This paper considers the potential impacts of the proposed mergers between the Royal Bank and the Bank of Montreal and between the Canadian Imperial Bank of Commerce (CIBC) and the Toronto Dominion Bank (TD Bank) on BC consumers and on BC and Canadian consumer protection measures. It focusses on the retail banking sector and potential merger impacts on individual and household consumers.
Section I examines the impacts of mergers in other jurisdictions. It reviews the available empirical research on the consumer impacts of bank mergers and related consumer protection measures. This comparative survey focusses primarily on the United States, where merger activity has been the greatest, and on Australia, whose economy is similar in many respects to Canada’s and which has just completed a major public inquiry into its financial services sector and regulatory policies.
Section II assesses the likely impact of the proposed mergers on BC consumers and on the competitive practices of banks within BC and Canada by applying the research findings from other jurisdictions.
Section III highlights options for consumer protection. It considers a range of measures that have been proposed – by Canadian industry, governments, consumer organisations and public interest advocacy groups – to prevent or mitigate potential adverse impacts of the mergers or to redress other financial services consumer issues that have been highlighted by the proposed mergers. Where relevant, these proposals are compared to examples of consumer protection practices adopted in other OECD jurisdictions.
The case for improved efficiency as a result of the proposed bank mergers is empirically very weak. Indeed, the bulk of empirical research into bank mergers shows that most do not result in efficiency gains and the there are no returns to scale beyond a certain modest size.
Most individuals and households continue to rely on their local deposit-taking institution for a range of basic services. From a consumer perspective, the structure of retail financial markets has not changed as radically as is sometimes suggested. Most British Columbian consumers continue to rely on the local branch of their deposit-taking institution for most of their basic financial services.
Because the proposed mergers would significantly increase the rate at which full-service branches are closed and jobs are eliminated, the most direct impacts on BC consumers generally would be increased time and/or travel costs spent getting personal service and reduced choice as customers are forced to substitute automated for personal service.
There are a range of consumer protection concerns related to the dominance of the largest Canadian banks that have been highlighted by the merger proposals. These include service fees, credit card interest rates, privacy concerns, and selling practices. The paper assesses the likely impact of the mergers in each of these areas. Even if the proposed mergers were denied, the continued dominance of five or six large banks requires that certain consumer protection concerns related to these issues be addressed.
Beyond certain niche products, increased expansion of foreign banks in the Canadian retail market is not a realistic prospect. If this were to occur, it would probably involve a takeover of a Canadian schedule I bank. Such a takeover would not increase competition or reduce concentration, but it would raise broader concerns about the acceptable level of foreign ownership in the Canadian banking sector and the continuing viability of national regulation of the Canadian financial system.
There have been many promising regulatory and policy proposals for consumer protection presented during the merger debate. The paper reviews and assesses a range of available consumer protection options. It also discusses useful examples from other OECD countries.
This section of the paper first explores what research in Canada and other jurisdictions has identified as the potential impacts on consumers and the competitive practices of banks from mergers and increased concentration. Then, focussing on the United States and Australia, it reviews measures that other jurisdictions have taken to mitigate or prevent these impacts and other related measures intended to promote bank accountability to consumers.
1) Research into potential impacts on consumers of bank mergers and increased concentration.
a) Research into the efficiency effects of bank mergers
Many bankers and bank industry analysts, from within Canada and abroad, have justified bank mergers on efficiency grounds. The CIBC, for example, asserts in its brief to the BC Bank Mergers Task Force (BC Task Force) that “by increasing our economies of scale and spreading costs over a larger customer base, the proposed merger will enable us to deliver additional price improvements to customers.”  Many other analysts, particularly government regulators and antitrust specialists, have been sceptical of these claims.  These critics point to a substantial body of empirical research on the effects of mergers that supports their scepticism.
Demonstrating that the merged banks would be more efficient is central to making the case for the consumer benefits of the proposed Canadian mergers and in assessing their potential impacts on consumers. If the mergers improve efficiency, then the larger, combined firms may be expected to pass a share of these savings on to consumers through lower prices or improved service. If the mergers are primarily cost-cutting exercises, however, then the likely impact on consumers of the anticipated job cuts and branch closures is reduced quantity and quality of service. 
Stephen Rhoades, an economist with the Board of Governors of the US Federal Reserve, explains the critical distinction between efficiency improvements and cost cutting in this way,
“Reductions in operating expenses may result from cutting employees, closing branches, consolidating headquarters offices, closing computer and back-office operations, and so forth. Such reductions in expenses, however, do not automatically translate into improvements in efficiency as measured by an expense ratio. Reductions in expenses may be accompanied by corresponding reductions in assets and revenues, which simply represent shrinkage of the firm rather than efficiency improvements. An improvement in efficiency requires that costs be reduced by more than any decline in assets (revenues).” 
In Rhoades’ view, the failure to distinguish between cost cutting and efficiency gains may at least partly explain the continuing disagreement between the views of some bankers “who often emphasise the cost reductions to be achieved through mergers” and researchers “who generally study the efficiency effects of mergers (Rhoades, 1998: p. 275).”
Much of the empirical research into the efficiency effects of bank mergers is from the United States where there has been a wave of mergers. The number of US banks has declined significantly from 14,478 in 1983 to 9,663 in 1996. Over this period 2,691 banks were newly chartered, more than making up for the 1,453 banks that failed. The overall decline in the number of banks is due to the greatest number of bank mergers in the US since the Great Depression.  Rhoades (1994) examined all thirty nine studies published between 1980 and 1993 on the effects of US bank mergers on bank performance. His review indicated that “the bulk of empirical research shows no evidence of efficiency gains from bank mergers or from increased bank size per se (that is due to scale efficiencies) beyond a small size (Rhoades, 1994).”
A similar conclusion was reached by the Wallis Commission in Australia which noted that the submissions to the inquiry (both for and against potential mergers) “generally recognised that the evidence from studies on bank mergers and efficiencies to date has, at best, been equivocal on whether or not there are efficiency gains to be had and, on the whole, points towards there being no correlation between bank mergers and improved efficiency (Wallis Commission report, p. 175).”
The empirical evidence against increasing returns to scale in banking, at least for banks above a modest size, is especially substantial. The Consumers’ Association of Canada Committee on Financial Services (1998) quotes a typical finding,
“There appear to substantially increasing returns to scale for banks below about US$500 million in total assets. Above that point there appear to be approximately constant returns to scale. ...It does not appear that scale efficiency gains are a valid reason for mergers between large banks, however, at least within the size range studies [up to US$10 billion total assets] since the technology displays roughly constant returns to scale above US$1billion.” 
While estimates of the cutoff point vary, a significant body of research concurs that efficiencies associated with larger size are likely to be exhausted after $US10 to $US50 billion in assets.  The proposed Canadian bank mergers would create firms several times larger than even the highest estimates of the size beyond which returns to scale disappear. 
The failure of most empirical research to support their view that bank mergers increase efficiency has drawn a number of rebuttals from Canadian bank merger proponents. One typical example, a C.D. Howe Institute study, acknowledges that “US studies find no efficiency gains” but suggests that “the relevance of the data used is doubtful and the US banking regime is so different from the Canadian that comparison may be inappropriate (Mathewson and Quigley, 1998: p. 2).”
It is difficult to assess the validity of Mathewson and Quigley’s objection that the Canadian system is so different from the US that the US data is irrelevant. The structure of the Canadian banking market does differ very significantly from the US. The Canadian commercial banking market is already highly concentrated and national in scope, whereas the US system is far more fragmented and only in the process of becoming national in scope. But given the limited Canadian experience with large-scale bank mergers, the absence of supporting evidence from other jurisdictions that mergers or increased size beyond a certain scale contribute to efficiency can not be readily dismissed.
Australian national banks made similar objections to applying US studies to the Australian situation when they appeared before the Wallis Commission. The National Australia Bank in its brief to the commission acknowledged the disappointing results of traditional studies of economies of scale actually achieved by merged banking entities (emphasis in original) (NAB brief, p. 57).” Its submission stressed its conviction that despite these disappointing results, given sufficiently skilled management there were opportunities for efficiency gains in mergers. Other submissions from national banks also questioned the relevance of the empirical research on bank mergers in the US and elsewhere to “current circumstances in Australia” or argued “that the situation will be different in future (Wallis Commission, p. 176).”
Mathewson and Quigley’s other main critique of the US research is that the US data “focus on mergers of banks with geographically complementary rather than substitutable assets.” The proposed Canadian bank mergers, by contrast, would be “within-market mergers focussed on branch consolidation.” They go on to contend that “analysts should use microdata from individual banks in testing the hypothesis that efficiency gains result from mergers.” (Mathewson and Quigley, 1998: p. 17) This hypothesis can be evaluated in light of additional US research published after Mathewson and Quigley’s own.
Similar objections had been raised by US banking industry analysts to the US cross-sectoral research on mergers. In an attempt to resolve this debate the Federal Reserve Board of Governors commissioned nine cases studies of bank mergers from nine different economists. The case studies were not randomly selected, but chosen specifically because they exhibited characteristics that industry analysts had identified as favourable to achieving efficiency gains. All nine studies used the same basic analytical framework, employed microdata and focussed on within-market mergers as Mathewson and Quigley propose. 
The results of the case studies were summarised by Rhoades in an article published in 1998.  “All nine of the mergers resulted in significant cost cutting in line with pre-merger projections. Four of the nine mergers were clearly successful in improving efficiency but five were not.” The results of these case studies lend support to the previous cross-sectoral research that showed that US bank mergers did not generally result in efficiency gains. Rhoades notes in his conclusion that “among these nine mergers, all were selected because of basic attributes believed likely to yield efficiency gains;  all were committed to cost cutting; and all of the acquirers were more efficient (by at least one measure) than their targets. However, not all of these mergers unambiguously yielded efficiency and profitability improvements despite the favourable characteristics and the significant reduction of noninterest costs achieved in all of these mergers. Consequently, it is not especially surprising that studies using large cross-sections of bank mergers rather than mergers selected for their favorable attributes generally have not found efficiency gains from bank mergers (Rhoades, 1998).”
These US case studies all involved in-market mergers, a feature of the proposed Canadian mergers. Indeed, the US case studies selected were hypothetically more favourable to potential efficiency gains than the proposed Canadian mergers because in addition to considerable branch overlap and a strong commitment to cost-cutting they all involved the acquiring bank being more efficient that the target bank. Gaps in efficiency between the firms involved in the planned Canadian mergers have not been highlighted as a significant factor in predicting benefits from the proposed mergers.
Perhaps because the better documented US case studies were not available at the time their research was conducted, Quigley and Mathewson, instead turn to examples of successful bank mergers in other countries. Based on data and interviews from New Zealand and the admittedly “small amount of public information about comparable mergers in other countries” Mathewson and Quigley “suspect that 20 percent of total noninterest costs should be viewed as the appropriate cost savings to be realised from a Canadian bank merger (Matheson and Quigley, 1998: p. 20).” As has been pointed out, cost savings are not synonymous with efficiency gains and these suspicions about the likely positive impact of bank mergers have not been not borne out by the subsequent and better documented US case studies.
