- Consulting with Canadians -

Scotiabank's Submission in Response to Finance Canada's Large Bank Mergers in Canada:

Related Document:

December 23, 2003

Mr. Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
140 O'Connor Street
Ottawa, Ontario

Dear Mr. Salembier,

This letter outlines our comments on the Government's June 2003 statement on the large bank merger review process. We believe that further delay proposed in the statement is unwarranted, and that the policy direction suggested by it runs counter to recommendations of the MacKay Task Force, the June 1999 policy statement and the 2001 Bank Act reform.

Progress is now long overdue with Canada's merger policy. The MacKay Task Force, established in late 1996, was a timely and extensive examination of the future of the financial sector, including the policy underpinning it. Its recommendations – in particular, the need for regulatory flexibility – set the direction for Bank Act reform and policies that would shape the future structure of the sector.

We strongly urge government to move forward with the policy now in place and provide certainty around the approval process (for emphasis, we are arguing for certainty around policies and processes, rather than certainty around outcomes, given the necessary degree of Ministerial discretion in the review process). Further delay is an unnecessary constraint that runs counter to the goal of providing a flexible policy framework. Specific issues contained in the statement further undermine this goal by introducing new limits and increasing government interference in the market (we provide comments on these issues in an attachment).

Flexibility and international competitiveness

Canadian banks are international success stories. As the most international among them, we recognize that success in international markets is not unrelated to the strength of Canada's financial sector policy. The reputation of Canadian banks as safe, strong and sound financial institutions is an important factor when entering new markets. That reputation is, in large part, due to the strength and foresight of government policy and supervision.

At the same time, progressive financial sector policy in Canada has allowed Canadian banks to restructure, consolidate and grow into a national banking system. It has allowed Canadian banks to expand into new business lines and build expertise in providing technologically advanced services to customers from coast to coast. These advances translated into a strong financial system for Canada and competitive advantages and opportunities for international expansion for our banks.

Canadian banks compete in foreign markets against larger international banks without government subsidization. Financial sector policy in Canada has not been aimed, nor should it be, at creating national champions. That approach to government policy simply does not work. Examples from other jurisdictions are clear; the French government's attempts to intervene and over-manage consolidation within its banking sector in an effort to achieve a particular pre-determined outcome has not been successful.

Market forces must be allowed to determine the structure of the financial sector and guide the strategic decisions of individual institutions. This is a fundamentally important lesson when considering the appropriate balance between regulatory flexibility and protecting the public interest. Successive Canadian governments have recognized the need for this balance and its importance to both the overall strength and the international competitiveness of the financial sector. Indeed, Prime Minister Martin recently highlighted in a major speech in Toronto, the critical importance of Canadian firms being able to compete – truly compete – in the global marketplace to support strong economic growth in Canada.

Regulatory flexibility as a principle of reform

Allowing markets to quickly and efficiently adapt to changing demands and circumstances while protecting the public interest has been a fixture of Canada's regulatory approach for many, many years. It was the approach taken by the Porter Commission in 1964 (which it described as the "spirit of competitive freedom") and it was echoed by the MacKay Task Force in 1998 and the June 1999 policy statement. It figured prominently in the decision of the Task Force to recommend the removal of the policy prohibiting large bank mergers, as well as its development of the merger approval process. The Task Force stated that:

Looking ahead to the need to manage change, we believe flexibility and great imagination will be essential...in particular, the policy, legislative and regulatory framework will have to contain considerable flexibility – certainly more than currently exists. (p 18)

The June 1999 Policy Statement accepted the recommendation of the Task Force by stating as its first principle of financial sector policy:

Financial institutions must have the flexibility to adapt to the changing marketplace and to compete and thrive, both at home and abroad, in order to retain their role as critical sources of economic activity and job creation. (p.10)

When introducing the June 1999 Policy Statement, then Minister of Finance, Paul Martin, stated that: "Canada's banks will benefit from greater flexibility to adapt to the changing business environment, including...a transparent merger review process." The current merger guidelines, when introduced in 1999, addressed the need for progress in Canada's bank merger policy and, we believe, struck an appropriate balance between market flexibility and the public interest. We are deeply concerned that the June 2003 statement fails on both counts, in terms of the delay it introduces and the issues it suggests adding to bank merger policy.

Further delay is misguided

Further delay works directly counter to the principle of allowing markets to plan and adapt and to do so quickly and efficiently. Canadian banks have the international reach and the management experience to succeed in foreign markets. Scotiabank, with operations in some 50 countries around the world, is defined by international competition. The Bank has the toughness to excel, without financial support from government – something that is critical for Canadian firms generally – but we do need financial sector legislation to provide supportive policies and strategic flexibility.

