This record is a partial extract of the original cable. The full text of the original cable is not available.

212158Z Dec 04

UNCLAS SECTION 01 OF 02 OTTAWA 003433 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR EB/IFD, WHA/EPSC AND WHA/CAN 
STATE PASS FEDERAL RESERVE BANK FOR CHUGH 
STATE PASS SEC FOR JACOBS 
TREASURY FOR WILBUR MONROE AND DAVID NAGOSKI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON CA
SUBJECT: BANK OF CANADA GOVERNOR IMPLICITLY ENDORSES BANK 
MERGERS 
 
REF: A. TORONTO 1986 
 
     ¶B. TORONTO 1386 
 
¶1. (U)  Bank of Canada Governor David Dodge included a pitch 
for bank mergers in his December 9 speech on Financial System 
Efficiency, emphasizing that "scale does matter" and that 
Canada's financial markets must compensate for their limited 
"size, depth and liquidity" with greater relative efficiency. 
 Dodge, who was Deputy Minister of Finance while current 
Prime Minister Paul Martin was Finance Minister, is believed 
to closely reflect the PM's views on most issues. He pointed 
out that other markets, specifically the US and UK, have 
surpassed Canada's post-war lead in revising financial 
regulations, a trend reflected in the slide by Canadian banks 
down the scale of the world's banks.   The IMF's December 20 
call for clarification of the regulatory framework on bank 
mergers headlined the story in the business section of 
Ottawa's newspaper.  Financial sector observers now think 
that the uncertainty posed by a minority government might not 
prevent the GOC from having to clarify its position on bank 
mergers (an outright ban is not a feasible option), which 
could open opportunities for US banks.  Dodge also spoke 
about the need for a national securities regulator (septel). 
 
When, not If? 
------------- 
 
¶2.  (SBU) The final decision on bank mergers rests with the 
Prime Minister and Finance Minister.  In 1998, Paul Martin, 
the then-Finance Minister, refused to approve proposed 
mergers between the Royal Bank of Canada (RBC) and the Bank 
of Montreal, and between CIBC and Toronto-Dominion Bank. 
Pressure has been building over the past year for a clear 
statement on bank mergers by Finance Minister Ralph Goodale, 
but his "clarification" was postponed from June to October, 
and is now on hold indefinitely.  Claiming the need to 
complete consultations with bank CEOs (of which there aren't 
that many), Goodale has refused to indicate a possible date 
for the much-awaited statement.  A banking insider finds the 
delay laughable, pointing out that GOC policy already permits 
mergers, and that no financial institution has requested 
clarification of the process.  They are "horribly frustrated 
and the whole process is a sham." 
 
¶3.  (U) The is widespread agrement that Canada's biggest 
banks need to merge domestically in order to be globally 
competitive.   RBC, the largest, is now ranked 50th in the 
world by bank asset size, behind seven U.S. banks.   Four 
other Canadian banks are clumped between 61 and 66 in the 
rankings.  By market capitalization, RBC is the 36th largest 
financial institution in the world, followed by Scotiabank at 
41st. 
 
¶4.  (U) In the absence of Finance Ministry support for 
domestic mergers, Canadian banks have used some of their 
surplus cash to expand into the U.S. market (reftels).  The 
years of pent-up demand make multiple merger requests likely 
should banks receive a green light, so the GOC is wrestling 
with competition concerns in the highly-concentrated 
industry.  (Note:  Current betting, should mergers be 
approved, is on applications for a Scotiabank merger with the 
Bank of Montreal; Toronto Dominion (TD) with CIBC; and 
possibly a union between RBC and an insurance company. 
However, banks have kept their plans close-hold to avoid 
controversy.  End note.) 
 
Mergers could open the market 
----------------------------- 
 
¶5.  (SBU)  A contact at the Canadian Bankers' Association, 
speaking personally, sees the GOC's best option as permitting 
the mergers, which are necessary to boost Canadian banks' 
international competitiveness, while requiring significant 
divestiture of domestic branches.  Sale of 300-500 branches 
by merging banks would open opportunities for a mid-level 
Canadian bank (possibly National) and for foreign banks to 
expand in Canada's saturated market.  HSBC has the largest 
foreign-bank presence in Canada, but the availability of 
branches nationwide is also mentioned as an opportunity for 
players such as Citibank, which don't have a retail presence 
in Canada. 
 
¶6.  (U) Note:  U.S. banks in Canada welcome the uncertainty 
over mergers, which they believe provides them with a 
competitive edge. Institutional clients tend to become more 
interested in partnering with a large US bank when asked if 
they  really want their financing from an institution that 
may or may not be dealing with a major merger in the near 
future.  End note. 
 
Lack of Majority in Parliament may not prevent movement 
--------------------------------------------- ---------- 
 
¶7.  (U) Conventional wisdom has held that approval of bank 
mergers would be extremely unlikely in the context of a 
minority government and banks had been focusing their 
lobbying efforts on the upcoming review of the Bank Act in 
¶2006.  In October, the head of the House of Commons finance 
committee said "mergers between Canada's big banks and 
insurers are "going to happen" if the financial sector 
requests it, but bank-bank mergers have been more sensitive 
given the limited number (six) of large national banks. 
Although the opposition Conservative party contains an 
anti-big bank element, leaders such as Steven Harper and 
Finance Critic Monte Solberg recognize the need for financial 
sector efficiency. 
 
¶8.  (U) Solberg's position is that they would like to see 
bank mergers and think that "the industry and Canadians 
deserve" the benefits.  However, the Conservative party would 
want to see the specific proposals and have each case 
considered on an issue-by-issue basis. (Comment:  leaving 
open the possibility of objections in specific cases.  End 
comment.)  The negotiations needed to gain support from 
opposition parties in a minority government could, in fact, 
facilitate the decision by providing cover for the governing 
Liberal party. Governor Dodge's comments, the coverage given 
to the IMF statement, and the apparent willingness of the 
parties to work together on a range of issues in parliament 
may bring the merger issue back into play. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
CELLUCCI