Financial Services and Public Policy
Christopher Waddell (ed.),
2004 (Paper ISBN: 1-55339-068-7
$34.95) (Cloth ISBN: 1-55339-067-9 $75.00)
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| Contents | |
| Introduction | |
| Acknowledgements | . . . | iii | Welcome | . . . | ix | Message from the Organizers | . . . | xv |
| Introduction Chrisopher Waddell |
|
|
| Three Perspectives on the Issues | ||
| Research in Financial Services and Public Policy:
Filling the Gaps David Dodge, Governor, Bank of Canada |
|
|
| Discussion | . . . |
19 |
| The 3 Cs for Improving Securities Law Enforcement:
Coordination, Cooperation, and Communication David A. Brown, Chairman, Ontario Securities Commission |
. . . |
|
| Discussion | . . . |
37 |
| Remarks to the Financial Services and Public Policy
Conference Harold MacKay, Clifford Clark Visiting Economist, Finance Canada |
. . . |
39 |
| Discussion | . . . |
47 |
| Access to Financial Services | ||
| Access to Financial Services for Tiny Businesses: What
is the Role of Microcredit? Toni Williams |
. . . |
55 |
| Market Gaps and the Financing of New
Technology-Based Firms Miwako Nitani, George H. Haines, Jr., Judith J. Madill, Barbara J. Orser and Allan L. Riding |
. . . |
105 |
| Discussion | . . . |
144 |
| Law, Finance, and the Canadian Venture-Capital Cycle Douglas J. Cumming and Jeffrey G. MacIntosh |
. . . |
151 |
| Local Competition and the Price of Banking
Services Mario Fortin and André Leclerc |
. . . |
191 |
| Discussion |
. . . |
210 |
| Strategic and Management Challenges for Financial Services | ||
| Voluntary Turnover: Knowledge Management -- Friend or
Foe Nick Bontis and Meaghan Stovel |
. . . | 217 |
| Extended Abstract: The Impact of ATM Surcharges on Large
versus Small Banks: Is There a Switching Effect? Nadia Massoud, Anthony Saunders and Barry Scholnick |
. . . | 243 |
| Banking Production Measurement, Rationalization and
Efficiency of the Caisses Populaires Desjardins André Leclerc and Mario Fortin |
. . . | 251 |
| New Forms of Competition | ||
| The Distribution of Property/Casualty Insurance in
Canada, Past, Present and Future Mary Kelly and Anne Kleffner |
. . . |
291 |
| Foreign Bank Branching as a Means of Entry Into Retail
Banking John Chant |
. . . |
321 |
| Dissertation Research | ||
| Canadian Bank Mergers, Rescues and Failures Marie-Hélene Noiseux |
. . . |
345 |
| Secrets, Lies and Economic Inefficiency Tessa Hebb |
. . . |
349 |
| The Utilization of Heuristics by Novice and Habitual
Business Angels A. Ellen Farrell, Carole Howorth and Mike Wright |
. . . | 357 |
| Financial Governance and Regulation | ||
| Financial System Analysis: Theory and Application Edwin H. Neave and Lewis D. Johnson |
. . . |
393 |
| Managing Contractual Risk Through Organization:
Strategic vs. Consensual Networks Jean-Pierre Gueyié, Klaus P. Fischer and Martin Desrochers |
. . . |
423 |
| Discussion |
. . . |
467 |
| Private Pensions and Government Guarantees Norma L. Nielson and David K.W. Chan |
. . . | 477 |
| Globalization and the Changing Role of International
Private Financial Services Institutions Tony Porter |
. . . | 507 |
| Discussion |
. . . | 536 |
| Contributors |
| Return to Top |
INTRODUCTION
When the Government of Canada releases revised guidelines in the fall
of
2004 to govern prospective mergers within the financial services sector,
it will have been almost six years since it rejected the plans of
Canada's
four major banks to consolidate to become two.
On December 14, 1998, federal Finance Minister Paul Martin turned
down
plans to merge the Royal Bank of Canada and the Bank of Montreal that
had
been announced in January of that year and the Toronto-Dominion Bank and
Canadian Imperial Bank of Commerce announced in April.
The proposals from the banks generated an extensive investigation and
recommendations from the federal Competition Bureau and also created an
immediate political controversy. How would the government respond? What
were the facts about reduced competition and costs and benefits to the
banks, personal and business customers, and the entire Canadian economy
from the proposed mergers. Everyone had an opinion. Few had facts.
It had been almost a decade since banks and bank policy took
centre-stage
in national politics. The last time had been the mid-1980s' failures of
Alberta-based Canadian Commercial Bank and Northlands Bank. But
throughout
Canadian history, banks and politics have always been intertwined
because
the public has a more direct vested interest in banks and other
financial
institutions than any other sector of the economy, and individuals
express
their concern to their politicians.
Financial institutions hold the savings of individual Canadians in
savings
and chequing accounts, and through other financial instruments encourage
them to invest for the present and future and save for retirement. They
lend Canadians the money to buy homes and make other major purchases.
They
facilitate virtually all transactions in our economy, increasingly
through
the credit or debit cards they issue.