In summary, most of the available empirical research (both cross-sectoral and case studies) does not support the contention that bank mergers or increased bank size (beyond a modest level) increase bank efficiency. Certain mergers have contributed to improved bank performance and efficiency, but researchers have not been able to isolate with any confidence the particular factors that contributed to these efficiency gains. In the vast majority of bank mergers, despite significant cost cutting, expectations of improved efficiency were not realised in practice.
b) A note on other rationales for bank mergers
While the case for efficiency gains from bank mergers is empirically weak, there are other arguments that have been advanced to justify the proposed mergers. Mergers have been promoted as necessary:
The merit of each of these arguments is beyond the scope of this paper. Each has been hotly contested by competitors,  user groups and consumer advocates.
The essential point for the purposes of this paper is that these presumed benefits from mergers bear more on corporate strategy than on retail consumer welfare.  While mergers self-evidently fit with the banks’ strategic orientation and their desire to position themselves best for future growth, the benefits to consumers in the absence of efficiency gains are far less clear. 
One potential exception is the rationale that the proposed mergers contribute to the stability and soundness of the Canadian financial system by creating firms with a more diversified deposit and loan base. A sound and stable banking system clearly benefits consumers, not only as individual bank customers, but as economic agents, taxpayers, and citizens. Even some critics of Canadian banks accept that large banks, if well regulated and managed, contribute to systemic stability through diversification. Others argue that Canadian banks are already large enough to benefit from diversification and that bigger is not necessarily better. The paper returns to this issue in Section III.
c) The consumer impacts of increased concentration
Faced with reduced services or price increases consumers can, if they have the opportunity, switch to financial institutions with better quality services or more competitive prices. Consumer advocates, small business and competing financial institutions, however, have raised concerns that the proposed bank mergers by further concentrating the Canadian banking system would reduce consumers’ choice and leave them more vulnerable to anti-competitive practices by the dominant banks. In this case even if cost-cutting and mergers contributed to improved efficiency (which, as discussed, is a problematic assumption), these gains might not be passed on to Canadian consumers in the absence of competition or of strict government regulation.
The Canadian banking industry is already one of the most concentrated among all developed countries. The five largest Canadian banks account for more than 80 percent of banking sector assets (see appendix I). If the proposed mergers proceed, the two largest Canadian banks alone would control over 75 percent of the assets of Canadian Schedule I banks.  Not only do the largest banks dominate within the sector, but all banks’ share of total domestic financial assets has grown from 18% in 1986 to 47% in 1996.  A possible further indication of the market power of Canadian banks is their rate of return on equity which averaged 14% from 1991 to 1996, placing banks in the 88th percentile of profitability among Canadian corporations (PIAC/CAC, 1998: p. 2).
Bank industry spokespersons have attempted to allay anxiety about increased concentration and have employed a range of arguments to reject concerns as unfounded. The merging firms have portrayed the Canadian consumer as the ultimate beneficiary of the proposed mergers. 
The merging banks and some industry analysts argue that sweeping deregulation, globalisation and rapidly changing technology have fundamentally changed the structure of banking markets. They assert that today, or in the near future, consumers and households, wherever they are located, will be able to purchase nearly any financial service from a range of bank and non-bank service providers who may be located anywhere in the country. According to this view, commercial banks must compete not only with other deposit-taking institutions in their own local market but with foreign bank operations located outside the country and a variety of non-banks who do business nationally.
Furthermore, these industry representatives and analysts argue that even if existing competition is inadequate, banking markets are "contestable." That is, if service quality decreases or prices rise above competitive levels, then other financial service providers will enter the market. The banks have responded to concerns about concentration by asserting that financial markets, even local markets dominated by a handful of firms, can be competitive, despite high levels of concentration, as long as they are contestable.
A market is contestable if there are no significant barriers to entry. But a number of studies, mainly from the US, indicate that from the perspective of the retail consumer and small businesses, the structure of banking markets has not changed as fundamentally as suggested by merger proponents.  Even though legal barriers have been greatly reduced through deregulation, significant economic barriers to entry remain.  Moreover, research generally finds that “when concentration measures ... are higher, prices and profits tend to be higher.”  This research into the structure of consumer and household financial services markets will be discussed further in section II of the paper.
2) Measures taken by other jurisdictions to prevent or mitigate adverse consumer impacts of mergers and other measures intended to promote bank accountability to consumer.
The first line of defence against adverse impacts of bank mergers on consumers in most OECD countries is competition policy. The relevant competition authorities are entrusted with the authority to review proposed mergers, to deny them if their impact is deemed to be adverse on consumers, or to impose conditions designed to eliminate or mitigate anticipated adverse consumer impacts.
This section will review competition policy with respect to bank mergers in two other OECD countries: the United States and Australia. Bank merger activity has been greatest in recent years in the United States. Australia, whose economy and political structures are similar in many important respects to Canada’s, has just completed a major public inquiry into its financial services sector that included considering the merits of mergers. With respect to measures to promote bank accountability to consumers, the paper will consider measures from both these countries and in section III selected consumer protection measures from a broader range of OECD countries. 
a) The US regulatory environment
In the United States, as in most other OECD countries, significant regulatory reforms have allowed banks to compete in an expanding range of financial products and increased direct competition between banks and non-bank financial service providers. Even after these reforms, the US banking system remains one of the OECD’s most tightly regulated in terms of competition policy. The US also has some of the most extensive consumer protection provisions of any developed economy. These regulatory measures are designed both to ensure the stability and soundness of US financial institutions and to protect consumers against unfair or exploitative business practices.
i) Regulation of mergers in the US
In the United States, banks, credit unions, and thrifts may be chartered by either state or federal regulatory authorities. Four national regulating bodies oversee the activities of state and national banks and thrifts: the Federal Reserve Board (the Fed), the Office of the Comptroller of Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). State governments also regulate and supervise state chartered banks. Credit unions are regulated by the National Credit Union Administration (NCUA).
Bank mergers require regulatory approval by the relevant government agency.  Bank regulatory agencies are required by law to consider the possible competitive effects of proposed mergers. Bank regulatory agencies can not allow mergers that threaten competition unless the anticompetitive effects are clearly outweighed by public interest considerations of the communities to be served. The Antitrust Division of the US Department of Justice also reviews proposed mergers for their likely competitive effects and can file a suit under US antitrust laws to block a bank merger even if that merger has been approved by a bank regulatory agency.
Proposed mergers are analysed to determine whether they could create or facilitate the exercise of market power, that is the ability of firms to increase price or reduce service quality from competitive levels. One economic factor assessed is whether consumers faced with a price increase would be able to substitute readily an alternative product in an amount sufficient to render the price increase unprofitable. US regulatory authorities assess not only the potential for unilateral price increases or service reductions by the merged firm, but also the potential for collusion among fewer firms serving the relevant product market. The authorities assess the proposed merger’s impact on the whole range of services provided by banks, including, among other services, deposit, loan, investment and various other services to retail consumers and to small and medium-sized businesses.
Under current US merger guidelines and standards it is theoretically possible to have a consolidation resulting in a maximum of only 5 or 6 firms remaining in any local market.  If there are “mitigating factors” accepted by the relevant regulatory body it is hypothetically possible that the number of firms permitted in a local market could be even lower. But under US competition policy this degree of consolidation, which is already standard in the Canadian market, would be considered extraordinary. Furthermore, the Riegle-Neal Act of 1994, which opened the doors to interstate banking, capped the share of total US banking assets that can be acquired by any single bank via mergers and acquisitions at 10 percent. 
It is quite clear that US competition policy would not permit the degree of concentration that is already evident in Canada, let alone that envisaged under the proposed Canadian bank mergers.
ii) Other US measures to promote bank accountability to consumers
Consumer protection measures fall into two broad categories, those that are designed to reduce systemic risk and promote the soundness and stability of the financial sector generally and those measures that are designed to protect individual consumers, households and small businesses from unfair practices or to promote the responsiveness of banks to consumer, household, small business and community needs.
Some of the more important features of the US regulatory system from a consumer protection perspective are:
As discussed, regulatory approval is required to acquire the assets of a bank or to merge with another bank holding company and authorities may attach performance and other requirements to such approval.
b) The Australian regulatory environment
Regulation of mergers in Australia
The Trade Practices Act of 1974 (s.50) is the main law governing mergers. It applies to all industries including the banking and financial sectors (Wallis 1997, p. 155). The Australian Competition and Consumer Commission (ACCC) administers the Trade Practices Act and investigates proposed mergers.
In addition, under the Banking Act 1959 and the Banks Act 1972, the Treasurer must also give approval to bank mergers. The Treasurer has wide-ranging discretion to look at prudential, competitive and other factors in deciding whether to approve a proposed merger. The treasurer’s veto power with respect to mergers have been criticised by large players in the Australian financial system for “lacking transparency and creating uncertainty and a double hurdle (Wallis, 1997: p. 158).”
Under Australia’s “six pillars” policy, first clearly articulated in 1990, mergers would not be permitted between any of the four largest banks or two or three of the major life insurance companies. The then Treasurer made clear that big would not be permitted to buy big. 
The six pillars policy has also been criticised by the largest Australian financial firms (Wallis 1997, p. 162). Australian regulators, however, have expressed concerns about removing it. The Reserve Bank of Australia (RBA) and the Treasury expressed concerns about mergers between the majors leading to an “undesirable degree of economic power” and about creating institutions that are “too big to fail” (Wallis, 1997: 162). In one comment that may be germane to the Canadian context, the RBA specifically expressed concerns about a merger scenario which left just 2 major banks. It stated, “(i)f this were to occur , it would give Australia the most concentrated banking industry in the industrialised world, and would take us into uncharted prudential waters.” 
In April 1997, when accepting the Wallis Committee report, the Hon. Peter Costello Australian Treasurer announced that the Australian government had decided to end the “six pillars” policy, thereby lifting the blanket ban on mergers between the six largest banks and insurance companies. However, in response to intense “market speculation” and public concern about mergers, the Treasurer made clear that “the government has decided that mergers among the four major banks will not be permitted at this time.”  Since that decision was announced, public opinion in Australia is reported to have swung further against approving mergers among Australia’s biggest banks (Metcalfe, 1998).
In Australia then, due to concerns about the potential competitive and prudential impacts of large-scale bank mergers, the broad discretionary authority vested in the Treasurer (the counterpart to Canada’s finance minister) has been exercised to prevent mergers, at least for the time being, among the country’s four largest banks.
Other Australian measures to promote bank accountability to consumers
Comparatively speaking, the Australian regulatory framework is looser than many (and certainly less strict than the US). It does have certain consumer protection features related to cost-of-credit disclosure and consumer redress that are not available in Canada. The primary focus of consumer protection policy, other than the merger approval practices and procedures discussed already, is to improve transparency in order to allow the consumer to make more informed choices among financial services and products.
Some of the more important features of the Australian regulatory system from a consumer protection perspective are:
Section II assesses the likely impact of the proposed mergers on BC consumers and on the competitive practices of banks within BC and Canada by applying the research findings from other jurisdictions. It then considers the prospects that increased expansion by foreign financial service providers might offset the potential impacts of increased concentration.
