Tuesday, June 27, 2006

OECD Calls for Action on Bank Mergers

The Globe and Mail, Sinclair Stewart, 27 June 2006

The Organization for Economic Co-Operation and Development is warning that Canada's effective ban on bank mergers could be hampering the country's productivity, and is urging Ottawa to remove the political red tape that has been choking the industry's efforts to consolidate.

The OECD, which released its recommendations yesterday as part of a larger economic survey of Canada, is the latest in a long line of groups that have stepped forward declaring the need for an improved merger process in the financial services sector.

Bank of Canada chairman David Dodge has speculated that the dormant merger file could be partly to blame for the industry's weak productivity growth. An internal government report, prepared for recently appointed Finance Minister Jim Flaherty, came to a similar conclusion, as did an April study on service exports conducted by the Conference Board of Canada.

The OECD said the best option is to eliminate the Minister of Finance's role in approving mergers, as a means of depoliticizing the process. Failing that, it recommended the Finance Department issue a clear set of guidelines that the industry could rely upon to form their proposals.

"Either way," the organization wrote, "the ongoing uncertainty is preventing possible efficiency gains from being explored and needs to be resolved."

So far, however, all of this pro-merger agitation has fallen upon deaf ears. Mr. Flaherty has insisted that the merger file is not a priority for Prime Minister Stephen Harper and his Conservative government. Indeed, a recent white paper on financial services legislation made no mention of the issue; nor did it tackle the equally slippery subject of bank-insurance mergers, in keeping with a pre-election promise by Conservatives.

After seeing their merger hopes dashed in 1998, and then again in 2002, and then again in 2005, you'd think bankers may have finally accepted defeat. Not all of them. There is a growing optimism in some quarters of Bay Street, however cautious, that Stephen Harper is well-positioned to win a majority government if there is an election early next year. Some influential bank executives believe Mr. Harper is ideologically sympathetic to the industry's merger ambitions, despite the populist bent of his caucus, and that with a majority hold on Parliament he would be willing to deal with the merger file early in his tenure.

"Whether it's the 30th fire drill since the year 2000 is irrelevant," one bank official said yesterday. "You'd better be ready to get the people out of the building. You can't afford to not be ready: If there is a shot here, it will likely be relatively quick and decisive."

A chief executive officer at one of the country's big banks echoed this opinion, and predicted the merger file will be rekindled in the fall if Mr. Harper appears headed for a majority victory at the polls. Bank sources say it would take between one and two months to cobble together a proposal for Ottawa. Bank of Montreal, whose merger plans with Bank of Nova Scotia were privately quashed by Ottawa a few years ago, is still seen as the most attractive and likely takeover target.

The OECD report, meanwhile, suggested that Canada's capital markets would also benefit from a standardization of securities regulation: an effort that rivals the merger debate for lack of progress. The organization noted that Canada has taken some steps to harmonize rules, but suggested it should also look to consolidate its patchwork regime of provincial and territorial regulators.