Size and Competition in Canadian Banking

Head Table Guests

Monike Tran, grade 12 student, Parkdale Collegiate Institute; The Rev. Jane Watanabe, Associate Priest, St. James Cathedral; Robert McLeese, President, Access Capital; Terence Corcoran, Columnist, Report on Business, The Globe and Mail; Robert Brooks, Executive Vice-President, The Bank of Nova Scotia and a distinguished Past President, The Empire Club of Canada; Allan Cooper, President, Canadian Depository for Securities; Bill Broadhurst, Past Chairman and Senior Partner, Price Waterhouse; John H. Tory, President and CEO, Rogers Multi-Media Inc. and a Director, The Empire Club of Canada; Ed Waitzer, Chair, Ontario Securities Commission; Joanne De Laurentiis, President, Interac Association; Dwight Lacey, CEO, CIBC Insurance Company Limited; Bill Brock, Chairman, Canadian Bankers Association and Vice-Chairman, Toronto Dominion Bank; and Robert Chisholm, Vice-Chairman, The Bank of Nova Scotia.

Introduction by David Edmison

Well known satirist Ogden Nash wrote the following poem in the early part of this century:

"This is a song to celebrate banks,
Because they are full of money and you go into them and all you hear is clinks and clanks,
Or maybe a sound like the wind in the trees on the hills,
Which is the rustling of the thousand-dollar bills.
Most bankers dwell in marble halls,
Which they get to dwell in because they encourage deposits and discourage withdralls,
And particularly because they all observe one rule which woe betides the banker who fails to heed it,
Which is you must never lend any money to anybody unless they don't need it."

Well unfortunately a number of bankers didn't obey this golden rule. They actually lent money to people who really needed it and even to some who felt it was rather inconvenient to pay it back. John Maynard Keynes used to say: "If I owe the bank a thousand pounds, I have a problem; if I owe the bank a million pounds, the bank has a problem." Indeed in the United States, breaking Nash's golden rule has caused thousands of banks to fail, in some cases leaving depositors empty handed. In Canada, our banking system is more stable and over the years only a few banks have needed assistance and depositors have, by and large, not lost a cent. We are fortunate in this country to have a secure banking system, and one in which Canadians have confidence.

While we value the stability of our deposit institutions it has become somewhat of a pastime for people today to complain about banks for one reason or another. The business of lending money and assessing risk is not easy. It is sometimes difficult, and at times, unpopular decisions have to be made. Bankers, on occasion, have had to deal with adverse public opinion. This is not a recent phenomenon. For example, in the middle of the 14th century Florentine bankers helped finance Edward the Third in his war with France. The terms they imposed reflected their assessment of the risk. They demanded as collateral the Archbishop of Canterbury, in person! Interest was 120 per cent, with charges of 60 per cent if payment was not prompt. As well they imposed a lien on state income and installed two merchants to supervise Edward's household accounts. How would you like to have the job of PR Manager at one of those banks? Needless to say 100 years later Henry the Seventh found new bankers.

These, and other experiences have helped bankers learn a great deal about public relations over the years. Helping to improve the image of the banks and lobby for their best interests in Canada is the Canadian Bankers Association, an organisation which was established in 1891. The CBA provides the banks with information, research and operational support, and contributes to the development of public policy on issues that affect financial institutions. The CBA works closely with the banks on issues ranging from customer service to self-regulatory codes and consumer protection. The CBA also interfaces with the various levels of government to ensure that regulations and issues affecting the banking industry are developed and maintained in the best interests of the Canadian bank customers.

Quite obviously, the Canadian Bankers Association is an important body and requires a uniquely talented person to lead it. Our special guest today is such an individual. Helen Sinclair was the first woman and the youngest person to ever preside over the CBA. She has been in her present position since 1989 having previously held several senior executive positions with the Bank of Nova Scotia, including vice-president and general manager of planning and legislation. From 1980 to 1985 our guest served as the CBA's public-affairs director.

