhances opportunity for capital deployment. In addition, a cross-pillar institution, with strong credit rating, could be leveraged to help capitalize Canadian companies abroad as partners in business.
A cross-pillar merger would not have the negative impact upon employment, branches and choice characterized by a bank-bank merger. In fact, any cross-pillar institution with scale has the potential of ensuring long-term head office jobs in Canada. A large cross-pillar financial institution could also attract jobs to Canada in institutions and industries that serve financial institutions globally.

3.2 A Cross-Pillar Transaction should not be scrutinized under the same public interest determinations as those set out in bank merger review guidelines

CIBC believes that a cross-pillar merger proposal would be best reviewed by the Competition Bureau to address overall competition issues and OSFI to ensure the safety and soundness of the new institution in protecting the interest of consumers. First, we believe that the public interest tests that apply to a large bank merger, which include issues concerning access, choice, and capital markets, do not have the same relevancy in the case of a large cross-pillar transaction. We have demonstrated this in the previous section of this paper, 3.1 Cross Pillar Mergers would not raise the same public concerns as a bank-bank merger. We also believe that a separate public interest test would not provide the Minister with a material view that would help determine whether the transaction would be in the public interest beyond the views provided by both the Competition Bureau and OSFI.

3.3 Ownership/Merger Policies for all Insurance Companies should be consistent

The ownership and merger policies for insurance companies should apply equally to all large insurance companies. Currently, converted insurance companies having an aggregate of surplus and minority interests of five billion dollars or more cannot have a major shareholder and must remain widely held, i.e. cannot have a shareholder that holds or controls more than 20% of any class of voting shares or 30% of any class of non-voting shares. This rule prohibiting major shareholders applies only to Manulife Financial ("Manulife") and Sun Life Financial ("Sun Life"). If the Minister of Finance decides that this requirement is not in the public interest, this rule may cease to apply to Sun Life or Manulife or both.

Companies which are not converted companies and have equity in excess of one billion dollars are required to have a 35% public shareholding. This means that for example, Great-West Life Assurance Company ("Great West Life"), a company with aggregate surplus and minority interests in excess of five billion dollars, can have a major shareholder, and in fact does have a major shareholder, Power Financial Corporation (in turn majority-owned by Power Corporation). Hence, with the approval of the Minister of Finance, another financial institution can acquire control of Great-West Life, but could not acquire control of Sun Life or Manulife.

CIBC believes that the current policy governing converted companies, such as Sun Life and Manulife is inconsistent with that of Great-West Life, and not in the public interest. Given that Sun Life, Manulife and Great-West Life are all large insurance companies, CIBC believes that Sun Life and Manulife should be permitted to have a major shareholder, subject to the Minister's approval. This would ensure fairness and consistency in the application of the principles of the Insurance Companies Act.

3.4 The original policy intent has been achieved. Large demutualized insurance companies are among the most successful publicly traded, well-capitalized, financial institutions

The initial policy rationale for having the large demutualized companies widely held was to ensure the maintenance of a strong insurance sector. In 1999, CIBC followed with interest legislation that allowed federally incorporated mutual life insurance companies to convert into stock companies in which four of Canada's largest insurance companies, Sun Life, Clarica Life, Manulife Financial and Canada Life Financial were given permission to demutualize and issue shares in the public market.

Since the period of time in which the demutualizations took place, all have performed extremely well as publicly traded securities, demonstrating increases in value from their initial public offerings. In particular, the two largest demutualized insurance companies, Sun Life and Manulife, have seen increases in their market capitalizations which compare favourably to the increases in market capitalization of the banks over the same period. Indeed, both Sun Life and Manulife's respective growth in market capitalization would rank among the top when compared to the large Canadian banks:

The market capitalization of Sun Life shares has grown at a compounded annual growth rate of 39.8%^[4], since its demutualization in March 23, 2000, including the effect of its acquisition of Clarica.
The market capitalization of Manulife has grown at a compound annual growth rate of 22.0%^[5] since its demutualization in September 24, 1999, not including the effect of its recently announced acquisition of John Hancock.

