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Report on Business How blocked mergers foiled banks' ambitions — and forced the Big Six to innovate

Matthew Barrett, CEO of Bank of Montreal, and John Cleghorn, CEO of the Royal Bank of Canada, answer questions at a news conference in Toronto on Jan. 23, 1998.

Peter Jones

When Royal Bank of Canada and Bank of Montreal announced a surprise plan to merge on Jan. 23, 1998, the news landed like a bombshell. By the time then-finance minister Paul Martin dashed their hopes less than a year later, the notion of mega-bank mergers had turned radioactive.

It was 20 years ago, on Dec. 14, 1998, when Mr. Martin turned down RBC and BMO’s plan, as well as a subsequent tie-up proposed by Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. His ruling stamped big bank mergers as politically untouchable in Canada, and that imprint is still clearly visible today.

The mergers, had they been allowed, would have dramatically reshaped Canada’s banking sector, condensing an already cozy industry while setting the combined banks on a fast track to extend their influence in the rapidly consolidating U.S. banking market.

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“It became pretty obvious that nobody other than the banks thought it was a good idea,” says Charles Baillie, who was chief executive officer of TD at the time, in an interview.

Instead, after a hard-fought public campaign lasting 11 months, each bank was forced to resort to its own plan B, with varying success. With diverging strategies, Canada’s leading banks carved out more distinctive identities over the next two decades, some gaining influence while others lost ground.

A calculated gamble

The agreement that set the merger debate in motion famously came to life over eggnog and hors d’oeuvres at BMO’s Christmas party on the 68th floor of its Toronto offices, late in 1997. John Cleghorn, who was RBC’s chief executive, crashed the party to bend the ear of his BMO counterpart, Matthew Barrett.

Their tête-à-tête was only one of a series of merger talks leaders from several of Canada’s largest banks had quietly held with each other in the late 1990s. A wave of consolidation among U.S. and European banks made Canadian executives wary that they would be vulnerable on their own turf if they didn’t get bigger and improve their clout abroad. Mr. Barrett warned that Canadian banks risked ending up like “the corner hardware store waiting for Home Depot to arrive to put it out of business."

Mr. Cleghorn, as the leader of the country’s largest bank, felt strongly that RBC needed to be first out of the gate. After a month of intense negotiations, a deal was struck late on the evening of Jan. 22. But it wasn’t until the next morning that the banks tried to give Mr. Martin a heads up.

Canadian Finance Minister Paul Martin told reporters April 17 that he would like to see 'greater competition' in the Canadian banking sector.

Mark Wilson

At the time, lawyer Harold MacKay was leading a federal task force that was in the midst of drafting a report on the future of financial institutions. Mr. Martin, who has not been in favour of the mergers from the start, says the banks should have waited for the report.

Internally, the banks debated how far in advance they should make Mr. Martin aware of such a blockbuster deal, given that he would be its arbiter. There were legal concerns to consider, but also fears that Mr. Martin or prime minister Jean Chrétien – who also instinctively opposed the mergers – might shut the plan down before it ever got started.

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“If we had not tried, we would not have found out what the rules were going to be – there were no rules,” Mr. Cleghorn says.

Once the merger was announced, bankers felt there was a chance they could win public support – which proved to be a fatal miscalculation. “It landed like a lead balloon in the court of public opinion,” says Konrad von Finckenstein, who was commissioner of the Competition Bureau, tasked with examining the merger’s impact.

When CIBC and TD announced their own merger agreement in April, 1998, the odds of either deal winning federal approval only grew more remote. “We weren’t that optimistic that we’d be able to pull it off, but we thought defensively, we can’t afford to have the Royal and the Montreal combine and be that much larger,” Mr. Baillie says.

Toronto Dominion Bank's Charles Baillie and CIBC's Al Flood at a press conference to announce the merger on April 17, 1998.

Edward Regan

That other banks would feel pressure to follow suit “was entirely predictable,” Mr. Martin says. What proved harder to anticipate was the strength of the backlash. Small businesses, in particular, feared they would be left with fewer options, and Mr. Martin confirms that “the business community was not in favour, by and large.”

In the early going, the banks' own arguments for the deal’s merits weren’t helping. Mr. von Finckenstein remembers receiving separate visits from Mr. Cleghorn and Mr. Barrett, each making the case it was “blindingly obvious” that a merger would make for a more efficient banking system and benefit shareholders. “I remember going away from them saying, ‘You never mentioned your customers,’" Mr. von Finckenstein says.

It wasn’t until the later stages of the campaign that the two banks began making public pledges about preserving bank branches, catering to small businesses, freezing some service charges and finding new roles for employees whose jobs would be displaced. But this came too late, says David Moorcroft, who was RBC’s vice-president of public affairs. “I think we were fighting a rearguard action then.”

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The final blow came when the Competition Bureau released a damning report detailing ways the mergers would diminish competition in banking, from access for small businesses to credit-card concentration. Some concerns could have been addressed, but that would have required major divestitures – for instance, the Competition Bureau would not have allowed RBC and BMO’s investment banking arms, Dominion Securities Inc. and Nesbitt Burns Inc., to join together.

Mr. Martin welcomed input from the Bureau. “He needed something to justify turning it down,” Mr. von Finckenstein says. “He was inclined to do it but he needed the ammunition, and we presented him with the ammunition.”

How the banks have grown

If Royal Bank of Canada and Bank of Montreal had

merged, the combined entity would have had

$497-billion in total assets, at the end of fiscal

1998. Meanwhile, the tie-up of Toronto-Dominion

Bank and Canadian Imperial Bank of Commerce

would have resulted in total assets of $463-billion.

Twenty years later, each bank is substantially

larger despite the scuttled mergers.