That empirical research into bank mergers fails to demonstrate resulting efficiency gains from most bank mergers or returns to scale beyond a modest size greatly reduces the force of hypothetical arguments that BC or Canadian consumers will benefit from the proposed mergers. Despite branch closures, employment losses and other cost-cutting measures, in the absence of efficiency improvements there would be no benefits to be passed on to consumers. 
To the contrary, if the combined firms, in effect, shrink, rather than doing more with less, the merged banks will simply do less, losing some of their combined revenue and a part of the acquired market share.  In concrete terms, this may mean that the merged firm withdraws from certain regions or reduces its effort in certain product lines. The cost cutting that accompanies consolidation may also shift non-monetary costs onto consumers through reduced or lower quality service.  Service reductions due to cost cutting can take a number of forms: reduced opening hours, fewer employees per customer, longer line-ups, substitution of automated teller machines (ATMs) for personal service and branch closures. These all translate into increased costs for customers who must spend more time or travel further to obtain their basic financial services.
Characteristics of the household financial services market
One of the best means available to assess the characteristics of the consumer and household finances market is through consumer survey data. One of the most detailed surveys of household consumer finances is the Survey of Consumer Finances commissioned periodically by the Federal Reserve Board of Governors. An analysis of the 1992 US survey data  indicates that:
These results “suggest that for perhaps the vast majority of households and small businesses, use of financial services has not changed as much in recent years as some observers have argued (Kwast, Starr-McCluer and Wolken, 1997: p. 995).”
While there is little detailed data, the character of the BC household and consumer finances market probably does not differ markedly in these respects from that in the United States.  It is a safe generalisation to say that most British Columbian households rely on banks, credit unions or other deposit-taking institutions for basic financial services such as safekeeping of deposits, chequing accounts, cheque cashing, bill-paying, short-term credit, credit cards, personal loans, and mortgages.  Canadian competition authorities also assume that consumers generally tend to purchase a cluster of basic financial services from their primary financial service provider. Most often, this primary financial institution is a deposit-taking institution with a branch located near their home or workplace.
Another study by Rhoades suggests that the costs to consumers of switching their primary financial service providers are high in retail banking “as compared to almost any other industry.”  Several reasons are offered for these unusually high switching costs,
The existence of these high switching costs, among other factors, leads Rhoades to conclude that “it is safe to say that local retail banking markets are not ‘contestable.’” 
Those who assert that consumer financial services markets have changed radically often stress the growing importance of electronic commerce. Electronic banking is portrayed as a means for individual consumers to manage their financial affairs and transactions remotely, without requiring personal teller service, or, for most purposes, having to visit a local branch. The universe of consumers to whom full electronic banking is available, however, is limited to those households that have a home computer and modem. While the number of British Columbia households with a computer and a modem is growing rapidly, in 1997 it was still less than one in five (17.6%).  Moreover, US research indicates that the take-up rate for electronic commerce has been modest and that most consumers limit their use of electronic banking to routine transactions. 
While electronic commerce may have the potential to intensify competition in retail financial services and someday make it possible for large numbers of consumers to choose financial service providers located at a distance, the immediate impact of electronic commerce may actually be to increase the costs to consumers of switching their primary financial institution. At this point in the development of electronic commerce, the increasing use of direct deposits by governments and employers and the use by consumers of direct debits to pay utility and other regular bills may actually increase the inconvenience to consumers of switching accounts (Rhoades, 1997: p. 1007).
While commercial banks increasingly see their future in "wealth management" services, basic savings, chequing and transaction services continue to be essential to British Columbia consumers and very few individuals or households function, at least by choice, without them.  And, despite the global aspirations of Canada’s largest banks, most British Columbian consumers remain closely tied to the local branch of their deposit-taking institution.
2. Consumer protection issues and competitive practices in the retail banking sector
One important respect in which the BC consumer financial services sector differs significantly from the US is in the much higher degree of concentration in the Canadian banking sector. Consumer advocacy and other financial service user groups have drawn attention to a number of consumer issues commonly associated with high concentration in the Canadian banking sector. Several of these key issues – related to service fees, credit card interest rates, privacy, and selling practices – are discussed below.  The likely impacts of the proposed mergers on each of these consumer protection concerns is also considered.
a) Service fees.
The increased prevalence of service fees, or a user-pay system, in retail banking is part of a broader trend in banking toward fee-based income rather than earnings from interest on loans.  As the focus of service has shifted from transaction processing to financial services advice, one rationale has been that like other professional advisers banks must charge a fee. However, for most household consumers the majority of fees they pay continue to be linked to transactions.
Banks and other Canadian financial institutions have generally been acknowledged to have improved their disclosure of service fees since the 1980s when public scrutiny was focussed on institutions that were accused of levying service charges without adequately informing consumers (PIAC/CAC, 1998: p. 31). At the same time banks and other financial institutions “are unbundling and explicitly pricing individual services that were not previously priced separately (Meyer, 1998: p. 15).” There are concerns that the array of service charges is confusing to customers, making cost comparisons and informed choice difficult. 
In the view of many Canadian consumer advocacy organisations excessive service charges are also a problem.  There are no studies that look specifically at the effects of mergers on bank service charges. There is evidence from a range of independent sources, however, that large US banks charge higher fees than small US banks.  One study attempts to explain this differential as related to the disproportionate presence of large banks in large urban areas where costs tend to be higher. But “there is substantial evidence that banks that are part of multistate organizations tend to charge higher fees in general than do banks that are not, and this cannot be explained by locational factors (Meyer, 1998: p. 18).”
The Canadian Banking Association (CBA) estimates that service fees from retail customers comprise 4.4 percent of Canadian bank earnings.  Canadian banks , according to a CBA survey, charge lower service fees than their US counterparts. CBA’s survey indicates that “Canadians with typical banking needs pay an average of $3.26 in service fees a month, as compared to the $7.53 a month that consumers pay in the US.”  It is difficult to know how much weight to give to these results because there is such a wide variation in US service charge levels. For example, Consumer Reports found that “fees can easily vary by $US40 a month between the lowest and the highest-cost accounts within a single market (Consumer Reports, 1996, p. 11).”
A recent public opinion survey indicated that 40% of Canadians felt that bank service charges were unreasonable, while 57% of Canadians felt they were reasonable enough. These polling data indicate a high level of dissatisfaction with service charges among regular customers, but also that Canadian financial service providers have done a satisfactory job of limiting service fees charged to certain lower-income groups (seniors and youth). 
Fees on savings and chequing accounts, like all fixed charges, are regressive with low-income customers paying a larger percentage of their incomes in fees. Many Canadian banks and other deposit-taking institutions have taken steps to lessen the impact of services charges on certain lower income groups by offering discount packages for seniors and youth.
Nearly every British Columbian household requires asset and transaction accounts, notably savings and chequing. These nearly universal financial services are obtained overwhelmingly from local deposit-taking institutions. Because the costs of switching accounts (a barrier to entry) are already high and increased concentration will reduce the substitutes available to consumers in their local market, the likely impact of the mergers is to increase the long-term potential for the setting of fees on basic services above competitive levels. Service fees place a higher burden on low-income consumers and households, among whom women, aboriginal persons and visible minorities are overrepresented.
b) Credit card interest rates .
Banks traditionally derived most of their earnings through interest on loans. The difference between the interest paid on deposits, or the banks’ cost to purchase money, and the interest that banks charged on loans to their customers – the interest rate spread –
was a key determinant of earnings and profits.  Canadian banks point to studies by the Swiss-based World Economic Forum that show that Canadian interest-rate spreads are the lowest among G-7 countries. 
From a consumer perspective, however, one of the most significant spreads is that on credit cards. The spread on a typical Visa or MasterCard is 10% or more above the prime rate.  Moreover, credit card interest rates are “sticky downwards,” that is as banks’ cost of capital and the prime rate fall, credit card interest rates have not fallen correspondingly (see appendix 2). 
Credit cards are a significant platform for chartered bank lending to BC consumers. At the end of the first quarter of 1997, BC credit card holders owed more than $2.8 billion to chartered banks. And over the last 15 years, the credit that chartered banks have provided to British Columbians through credit cards has increased significantly in relation to more traditional modes of consumer finance such as personal loan plans (see appendix 3).
Although banks sometimes justify high rates of interest on credit cards as a function of higher risk, it is generally acknowledged that consumer loans are lower risk than commercial loans (e.g. Mayer, 1997). While price competition is limited, banks and other credit card issuers do compete intensely on non-price items, such as offering reward points or other consumer discounts.
Credit cards are less locally oriented than other household financial services.  Consumers are not as tied to their local deposit-taking institution as they are for the purchase of other financial services. A number of non-bank issuers are active in the market. Regardless of their geographical location, consumers would be in a position to take advantage of price competition should it emerge. Furthermore, credit cards generate revenues for the card issuer from merchants as well as from fees and interest paid by card holders.  Nonetheless, price competition already appears to be weak in this area.  The likely impact of the proposed mergers is to reduce further the prospects for price competition emerging among bank issuers of credit cards. 
c) Privacy concerns
One of the most significant competitive advantages of large financial institutions is their ability to compile massive databases from their records of millions of individual customer transactions. Through the use of sophisticated information technology this data can be readily collected, retrieved, manipulated and transmitted.
The National Australia Bank (NAB), appearing before the Wallis Commission, underlined “the importance of allowing banks, and especially conglomerates, to fully utilise their databases.” The NAB approvingly cited an academic who stated that banks these days are essentially in the “information business” and that their “overwhelming advantage is the information they have on their customer base which is obtained through economies of scale, investment in information systems and expertise, and economies of scope or synergies (NAB brief, pp. 57-58).”
The creation of detailed information on customers and their behaviour is a commercially valuable by-product of millions of transactions mediated through information technology such as point-of-sale transactions or electronic funds transfers. Strong economic incentives exist to convert this personal information into databases and to use it for marketing and other commercial purposes. Today a major part of banks’ technology spending is directed to “data warehousing.”
But this detailed information about customers and their habits is open to abuse. Personal information gathered for one purpose should not be used for another without the meaningful consent of the customer. The widespread practice of financial institutions requesting social insurance numbers makes it technically possible to match personal financial information with other databases containing health and other confidential personal information. Further concerns relate to the security, or unauthorised use, of a large financial institution’s customer databases.
The proposed mergers would significantly increase the ability of the combined banks to collect, analyse and transmit personal data on millions of customers. Greater scale and scope means more personal information is collected. For both regulatory and commercial reasons, there are fewer controls on the use of personal information within a firm than between firms. The likely impact of the proposed mergers is to accentuate privacy concerns and to increase the potential for abuse of confidential private information.
d) Selling practices
An important motive for financial service conglomerates in compiling profiles of customers’ savings, credit and spending patterns is to enable them to market their products more effectively. As the major banks expand into more lines of business, this means that “one bank may be able to offer investment, insurance, deposit, credit, leasing, and perhaps other services in one location (PIAC/CAC, 1998: p. 58).”