3.4.1 Large Insurance Companies have grown through approved Acquisitions

As a result of current financial sector policy, Sun Life, Great West Life and Manulife have all grown significantly partially as a result of its acquisitions. On May 27, 2002, Sun Life was given Ministerial approval to acquire Clarica Life. On June 27, 2003, Great West Life ("GWL") received Ministerial Approval to acquire Canada Life Financial. Both transactions were shareholder-based decision with Ministerial approval following reviews from the Competition Bureau and OSFI. Finally, Manulife will acquire John Hancock subject to Ministerial approval.

With the acquisition of John Hancock, Manulife will become the second largest financial institution in Canada with a market capitalization of $34.7^[6] billion. This will mean that Manulife could be a potential acquirer (not acquiree) of four of the five large Canadian banks, should the current Ministerial policy prohibiting cross-pillars, be changed. Sun Life has grown to a size that is comparable to three of the large Canadian banks. As both large demutualized insurance companies have achieved scale, size, and market capitalization levels among the largest financial institutions in Canada, we believe that they should be allowed the option to pursue broader financial services strategies.

3.5 Summary

CIBC supports the removal of the policy preventing large demutualized insurance companies to merge with large Canadian banks. First, the option of a cross-pillar consolidation would achieve the public interest objectives of scale, the creation of a national champion, without compromising the public interest elements of access, choice, capital markets and employment. Second, we believe that all large insurance companies should be subject to consistent ownership policies. Finally, as Manulife will now become the second largest financial services company in Canada and Sun Life is at a size that rivals any large Canadian bank, we believe that the policy objective of a strong insurance sector has been achieved and the policy preventing consolidation is no longer warranted.

4.0 Process for Reviewing Multiple Merger Applications

CIBC would support a 60-day window that provides clarity and timeliness to the industry. We believe that both OSFI and the Competition Bureau should proceed with their reviews immediately following the completion of the 60-day window on a proposed transaction or transactions. However, we also believe that it would be in the interests of the industry, the public, and the Government, to have a more well-informed and transparent process. A process in which public interest hearings would be conducted by the House of Commons Finance Committee and the Senate Banking Committee only after they have received copies of reports from both OSFI and the Competition Bureau.

The rationale for NOT proceeding with Committee hearings until OSFI and the Competition Bureau have completed their reports is to provide a more efficient and transparent process:

1. The Minister of Finance, the House of Commons Finance Committee, and the Senate Banking Committee should be privy to reports of OSFI and Competition Bureau before engaging in their public interest hearings;

2. Upon receiving the report, the parties to the transaction or transactions will have a prudential analysis from the OSFI and a recommended set of remedies from the Competition Bureau. If the remedies are too strenuous for the parties to the transaction, then the parties to the transaction or transactions may decide to cancel their application for a merger or mergers;

3. Any cancellation of the merger application or applications would save the parties to the transactions, the House of Commons Finance and the Senate Banking Committees, and the Government the time and resources required to engage in the public interest hearings. This would also serve customers, stakeholders and shareholders well by minimizing any prolonged uncertainty regarding the outcome of the review process;

4. Parties to any transaction would proceed only after they have accepted the negotiated remedies. Then they would proceed with public interest hearings by the House and Senate Committees once these remedies have been agreed upon.

5. The House of Commons Finance Committee and Senate Banking Committee should examine public interest elements that have not been examined by OSFI and the Competition Bureau. Prudential and competition reports will provide a good framework to begin public interest hearings. As outlined by the Government policy paper, "the committees will not be expected to provide advice relating to prudential or competition issues"^[7], thereby removing overlap in the review process.

6. The public interest reports should be the third major determinant in advising the Minister of Finance for his/her decision to approve/reject any merger or mergers.

