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Cablegate: Bank of Canada Governor Implicitly Endorses Bank

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

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