Long-standing concerns of consumer protection organisations relate to the quality of information consumers are provided to enable them to choose which financial services to use and the possibility that consumers may be pressured into “accepting arrangements that they neither want nor require (PIAC/CAC, 1998: p. 58).” Poor information about alternative products and their prices act as barriers to entry and disadvantages consumers. A further specific concern is “tied selling,” that is “a selling arrangement in which a customer is required to buy one product as a condition of purchasing another (the customer must purchase life insurance to get a mortgage, for example.)” 
Consumer protection organisations remain concerned that customers, even in the absence of outright coercion, may feel pressured not to refuse complementary or related services offered by their primary financial institution, particularly if they are seeking credit from that institution. The frequency and extent of such practices, however, is unclear.
The CBA denies that “tied selling” occurs and opposes further legal restrictions. It stresses the distinction between the cross-selling of products and services, where as a customer adds additional components to a package of financial services a firm lowers the price, and coercive selling practices where a customer is pressured into accepting a product or service. 
The BC Task Force heard evidence from individual customers, independent financial planners, and bank competitors of banks offering consumers preferred prices on retail banking services as an inducement for purchasing additional services from bank-owned insurance or securities companies.  While the line between inducements and pressure is fuzzy, such pricing practices certainly reduce transparency and may constitute “implied pressure.”
Consumer issues concerning selling practices go beyond the merger issue. The principal challenge stems from the transformation of banks into financial conglomerates. This, in turn, follows from the removal of line-of-business restrictions and the dissolution of the four pillars of the financial services industry. Logically, large conglomerates have more opportunity to engage in tied selling practices. The increased sale and scope of the financial institutions resulting from the proposed mergers would create greater opportunity for tied selling to occur. Increased access by the combined firms to customer information would also increase the risk of “grey-area” measures, where customer information unavailable to competitors is employed to facilitate sales of related services to customers. 
It is sometimes suggested that greater participation by foreign financial service providers might mitigate the effects of increased concentration in the Canadian banking sector. This section will consider briefly the prospects that increased expansion by foreign financial service providers might negate the potential adverse consumer impacts of the proposed mergers.
In 1996 there were 45 Schedule II foreign banks operating in Canada, down from a high of 59 in 1987. By law the assets of Schedule II banks, which unlike Schedule I banks can be controlled by a dominant shareholder, may not exceed 12 percent of the assets of the whole Canadian banking industry (Informetrica, 1998: p. 3). Of the 45 foreign-controlled schedule II banks only one, the Hong Kong Bank of Canada, provides significant retail branch banking services to small depositors. The others focus on commercial banking and corporate clients, often those based in their home countries (Senate Committee on Banking, 1996: p. 11).
The Canadian pattern, with foreign banks concentrating on the commercial sector and corporate clients, is fairly typical of other countries. Even in jurisdictions where there are few restrictions on foreign banks operating retail networks there has been limited interest in doing so. 
In Sweden, for example, foreign banks have been permitted to establish subsidiaries since 1995 and, since 1990, to establish branches. As of December 1997 there were 17 branches of foreign banks established in Sweden. However, as in Canada, most of the clients of the foreign-owned banks are in the commercial sector.  The UK experience has been similar. Despite operating in one of the most liberalised retail banking markets in the world, the large number of foreign banks active in the UK market have focussed almost exclusively on the commercial banking market.
Those foreign banks that do have Canadian branch networks acquired them through takeovers of Canadian institutions. The requirement that Schedule I banks be widely held, with no shareholder able to own more than 10% of shares, has discouraged foreign banks from conducting business in Canada as a Schedule I bank and may effectively preclude a foreign takeover of a major Canadian bank. Even if such a takeover were permitted, it would not, in itself, increase competition or reduce concentration.
A few specialised foreign banks have shown interest in selling specific consumer products or services. For example, a major US credit card issuer, Capital One, has entered the Canadian credit card market through its Canadian subsidiary. Another US bank, Wells Fargo, plans to target the Canadian small business loan market through cross-border services. So far the inroads that these firms have made into the Canadian retail market are small, although the major banks portray them as a significant competitive threat.
At present, the realistic prospects for foreign entry into the full-service retail banking market are slight. If this were to occur, it would probably involve a takeover of a Canadian Schedule I bank. Such a takeover would not increase competition or reduce concentration, but it would raise broader concerns about the acceptable level of foreign ownership in the Canadian banking sector and the continuing viability of national regulation of the Canadian financial system.
This section highlights options for consumer protection. First it reviews the federal government process for considering the proposed bank mergers and assesses the consumer protection criteria to be applied. It then considers a range of measures that have been proposed – by Canadian industry, governments, consumer organisations and public interest advocacy groups – to prevent or mitigate potential adverse impacts of the mergers or to redress other financial services consumer issues that have been highlighted by the proposed mergers. It also reviews consumer protection practices from other OECD jurisdictions and how they might be applied in Canada.
a) financial sector deregulation
Over the last two decades Canada’s financial sector has been extensively deregulated. In a series of reforms from 1980 to 1992, the four pillars – banking, insurance, securities underwriting and trust services – have been effectively toppled. In 1980, the Bank Act was revised to allow banks to enter the factoring and leasing business. In 1987 banks were permitted to enter the domestic securities business and eventually to own investment dealers. 1992 reforms further blurred the remaining distinctions between the four pillars, allowing banks to own trust companies or insurance subsidiaries and for widely-held insurance companies to own trusts or Schedule II banks. Reserve requirements were also eliminated as part of the 1992 reforms.
Consequently, the Canadian financial services sector has undergone significant restructuring involving mergers, acquisitions and the sale of blocks of business from one firm to another. As the most important pillar, the banks were best positioned to take advantage of the effective dismantling of ownership and line-of-business restrictions and have done so. The six largest Canadian banks now control 93% of trust services and 67% of brokerage revenues.  Prior to the proposed Royal Bank-Bank of Montreal and CIBC-TD mergers, however, there had been no deals where a very large Canadian financial institution had acquired another.
A 1996 White paper signalled the federal government’s intention to engage in further regulatory reforms and liberalisation. But decisions on substantial reforms and future direction were postponed pending the report and recommendations of the Task Force on the Future of the Canadian Financial Services Sector. The task force was struck in December, 1996 and is expected to report in September, 1998.
b) approval of bank mergers in Canada
The Canadian competition authorities are charged with ensuring that neither of the proposed mergers substantially lessens competition, either by reducing the number of competitors in a manner that facilitates interdependent behaviour (implicit or explicit) or by enhancing the merged firms capability to exercise market power unilaterally (Merger and Enforcement Guidelines, 1998). The Competition Bureau can refuse to permit either or both proposed mergers on the grounds that they are anti-competitive. Alternatively, it could approve either or both, with or without conditions intended to prevent or mitigate any anticipated anti-competitive impacts. 
After expected Parliamentary Committee hearings in both the House of Commons and the Senate, the final decision on whether the mergers will be allowed to proceed, or under what conditions, rests with Finance minister Paul Martin and the Federal Cabinet. All these processes are expected to be completed by early 1999 and a final decision made by the Finance Minister not long after.
c) mergers and the Canadian retail banking market
The Canadian banking market, and particularly the retail banking market, has oligopolistic features. In an oligopolistic market the decisions of the dominant firms are highly interdependent. Because of each firm’s dependence on the decisions of the others, there is a strong incentive to develop understandings, implicit or explicit, among them on competitive practices, to emphasise non-price over price competition and, in extreme cases, to collude in pricing, marketing or investment plans.
By conventional yardsticks, Canada’s banking market is already one of the most concentrated in the developed world (see Appendix III). A small number of firms account for a large proportion of, for example, assets and employment. The proposed mergers, by shrinking the number of the largest players from five to three and significantly increasing the market power of the two dominant firms, would indisputably alter the dynamics among the top tier of highly interdependent firms. They would also heighten concerns that the dominant firms might coordinate competitive practices to disadvantage consumers.
d) is bigger better?
It can also be argued that there are some advantages from a consumer perspective of dealing with large banks. The most important of these is that a large bank generally has a more diversified asset and loan base that makes it inherently more stable.  This provides additional security to its customers, helps to maintain their confidence in the firm even in times of financial panic and contributes to the overall soundness and stability of the financial system. Large banks, especially in a concentrated market, may also feel more secure in making long-term investments in new technology required to modernise infrastructure such as the Canadian Payments System or the Interac system connecting Canada’s network of ATMs.
On the other hand, a number of consumer and public interest groups have expressed concerns that the merged banks would be perceived as “too big to fail” (see Schacter, 1998a). This would contribute to a “moral hazard” where the banks might take unwarranted risks in the knowledge that if their investments go badly they will be backstopped by taxpayers' money. As Dr. Roy Culpeper of the North-South Institute points out “Size and diversification increase the propensity to take risk because larger entities can more easily pool risk across a wider range of asset classes.”  Even though big banks may be more diversified, they are not immune from mismanagement, speculative excess or serious financial crisis. The CAC Financial Services Committee points to Japan where the some of the world’s very largest banks reported made huge losses in FY 1997 and some analysts fear worse to come, creating shock waves through the Japanese financial system and economy. 
Concerns about the ability of financial service conglomerates, especially when anchored by a bank, to engage in self-dealing and become enmeshed in conflicts of interest spurred governments to erect the four pillars following the financial crises that precipitated the Great Depression of the 1930s. Another concern is that underlying the confidence of Canadian banks to invest in technology and infrastructure or to compete aggressively in international markets, is that their dominance of the domestic market provides them with a captive base of capital, customers and revenues. 
e) The limits of competition policy
It has to be acknowledged, however, that even if the proposed mergers were denied the continued dominance of five or six firms raises many of the same consumer protection concerns as the dominance of two or three. A consideration of effective policy responses to the consumer protection issues highlighted by the proposed mergers must take this already high degree of concentration into account. Recognising the limitations of the status quo calls into question the adequacy of current competition policy alone to address satisfactorily the key consumer protection issues.
Simply denying the mergers and restoring the status quo ante would leave some key consumer protection issues unaddressed. Approving the mergers with specific remedies (such as divestiture of branches) would also neglect important consumer protection issues. Alternatively, the federal government could follow the Australian example and deny approval, in effect postponing a decision until such time as broader consumer protection issues are satisfactorily addressed. Or the federal government could deny approval and act on key consumer protection issues independently of the mergers.
2. Consumer protection issues: policy and regulatory options
The proposed mergers have provoked a vigorous debate that has highlighted a number of key consumer protection issues in the Canadian financial services sector. That debate has stimulated a variety of policy and regulatory proposals to enhance consumer protection. These proposals range from industry initiatives promoting self-regulation to calls for Canadian banks to be regulated as public utilities. This section reviews many of those proposals and, where relevant, looks to examples from other OECD countries of consumer protection or other measures to promote bank accountability to consumers.
a) Reduced levels of service and service quality issues
As other background papers prepared for the BC Task Force show, banks have been reducing their full-service branch network and shedding employees for some time (McBride, 1998; Bowles, 1998). The proposed mergers and accompanying rationalisation of branch networks and workforces would significantly accelerate the rate at which these changes are occurring. Even where price competition among banks is weak, fear of losing the customer base to a rival firm constrains firms from closing branches when a rival’s branch is located nearby. The proposed mergers would reverse this dynamic, making those nearby branches prime candidates for closure.
