November 2, 1998
Remarks By:
A. Charles Baillie
Chairman & Chief Executive Officer
Toronto Dominion Bank
To:
Standing Senate Committee on Banking,
Trade and Commerce
Toronto, Ontario
We are very pleased to have this opportunity to appear before this committee at this critical time in the financial services sector.
Last month, when TD appeared before the House Committee, we talked about a long term vision for the financial sector. We posed the question -- where would the government like to take the financial sector in the next century. What kind of industry do you want for Canada?
We discussed two scenarios. One vision of Canada would have our country in the front ranks of the global financial sector -- as a key provider of financial services in Canada and abroad -- giving our country the potential for 6 to 8 major, world class institutions that are Canadian-controlled and Canadian headquartered.
The other vision would see Canada slipping further from the top tier -- becoming a declining influence in financial affairs, and indeed, in world affairs. In that scenario, Canadians would probably continue to enjoy a reasonable domestic financial marketplace. But that marketplace would be based on growing domination of more sectors of financial services by foreign suppliers -- and the ongoing erosion of market position by Canadian institutions.
In our presentation to the Commons committee, we said that the MacKay Report has a set of recommendations that will -- if taken in their entirety -- allow for the first scenario. That is, the vision of Canada as a home of vibrant, competitive, world class, financial institutions. We said that these recommendations are balanced and fair -- and that cherry-picking these recommendations would upset the balance, ultimately hurting consumers and the financial sector.
We would like to expand on that today -- to discuss the MacKay recommendations that go to the heart of changes in the structure of the financial sector -- and that would reshape the sector for the next century.
When we say the MacKay package should be looked at in its entirety -- we don't mean all 124 recommendations. A lot of the 124 recommendations are good and timely. Many would benefit Canadians -- and all warrant serious consideration. But most of them would have little or no impact on positioning Canada's financial service providers for the twenty-first century.
We have identified a dozen of the recommendations that would have such an impact -- that would indeed shape Canada's financial services industry, depending on whether and how they are incorporated into legislation.
As a group, these recommendations would encourage Canadian ownership of major institutions... they would allow major institutions to pursue their strategic goals in the changing global marketplace... they would allow for a very competitive, but level playing field in Canada... and they would increase foreign competition in Canada.
That is the balance that would lead to the vision of Canada as a home of strong, vibrant, competitive institutions -- and an open competitive marketplace delivering benefits to consumers.
I will devote most of my remarks today to these core recommendations -- and then close with some comments about our vision of TD -- our vision of being an integral part of that strong, vibrant Canadian financial sector through our merger with CIBC.
National ownership recommendations
I will start with the two recommendations that relate to national ownership. These are recommendation #3 -- that large regulated financial institutions should be Canadian controlled, and #39 -- that big Canadian financial institutions can be bought by widely held foreign financial institutions, subject to the approval of the Minister of Finance.
With these two recommendations, Canada will encourage Canadian ownership of major institutions, without precluding foreign ownership of some major institutions in our country, as may suit the national interest. These are vital to the vision of Canada as a home of strong, world class financial institutions.
Permitting the pursuit of strategic goals
Now for the four recommendations which would provide financial institutions in Canada with the flexibility to pursue their strategic business goals -- to
chart their course for being strong, competitive, and world class.
These include #26 -- that financial holding companies be permitted... #38 -- that demutualization of insurance companies should be permitted... #45 -- that there should be no policy that prevents mergers -- be they banks, insurance companies, mutual fund companies, investment managers or others... and #42, that the Office of the Superintendent of Financial Institutions and the Canadian Institute of Chartered Accountants should resolve goodwill accounting principles.
This group of recommendations is vital to allowing our institutions to make the acquisitions, divestitures and mergers they judge to be appropriate in the pursuit of their strategic business goals. And this in turn, will allow the emergence of a strong group of world class financial institutions -- not just TD and CIBC, and not just banks -- but insurers, mutual fund companies and others.
Leveling the Canadian playing field
Next, there are three recommendations -- 12, 18 and 13 -- that would level the Canadian playing field, removing barriers and increasing competition within Canadian markets.
#12 would combine CDIC deposit insurance and COMCORP insurance protection -- which would open up the deposit taking industry...
#18 would allow deposit takers to sell insurance through retail branches -- opening up the delivery of insurance in Canada and, we believe, lowering the cost for Canadian consumers...
#13 would be most significant to the reshaping of our entire industry -- as it would open up the payments system. This would give new powers to insurance companies, money market mutual funds, and securities dealers to provide operating deposit account equivalents with wide ranging transaction privileges -- in direct competition with the banks.
