Why Bank Mergers are in the National Interest

October 14, 1998

Remarks By:
A. Charles Baillie
Chairman & Chief Executive Officer
Toronto Dominion Bank


To:
C.D. Howe Institute
Toronto, Ontario

I appreciate this opportunity to speak, and to contribute to the discussion about the future of the financial sector and the future of Canada.

I would like to take the opportunity to talk about that future today, because I believe that a lot of attention has been focused on the individual deals... the individual banks... the individual personalities of the bankers involved... and the short-term impact of major changes in our financial system.

Not enough attention has been focused on a much larger and more important question. Where should the government take our country's financial sector? What is the vision? That is a vital question, because the decisions made over the coming months will have a profound impact -- not just on a few banks, but on the broader financial sector and on the future of our country.

The MacKay Report presented a sound analysis of the forces that are transforming our industry on a global basis. The Report also presented recommendations that would transform our industry.

For the record, I believe that the MacKay Report takes a balanced approach, with no clear winners or losers -- and I hope the recommendations will be considered in their entirety, in order to ensure a level playing field and full, fair competition. This will be very challenging, because some groups will like some parts and some will want others -- it will be tempting to cherry pick. But to do so would be to upset the balance -- ultimately harming consumers and the financial sector.

The MacKay Task Force called for change and recommended specific changes in our industry -- stating that the status quo is no longer a viable option. It did not presume to set out a vision of what the Canadian industry could or should look like. That opportunity is the government's, the elected officials charged with serving and furthering the national interest. The opportunity is historic, and the consequences will be profound.

The fundamental question is: What kind of industry do we want for Canada?

I see two broad choices.

One vision of Canada would have us at the table -- as a North American financial centre -- Canadian-controlled and Canadian-headquartered -- that is influential in global financial affairs. The other would see us slip further from the top tier -- and become a gradually declining influence in financial affairs, and indeed, in world affairs. Canada might remain a healthy domestic financial marketplace, but it will not be a global financial force.

Those two visions are at the end of two basic roads that the government could follow.

One -- which would allow big to buy big -- would allow the mergers of major Canadian banks, and major Canadian insurance companies, and major Canadian mutual fund companies, and major Canadian investment managers -- and would give Canada the potential for six to eight very strong, Canadian-owned, Canadian-based world class financial institutions.

I mean world class in the context of the rapidly changing global marketplace, marked as it is by the trends identified by the MacKay Task force: consolidation and rationalization -- with large mergers in the United States and in other financial centres around the world.

Operating alongside this group of major Canadian financial institutions, there would be a host of other healthy financial suppliers -- including major foreign-owned full service institutions, as well as a range of domestic and foreign financial businesses, some large, some small, some full service, some specialized.

With that kind of make-up, Canada would have a seat at the table, internationally. It would cement Toronto as a thriving financial centre with banks that are sufficiently large not to be take-over targets. It would ensure the jobs that are associated with having headquarters in a country. At the same time, our domestic marketplace would be well served, and Canadian consumers would have a wide variety of choices among suppliers domestic and foreign.

The other road is to say no to mergers -- to say that big shall not buy big... to say that our institutions are big enough for Canada, and to rule out our competing effectively in world markets. Canadian financial institutions would also see their domestic market shares dwindle, -- squaring off against much larger foreign-owned competitors operating here.

Such a choice would not be catastrophic. It would not be a crisis. The decline of our influence as institutions -- and Canada's position as a global financial centre -- would be gradual. Our major banks and insurance companies and mutual fund companies are large enough to continue to operate profitably, and to develop strategies to operate in a narrower range of businesses, in order to generate acceptable returns for shareholders.

But what of the long term -- where would we be? Certainly, with consolidation continuing elsewhere, and make no mistake, bank mergers are a worldwide phenomenon, we would gradually lose our place at the table. There would be certain areas and businesses in which we simply could not compete. Other countries and regions of the world are eager to take our place. Other countries and cities see the value in being a major financial centre, and -- if they have not already done so, they are encouraging mergers. France, the Netherlands and Singapore are examples. Charlotte, through encouraging its banks to merge and acquire has become the number two financial centre in the U.S.

Until fairly recently, I had hoped that TD could thrive and outcompete on its own but in changing global markets, it has become apparent that the strategies TD has pursued as a major Canadian full service financial institution must be reinforced and backed up by greater size and scale. That is the key to maintaining the kind of massive investments in technology and in new businesses that are essential to long term growth, and to retaining the benefits in terms of jobs, economic returns, progress and influence that such growth will bring.

I am not just talking about TD -- I am not just talking about our proposed merger with CIBC. I am talking about Canada. Being at the table as part of the G-7 for the past decade has been good for Canada. It's been good for our industries. It's been good for our presence in the world. It's been good for our influence... it's been good for our economy.

But will we be there in the twenty-first century, with the forces of change now sweeping the world?

Gradually, as they fall further from the top tier, some of our institutions will exit businesses where they cannot compete effectively -- they will have to, in order to generate an acceptable return for shareholders. And that is absolutely critical -- we operate in a market economy and we are owned by our shareholders. Their interests must be served. And in the case of banks, our shareholders include one out of every two working Canadians. That is a substantial public interest, and it is one that has perhaps been overlooked in this debate.