The merging banks and other merger proponents contend that banks have significant overcapacity,  but full-service branch closures and employee reductions are likely to shift non-monetary costs on to consumers. The most direct impacts on BC consumers generally would be increased time and travel costs spent obtaining full personal banking service. Customers would also face reduced choice as they are obliged to substitute automated for personal service.
The opportunity for BC consumers to switch to an alternative deposit-taking institution if the quality of their banking services declines will be more limited if the proposed mergers are approved. The number of British Columbians who are able and willing to take full advantage of electronic commerce remains limited and should not be expected to ease pressure on understaffed branches or underserviced communities. And all deposit-taking institutions, including trusts and to some extent even credit unions, face the same inducement in an oligopolistic market to reduce costs or to shift them on to the customer through longer waits, increased travel or raising obstacles to personal service.
It may be possible to approve the mergers, but to impose conditions that would require the merging firms to maintain branches and employment levels. To some extent, however, this would defeat the cost-cutting objectives of the mergers and probably, if stringent, undercut their attractiveness from a corporate perspective. And there is a substantial risk that the merging firms might agree to delay their cost-cutting plans in return for approval, but would proceed with them eventually. The principal means to fend off severe service cuts remains strict enforcement of federal competition policy.
As discussed elsewhere (Bowles, 1998), the branch closures and job cuts would have the greatest impact on communities and neighborhoods left with no or very limited service. These geographic effects would be felt most in rural, northern and low and middle-income urban neighborhoods. More general (non-geographic) impacts would be felt by those consumers that require personal service (e.g. persons with certain physical or learning disabilities, illiterate persons, and low-income persons  without accounts or banking cards) and those that simply prefer to use a teller.
Canadian banks have now acknowledged that many poor people face problems getting access to banking services. The CBA has taken steps to remedy this situation by developing looser identification requirements for opening accounts or cashing cheques. A recent study by the National Council of Welfare, however, reports survey data that shows that the CBA’s voluntary guidelines have been poorly complied with by bank branches. Denying the poor this basic form of access to the payments system, forces many of them to use expensive cheque-cashing services. Inexplicably, this problem persists despite the fact that both the federal and BC governments will honor most government cheques that have been fraudulently cashed. 
France assures all citizens the right to a bank account. If a bank refuses to open an account, the French central bank will order them to do so. Lifeline accounts in the US and “minimum accounts” in Germany are intended to ensure that low-income and highly indebted persons are not denied access to the banking system. There is a compelling case for enforceable measures to afford all Canadians access to essential financial services.
b) Strengthening consumer advocacy
Large firms, especially in a highly concentrated market, may have disproportionate social and political, as well as economic power. Banks especially, because of their privileged role in the creation of money and the supply of credit, wield tremendous influence on corporate and government decision-makers.
Consumers organisations that rely primarily on volunteers and charitable contributions are no match. Several proposals have been made to enable a revitalised national consumer organisation, or coalition, to act as a countervailing influence to the big players in the financial services sector. 
The roles of a such a public interest consumer watchdog could include lobbying governments on regulatory issues related to consumer protection, providing independent monitoring of financial service providers’ performance, preparing regular reports comparing services and fees offered at Canadian financial institutions, and shaping policy proposals to redress consumer complaints and concerns. 
Such an organisation can only be effective if adequately resourced. One available model is the Citizen Utility Boards which operate in some US states. Utilities are required to insert information periodically from the citizen boards with their billings to customers. Similarly, financial institutions could be required to insert information with customers monthly statements or credit card billings.
c) Customer redress (Ombudsmen)
All the major Canadian banks and several of the smaller ones have appointed ombudsmen to investigate and attempt to resolve customer complaints. In addition the Canadian Banking Association funds the Canadian Banking Ombudsman (CBO) a separate organisation that handles complaints that can not be resolved through the individual banks’ ombudsmen. 
The Canadian Banking Ombudsman’s recommendations are not binding.  After March 1997 when the CBO expanded its mandate to include complaints from individual customers its case load increased substantially,  indicating strong demand from consumer for redress procedures. The CBO’s terms of reference prevent it from investigating complaints about the general pricing of products and services, the credit granting policies of banks, or issues that have been before the courts. 
Most Canadian consumer organisations believe that an independent ombudsman is necessary.  One group, the Canadian Community Reinvestment Coalition, has prepared a paper on the ombudsman system that argues that the industry’s internal procedures are flawed. 
Certainly, several other OECD countries have ombudsmen charged with dealing with financial consumers complaints who are independent of the industry. The British Banking Ombudsmen, was an example of a private sector dispute resolution body that unlike the CBO had the authority to make binding rulings. Britain is now replacing this system with an even stronger quasi-judicial process that will have the authority to hear complaints involving all financial service providers, have independent powers of investigation, the authority to make binding rulings and to impose penalties for noncompliance.
Given the blurring of the four pillars a Canadian ombudsman or tribunal established to adjudicate consumer complaints and to redress them should have broad authority to investigate complaints concerning the practices of all financial service providers, including the banks. It should also have independent powers of investigation and the capability to produce independent research. Its terms of reference should be broad enough to permit it to consider complaints from consumers and small businesses related to pricing, including interest rates, service charges, credit card charges and credit granting policies.
d) Service fees
The 1992 financial reforms included improved fee disclosure provisions. Consumer surveys, however, indicate that further steps to improve transparency are needed to permit easy cost comparisons and informed consumer choice. One task of a national consumer organisation could be to commission, with industry or government financial support, independent research and to report annually on service fees. Part of the mandate of an independent ombudsman could be the authority to investigate consumer complaints about service fees and to remedy them.
In Canada, the National Council of Welfare has recommended that Canadian financial institutions be obliged to offer low-cost, “no frills” accounts to low-income consumers (National Council of Welfare, 1998). Steps taken by France and Germany to ensure access to basic financial services were described in section (a) above. New Jersey, Illinois, Massachusetts, New York and Minnesota are examples of other jurisdictions that require banks operating within their borders to offer basic chequing accounts with minimal fees to consumers making a limited number of transactions. New Jersey’s Consumer Checking Accounts law “requires banks to offer checking accounts with an opening balance of $50 or less, and permits consumers to write at least eight free cheques a month and to make an unlimited number of withdrawals at teller windows – all for a fee of no more than $3 a month (Consumer Reports, 1996: p. 11).”
e) Credit card interest rates
Federal and provincial governments could enact strong, uniform cost-of-credit disclosure regulations. All credit card issuers (and other lenders) would be required to follow similar methods in calculating their posted rates. One proposal that has been under discussion among federal-provincial consumer ministries for several years is to ensure that fixed (e.g. set-up fees, documentation, annual fees) and variable charges (e.g. interest rates on outstanding balances) are expressed as an annualised percentage rate and that these rates are clearly posted by all federally and provincially regulated lenders across the country. This would allow consumers to compare credit costs more easily and to make better informed choices among credit cards and alternative forms of short-term consumer credit.
Credit card interest rates are one area where a strong case can be made for applying price restrictions. Price restrictions on lending and other financial service rates have systematically been eliminated throughout the OECD. In Canada, the trend toward deregulation began with the 1967 amendments to the Bank Act that eliminated the six per cent interest rate ceiling on chartered banks loans. Certain US states continue to apply usury laws that make excessive lending rates illegal.
Very high credit card interest rates (as well as the lending rates of cheque-cashing and other services that focus on consumers that are unable to obtain credit from mainstream lenders) have been a persistent problem. Spreads have consistently been higher than justified and sticky downwards. This has exacerbated problems of indebtedness among consumers who can not obtain credit more cheaply elsewhere.  The maximum rate could equal the current prime rate plus a fixed increment. If the maximum rate were set at prime plus 6% , for example, that would result in a maximum of 12.5% down form 17 per cent for bank credit cards and 30% for retail cards. 
In 1997, the CBA released a Model Privacy Code that its members are committed to adopting and implementing. Several consumer groups participated along the CBA in the development of the code, lending legitimacy to the process (PIAC/CAC, 1998: 44). While welcoming the code as a positive initiative, the Consumers Association of Canada and the Public Interest Advocacy Centre have pointed out the shortcomings of a code compared with regulations.  They have also observed that with no independent scrutiny of its implementation “the public will never know if the code is being implemented properly (PIAC/CAC, 1998: p. 45).  The Senate Standing Committee on Banking, Trade and Commerce also agreed that self-regulation and voluntary codes were not sufficient to safeguard the privacy of Canadians. 
University of Waterloo economist Robert Kerton points out that certain contracts customers sign with banks, for debit cards for example, contain clauses consenting to the use of the customer’s personal information.  PIAC and the CAC observe that “when presented with such a contract it is difficult for the customer to refuse it, particularly when identical terms are likely required by the banks competitors (PIAC/CAC, 1998: p. 47).”
The privacy issue is broader than the financial service sector. Comprehensive legislation and regulations are needed to protect privacy rights throughout the private sector. Federal legislation is expected by the year 2000.  But because financial sector reform and further legislative changes are expected to proceed prior to the broader privacy legislation, the CAC warns that the financial sector should not be singled out for more lenient treatment. 
Indeed, the scale and scope of the largest financial institutions, the huge volume of transactions recorded, and the intensive application of sophisticated information technology argue for more stringent safeguards in the financial sector. Because of the strong incentives to use personal data for economic gain, self-regulation cannot be relied upon to prevent abuse of personal information or its use without the customer’s informed consent.
In contrast to Canada, many other OECD countries, particularly European ones, already have more effective privacy protection provisions in place or are adopting privacy protections that are considerably tougher. The new European Union Directive on the Protection and Free Movement of Data, for example, contains strict controls on the use and transfer of private information, including notification of customers about information collected and how it is used. It has been harshly criticised by the North American private sector. And the US government has threatened to challenge the EU directive under international trade rules if it is implemented as planned. 
g) Selling practices
More research is required into the extent and frequency of tied selling practices in Canada. To be credible, this research must be carried out by an independent agency, such as a new Ombudsman’s office, with input from both consumer organisations and the financial services industry. More precise legal definition of “pressure” and “coercion” with respect to cross-selling and relationship pricing are obviously needed. 
Current Competition Bureau guidelines prohibit “tied selling” in certain circumstances, but enforcement through competition policy is more cumbersome than direct enforcement of the Bank Act.  The most recent amendments to the Bank Act include a provision prohibiting tied selling, but that clause remains inactive until “proved necessary.”
The United States already prohibits “tied selling” or offering discounts on traditional bank products (such as loans, discounted service charges, and deposits) conditional on the purchase of other products. Given the extent of consumer and business concerns about such practices, the federal government should move quickly to define the scope of “tied selling” practices and to activate the Bank Act provisions prohibiting such practices. Furthermore, an independent ombudsman’s office could be mandated to investigate consumer complaints about “tied selling.”
h) Community reinvestment provisions
Among the most promising examples of effective policy to promote bank accountability to consumers and communities are the US community reinvestment provisions. Branch closings and their impact on the convenience and needs of the local community are one of the key factors in a bank’s Community Reinvestment Act (CRA) examination. The US CRA and related state and local laws have proven successful in ensuring service to minority groups, poor urban neighborhoods, rural regions etc. (as well as in improving lending to small business and community groups).