Ms. Sinclair is active on a number of public-policy boards. She was chair of the Board of Directors of the YMCA of Greater Toronto from 1992 to 1994 and continues as a board member. She serves on the boards of the C.D. Howe Institute, the Payments Association, The Livingston Group, and Stelco Inc. She also volunteers her time to serve on the boards of York University and the Social Sciences and Humanities Research Council. She is a member of the University of Western Ontario's Business School Advisory Board and was recently appointed Vice-Chair of the Ontario Financial Review Commission.

Our guest has a B.A. from York University, an M.A. from the University of Toronto and has completed the Advanced Management Programme of the Harvard Business School.

Given the current debate on the upcoming White Paper on financial regulation, I can think of no one more qualified to address us today on the issue of allowing banks to sell insurance and the future of the banking industry in Canada.

Ladies and gentlemen, will you please welcome our very distinguished guest, Helen Sinclair.

Helen Sinclair

Thank you for your introduction--and your "relatively" kind literary quote! While it may not appear an obvious match, banking has not been distant from literature.

Robert Service, T.S. Eliot and Rohinton Mistry all spent part of their careers as bankers. At least one other literary figure has even undertaken some bank lobbying. Stephen Leacock in the 1930s took on a contract with the Canadian Bankers Association, according to Robert Macintosh in his book "Different Drummers." Leacock's speaking tour in Western Canada aimed to poke satirical fun at the credit policies of "Bible Bill" Aberhart. By all accounts even Bible Bill, who attended at least one of the speeches, joined the laughter.

The usual speech of a CBA president nearing the end of her term is one of quiet reflection on past battles followed by non-controversial advice to the fortunate successor. Not this time, ladies and gentlemen. You may have seen the movie "Braveheart." If so, you recognise the disposition of my Scottish forebears to speak their minds. I am going to do just that. I take great pride in Canada's banking industry, its people and its accomplishments. I am particularly proud to have represented, for the past six years, an industry of such strategic importance to Canada's competitiveness--an industry essential to the current and future well-being of the Toronto region. Banks directly employ 175,000 Canadians--60,000 jobs in Toronto alone. Banks pay more than 12 per cent of Canada's total corporate taxes--over $4.2 billion in taxes and levies--while representing just four per cent of the economy.

The financial industry is second only to the automobile industry in the scale of economic benefits conferred on the Greater Toronto Area. It is the only industry with two companies, both banks, among the region's top 10 employers. The Boston Consulting Group, in its recent study for the Greater Toronto Area Task force, concluded: "Most city-regions would die to have that kind of strength in two-traded industries." In addition to direct employment hundreds of thousands of jobs have been created by the $6 billion that banks spend annually on goods and services.

Perhaps the largest and fastest-growing component of bank out-sourcing is information technology and communications. Banks are among the largest clients of Canada's IT industry. In turn, Canada's banks are the world's best-equipped in terms of their technology and their human resources. The scale of investment in these areas is remarkable. Equally remarkable is the achievement of creating a highly automated and accessible branch-banking network--reaching all parts of our vast country.

Some 13,000 automated banking machines supplement over 8,000 bank branches--every one of them on-line. In Canada's North, banks are among the largest users of satellite communications so that we can maintain personal and corporate services that are just as efficient as in more populated areas of our country.

I recently welcomed visitors from Dallas. They simply could not believe that a Canadian could cash a cheque in Halifax and receive credit the same day in his account in Vancouver. The same service is not possible south of the border--but we take it for granted in Canada. That is because Canadian banks have made huge investments in state-of-the-art electronic payments systems. Take Interac. It will process about 700 million transactions this year, from about 200,000 merchant locations. To put this achievement into perspective, Interac is now comparable in size to the 10 largest electronic payments systems in the United States--combined.

Consider the rapid growth of CDS, the Canadian Depository for Securities. Its role is to take the paper and the risk out of securities trading in Canada. Its success is such that, at any given time, 80 per cent of Canada's capital market is on deposit at CDS--representing over $1 trillion in securities. Each day between $55 billion and $100 billion is cleared and settled through CDS--quickly and cost-effectively.