5.0 Measures to Enhance Competition

CIBC does not believe that there should be additional specific policies to guide the divestiture process. The Competition Bureau has been effective in ensuring or enhancing competition.

5.1 Measure to Enhance Competition already exist

The Government of Canada provided a clear framework in 1999 to increase competition in Canada and has since passed legislation under Bill C-8: An Act to Establish the Financial Consumer Agency of Canada, and to Amend Certain Acts in Relation to Financial Institutions. This bill provides for measures to increase competition in the domestic marketplace. This included the encouragement of new entrants with liberalized ownership rules and lower minimum capital requirements. Second, there was a policy review conducted to examine the ability of credit unions to compete under a restructured system such as "national", "federated" or "individual cooperative models. Third, Bill C-8 facilitated access to the payments system. This broadening included accommodating entry of life insurance companies (for both recently demutualized and mutualized companies), securities dealers, money market mutual funds. Finally, the Government implemented legislation that should facilitate growth of foreign banks in providing services through branches, rather than requiring them to set up separate Canadian subsidiaries. Since the implementation of these policies, demutualized insurance companies have grown to sizes that equal or exceed large Canadian banks, there has been significant consolidation in the mutual fund industry, and we have seen new banks created by commercial enterprises.

HSBC Holdings plc is a foreign conglomerate more than nine times the size of CIBC. Its growth in the Canadian market is representative of how competition has increased in the Canadian financial services market over the last five years.

HSBC Bank Canada has an estimated 160 offices in Canada including 122 branches. At the nine months ended September 30, 2003, HSBC Canada has reported growth in the following areas:

asset growth to $37 billion from $25 billion in 1998;
loan growth to $24.9 billion from $17.5 billion in 1998;
deposit growth to $29.0 billion from $20.5 billion in 1998;
funds under management have almost doubled to $13.5 billion from $7.3 billion in 1998;
net income for year to date is $227 million compared with net income of $156 million for all of 1998.

ING Group is a global financial institution with total world-wide assets of over $1 trillion operating in 65 countries. ING Bank of Canada ("ING Canada") was launched in April 1997, with a focus on growing its markets share of Canadian deposits. Today, after only six years of focusing on the Canadian market, ING Canada, the banking arm, has over 650,000 Canadian clients with over $8 billion in total deposits. ING Canada today has over 5,000 employees in the insurance and asset management areas in Canada serving over 4 million Canadian customers, with a total of $3 billion in annual gross written insurance premiums and Canadian assets of more than $6 billion. Most recently, ING Canada announced its strategic focus to compete heavily for the Canadian mortgage business.

5.2 The Competition Bureau's responsibility is to ensure the maintenance or enhancement of competition

CIBC believes that merger enforcement guidelines have already been established to preserve competition. In fact, these guidelines enforced by the Competition Bureau have been very effective in Canada.

CIBC appreciates National Bank's submission proposing that a potential divestiture of a presence, groups of branches, or whole lines of businesses by the merger applicants may actually work as a remedy to increase competition. However, we believe that it would be prudent to allow the merger applicants to have the flexibility to propose these arrangements, as these parties should know the remedies that could be potentially required if it were to proceed through the steps of a merger review process. Hence, as CIBC believes that the Competition Bureau should be responsible for dictating remedies to maintain/enhance competition, it would be the responsibility of the merger applicants to then deem what would be acceptable and non-acceptable.

CIBC be will working with the Competition Bureau in the months ahead with its review of the "Merger Enforcement Guidelines as Applied to a Bank Merger" to ensure that the guidelines reflect the changing nature of the financial services landscape.

6.0 Credit Unions

CIBC believes that a national cooperative bank model would provide significant competition in Canada. Rabobank is a successful Dutch powerhouse and an excellent model of a National Cooperative Bank.

CIBC believes that the credit union movement plays an important role in meeting Canadians' financial services needs.