A prerequisite and foundation for community reinvestment provisions is detailed disclosure requirements that enable the public to assess the performance of banks and other financial institutions in key areas, including lending, service and investment (see Bowles, 1998). As many consumer and public interest groups have pointed out, detailed and verifiable information about bank practices is not publicly disclosed in Canada. Requiring public disclosure would provide the benchmark for an objective assessment of bank performance in meeting consumer and community needs.
Related US performance requirements, however, have been enforced primarily by making merger approval conditional upon improvements in these areas. The disclosure requirements upon which these evaluations are made are applied generally. Because there are over 9,000 banks in the US, there is more M&A activity and, consequently, frequent opportunities to enforce and monitor community reinvestment standards. Given the far higher levels of concentration in the Canadian financial sector, different design and enforcement mechanisms will be needed to achieve similar objectives. One lesson from the US is that community reinvestment provisions will need to be applied to the entire financial services sector, not just Schedule I banks (see National Community Reinvestment Coalition, 1998).
The 1998 Alternative Federal Budget contained a broader option that may suit the Canadian context (CCPA 1998). It proposed that all financial institutions and investment funds should pay a small tax on their assets. This tax would fund the base capital of a National Investment Fund. A second proposal from Jim Stanford, an economist with the Canadian Auto Workers Union, is that banks and near-banks could be required to hold a certain proportion of their total business lending to non-financial enterprises in the form of either equity or long-term subordinated debt. The goal of such a regulation would be to compel banks to take a more direct and active interest in the operation of companies in the “real” as opposed to the “paper” economy.
In addition to these broader steps, specific community reinvestment provisions that would require banks and other financial service firms to serve low- and middle-income neighborhoods, rural areas, and northern communities and to fund community development initiatives in the communities in which they operate would still be needed. Additional enforcement mechanisms, independent of merger approval procedures -- for example, a financial services sector tax that would be rebated to institutions that meet community service and reinvestment standards -- need to be considered.
i) regulating banks as utilities
A final option, presented several times to the BC Task Force, is that banking should be regulated as a public utility.  As consumer advocacy groups have asserted throughout the merger debate, consumers and households require access to basic financial services in order to participate meaningfully in the Canadian economy. As citizens they, arguably, have a right to reasonable access to these essential services at a reasonable cost, for reasons that are analogous to those underpinning political and legal rights. This suggests a model of “financial citizenship,” an individual entitlement to minimum standards of treatment and access.
There are also broader, or “macro,” considerations that suggest that financial markets should not be viewed as a market like any other to be determined solely by the interplay of private and corporate decisions. The economy needs credit to operate. Banks are given unique powers to create money and to allocate credit. Private banks seeking to maximise their profit may create money when the broader society does not need it or lend for purposes that are not socially desirable. Or they may contract credit precisely when the broader society requires it. According to this line of reasoning, the right to create money is analogous to the right to broadcast on the public airwaves. In return for permission to create publicly sanctioned money, banks must meet certain standards of service and social utility.
This concept merits serious consideration and further public debate. While it may not give a blueprint for regulating financial services in the current context, it does provide an orientation that is a useful antidote to powerful rhetoric about the futility of public interest regulation of financial services in contemporary Canada. 
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Consumer Reports, (1996b), How Good is your Bank? , March, pp. 10-15.
Consumer Reports, (1996c), Beating the High Cost of ATM Withdrawals, October, p. 8.
Consumer Reports, (1997), Your Money: Check Cards, Should You Replace Your ATM Card? , October, p. 68.
Consumer Reports, (1998), Union in Action: Toward Better Banks , May, p. 7.
Consumers' Association of Canada, British Columbia Branch, (1998), Submission to the British Columbia Task Force on Bank Mergers, July 17.
Consumers' Association of Canada, Committee on Financial Services, (1998), Being Big or Being Good? CAC Briefing Paper on Bank Mergers , July.
Cordon, S., (1998), "Mergers May Not be Good News for Consumers," Canadian Press Newswire , April 20.
Corporation of the District of Peachland, (1998), Submission to the British Columbia Task Force on Bank Mergers, July 7.
Costello, The Hon. P., (1997a), “Release of the Report of the Financial System Inquiry and Initial Government Response on Mergers Policy,” Press Release No. 28, April 9.
Costello, The Hon. P., (1997b), “Reform of the Australian Financial System,” available at the Australian Treasury internet homepage (http://www.treasury.gov.au), September 2.
Culpeper, Roy, “Systemic Instability or Global Growing Pains? Implications of the Asian Financial Crisis” Briefing B-41, Ottawa: The North-South Institute, 1998.
Credit Union Central of Canada, (1997), Submission to the Task Force on the future of the Canadian Financial Services Sector , October.
Deloitte Touche, The Future of Retail Banking: A Global Perspective . mimeograph, undated.
Democracy Watch, (1994) A Capital Idea: The Case for Reinvestment Requirements and Accountability Mechanisms for Financial Institutions in Canada , April.
Ecumenical Coalition for Economic Justice, (1998), Economic Justice Report, July, Volume IX, Number 2.
Evanoff, D., and Israelevish, P., (1991), "Productive Efficiency in Banking," Economic Perspectives, 15, Federal Reserve Bank of Chicago, p. 11.
Federal Register, (1995), Community Reinvestment Act Regulations and Home Mortgage Disclosure; Final Rules , May 4.
Humphrey, D., (1990). "Why Do Estimates of Scale Economies Differ?," Federal Reserve Bank of Richmond, Economic Review, September/October, pp 38-50.
Hannan, (1992), "The Functional Relationship Between Prices and Market Concentration: The Case of the Banking Industry," Empirical Studies in Industrial Organization , pp. 35-59.
Informetrica Ltd., (1998), "Current Banking Issues: A Discussion Paper," Report Prepared for the British Columbia Ministry of Small Business, Tourism and Culture , May 22.
Johnson, R., (1993), Bank Mergers and Excess Capacity: A Study of the Operating Performance of Four Multi-Bank Holding Companies, Federal Reserve Bank of New York, Research Paper 9305.
Jordan, J., (1998), Submission to the British Columbia Task Force on Bank Mergers, July 16.
Keeton, W., (1996), "Do Bank Mergers Reduce Lending to Businesses and Farmers? New Evidence from Tenth District States," Federal Reserve Bank of Kansas City Economic Review , 81, 3, pp. 63-75.
Kehoe, L., (1998), "US, EU in Bid to Avoid 'Cyber War'," Financial Times, August 28.
Kennickell and Kwast, M., (1996), Who Uses Electronic Banking? Preliminary Results from the 1995 Survey of Consumer Finances , Paper presented at the Annual Meetings of the Financial Management Association, October, pp. 22-24.
Robert Kerton, (1995), “A Consumer Test for Financial Regulation in Canada,” Policy Options June.
Kerton, R., (1997), "The Future of the Canadian Financial Services Sector: Is There a Place for the Consumer?," Presentation to the Conference Board Seminar on the Task Force Discussion Paper of June, 1997, June 25.
Klinkerman, S., (1991), "Merger Route a Dead End, Contrarians Say," American Banker, September 24, pp. 1 and 13.
Krabill, D., (1985), "Merger Economies, Part I," Banking Expansion Reporter , July 15, pp. 1 and 8-11.
Kwast, M., Starr-McCluer, M. and Wolken, J., (1997), "Market Definition and the Analysis of Antitrust in Banking", The Antitrust Bulletin , Winter, pp. 973-995.
Liang, J. N. and Rhoades, Stephen. “Asset Diversification, firm risk and Risk-based Capital requirements in Banking,” Review of Industrial Organization , 6(1) 1991 , pp. 39-50.
Luce, E., (1998), "Bank Lending Falls as Borrowers Switch to Bonds," Financial Times , July 15, p. 17.
Mallet, T., (1998), Credit Where Credit is Due: Results of CFIB Survey on Credit Conditions in the Small- and Medium-sized Business Sector , January.
Marks, J., (1991), "Bank M&A as a Factor in Investing," Bank Securities Monthly , October, pp. 3-10.
Matthews, G., (1993), "Delays in Post-Merger Cost Cutting Give Wall Street the Jitters," American Banker , January 26, pp 1 and 16.
Mathewson, G. F. and Quigley, N, (1998), "Canadian Bank Mergers: Efficiency and Consumer Gain versus Market Power," C.D. Howe Institute Commentary, No 108 , June.
Mayer, Martin, (1997). The Bankers: The Next Generation .
Mayo, E., (1998), Community Reinvestment Disclosure , Presentation at Downing St., March 19.
McBride, S., (1998), The Employment Impact of the Proposed Bank Mergers: A Report Prepared for the British Columbia Task Force on the Bank Mergers , August.
McIntosh, Gord, (1998), "CIBC Tells Merger Watchdog to Change Methods," Canadian Press Newswire, April 29.
McNamee, M., (1992), "Are Fewer Banks Better?," Business Week, August 17, pp 92-93.
Meehan, J., (1989), "Banking Gets Leaner and Meaner," Business Week , October 16, pp. 106-107.
Metcalfe, Brian (1998), “Resisting the Urge to Merge,” Financial Post , April 25/27, p. 39.
Meyer, L., (1998), "Statements to the Congress," Federal Reserve Bulletin , June.
National Australia Bank, (1996), Submission to the Wallis Inquiry , Ch. 5.
National Community Reinvestment Coalition, (1998), “Testimony Of John E. Taylor, President,” before The US Senate Committee on Banking, Washington D.C., June 24.
National Council of Welfare, (1998), Banking and Poor People: Talk is Cheap , Summer.
New Economics Foundation, (1997), Financial Exclusion in London , London:NEF.
New Economics Foundation, (1998), Community Reinvestment Disclosure , July.
Noulas, A., Ray, S., and Miller, S., (1990), "Returns to Scale and Input Substitution for Large U.S. Banks," Journal of Money, Credit and Banking, 22, p. 94.
Philp, M., (1998), "Banks Often Slam Financial Door on Poor Seeking Accounts," Globe & Mail , April 18.
Picard, M., (1998), Submission to the BC Task Force on Bank Mergers , Council of Canadians - Victoria Chapter, July 14.
Piloff, (1996), Multimarket Contact and Competition: Evidence from the Banking Industry , Federal Reserve Board, October.
Public Interest Advocacy Centre (PIAC) and the Consumers' Association of Canada (CAC), (1998), Banking on Consumer Power: The Issues for a Canadian Consumer Coalition for the Banking Industry , February.
Rhoades, S., (1993), "Efficiency Effects of Horizontal (In-Market) Bank Mergers," Journal of Banking and Finance 17, pp. 411-422.
Rhoades, S., (1994), A Summary of Merger Performance Studies in Banking, 1980-1993, and an Assessment of the "Operating Performance" and "Event Study" Methodologies, Federal Reserve Board Staff Study 169.