These technological achievements could not be possible without a highly trained work force. The adult-training programmes of Canada's banking industry are second to none in Canada and the world. The ICB, the Institute of Canadian Bankers, is the largest industry-based educational institute in Canada. It has the widest global reach of any banking institution in the world: students from 79 countries across five continents participate in its programming. And the ICB is just the tip of the iceberg; ICB accounts for just five per cent of total bank spending on work force training in Canada. These last six years, which combined recession and pronounced economic restructuring, have been far from easy for any industry. But generally the scenario looking forward is positive.

Six years ago, when I become CBA president, Canada was moving into the worst recession in 60 years. Since the depth of the recession in 1991, however, the economy has grown 10.1 per cent. Commensurate with this growth, business loans by banks have grown 7.2 per cent--with small business loans showing an annualised growth rate of 11 per cent in 1995 alone. We have strived through these six years like every other business to improve our productivity, efficiency and customer convenience. Increased automation has been a boon for our industry and for our customers. Being a healthy industry, we have maintained employment levels. Bank employment is just over two per cent below the level in 1989. In a recent letter to the editor, Warren Jestin, Chief Economist of Scotiabank, wrote: "Downsizing may be the corporate trend of the 1990s, but this has not been the case at Scotiabank. In the past five years, the number of employees actually increased ... about 12 per cent."

This is where we stand today. But today's indicators--no matter how positive--guarantee nothing for the future. Anyone participating in this economy knows that Canadian companies face intense competition in each and every sector where we excel, or wish to excel.

This leads me to the public-policy agenda, and an issue that increasingly concerns me. Does our country have a competitiveness vision? We have some successes as a country, but there are many questions. Six years ago it seemed inconceivable that provincial governments in this country might actually abandon some turf and move in the direction of common regulation of our securities industry. Today, with the leadership of governments such as that of Ontario, we may just get there. This achievement will be enormously important to Canada's competitiveness. Good regulation is a key ingredient of good infrastructure. They both mean lower costs, better process and more convenience for users and consumers. Six years ago, too, the financial industry was only in the initial throes of the so-called "little bang." The securities and banking industries had begun to join forces by this time. The reforms of 1992 helped move Canada further along the path of competition in financial services, although not as far as competing jurisdictions.

This story is not yet as positive as it could be. I will speak bluntly here about the potential impacts on the competitiveness of our country and the industry in which I work. The issue of the banking industry's size clouds the horizon. It threatens to weaken the political will to deal with the financial sector strategically and to do what is right for the country and the banking public. Size according to our detractors is a negative. But size is also about competitiveness globally, and about jobs in Canada. Size is not the be-all-and-end-all to bank competitiveness. Good earnings, increasing productivity, ongoing investment in people and in technology are indispensable.

But size does matter. Size lowers the high fixed costs of information technology. And, for a bank to play a major role in the larger transactions of the world's capital markets, large amounts of capital are required. And this translates into size.

At present no Canadian bank makes the grade and we are slipping. In 1980, Canada had four of the world's top 50 banks. Today we have none. As North American institutions, we have traditionally looked relatively large and competitive. The basis of that comparison has been the United States, which has 10,000 banks, most of them small. The basis of that comparison is changing. Some American banks already are twice the size of our largest. and, as the U.S. adopts the same kind of banking laws as Canada, more and more American banks will grow larger than ours through merger consolidation. As one measure of things to come, the Chemical Bank and Chase Manhattan were already bigger than our biggest--even before their merger.

You might think the size of our banks is inextricably linked to Canada's relatively small population base. It is not. Holland, with half our population, has two banks larger than our largest. Switzerland with a quarter of our population has three. The question for Canada is one of vision. Do we wish to allow our institution to at least have a shot at world scale? If so the recipe is relatively simple.