We noted that during the hearings of the Senate Committee on Banking, Trade and Commerce of last December 2002, the President and CEO, Credit Union Central of Canada acknowledged very clearly that mergers are a legitimate business strategy and can benefit customers and financial institutions. Consequently, this business strategy should be available to all players in the Canadian financial system. She noted that the mergers of Coast Capital Savings and Surrey Metro Savings Credit Union British Columbia had resulted in the largest credit union in Canada - its membership is approximately 300,000 and its assets are approximately $6 billion.

The President and CEO also indicated during her testimony that many of the forces driving bank mergers and consolidations apply equally to the cooperative financial sector. She stated that mergers help financial institutions grapple with decreasing margins and increasing operating and technology costs. Credit unions, like banks, must find ways to reduce costs through the more efficient use of resources and to spread these costs over a wider base of customers.

CIBC agrees with the Credit Union of Central Canada that in anticipation of a large bank merger(s), a key public policy consideration must be whether a second-tier of financial institutions exists to balance the market power of the banks. Competitive balance will ensure that consumers continue to have many choices for retail financial services.

CIBC was encouraged that in the Government 1998 document, Reforming Canada's Financial Services Sector: A Framework for the Future "the White Paper", there was a proposal to develop a co-operative bank structure under which they could operate on a national basis. CIBC believes that Rabobank in the Netherlands could be an ideal model which could merit further examination.

6.1 The Rabobank as a successful national cooperative bank model

The Rabobank model represents the evolution of how a cooperative can evolve into global financial services powerhouse. Rabobank operates over 363 cooperative branches, 1,516 offices. This represents the largest branch network in the Netherlands. Rabobank is amongst the top 40 banks in Tier 1 capital, with total assets of US$392.7 billion and 51,867 employees. It also represents the only privately held bank and commercial bank to hold AAA credit rating from S&P, Moody's and IBCA.^[8]

Rabobank is one of the strongest and healthiest competitors in local and foreign markets with 143 foreign offices in 34 countries. It ranks third in capitalization in the Dutch marketplace behind ABM-Amro and ING respectively. However, it is considered the number one bank in the Netherlands by market share and dominance by virtue of its large branch network. It has a 40% market share in deposits, 35% of small businesses have a relationship with Rabobank; it is the fourth largest insurance company (Interpolis) and has a 43% share of the home mortgage market.^[9]

Rabobank has observed that the average interest margin of bank in countries with a sound cooperative banking system is much lower than in countries which do not have one. The cooperative banking model depends on a large deposit base to provide a low cost source of funds. It is then assumed that these lower cost funds translate into reduced pricing on lending products.

6.2 A "National" Cooperative in Canada would foster significant competition

In Canada, there are 1,386 credit unions and affiliated caisses populaires, with 3,602 branches, combined assets of $142.7 billion, and over 10.4 million members.^[10] Market share in residential mortgage financing is 13%, consumer credit is 10% and deposits services is 15%. Further, Canada has the highest per capita membership with over 10.7 million customers (one-third of the Canadian population). In Quebec approximately 70% of the population belongs to a caisse populaire, while 60% of the Saskatchewan population belongs to a credit union.

With a significant loyal customer base, market share in key markets such as residential mortgages, deposits and consumer loans, and combined assets that could eventually rival a large Canadian bank, the potential establishment of national cooperatively owned banks is an essential option to foster more competition in Canada.

In examining the significant success of credit unions and caisses populaires in Canada, CIBC believes that a Canadian national cooperative model would not only create domestic competition for Canadians, but could also develop into a large financial services player along the lines of a Rabobank. We would ask that the Government continue to work with the credit unions to reexamine the potential benefits of implementing various models of national cooperatives.

7.0 Foreign Bank Entry

As Canadians enjoy one of the best deposit insurance systems in the world, there is little policy rationale to redefine a "sophisticated investor" to below $150,000 per deposit. One of the primary public interest test elements must be the protection of customers and their deposits.