The primary drivers of consolidation are technology and capital. The sheer numbers tell the story. There was a time when TD spent as much on technology as NationsBank. Since then Nations has experienced several mergers with the result that the new Nations/Bank of America spent the equivalent of Cdn $3.8 billion in 1997 while we at TD spent only $500 million. There was a time when TD spent roughly the same as MBNA on card technology but last year MBNA spent Cdn. $150 million while TD spent $6.5 million. NationsBank and MBNA are able to do that because they have a much broader customer base and much higher volumes over which to spread the costs and the gap continues to grow.

Moreover these concerns are not just hypothetical. TD has already exited from two businesses in the last couple of years – our custody business and our payroll business. Those are international businesses that require massive volumes to be viable – and massive investments in technology to be competitive. We simply could not justify such a vast investment. Spending on technology has become more critical than ever to keeping pace with the new competition – the new global giants, in these and other businesses.

Another example – TD has an enviable record in leading loan underwritings. We just ranked number two in the U.S. in leveraged deals and number seven in all loans. No other non-U.S. Bank was in the top 10. But last quarter we saw NationsBank commit to two loans of almost $4 billion each. At our size, we would only be able to commit to roughly half that amount on a single loan. The fact is, as more and more of our clients merge, they will be seeking larger loans. And larger banks are better positioned to provide these loans. To suggest that banks need not grow – or indeed should not grow – in tandem with their clients is simply counter to common sense.

How long can we compete against these giants in every realm of business? How long can we continue to offer consumers a full service approach -- with leading edge products and services? How long before we have to narrow our business focus further?

In responding to the realities of the changing global marketplace, we have a vision at TD -- of joining forces with a major competitor so we can ensure that we create a Canadian institution that is at the table for the long term -- that we can grow and flourish in the new environment... that we can sustain the job, tax and investment benefits in Canada, provide a broad range of competitive products and services to customers, and produce good returns for shareholders.

Canadian ownership of global concerns means, ultimately, keeping more jobs in Canada. As a strong financial centre, we have the opportunity to maintain and continue to build a world class talent pool. But if we are held back, and the giants to the south are able to penetrate our markets while keeping the majority of the jobs offshore -- further bolstering New York and Charlotte, but not adding anything here -- where does that lead?

There aren't any guarantees of success in today's marketplace -- change is too rapid. But there is a road we can follow that will take us in one direction or a road we can follow that will take us in another. If we accept the vision of Canada as a country with a group of major Canadian institutions that help keep Canada at the table, then we can find a way to get there -- a way to meet and address the concerns about mergers in our domestic market -- the impact on consumers, the impact on jobs, the impact on rural communities and the impact on small businesses. These are valid concerns -- indeed, they are issues Canada's banks must face with or without mergers.

We know these concerns must be addressed. We are committed to working with the government and other stakeholders on this because the public interest includes our customers, our shareholders, our employees. And we want to ensure the national interest is served well into the future.

Would mergers change the landscape? Yes. Would they pose some challenges? Yes. Would there be a need to ensure competition and consumer protection? Yes.

But surely there are limits. The millions of Canadians who are our shareholders – directly or indirectly – have not purchased our shares in order to see us run surrogate governments. They want us to run a competitive, successful bank. The millions of Canadians who entrust their money to us want us to invest it and safeguard it in a way that enhances their financial well being.

What is more, we are ill-equipped to function as social agencies – and would probably fail if forced to do so.

Social policy is the role of government.

Surely we have learned enough from the experiments and the errors of the '60's and '70's and early '80's to have a clear understanding of what the respective roles of government and the private sector ought to be.

I would ask others in the private sector in this country to consider what is at stake here. This is about their future too. There is something called precedent.

The imposition of enforced competitive weakness is a very odd approach to employment and service delivery. It is contrary to logic. And it is certainly contrary to some very hard and real lessons we have learned from Canadian history.

We can all understand the controversy around the merger issue. This is, after all, about a very fundamental restructuring of what is the backbone of the Canadian economy. And I understand, as well, the emotions that have been generated. Canada's banks may never be loved.

But there is something perverse in an attitude which implies it is wrong for a successful enterprise to want to be more successful. That it is wrong when you are profitable today to want to safeguard your shareholders' profits for tomorrow. And that it is wrong for two successful institutions to want to pool their strengths together. Perhaps to some it is un-Canadian to say so, but we are planning for success, for Canadian success.

I do not fall down before the alter of globalization and technology change. But I do accept them for the forces that they are. In an ideal world – in a dream world – we might wish that mergers were not on the agenda. We would like to be able to ignore the foreign competition we now face – which will grow more fierce every year. But we can't.

Banks around the world are merging and will be free to compete in Canada. What is the logic in denying to Canadian banks the ability to merge and therefore the ability to compete against these much larger financial institutions which are reaping the advantages of scale? I believe this is a critical issue we face in terms of the long term national interest. And I am convinced that given the opportunity, we will succeed in the next century – as an institution, as an industry and as a nation.