First, understand the importance of capital and earnings, and what taxes do to them. If the banks' size and absolute profits are to make them target for ever-steeper and more discriminatory taxation, then, by definition, the battle for the world league will be lost. Northern Telecom and Bombardier may make the grade in their sectors, but we won't in ours. Second, we need to revisit our mergers and acquisition policy. The world's largest financial institutions will all be products of mergers of already large institutions. Third, we must follow international practice in deciding what Canadian financial institutions can do. This brings us to the debate surrounding upcoming changes in financial-sector legislation, and the question of banks distributing insurance and providing lease financing for cars.

Let's look at who's selling insurance in Canada. ING, Prudential, AXA and Allianz are all in the insurance business in Canada. All are larger than the Royal Bank and all distribute insurance through banks in their home markets. The top five property and casualty insurers in Canada are foreign-owned. They control over 60 per cent of Canada's P and C market and all five face bank competition in their home markets. Canadian insurers such as Manulife, Great-West and Sun Life all compete successfully against banks internationally. They also distribute their products through a variety of banks abroad. So, why not in Canada? Why does Canada remain (along with South Korea) among the only countries in the industrialised world to prohibit insurance sales through banks, particularly where the benefits to consumers in terms of more competitive pricing are clearly identified in the experience of other countries? Why does Canada allow General Electric, General Motors and Ford--all larger than the largest Canadian bank--to lease cars in Canada through their financing arms? All of these multinationals compete against banks in car leasing at home. Why should they face no competition from banks in Canada?

It has been very ironic and very frustrating to have the issues of the size and profits of Canadian banks to become the rallying points for not doing the right thing in upcoming legislative reforms. These issues are not going away. The federal government has shown through its trade policies that it understands no country facing inward will enhance its world standing in the 21st century. The question, as always, is timing--and vision. Canada's banks understand they must help deliver the required changes.

The involvement of bankers as individuals is the only effective way to deal with the issues we must confront. In part we need to explain--with consistency and even a little passion--how our industry makes Canada more competitive. Mostly we need to remind people that banks are more than towers and executives: they are thousands of employees each doing a job, by no means perfectly, but with professionalism, dedication and pride. Grassroots politics is not part of our tradition--but it's got to be part of our future. We learned an important lesson from the government's decision to abort any further public discussion of insurance powers. We learned that getting the analysis right is only part of the process. We need to be seen and heard.

The budget statement was the first volley in the next revision of financial-sector law. In Churchillian parlance it is merely the end of the beginning. I have every confidence in the right set of outcomes and I wish my successor, Ray Protti, all the very best as he moves our agenda forward.

I started this speech by speaking about the pride I have felt representing this industry. In closing, I would like you to know I am not disappearing from the landscape. In fact, I will be putting my money where my mouth is. I am incorporating a company under the name BankTech Trading. Its goal is to adapt and resell the products and know-how of the North American financial services industry to the financial industry in other markets. These include products such as the software and standards which underpin Interac; the networking and processing systems which underpin the Canadian Depository for Securities; the courseware and educational programming produced by the Institute of Canadian Bankers; and maybe even some of the structures and systems of the Canadian regulatory community.

We Canadians have been successful at exporting know-how, subway cars, telephone switches and engineering services--our financial industry has the same potential. A huge and growing market for financial industry know-how is developing in emerging and developed countries alike. We have the best the world can offer and like other Canadian exporters we have to get out and sell, sell, sell.

The Empire Club is not accustomed to having this platform used for self-promotion, I realise. But entrepreneurs will try to get away with anything. If you have anything to direct my way--we'll even take insurance industry business--please let me know!

In closing, I would like to reiterate that no nation has assured the prosperity of its citizens in the absence of a strong, well-managed and profitable domestic-banking sector. In the hyper-competitive 1990s and beyond, with strong competitors emerging on every continent, well-managed and well-capitalised Canadian banks are critically important to our economic well-being.

Let's get our country's competitive vision in 20-20 focus and allow the dedicated men and women of this very strategic industry to do their best for their customer, their companies and for Canada.

Thank you.

The appreciation of the meeting was expressed by Robert Brooks, Executive Vice-President, The Bank of Nova Scotia and a distinguished Past President, The Empire Club of Canada.