Rhoades, S., (1995), "Market Share Inequality, the HHI, and Other Measures of the Firm-Composition of a Market," Rev. Indus. Organization, December, p. 657.
Rhoades, S., (1996a), Bank Mergers and Industry-Wide Structure, 1980-94, Federal Reserve Board, Staff Study 169.
Rhoades, S., (1996b), "Competition and Bank Mergers: Directions for Analysis from Available Evidence: The Antitrust Bulletin , 41, 2, Summer, pp. 339-364.
Rhoades, S., (1997a), "Research on IO Topics in Banking: An Introduction and Overview," Review of Industrial Organization , 12, 1 pp. 1-8.
Rhoades, S., (1997b), "Have Barriers to Entry in Retail Commercial Banking Disappeared?," The Antitrust Bulletin , Winter, pp. 997-1013.
Rhoades, S., (1998), " The Efficiency Effects of Bank Mergers: An Overview of Case Studies of Nine Mergers", Journal of Banking and Finance , 22, 3, pp. 273-291.
Royal Bank, (1997), Submission to the Task Force on the Future of the Canadian Financial Services Sector , October 30.
Royal Bank, BC & Yukon, (1998), Submission to the British Columbia Task Force on Bank Mergers , July 16.
Schachter, H., (1998a), "The Great Debate," Canadian Banker, May/June.
Schachter, H., (1998b), "What's the Difference Between a Bank and a Gas Company?," Canadian Banker, July/August.
Shaffer, S., (1993), "Can Megamergers Improve Bank Efficiency?," Journal of Banking and Finance, 17, p. 423.
Standing Senate Committee on Banking, Trade and Commerce, The, (1996), Lowering the Barriers to Foreign Banks, October.
Statistics Canada, (1998), "Deposit-Accepting Institutions: Activities and Economic Performance 1996", Statistics Canada Daily , July 8.
Taylor, J., (1998), Testimony before the Committee on Banking, Housing, and Urban Affairs of the United States Senate , for the National Community Reinvestment Coalition, June 24.
Thompson Lightstone & Co. Ltd., Small and Medium Sized Business in Canada: An Ongoing Perspective of Their Needs, Expectations and Satisfaction with Financial Institutions, (1997), prepared for the Canadian Bankers Association, vol.2, p. 204.
Trust Companies Association of Canada, (1997), "The Need for a Strong Second Tier of Canadian Financial Institutions: Constructive Recommendations for Change," Submission to the Task Force on the Future of the Canadian Financial Services Sector , October.
Vancouver City Savings Credit Union, Board of Directors, (1998), Submission to the BC Task Force on Bank Mergers.
Wallis Commission, (1997), Final Report of the Financial System Inquiry , Government of Australia.
Weiss, L.W. (1989), "A Review of Concentration-Price Studies in Banking," Concentration and Price , pp. 219-265.
 CIBC (1998) “The Case for Bank Mergers in Canada,” A submission to the BC Government Task Force on Bank Mergers, July 16, p. 10. Some academic references from Canada and the United States include Mathewson and Quigley (1998), Krabill (1985), Meehan, (1989), and McNamee, (1992).
 For example, Rhoades (1996) and (1998), Asher (1994), Klinkerman (1991), Mathews, (1993)
 As discussed later in the paper, reduced service could take a number of forms ranging from local impacts such as withdrawal from rural regions and low-income urban neighbourhoods (see Bowles, 1998) to more generalised declines in quality of service resulting from reduced effort in certain product lines or service modes (e.g. teller service for deposit-taking, cheque-cashing, transaction and other basic services.)
 Rhoades (1998), p. 275.
 NIC Data base, Board of Governors of the Federal Reserve System. Cited in Rhoades (1998)
 McAllister and McManus (1993) p. 541 quoted in CAC Committee on Financial Services (1998), p. 2.
 In addition to Rhoades (1998), see Meyer (1998), McAllister and McManus (1993), Berger, Hunter and Timme (1993), Shaffer (1993), Berger and Humphrey (1992), Evanoff and Israelevich (1991), Humphrey (1990), Noulas, Ray and Miller (1990), Berger, Hanweck and Humphrey (1987) and Clark (1988). See also CAC Committee on Financial Services (1998) where many of these sources are cited.
 In 1996 the assets of the merging banks were: Royal Bank C$218 billion; Bank of Montreal C$170 billion; CIBC C$199 billion; and TD Bank C$126 billion. (Informetrica, 1998: p. 2)
 In Mathewson and Quigley’s terms the mergers involved “substitutable” rather than “complementary” assets.
 Stephen A. Rhoades, “The efficiency effects of bank mergers: an overview of case studies of nine mergers,” Journal of Banking and Finance, 22 (1998), p. 275.
 All involved considerable branch overlap as suggested by Mathewson and Quigley.
 For one systematic critique of its competitors’ rationales for the proposed mergers see Scotiabank “Remarks to the BC Task Force on Bank Mergers.” Robert W. Chisholm, Vice-Chairman, July 16, 1998, pp. 4-8.
 “Global competition appears to be especially important for banks that specialize in corporate customers and wholesale services, especially among the very largest institutions (Meyer, 1998: p. 5).”
 Lawrence H. Meyer, a member of the Board of Governors of the Federal Reserve System, testified before a US Congressional Committee in April 1998 that “other possible motives for mergers include the simple desire to achieve market power or the desire by management to build empires and enhance compensation (Meyer, 1998: p. 5).”
 (Informetrica, 1998: 3) Schedule II bank assets are excluded because only two of 45 schedule II banks provide retail branch banking services. Furthermore, by law the assets of Schedule II banks may not exceed 16 percent of the assets of the whole Canadian banking industry. The four merging banks argue that it is fairer to focus on their combined share of the total domestic assets of all financial institutions (including all banks, credit unions, trusts, securities firms and insurance companies), which stands at 31%. (Royal Bank, 1998: p. 2).
 Power Financial Corporation (1997), submission to the Task Force on the Future of the Canadian Financial Services Sector.
"Our merger. . .is about providing customers with more product choice at better value and at lower prices," said CIBC chairman Al Flood. Sandra Cordon “Mergers may not be good news for consumers.” Canadian Press Newswire -- April 20, 1998
 Deregulation, technological developments and globalisation of financial markets have undoubtedly radically altered the structure of financial services markets from the standpoint of large and especially multinational businesses. These businesses have direct access to global capital markets through stock offerings, bonds and other innovative financial instruments. Banks wanting to compete for this segment of the market have been compelled to operate internationally and to adapt their products to the needs of their corporate clients. For example, in the first half of 1998 total bank lending in international markets dropped for the first time in a decade as companies and governments switched to bonds as the preferred means to raise capital in international markets. Bankers anticipate that the international syndicated loan market, which recently has shrunk to less than half the size of the bond markets, is set to decline even further. Financial Times of London , July 15, 1998.
 Types of barriers to entry include (1) large numbers of relatively uninformed buyers (2) information and transaction costs for buyers and sellers (3) a small number of sellers in many local markets, and (4) the existence of sunk costs and frictions associated with entry and exit (Rhoades, 1997: p. 1004). Rhoades (1997) reviews “a large and varied body of empirical evidence which suggests that there are barriers to entry in retail banking markets.”
 Rhoades (1997) p. 1011. Rhoades points to a range of price-concentration studies including Weiss (1989); Hannan (1992); Rhoades (1995); Berger and Hannan (1997) and Pilloff (1996).
Sweden is one an example of an OECD country where government policy has accommodated a high level of concentration in the banking sector. University of Waterloo Professor Robert Kerton points out that Swedish consumer surveys have found that monopolized services mean lower quality (quoted in Cordon, 1998).
 The agency that has authority over a particular body is determined by the type of institution that would result from the merger.
 Stephen Rhoades, “Consolidation of the banking industry and the merger guidelines,” The Antitrust Bulletin, v. 37, 1992.
 The Riegle-Neal Act also caps the share of deposits that an out-of-state bank can acquire in another state through mergers or acquisitions at 30% of the target state’s deposits. These caps may be exceeded through internal growth of a firm, but not through mergers and acquisitions.
 Since 1996 new rules permit regulators to force banks deemed to have inadequate controls for market risks to hold more than the minimum capital adequacy requirements. Recognizing the increasing trading activity of the largest financial institutions, regulators also required those US banks with the largest trading positions to measure market risk and to apply capital charges against that risk. Effective January 1, 1998 these risk-based capital standards apply to any bank or bank holding company whose trading activity equals 10 per cent or more of its total assets or US$1 billion or more. Risk-Based Capital Standards: Market Risk, 61 US Federal Register .
 This policy position was articulated by Australia’s previous Labour government.
 From the RBA brief to the Wallis commission, quoted in the Wallis report (Wallis, 1997: p. 163).
 Costello (1997a) p. 2
 see Costello (1997b)
 In the absence of efficiency gains, output declines proportionately as costs are cut or, as suggested by the CAC Committee on Financial Services (1997, p. 3) the “cost savings are washed out by the increased costs induced by the mergers.”
 The ANZ in its submission to the Wallis Commission noted that its “own experience of the commercial reality is that the savings that appear possible on paper through, for example, removal of network and system duplication, are not always fully realisable and that cost-cutting may be accompanied by revenue-cutting and a part of the acquired market share lost (Wallis Commission, p. 176).”
 Imposing such “externalities” on consumers could result in improved productivity measured strictly in monetary terms if the combined firms can maintain or increase their current output. From the standpoint of the affected consumer on whom these costs have been imposed, however, the service is less efficient.
 Myron L. Kwast, Martha Starr-McCluer and John D. Wolken, “Market definition and the analysis of antitrust in banking.” The Antitrust Bulletin, Winter 1997
 “Key household asset services appear to a substantial degree to be obtained, and preferred to be obtained, at local depositary institutions.” (Kwast, Starr-McCluer and Wolken, 1997: p. 976) “Households obtain 75% of their checking, savings, money market, certificate of deposit, and line of credit services at a financial institution within 10 miles of their home and workplace.” (ibid. p. 984).
 Enquiries with BC Stats, the provincial government statistics agency, and the Canadian Banking Association indicate that there is no publicly available survey data on BC household finances that is comparable to the US data.
 Survey data pertaining to small and medium-sized businesses indicates that “In British Columbia, 73 percent of small and medium-sized businesses said that their main financial institution was a bank (Thompson Lightstone & Co. 1997: p. 204) cited in The Chancellor Partners (1997) p. 9.
 Stephen Rhoades, “Have barriers to entry in retail commercial banking disappeared?” The Antitrust Bulletin, Winter 1997. p. 1005.
 Rhoades (1997): p. 1013.
 In 1996 the comparable figure was 10.4%. Source: BC Stats.
 “Very few people are doing electronic banking in a way that leads them to obtain basic banking services from banks located anywhere in the country. Electronic banking, to date, is generally used simply as an added convenience for dealing with one’s local bank, such as using ATMs primarily as cash dispensers or using telephones to check account balances (Rhoades, 1997, p. 1004).” Rhoades cites Kennicikell and Kwast, “Who uses electronic banking? Preliminary results from the 1995 Survey of Consumer Finances,” pp. 22-24.
