Banks Will Be On the Agenda in 2003

Have you noticed how the banks are changing their names these days? The Royal Bank of Canada is now RBC and the Bank of Montreal is now BMO. The names are changing because words like “Royal”, “Canada” and “Montreal” don’t play well south of the border. Of course, rural lending plays even less well.

It is now five years since The Royal Bank of Canada and the Bank of Montreal announced plans to merge. A political firestorm engulfing rivals Paul Martin and Jean Chretien put those plans on ice. But you should expect Bank mergers to resurface on the national agenda this year regardless of who wins the Liberal leadership race.

These two Canadian banks marked each other’s dance card early because they wanted to take advantage of the newly minted Agreement on Financial Services announced by the World Trade organization one month earlier. This Agreement was aimed at reducing national barriers to transnational financial companies. The political roadblock in Ottawa meant these banks had to move to plan “B”. What does plan “B” look like? It looks like expanding internationally or moving into businesses not associated with banks.

Take the Royal Bank for example. RBC is the largest bank in Canada with 2001 net income of $2.4 billion, an increase of $800 million since 1997. In November of 2000 they bought Liberty Life Insurance in the US. Liberty operates in 6 states and provides a good foundation for growing an insurance business. In June of 2001, RBC also bought Centura Banks in the south-eastern US. Centura has US$14 billion in assets.

Why would Canadian banks follow this strategy? All around the world banks are merging and getting larger. As global trade grows, businesses want to deal with only one lender even though they are operating in several countries. The competition is to see who will be the largest bank in the European Union or in NAFTA or in Asia. For example, Crédit Agricole, which started as a farmer owned cooperative, just bought the city based Crédit Lyonnais to create the largest bank in France and the second largest in Europe. The largest bank in Europe is Deutschbank although some people wonder if it’s even German anymore since more than half its Executive Committee is made up of foreigners.

RBC is very clear about its motivation. It’s Annual Report claims “our approach is to encourage every business segment to grow internationally …. In addition, many of our clients are expanding in the US and seeking service capability in that market.”

The winners in this strategy will be international businesses who will be better served by this new arrangement. The losers will be small Canadian towns and small businesses with less financial clout. Rural people may be able to exert political pressure by lobbying the federal rural caucus with some clear, practical ideas. Small towns can insist that bank mergers not force the closure of the only remaining bank. They can also insist that proper regulatory mechanisms be put in place to govern sectors where a virtual banking monopoly exists. Maybe the Feds could insist that all banks with a Class A charter commit a certain proportion of their assets to agricultural lending? Finally, they can ensure that Credit Unions have the same access to the insurance business that banks will shortly have. Banks have grown wealthy because of the protected environment we created for them. We shouldn’t be shy about insisting on reciprocity. You can express your opinion by contacting the Charles Hubbard, Chair of the Standing Committee on Agriculture and Agri-food, and Liberal M.P. for Miramichi.

First Published in January 2003