To merge or not to merge?

Government approval of bank mergers in Canada continues to elude merger proponents, despite recent hopes for change. By James R. Christie and Ian J. Binnie of Blake, Cassels & Graydon LLP.

To the great surprise of most observers, bank mergers suddenly reappeared on the agenda of Canada’s federal government in July 2005. Seeming to mark the end of almost eight years of concerted inaction by successive Liberal governments, Finance Minister Ralph Goodale unexpectedly announced his intention to release long-awaited merger review guidelines sometime in the fall of 2005. To much less surprise, Prime Minister Paul Martin publicly reversed the government’s course in early October and firmly closed the door on any bank mergers during his term of office.

Readers with long memories will recall that Royal Bank of Canada and Bank of Montreal, two of Canada’s largest banks, announced their intention to merge in January 1998.

At that point, the merged institution would have been one of the top ten banks in North America, ranked by market capitalisation, and among the top 25 in the world. This was followed in April 1998 by a similar merger announcement from two smaller members of Canada’s ‘big five’ – Canadian Imperial Bank of Commerce and The Toronto-Dominion Bank.

Unfortunately for the merger proponents, the Bank Act gave then Minister of Finance Paul Martin the final word on their proposals. And, by late 1998, it was clear that his approval would not be forthcoming. Although Martin claimed at the time that the merger proposals were simply premature, he was undoubtedly swayed in his decision by visceral opposition to bank mergers from the back benches of his own Liberal Party. In fact, his decision ran contrary to the recommendations of his own blue-ribbon Task Force on the Future of the Canadian Financial Services Sector.

The Task Force had steered clear of commenting directly on the RBC-BMO and CIBC-TD merger proposals when it released its comprehensive report in September of 1998, but it did give quite careful consideration to the bank merger issue. On this, the Task Force recommended that the federal government abandon its informal ‘big shall not buy big’ policy and proposed that merger transactions be evaluated on their individual merits. More particularly, the Task Force proposed the implementation of a public review process involving the Competition Bureau (with respect to competition matters), the Office of the Superintendent of Financial Institutions (with respect to prudential matters), the Canadian public (with respect to ‘the public interest’) and the Minister of Finance (with respect to the federal government’s interpretation of ‘the public interest’). Although lukewarm on the actual need for bank mergers, the Task Force Report concluded that if a proposed merger met the competition and prudential standards, it should be approved unless there were overriding public interest concerns.

In response to this recommendation, the federal government committed itself in late 1998 to publish clear guidelines for the approval (or disapproval) of future merger proposals. These guidelines did not, however, appear until 7 February 2001, when the Department of Finance issued a press release that contained, as a two-page annex to a brief summary of some proposed changes to the Bank Act, the federal government’s long-awaited merger review guidelines for large banks (that is, those having more than $5bn in equity). These guidelines proved to be almost vanishingly short – just about as long as this article – and described a three-stage public review process that was little different from the one outlined in the 1998 Task Force Report.

Predictably, the issuance of these guidelines did nothing to stimulate a new round of bank merger announcements. Instead, they produced a sustained barrage of criticism from banks and other interested parties, who concluded that the guidelines’ cryptic reference to the ‘public interest’ was still code for the perceived ‘political interest’ of the Liberal government. The focus of complaint remained the fact that, although the guidelines purported to create an objective and transparent review process, the final decision still rested with the minister of finance.

In response to continuing entreaties from the banks to give substance to these ‘public interest’ criteria, the guidelines have since been volleyed back and forth between the Department of Finance and various standing committees of the House of Commons and the Senate. The issue of ‘cross-pillar’ mergers between big banks and big insurance companies has been added to the discussion along the way, but essentially no measurable progress has ever been made on clarifying what banks must do (or not do) in order to win approval for a merger.

Now, with the prime minister’s recent pronouncement, there is little or no prospect that merger review guidelines will be released during the remaining days of his government. A federal election is due in the first half of 2006, but merger proponents may find that any change of government will do little to change their situation. Opinion polls have consistently shown limited support for bank mergers among ordinary Canadians, and, sometimes, our politicians are attentive to their masters.