Some policies that have worked in the past, such as ownership restrictions, will eventually be opened under the WTO. For Canadian banks to thrive in this environment, they need the flexibility to adapt today, rather than reacting to changes forced upon them by international developments. Defensive policies that build walls will no longer work to protect against foreign takeovers. National treatment is a fundamental principle of Canadian policy and one that has important implications for the future of the sector. Restrictive policies that protect the status quo will, over time, run counter to Canada's interest in the ongoing liberalization of foreign financial sector markets. The only effective policy is to allow Canadian institutions to grow stronger and more competitive today.

Similarly, a new wave of consolidation has begun in the U.S. financial services market. The recent merger between BankAmerica and FleetBoston is a reminder of how mergers continue to play a key role in the strategic plans of our competitors. Restricting the growth options for Canadian-based, internationally competitive institutions is misguided.

Further clarification is unnecessary

As well, working to further clarify the public interest test is not practical. Harold MacKay, in his testimony before the Finance Committee, stressed that the public interest test and the approval guidelines need to retain a sufficient degree of Ministerial discretion to address the nature of the public interest determination:

Neither – and this is important to your review, I believe – did we intend the public interest review process as a way to fetter ministerial discretion. We were not suggesting there should be a series of precise hurdles through which a bank would be asked to jump to have a merger approved, with an assured approval from the minister once those hurdles were met. Such an approach would be far too simplistic. The public interest cannot be crammed into narrow compartments.

The Finance Committee heeded Mr. MacKay's advice and provided recommendations that endorsed the structure and content of the existing guidelines, while providing insight into an appropriate approach to the guidelines. In fact, neither Parliamentary committee called for additional elements to be included in the guidelines and, importantly, neither indicated a need for a ban on large bank mergers in order to conduct further study.

Despite the advice of Mr. MacKay and the recommendations of the two committees, the 2003 statement inexplicably introduces several policy proposals for further study. Notwithstanding our strong belief that the entire process should be set aside, we provide comments in an attachment on specific points raised in the June 2003 statement that we believe are particularly troubling.


The bank merger review guidelines and the Public Interest Impact Assessment established in 2001 are an approach unique to Canada. They provide the Minister with the discretion needed to assess and protect the public interest and they provide Canadian banks with the flexibility and opportunity to meet that test. The Government's statement of June 2003 is not an appropriate policy direction. It contemplates unnecessary and potentially damaging delays regarding the ongoing evolution of our financial sector and suggests a troubling degree of interventionism that cuts against Canada's tradition of enlightened public policy – a tradition that has been the foundation of our strong and internationally competitive financial sector. The report should be set aside and the federal government should take immediate steps to finalize merger policy.

We would be pleased to discuss these issues, or any other related to the Government's statement, at your convenience. We hope that you will consider our position in the context of Canadian, as well as international, financial sector developments and conclude, as we have, that the current public interest test and merger review guidelines are a sound process that requires no further adjustment to meet the needs of the financial sector and all of its stakeholders.


Signature - Rick Waugh, President

Rick Waugh


Concerns with specific policies raised in the June 2003 statement

The following issues are raised in Finance Minister Manley's June 2003 statement. Our comments reflect our significant concerns with each issue. Generally, these policies, instead of enhancing competition and providing a transparent and efficient merger approval process, will create distortions and uncertainty in the market. They represent an extraordinary level of government intervention in the evolution of the financial marketplace.

The danger of the type of approach suggested by each policy, beyond the obvious constraints it imposes on the market, is that it often works to the detriment of the shareholders' interest, efficient markets, innovation and, ultimately, the public interest. The Competition Bureau argued in its submission to the MacKay Task Force that direct regulation should only be considered when market forces are inadequate by themselves to achieve the desired policy objective. And when direct regulation is required, the form of regulation that least distorts competition and efficiency should be chosen. These principles, similar to the principle of regulatory flexibility, rightly allow markets to function properly, where the onus is on market institutions to make their case, subject to the public interest being protected.

1. Introduction of a new public interest criteria. The former Chair of the Finance Committee recently remarked that the Finance Committee deliberately chose not to add any new criteria to the public interest test. They believed it was important that government not micro-manage the process. This decision is consistent with the advice of Harold MacKay that the public interest cannot be fully defined and compartmentalized. For that reason, it is puzzling why government introduced a new criterion, the "deepening and broadening of Canadian capital markets.". Even if government felt additional compartments were necessary, it seems contradictory to seek further clarity by introducing an entirely new criterion at this stage, one that raises additional questions of interpretation and uncertainty.