7.1 The current restriction protects non-sophisticated investors

Since 1980, foreign banks have been allowed to establish regulated banking operations in Canada through the incorporation of separate Canadian banking subsidiaries. Many foreign banks have established bank subsidiaries, which have the same business powers as domestic-owned banks, since that time. With the passage of legislation in June 1999, foreign banks were authorized to offer specified services in Canada through branches, rather than requiring them to set up separate subsidiaries. The rationale from the Government was that for many foreign banks, this would be more cost-effective, thereby encouraging a healthy foreign bank presence in Canada. From a policy perspective, there was also a trade-off between encouraging foreign branching and alternative competition in Canada, and giving up consumer protection - deposit insurance.

In the 1999 Bank Act legislation, the policy interpretation of a "sophisticated investor" threshold, was defined by the Government as an investor who has the ability to invest more than $150,000 into a retail deposit account. This provided the basis for the policy that foreign banks operating in Canada directly through a branch of a foreign institution, rather than through a Canadian subsidiary, would be allowed to accept wholesale deposits. Any deposits under $150,000 would be considered "retail banking" and should be subject to deposit insurance.

Canadian Deposit Insurance Corporation ("CDIC") is the main provider of deposit insurance for Canadian banks and banks with Canadian subsidiaries in good standing. OSFI conducts risk assessment before a bank can become a good standing member of the CDIC. The maximum insurance for all deposits having the same joint owners at each member institution is $60,000 collectively.

As Canadians enjoy one of the best deposit insurance systems in the world, there is little policy rationale to redefine a "sophisticated investor" to below $150,000 per deposit. CIBC believes that one of the primary public interest test elements must be the protection of customers and their deposits.

Further, in order to become a member of CDIC, a bank must be incorporated here in Canada and meet OSFI requirements. Hence, it is would be difficult to comprehend a retail market base that would have an incentive to move its retail deposits from a CDIC insured member to a financial institution that has no retail deposit insurance.

7.2 The lowering of the $150,000 deposit threshold would put all Canadian financial institutions at great risk

The lowering of the $150,000 deposit and potential admission of foreign banks that do not have incorporated Canadian banking subsidiaries would put all financial institutions in Canada at risk. A potential failure would drive up the cost of premiums for all Canadian financial institutions, and other member institutions. CIBC believes that proper mechanisms must be in place to control membership in the CDIC.

In order to protect the safety and soundness of the financial system in Canada, CIBC believes that all members of the CDIC must be incorporated and meet the regulatory requirements of OSFI. There should be no change or flexibility in this policy.

7.3 The Australian Model of Consumer Protection against Foreign Banking

In Australia, foreign banks may conduct banking through an authorized branch, but not accept "retail deposits". Similar to Canadian policy, foreign bank branches in Australia are effectively limited to wholesale banking transactions. Foreign banks wanting to provide retail banking must be locally incorporated as a subsidiary for the purposes of taking retail deposits. If a subsidiary is not incorporated, the foreign bank may only accept "initial" deposits of at least A$250,000 from individuals and non-incorporated entities.

Australia's protection of its consumers is evident in its restrictions on foreign branches. First and foremost, the minimum deposit that foreign branches may accept as initial deposits is A$250,000. Australia goes even further than Canada to protect its investors by mandating that investors in foreign bank(s) are warned prior to making their initial deposit, that those deposits will not be covered in the event of a bank run, or similar bank failure.

The Australian Prudential Regulation Authority (APRA) acknowledges in its documents that it is difficult to oversee foreign branches that are not incorporated, and thus these branches should not be regulated by the APRA, and instead, the home country's regulator and deposit insurance plan.

