Nearly four years after then-finance-minister Paul Martin blocked two major bank mergers that would have permanently changed Canada's financial services landscape, it's plain that little has changed. The banks still have an urge to merge and they have yet to figure out how to read Ottawa's confusing political signals.
What's crystal clear, though, is that the government has no intention of treating banking like any other industry, subject to clearly drawn rules, normal market conditions, competitive pressures and the desires of shareholders.
The Globe and Mail has revealed that Bank of Nova Scotia and Bank of Montreal were on the verge of announcing a blockbuster merger this week, with a signal from Finance Minister John Manley that he was receptive to the idea, until word came down from the Prime Minister's Office just before Thanksgiving that this particular bird was not going to fly -- at least not while Jean Chrétien remained in office.
It's now obvious that Mr. Manley's unexpected announcement last week that he wants to get more clarity into the existing bank merger rules was widely misinterpreted. Investors rushed into bank stocks in the mistaken belief he was signalling that the road to mergerdom would become easier on his watch. In fact, what he was doing was trying to soften the blow for the two banks while assuring them he wasn't the one who scotched their plans.
"From Manley, there was a sense that it was doable," a knowledgeable person told The Globe. It's inconceivable that a banker as politically plugged in as Scotia's Peter Godsoe, a staunch Liberal supporter, would have allowed the secret negotiations to advance as far as they did without considerable faith that they would be allowed to proceed. Scotia was the only one of the big banks to sit on the sidelines during the last bout of merger mania to hit the industry.
Yet, after what happened in 1998 to the proposed mergers of Royal Bank of Canada with Bank of Montreal and of Canadian Imperial Bank of Commerce with Toronto-Dominion Bank, you would think all of our top bankers would know better.
Blocking those mergers was seen then and is seen now as a popular decision for a politician seeking re-election or attempting to woo his caucus colleagues. Bank-bashing has never hurt at the polls or in raising money at local riding levels.
But as we have seen many times before, it's a bad idea for government to dictate strategy for any business. And it's downright terrible to do it based on leadership politics or Jean Chrétien's fear that controversy will mar his glorious sail into retirement.
The banks haven't done a particularly good job of selling Canadians on the need for megamergers. But it's easy enough to understand their basic rationale. The bigger they are, the better positioned they will be to compete on the international stage and on their home turf. The key is lowering costs, particularly for the technologies they must have, and boosting margins. With supposedly greater efficiencies, they will have larger war chests to compete both with non-banks and with foreign invaders.
Is bigger necessarily better? Not if we look at the experience of a J.P. Morgan Chase, a Bank of America or some of the major Swiss and German banks. But neither is it necessarily less competitive. That decision should be left to the markets, not to the vagaries of Liberal politics.
There are those who worry that bank mergers would squelch competition, slash service, shut branches in smaller communities, lay off thousands and boost fees. But before the politicians intervene, the federal competition watchdog should have a chance to examine the proposal on its merits, and set the conditions that would protect the marketplace.
In any case, the solution to greater banking concentration in Canada lies not in keeping the banks apart but in giving full sway to credit unions, insurers, foreign financial institutions and niche players in areas such as mortgage lending to compete with the banks.
As for the proposed merger itself, the Scotia-BMo combination is probably the least problematic on competition grounds. There is less overlap than there would be with the other members of the Big Five, and hence likely fewer cuts and branch closings.
So if it makes sense to allow the banks to combine, if the process for approvals is in place and if the Finance Minister agrees that it's a good idea, why do we have to wait until a lame-duck Prime Minister finally exits the stage?