 Most households and individuals that do not have a chequing or savings account with a deposit-taking institution are probably too poor or indebted to open an account. One survey, ACEF (1996), found that nearly eight percent of adults living in households with incomes of $25,000 a year or less did not have a bank account.
 Another major area of concern, access issues, including those related to geographical location and accessibility of low-income individuals and households, are discussed in detail in another report prepared for the Task Force (see Bowles, 1998).
 This shift to fee-based income may have a cyclical bias since it has coincided with strong growth in mutual funds, an extended bull stock market, and a recent wave of mergers and acquisitions. Fears have been expressed that, if the growth of revenues in this area contract and competition from foreign banks increases in the commercial banking markets, domestic banks may attempt to compensate by increasing profits from retail banking customers through increased service charges. (PIAC/CAC 1998: p. 29 .)
 “Only 22% of Canadians find the information they get from banks about the services offered and the charges for those services to be very understandable. Another 49% feel information about charges is somewhat understandable. However, 20% feel the information is not very understandable and 8% find it not at all understandable (PIAC/CAC, 1998: p. 83).” In preparing a 1996 special report on consumer finances, Consumer Reports identified “at least 100 separate fees that banks now impose on consumers (Consumer Reports, March 1996: p. 10).” Imperfect information and uniformed buyers act as barriers to entry. To address this issue, the Industry Canada Consumer Protection Branch has created a financial calculator which helps consumers compare account service charges. The calculator is available at Industry Canada’s web site (http://strategis.ic.gc.ca).
 Consumer organizations “strongly feel that service fees at current levels create difficulties for low-income consumers, and do not think that competition is keeping fees at reasonable levels. The organizations agreed that the government should ensure a basic banking package with minimal bank fees. They are still concerned that information presented to consumers about service charges is unclear, despite progress made on this issue. Also most of them feel that there is a problem with consumers understanding the advantages and disadvantages of the various bank account fee structures and selecting the best options available to them (PIAC/CAC, 1998 p. 34).”
 These sources include regular surveys by the Federal Reserve Board of Governors and the Bank Rank Monitor, as well as studies by a number of US consumer organisations including the Consumer Federation of America, the US Public Interest Research Group Consumer Action and the New York City Office of Consumer Affairs. cf. CAC Financial Services Committee (1997) and Meyer (1998).
 “Service charges,” a CBA Issues Backgrounder, available at the CBA web site (http://www.cba.ca). The CBA’s estimate is higher than the Royal Bank’s, which estimated its 1997 retail services fees at 3% of earnings in 1997.
“Service charges,” a CBA Issues Backgrounder, available at the CBA web site (http://www.cba.ca), p. 2. The methodology of this CBA survey limits its usefulness. It is based on a comparison with 6 large US banks, which US data indicate have higher fees than smaller US banks. The CBA survey also assumed, among other things, “an urban, dual income, middle-aged family who own their own home and maintain a typical account balance of $1,500.” CBA (1998a), p. 17n.
 PIAC/CAC, 1998 p. 83. Generally speaking, as one’s level of income increases, so too does the likelihood that bank service charges are seen as unreasonable.” PIAC/CAC attribute this attitude to the offering of discount service packages for youth, students and seniors.
 For most banks fee-based income is now the strongest area of growth.
 See, for example, CIBC (1998).
 Industry Canada (1998) reproduced as Appendix I.
 Most bank issuers now offer a low-interest rate card option. This option, however, usually involves higher fees and may involve different means of calculating interest, for example from the date of purchase rather than the billing date.
 Kwast, et. al conclude that “asset services generally appear to be more locally oriented than credit services. While the Survey of Consumer Finances does not collect distance information for institutions used for credit cards only .... the information that is available suggests that credit cards are among the less locally oriented financial services. Almost 58% of all general-purpose credit cards (e.g. Visa and MasterCard) held by households are issued by institutions where the household obtains no other financial service. It seems reasonable to presume that many of these institutions are not local firms (Kwast, et. al., 1997: p. 985n).”
 A further concern presented to the BC Task Force is that the Canadian market presence of MasterCard could be reduced as a consequence of the mergers. The Bank of Montreal is currently the only major bank that issues MasterCard. If Montreal were to drop MasterCard, Visa would completely dominate the Canadian bank credit card market.
 Capital One Financial Corporation, a US credit cared issuer that does business in Canada through a subsidiary, asserts that when it decided to enter the Canadian market in 1995 “our research indicated that the Canadian credit card market was dominated by relatively few issuers, that those issuers charged higher rates relative to the US and that they offered few product variations (Capital One, 1997: p. 2).”
 There has been at least one instance where collusive and predatory practices have been proven in another OECD jurisdiction. The Mexican banking system is highly concentrated with the three biggest banks (Banamex, Bancomer, and Serfín) holding more than 50% of total banking assets. Each of these banks operate their own credit card systems. In 1994, the Mexican competition authorities responded to complaints that commissions charged to merchants were high, interest rates charged to cardholders were substantially the same and that profit margins were high compared to other countries and other banking products. The investigation found evidence of collusion in the setting of credit card interest rates, in preventing merchants from offering discounts for cash payments and in regard to the setting of merchant commissions.
 Senate Committee on Banking, Trade and Commerce (1996), p.35
 For the CBA’s distinction between cross selling and coercive tied selling, see the Senate Committee on Banking (1996), p. 36.
 See, for example, the remarks of Dennis Prouse, Insurance Bureau of Canada (Pacific Region), July 15, 1998 and Thal Poonian, July 16, 1998.
 This concern has been raised by bank competitors. For example, in a 1997 letter Power Financial Corporation urged the federal Task Force on the Future of the Canadian Financial Services Sector to consider “the wider implications of the manipulation of customer information and its potential impact on competition, regardless whether there is customer consent to use it.” Power Financial Corporation, letter, March 7, 1997. Task Force on the Future of the Canadian Financial Services Sector. available at http://finservtaskforce.fin.gc.ca.
 In New Zealand which has a high degree of foreign ownership in its retail banking sector, foreign banks acquired retail branch networks primarily though mergers or takeovers of New Zealand banks. For example, the mergers between Bank of New Zealand and National Australia Bank or Westpac Banking Corporation and Trustbank New Zealand.
 source, OECD
 Prior to this banks were required to hold a certain percentage of their assets as interest-free deposits with the Bank of Canada.
Power Financial Corporation, submission to the Task Force on the Future of the Canadian Financial Services Sector.
 The Office of the Superintendent of Financial Institutions reviews merger-related prudential considerations and must be satisfied that the proposed mergers do not detract from the soundness or stability of the financial system.
 This could help explain the much higher rate of bank failure in the United States where there are many more small and medium-sized banks. Research by Liang and Rhoades (1991) “indicate that financial asset diversification, as well as geographic diversification, are related to lower risk.
 Roy Culpeper “Systemic Instability or Global Growing Pains? Implications of the Asian Financial Crisis” Briefing B-41, Ottawa: The North-South Institute, 1998, p.16.
 CAC Committee on Financial Services, 1997, p1.
 “If there is something that domestic consumers can do to help banks become more agile for international markets, we are eager to listen. But there is no reason for Canadians to be fodder for institutions to ‘bulk up’ at home to be able to survive in the more competitive international marketplace. CAC Committee on Financial Services, 1997: p.1)”
 For example, the banks merger proposals are part of “an international trend toward consolidation in the banking industry, driven, at least in part, by technological changes that are making a dense network of branch banks less and less necessary for competition.” (Mathewson and Quigley, 1998, p. 1)
 Among whom women, aboriginal groups and other visible minorities are disproportionately represented.
 National Council of Welfare, (1998) pp. 8-9.
 For example, PIAC/CAC (1998) and BC Ministry of Attorney General, (January 27, 1998.
 cf. PIAC/CAC (1998), p. 69.
 Before taking a complaint to the CBO a customer must first try to resolve the complaint directly with the bank involved.
The CBO reports that to date all its recommendations have been implemented by the participating banks. Canadian Banking Ombudsman, (1998b)
 “Of the almost 3,200 customers who approached individual bank ombudsmen last year, approximately 2,200 or 69 per cent of the customers who were eligible to appeal to the CBO brought their complaints forward for review” The CBO reports that “Activity increased significantly after we began accepting complaints form individual customers. While we anticipated a larger caseload [in 1997], we underestimated the time required to investigate many of the complaints because of their complexity.” (CBO 1997 Annual Report, p. 4).
 “How the Canadian Banking Ombudsman Can Help You.” Canadian Banking Ombudsman Home Page. Http://www.bankingombudsman.com
 PIAC/CAC 1998, p. 48
 Canadian Community Reinvestment Coalition, “Banking Ombudsmen: Why They Must Be Independent, 1997.
 It seems reasonable to assume that the high cost of borrowing through credit cards is a factor in the growing number of personal bankruptcies in Canada, which, ironically, the CBA points to justify continuing high rates on credit card lending.
 In mid-August 1998 the prime rate was 6.5%.
 “The main difference between a code and regulations is that regulations place the responsibility for monitoring compliance with the government, and the means of redress within an administrative or legal system. A code, in contrast, places responsibility for monitoring compliance with the business. Independent audits may be required by a code, but are notably absent form the CBA’s model privacy code. Thus, consumers have no way of assessing the compliance of financial institutions to the code. The effectiveness of codes depends on the good will of the institution, and public scrutiny of its activities, but in this case, public scrutiny is curtailed, so we are left with only the good will of the institution.” (PIAC/CAC 1998: p. 45)
 National council on Welfare research demonstrates that CBA directives around accessibility for low-income consumers have not been adequately implemented at the branch level (NCW, 1998).
 The committee agreed with the views of the ACEF, a Quebec-based consumer organisation, that “voluntary codes of conduct are not adequate.” The Committee called on the federal government to “introduce regulations governing the collection, use, retention, and disclosure of customer information by all federally regulated financial institutions along the lines of the Canadian standards Association Model code for the protection of personal Information (emphasis added).” 1997 Financial Institution reform report of the Senate committee on Banking, Trade and Commerce. October 1996. P. 34.
 Robert Kerton, “A Consumer Test for Financial Regulation in Canada,” Policy Options June 1995, p. 26, cited in PIAC/CAC (1998), p. 47.
 The “Justice Minister recently announced that federal government’s intention to introduce legislation to protect privacy rights in the private sector by the year 2000.”
 “Any broader privacy law should be carefully scrutinised to ensure that there are no loopholes for banks and that sectoral codes are not permitted to replace legislation.” (PIAC/CAC, 1998; p. 46)
 See, for example, Louise Kehoe, ‘US, EU in Bid to Avoid ‘Cyber War’,” Financial Times of London, August 28, 1998.
 See the Senate Committee on Banking (1996), chapter 3.
 See Competition Bureau, (1998), s.28 n.13.
 See, for example, the briefs of the VanCity Credit Union and the Council Of Canadians.
 For example, the CBA asserts that “Many of the financial activities [governments] used to oversee and control with a large degree of certainty are now, or can be, beyond any conceivable regulatory control (emphasis added).” Quoted in Schacter (1998a)
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