Lowering the level at which foreign banks can take retail deposits without establishing subsidiaries puts more Canadian bank customers with lower sophisticated knowledge of finances at higher risk. Any potential proposal in the relaxation of deposit insurance membership puts all Canadian financial institutions at prudential risk. Finally, other jurisdictions, such as Australia, demonstrate regulatory regimes that advocate more consumer protection from foreign banks.

8.0 Full Functionality of ATMs

Mandating full functionality for ATMs in Canada would result in a smaller ATM service base - less access, choice, and competition. This policy would benefit large foreign financial institutions that were previously not willing to invest in Canada.

8.1 The costs associated with ATM full functionality would make ATM usage uneconomic for Canadian consumers and would lead to a smaller ATM service base

Several unintended consequences for consumers would result from imposing additional functionality on either the current Interac network or THE EXCHANGE Network from severe operational and revenue implications for their members. These consequences would be largely due to the added costs and disruptions to service incurred by these two networks when opened up to increased functionality. The substantial increased costs (both capital and operational) would mean prohibitive surcharge fees for consumers.

CIBC is concerned about the hundreds of millions of dollars that would be required to add full functionality that would inevitably pass through to clients as well as to the shareholders. In the U.S., the cost of upgrading machines to include deposit sharing capabilities range from US$3,000-US$20,000 per machine. The unintended consequence would be to make ATM access uneconomic for consumers and would eventually lead to a smaller ATM service base.

Fraud is an increasing challenge for the financial services industry. Permitting persons to use all bank ATM machines for deposits could lead to an increase in the number of empty envelope deposits and other fraudulent activity across the system. Steps to mitigate fraud could have serious implications for customer service. Hold periods for deposits would likely increase due to the increased complexity experienced at cheque processing centers and holds on deposits by non-clients would also rise relative to what those persons would experience at their own financial institutions. Further, any move to full functionality would require careful indemnities to absorb such losses and full cost recoveries. Pricing would be difficult, as it would have to reflect both full cost recovery for normal transactions, plus a pricing schedule reflecting investigations and settling disputed counterfeit and fraudulent claims.

8.2 Mandating ATM full functionality runs against the principle of "fairness" and would lead to less innovation and overall scale back of ATMs

The other main concern is the principle of "fairness". CIBC offers its customers the largest ATM network in Canada with more than 4,400 machines in branch and non-branch location across Canada. CIBC's ATM network size, location, and features, are key components of our strategy to provide affordable, accessible banking services to customers in rural and urban Canada including seniors, persons using wheelchairs or having restricted mobility, and customers with visual impairment. CIBC is committed to becoming Canada's leading financial services retailer dedicated to meeting the needs of these customers:

The total number of wheelchair accessible locations was 445 at the end of 2003.
480 branches at year end had been equipped with Access for all ABMs, which are installed at a lower height, with curved parcel shelves for easier wheelchair access, grab bars for persons with mobility impairments, and improved task lighting and easier-to-read screens in high-contrast colours to assist the elderly and the partially sighted. These machines also allow blind and partially sighted customers to plug headsets into an auto jack and follow spoken instructions to complete their banking transactions.

Potential participants in full functionality could include large foreign financial institutions that were previously unwilling to make similar investments in Canada. These global conglomerates would gain unfairly from such a policy. This policy would lead to the unwillingness of CIBC and other large Canadian banks to invest in innovative services in locations where machines would be used to the benefit of other participants.

Canada is recognized as a leader in the development of innovative customer service channels, including ATMs. According to the Bank for International Settlements, Canadians are the highest per capita users of ATMs in the world. The Canadian banks continue to view ATMs as a competitive market differentiator and allocate capital to this delivery system accordingly. Any decision to require institutions to add functionality to machines and to share machines with other banks, trust companies and credit unions, would need to take fair and careful consideration of compensation for the investments made by individual institutions. In addition, Canadian banks would have little incentive to invest in innovative new functions for their ATMs if they are required to open their client delivery channels to competitors.