The impact of a large bank merger on the "deepening and broadening" of Canada's capital market is fundamentally an issue of competition – the number of competitors and the level of competition in the market – and should remain so. The concept of a merger having to deepen or expand any particular market runs well outside standard competition analysis and is not appropriate. Moreover, it is not clear how Parliamentary Committees are to examine this issue, if they are not expected to provide advice relating to competition issues – one of the points included later in the 2003 statement.

2 . Cross pillar and large insurance company mergers. Scotiabank has consistently argued that the ban on large bank-large insurance company mergers was an artificial barrier to the evolution of the financial sector and it should be removed. Such a policy does not exist in any other major jurisdiction and cuts against the principle of regulatory flexibility.

3. Minimum number of large financial institutions. Attempting to set a minimum number of large financial institutions, as a matter of policy, is subject to the same criticism the Task Force made of the previous ban on large bank mergers. It is an inflexible constraint on market forces that precludes consideration of the merits of individual merger proposals. No entity, government included, is capable of successfully choosing, then force-fitting a preferred structure on the market. Such an approach takes competition policy and analysis out of the hands of the Competition Bureau. It takes the evolution of the sector out of the hands of the market, and strategic options out of the hands of individual institutions.

4. New merger approval process. Similarly, the proposed 60-day window also appears to be an attempt to force-fit a certain structure on the market. To our knowledge, no other jurisdiction has attempted such a merger "box." We believe the distortion to market practices will be significant from such a deadline. Moreover, the Competition Bureau established a process in 1998 to examine multiple merger proposals simultaneously, thereby eliminating any first-mover advantage. It has committed to following this approach in the future. The 60-day window makes this process less, rather than more, transparent.

5. Divestiture process. Divestitures are another area where the Competition Bureau has extensive experience and an approach that is tested by time. It is appropriately driven by the interests of improving competition, while eliminating, to the extent possible, interference with the market. We do not believe that government policy should attempt to "guide" the divestiture process or dictate how divestitures contribute to the public interest. We believe markets are the most efficient mechanism for structuring divestiture proposals and, through this process, divestitures will provide an opportunity to enhance the competitiveness of other competitors in the market.

The Competition Bureau, during its consultations on the Bank Enforcement Merger Guidelines, suggested a preference for pre-packaged remedies – an approach that is linked to a divestiture policy that seeks to "create" a new competitor to Canada's largest banks. We do not believe this approach would serve the public interest, particularly should remedies favour foreign banks in Canada that are already larger in global market capitalization than all of the Canadian banks combined. Such an outcome would have the perverse effect of having the interest of foreign banks drive the restructuring of the sector.

6. ABM functionality. ABM full functionality is proposed in the June 2003 statement as a policy to enhance competition in Canada. It is another example of policy that would result in an inappropriate level of government intervention in the market.

As we understand it, part of the reasoning behind this proposal is to increase SME access to deposit facilities. Our read of the SME market and our own research indicates that SMEs will not, in the main, make use of ABMs for deposits. At the same time, we understand that financial institutions involved in the Exchange Network are absorbing significant costs in administering shared deposits – costs that would be significantly higher under increased volumes. A broader implementation of shared functionality (i.e., not just deposits, but bill payments, etc.) would run up against substantial technical obstacles and policy issues that would render it ineffective and inappropriate as a policy. We fully concur with additional concerns with this policy that are outlined in the submission by the Canadian Bankers Association. Shared functionality exists today in Canada on a voluntary basis. It should remain a voluntary option. Imposing shared functionality either across all Canadian banks or as a condition of bank mergers would be tantamount to expropriation of a proprietary delivery system. It would impose costs on Canadian banks in order to reward some financial institutions that made a strategic decision not to invest in their own delivery systems.

7. Credit unions and foreign banks. Policies to enhance the competitiveness of credit unions and policies related to foreign bank entry are both cited as key issues which must be addressed as government finalizes its bank merger policy. Both issues have been extensively studied and hold little or no relevance to the finalization of the approval process. If government chooses to engage in further study of these issues, it should be on a separate track from the immediate steps needed to finalize merger policy.


We strongly believe that existing competition policy and merger review guidelines are sufficient and appropriate to protect the public interest. The obligation is rightfully with the banks proposing a merger to properly address this issue and the decision, as to whether they do so, is rightfully with the Minister.