Greater access to Canadian markets for foreign banks
Next, there are two recommendations that would provide greater access to Canadian markets for foreign banks. These include #8 -- removing the withholding tax on interest on arms length loans... and # 9A -- allowing foreign banks to operate through branches as an alternative to Canadian subsidiaries, as long as they don't take retail deposits. These moves would allow major foreign banks to move directly into our corporate, commercial and small business loan markets without having to establish Canadian subsidiaries.
That adds up to 11 core recommendations which would reshape our financial sector profoundly. The twelfth recommendation that is key to the vision of a strong canadian financial sector in the twenty-first century is the very first recommendation of the MacKay Task Force: #1 -- that the government should move now, and not wait until 2002.
This is vital, because the change in the world around us is so rapid. If we don't take the opportunity now to put together the building blocks that will allow for world class Canadian owned financial institutions, then we may end up too far behind our foreign competitors to ever be a significant factor.
With the changing face of global banking -- the new benchmarks for globally competitive institutions have changed dramatically. In just the past year, consolidations and mergers elsewhere have created huge competitors that have new advantages of scope and scale, capital and technology.
We believe the package of a dozen recommendations sprinkled throughout the report is fundamental to creating a globally competitive financial system -- that opens up our markets to competition which will be good for consumers -- and, at the same time, allows the emergence of major world class institutions that are Canadian owned. The danger would be in picking and choosing -- opening up competition and ownership to foreign institutions for instance, without giving Canadian institutions the chance to respond by merging and creating the scale and scope to be domestically and globally competitive.
There is one other recommendation upon which I would like to comment -- because it could have a negative impact on the thrust of the legislation you develop to reshape the sector. That is recommendation #47 -- which endorses the Competition Bureau's policies for reviewing bank mergers. We certainly agree with the need for Competition Bureau review -- but we are concerned about the Bureau's policy to restrict its view on the competitive impact of technology to a two-year time frame. We operate in a world where technology is changing day by day, and transforming the marketplace. And you, as Senators, are going to be developing legislation that will be in place for many years. We believe that a two-year focus falls far short of what is necessary for such long term legislation. We also caution against over-regulation of the sector in the context of a rapidly changing environment. The businesses in the sector need to be flexible to be able to respond to the competitive environment.
We are not asking for protection -- we are not asking you to keep competitive global suppliers out of Canada. We are just asking for the opportunity to build the scope and scale we need to fight back. We are asking you not to tie our hands while we face aggressive competition from global giants. We believe it would be better for Canada if Canadian companies were able to stay in the front ranks of
these financial businesses which are vital to Canadian consumers -- and to Canadian industries.
World class industries require world class banks. Our vision of Canada is a Canada that has both.
Back in the fifties, the Bank of Toronto and the Dominion Bank faced an uncertain future -- both were mid-sized banks that were losing major customers -- because those customers were outgrowing the capacity of those two banks. When those banks merged in 1955 to create TD we were able to keep pace with our customers' needs and with our competitors. We are at the same crossroads now. And we want to keep pace... we want to meet our customers' changing needs and compete against the global giants -- while ensuring we can continue to meet the needs of Canadian consumers in a highly competitive domestic market.
Canada has a choice here -- we have what it takes to be globally competitive, if we are given the opportunity to join forces -- as TD would like to do with CIBC. Countries that don't have that opportunity are now dominated by foreign owned or controlled financial institutions. Mexico and Argentina are examples. Surely it is in the national interest for Canada to encourage strong and competitive Canadian-headquartered banks.
And we believe, as we have stated elsewhere, that having the ability to pursue our growth strategies will ultimately mean more jobs in Canada, better returns for shareholders, more taxes paid here, and greater opportunities for our institutions to continue providing a full range of competitively priced services and products to consumers and businesses.
We acknowledge that there are no guarantees of success in any of these areas in today's rapidly changing markets. And we know that you have very real concerns about the impact of mergers on consumers and rural communities and employment and small business.
We know that these concerns must be addressed. And we are committed to working with you, and the House of Commons and other stakeholders on this because the public interest includes our customers, our shareholders, and our employees.
I go back to one of the core MacKay recommendations -- that the government should move now, and not wait until 2002. The rest of the world has been moving aggressively. The rest of the world is not going to wait for Canada to keep pace. The longer it takes the government to move, the harder it will be to retain in Canada the headquarters of world competitive financial institutions in the twenty-first century. The opportunity to achieve the vision of Canada maintaining its valuable worldwide influence as the home of major international companies and banks must be grasped.
We are committed to the vision of a Canada with a strong group of world class institutions. We want to be one of those institutions. We want to be able to succeed in the next century. We believe a healthy vibrant competitive financial sector with some world class Canadian-owned financial institutions is in the national interest, and we seek the opportunity to contribute to that interest.