Mandated shared use of ATMs would act as a disincentive to enhancing ATM technology (hardware and software) and expanding deployment. Old machines would be eliminated rather than upgraded by relying on other banks' ATMs. Given the close linkage between ATMs and branches, it is likely that off-premises ATMs would be eliminated more quickly. Moreover, CIBC would have an incentive to remove its own ATMs in cases where customers of competitors were the major users.

8.3 Other jurisdictions provide precedents against the mandating of ATM full functionality

According to the Australian Bankers Association ("ABA"), banks in Australia generally offer full functionality but on an entirely voluntary basis. The ABA makes it clear that this is not a legislated or regulatory requirement, but is a "commercial decision taken by each bank and other financial service provider."^[11]

In the UK, the scope of shared functions appears to be very limited compared to Australia. As in Australia, the U.K. government does not mandate these shared functions. There does not seem to be any appetite by the government to mandate full functionality in the near future.

In the U.S., we understand that State and Federal regulations do not mandate that financial institutions offer deposit sharing if they do not have any existing deposit sharing agreements. ^[12] However, very few U.S. States such as Connecticut mandate ATM full functionality while Illinois, which used to require full functionality, has since made it optional.

In examining the U.S. experience with ATM full functionality, the Canadian Bankers Association, in their research, identified only four states that currently mandate shared deposit taking: Iowa, Michigan, Indiana and Connecticut. Reasons for abandoning shared deposits include increased costs, transaction adjustment and settlement issues, increased fraud, lengthy clearing times, customer reluctance to place deposits in machines of other banks and customer avoidance of required surcharge fees. In addition, the increase in direct deposits by employers, insurers and governments have reduced the need to make deposits by hand.

Currently, there are more than 352,000 ATM machines in the U.S. Of these, 209,000 are on the STAR EFT network. Only 11,000, or 5% of STAR's ATMs will participate in deposit sharing, and a fee of US$2.00-US$2.25 surcharge per transaction is charged in addition to the "foreign fee" that the ATM owner collects from the user that pays for the transaction processing cost.

Interest in allowing deposit sharing is low in the U.S. for a variety of reasons. First, withdrawals comprise approximately 77% of all transactions while deposits represent the next largest at 9%. One of the main reasons for this lack of interest is that most ATMs do not currently have the capability to share deposits and the institutions are cautious about upgrading their ATM machines given the additional fees they would have to charge customers.^[13]

8.3.1 Illinois Case Study

Although mandated shared functionality was a feature in some U.S. states in the past, increasingly governments have turned away from this approach. The experience of Illinois with shared functionality is illustrative. Illinois mandated shared deposit taking from 1979 until the mid-1990's when it was made optional. The context of Illinois banking in the 1970's suggests the original reason for mandatory shared deposit taking: when ATM made their debut in the 1970's, Illinois law only permitted a bank to have one main office and two satellite locations at which the bank could take deposits and dispense cash. Therefore to gain network effects, Illinois law required banks to share ATMs, including the taking of deposits. At the dawn of the ATM era, banking machines were scarce in other states as well.

In the 1990's Illinois dropped its restrictions on branch banking. By this time, a number of ATM networks had sprung up and the number of ABM had increased substantially. With the proliferation of ABMs and competing networks, Illinois's rationale for mandating shared deposit taking had disappeared and the state made shared deposit-taking optional.

With the change in Illinois law, Chicago-based Bank One Corp, which owns the fifth largest ATM network in the U.S. with over 5,141 ATMs, no longer accepts deposits for other financial institutions effective last October 1, 2003. The policy change was prompted by the costs associated with shared deposits such as the settling of deposits with other banks and fraud risks. Bank One indicated that the number of shared deposits was relatively small compared with the number of Bank One customer deposits at Bank One ATMs. The change in policy is also meant to minimize any inconvenience imposed on the bank's own customers. Bank One Corp, has re-prioritized its spending with plans to replace its entire ATM network over 3 years. It will spend more than $50 million to replace one-third of its ATMs in 2003.