RBC/BMO merger

(end of fiscal ’98)

$497B

RBC

$1.3T

(end FY’18)

$274B

(end FY’98)

BMO

$774B

$223B

TD/CIBC merger

(end of fiscal ’98)

$463B

TD

$1.3T

$182B

CIBC

$597B

$281B

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

How the banks have grown

If Royal Bank of Canada and Bank

of Montreal had merged, the

combined entity would have had

$497-billion in total assets, at the

end of fiscal 1998. Meanwhile, the

tie-up of Toronto-Dominion Bank

and Canadian Imperial Bank of

Commerce would have resulted in

total assets of $463-billion. Twenty

years later, each bank is substantially

larger despite the scuttled mergers.

End

FY’18

End

FY’98

RBC/BMO merger

(end of fiscal ’98)

$497B

RBC

BMO

$1.3T

$774B

$274B

$223B

TD/CIBC merger

(end of fiscal ’98)

$463B

TD

CIBC

$1.3T

$597B

$281B

$182B

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

How the banks have grown

If Royal Bank of Canada and Bank of Montreal had merged, the

combined entity would have had $497-billion in total assets, at

the end of fiscal 1998. Meanwhile, the tie-up of Toronto-Dominion

Bank and Canadian Imperial Bank of Commerce would have

resulted in total assets of $463-billion. Twenty years later, each

bank is substantially larger despite the scuttled mergers.

End

FY’18

End

FY’98

RBC/BMO merger

(end of fiscal ’98)

RBC

BMO

$1.3T

$497B

$774B

$274B

$223B

TD/CIBC merger

(end of fiscal ’98)

TD

CIBC

$1.3T

$463B

$597B

$281B

$182B

THE GLOBE AND MAIL, SOURCE: BLOOMBERG

A lasting legacy

Some bankers were angry when Mr. Martin killed the mergers, but their bitterness faded over time.

“[Mr. Martin] had to do what he had to do, and I was trying to do what I had to do. We all moved on. But we also knew what the score was," Mr. Cleghorn says.

Discussions about mergers carried on in the background for years, and BMO even took a second run at a merger in 2002, this time with Bank of Nova Scotia, which had been vocally opposed to mergers in 1998 when it was unable to find a dance partner. But the banks failed to win a blessing from new finance minister John Manley, and abandoned the plan.

At TD, a backup plan was already in motion. In advance of Mr. Martin announcing his decision in late 1998, he called bank CEOs to Ottawa to brief them. Mr. Baillie hitched a ride to Ottawa on CIBC CEO Al Flood’s plane, and on the flight, said to him, "'Well, it looks like we’re competitors again, so you might want five minutes alone with the finance minister, and I’d like to have five minutes alone with him.’ So we agreed to that.”

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Mr. Baillie says he used his five minutes to test Mr. Martin’s willingness to allow TD to acquire Canada Trust, a major force in retail banking that had attracted takeover interest from several lenders. Mr. Martin’s response, as Mr. Baillie recalls, was “as long is it isn’t one of the [Big Five banks]." Mr. Martin says he doesn’t remember that exchange.

In no time, TD was on the phone with the largest shareholders in Imasco Ltd., which owned Canada Trust. In 2000, TD struck a deal, pulling off a coup that helped transform what was then Canada’s fifth-largest lender. TD is now neck and neck with RBC for the title of Canada’s largest bank, with $1.3-trillion in assets.

“I think if [the mergers of 1998] had gone through, we would not have had a competitive advantage vis-à-vis the Royal and the Montreal,” Mr. Baillie says. “From TD’s point of view, it couldn’t have worked out better.”

Paul Bleyer, executive director for the Council of Canadians, yells up to the office of Canadian Finance Minister Paul Martin after unveiling a billboard memo in Ottawa on Dec. 2, 1998.

Jim Young

Other banks took longer to regroup. RBC ultimately bought North Carolina-based Centura Bank in 2001, then sold it in 2011 after struggling to gain traction in American retail banking, though it also built a New York-based capital markets arm that now ranks among the top 10 U.S. investment banks. CIBC, which was Canada’s second-largest bank at the time of the mergers, plunged aggressively into ill-fated forays in U.S. investment banking and electronic retail banking that led to massive write-downs. Over time, CIBC fell to fifth place among Canada’s largest banks, and only recently re-established its U.S. footprint with a commercial and private bank based in Chicago. BMO gradually built its strength in commercial and retail banking in the U.S. Midwest through BMO Harris Bank, which it had already acquired in 1984. And Scotiabank largely bypassed the United States, investing instead in more emerging markets such as Latin America and the Caribbean.

"The biggest lasting impact [of the blocked bank mergers] is that Canadian banks had to be more innovative about how they would continue to grow,” Mr. Moorcroft says. “Before that, the strategies of the big banks were pretty similar.”

The fallout was tangible in other important ways. Discussions over mergers between the government, regulators and the Bank of Canada shaped concerns about banks becoming too big to fail – a problem that came into sharp focus in 2008 with the onset of a global financial crisis. Canadian banks were still building their U.S. footprints and had avoided many of the worst excesses of their peers abroad, seizing the opportunity to snatch up talent cut loose by floundering U.S. banks.

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Denying the mergers may also have strengthened the hand of Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), in restraining the banks. “I’m sure OSFI was under tremendous pressure to loosen the reins and allow all sorts of things that were happening in the States,” Mr. von Finckenstein says. “If we had had even larger entities, and fewer, it would have been so much harder for them to resist the pressure.”

Today, there is broad agreement that a merger between any of Canada’s largest banks is still verboten, no matter the government of the day, except in a crisis in which a major Canadian bank would need rescuing. “I think all you could do is lose votes if you supported it,” Mr. Baillie says.

Then again, Mr. Cleghorn says, “you never say never.”

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