The following is a list of the top five ATM owners in the U.S. in 2003 and their status on full functionality from the American Bankers Association.^[14]

Company	No. of ATMs	Status Full Functionality


Bank of America	12,000	Deposit sharing not allowed
American Express	7,400	Only dispenses cash
Wells Fargo	6,488	Deposit sharing not allowed
U.S. Bancorp	6,108	Deposit sharing only on smaller PLUS network
Bank One	5,141	Terminated on Oct 1, 2003

CIBC understands the intent of the Government raising the issue of full functionality of ATMs. However, we strongly believe that mandating such a policy would result in ATM networks that would run contrary to the Government's policy intent of providing more access, choice, and competition in financial services to Canadians. Voluntary full functionality is the approach taken in Australia, the U.K., and increasingly in the U.S, and is the current approach in Canada through THE EXCHANGE Network. It is based on the premise that individual institutions can follow their own business strategies in choosing whether or not to offer full functionality. To break from this competitive voluntary practice would have significant ramifications for financial services public sector policy in Canada.

9.0 Conclusion

CIBC is in the business to help our customers achieve what matters to them. Our position in each of these policy questions is based on this overarching consideration.

In all of its submissions on the topic of consolidation over the last thirteen months, CIBC has emphasized the importance of scale in order to enable Canadian financial institutions to better service the demands of growing Canadian small, medium and large businesses, and continue to provide fully competitive consumer banking. We believe that the public interest tests and Competition Bureau tests will provide sufficient analyses to ensure that this is the case. CIBC believes that the Canadian Government has a unique opportunity, much like the Dutch government fifteen years ago, to provide a framework for consolidation that will allow Canadian financial services companies to grow as national champions. When examining issues pertaining to public interest, we have demonstrated that a cross-pillar transaction would not provide the same public interest concerns as a bank-bank mergers while still achieving the objective of scale. Finally, we have demonstrated that mandated ATM full functionality would not help customers, but instead would lead to less access and choice for consumers in a key area of service in which CIBC has invested heavily to serve its customers.

Appendix A - Growth Indicators Comparison between ING, ABN-AMRO, Rabobank and CIBC

¹ Canadian Banks Derive Stability From Broad Customer, Product Bases, Standard & Poors, December, 2003[Return]

² Moody's Teleconference: Update on Canadian Banks, July 2002[Return]

³ All dollar figures are in Canadian dollars exchanged as of December 5, 2003[Return]

⁴ Given Sun Life's demutualization in 2000, CAGR based upon 3-year period from 2000 to 2003[Return]

⁵ Given Manulife's demutualization in 1999, CAGR based upon 4-year period from 1999 to 2003[Return]

⁶ As at September 24, 2003, assumes John Hancock market capitalization based on purchase price[Return]

⁷ Response of the Government to Large Bank Mergers in Canada: Safeguarding the Public Interest for Canadians and Canadian Businesses and Competition in the Public Interest: Large Bank Mergers in Canada, June 23, 2003[Return]

⁸ Radobank, The difficulty and necessity of keeping the pioneering spirit: Rabobank, Jeucken and Krowel, 2001[Return]

⁹

Moody's Global Credit Research, August 2003, S&P Financial Institutions Research, February 2003, Cooperatives and the Financing of Enterprises[Return]

¹⁰ Department of Finance Factsheet (Consolidated figures (Q1, 2003))[Return]

¹¹ The Canadian Bankers Association[Return]

¹² The Canadian Bankers Association[Return]

¹³

ABA 2003 Fact Sheet, American Banker Association, 2002 ATM Deployer Study, Dove Consulting, March, 2002[Return]

¹⁴ American Bankers Association, 2003[Return]

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CIBC's Submission to the Department of Finance on Matters Raised in the Response of the Government to Large Bank Mergers in Canada

Table of Contents

9.0 Conclusion