Since the decision in the late 1980s to break down the four pillars
of
the
Canadian financial system that had prevented cross-ownership between
banks, trust companies, insurance firms, and brokerage houses there has
been a huge consolidation of the financial services sector. At the same
time there has been growing pressure to open the doors to more foreign
competition in Canada while many Canadian institutions have sought and
taken advantage of opportunities to expand outside Canada's borders.
It is usually mergers, crises or what are perceived as usury
practices
or
attempts to limit competition by financial institutions that generate
political controversy. The controversies multiply as the sector grows
and
changes and financial services have been in almost continual change for
more than a decade.
While the world of financial services evolves, one thing that has not
changed is the degree to which the political controversies about
financial
services are debated in what amounts largely to an information vacuum.
The environment in which the controversies emerge, in which the
political
debates are held and policy decisions made and implemented has too often
been shaped primarily by impressions and anecdotes, rather than facts
that
flow from comprehensive research. This was true during much of the
period
from the banks' announcement of their intention to merge early in 1998
to
the finance minister's decision to cancel their plans at the end of that
year.
The September 1998 release of its report by the Task Force on the
Future
of the Canadian Financial Services Sector chaired by Harold MacKay began
to address the gaps in research and information. Accompanying its report
were 18 research studies that considered everything from the changing
landscape of the financial services sector in Canada to ownership
restrictions, taxation policies, the impact of new technologies on
financial institutions, corporate and consumer lending practices and the
venture capital sector, property and casualty insurers, the changing
demands on employees in the sector, and the impact of all these changes
on
consumers both in Canada and from an international perspective.
The National Research Program in Financial Services and Public Policy
launched by the Schulich School of Business at York University five
years
ago is built on the research foundation established by the task force.
The
goals are to expand on the work done for the task force and also to
branch
out to provide research on new, emerging issues around which future
policy
debates will centre and decisions be required. The research program also
seeks to identify the "next generation" of Canadian researchers in this
field within the Canadian university community, and facilitate the
development of effective networks of cooperation among these
individuals.
This volume summarizes the results of the some of that research as
presented at a conference held at the Schulich School of Business in
Toronto on April 22–24, 2004 (Additional information about the research
program and other projects underway and completed can be found at
www.schulich.yorku.ca/research/fnsv).
The results reported in this volume include work by some of Canada's
leading researchers in financial services, plus work in progress by
doctoral candidates who have chosen the financial services sector as
their
area of specialization. The papers are presented in the order in which
they were considered at the conference. The volume also includes some of
the discussion that took place with delegates after each series of
presentations.
However, the results of the research contained in this volume could
just
as easily have been clustered around some of the key themes that have
always dominated debate about financial services: the efficiency of
financial institutions and Canada's financial system, the search for
capital and the credit decisions made by institutions, the pension
system,
banking and future issues, and directions for regulation.
Greater efficiency is a frequent argument for mergers and
consolidations,
not only in financial services. It is also a central element of
corporate
strategic planning as Canadian financial institutions are increasingly
facing global competition. A critical element of efficiency is how
financial institutions manage the people who work for them. Nick Bontis
from Hamilton's McMaster University examines how much attention
financial
institutions pay to leveraging the human capital that exists within
their
knowledge-intensive workforce. He also assesses the degree to which they
have codified the knowledge their employees possess and placed a value
on
that knowledge to ensure valuable employees are retained and to assess
the
real cost to their operations of losing such key personnel.
André Leclerc of the Université de Moncton (Edmundston) and Mario
Fortin
of the Université de Sherbrooke consider efficiency through the eyes of
Les caisses populaires Desjardins. In one paper they examine how the
geographic location of individual local caisses populaires affects how
they set interest rates on both savings and loans, working from the
theory
that in small communities of Quebec, Desjardins may have the market
power
to raise the price of its financial services when there is no local
competition. Their second contribution to the volume analyzes whether
recent rationalization and consolidation within Les caisses populaires
Desjardins have increased the efficiency of the organization.
Jean-Pierre Gueyié from the Université de Québec à Montréal and Klaus
Fischer from Laval University in Quebec City have also examined Les
caisses populaires Desjardins and the credit union system in Ontario.
They
assess whether strategic networks are a more efficient way to manage a
system of linked financial institutions by comparing the performance of
the Desjardins network in Quebec with the more independent operations of
individual credit unions in Ontario.
Efficiencies in the sale of property and casualty insurance in Canada
are
calculated by Mary Kelly of Wilfrid Laurier University, Waterloo and
Anne
Kleffner of the University of Calgary. They compare the costs of selling
insurance through independent agents or brokers, selling it directly
through an insurance firm's own sales force and distributing products
directly to consumers through commodity channels such as mail order,
call
centres, and the Internet.
The final aspect of efficiency considered by the conference involves
the
impact of automatic teller machine (ATM) surcharges. Nadia Massoud from
the University of Alberta in Edmonton has examined the impact of
surcharges in the United States. Her study explores whether increasing
surcharges by larger banks on the use of their ATMs by non-customers can
be used strategically to attract customers to the larger bank to avoid
such surcharges.
Many of the most controversial issues relating to financial services
revolve around who does and does not obtain credit and how capital is
raised to finance growth of both established firms and start-up
businesses.
Not surprisingly, with the late 1990s boom and then bust of the high
technology sector and subsequent attempts to revive it, the financing of
start-up businesses is of considerable interest. Ellen Farrell from St.
Mary's University in Halifax reports on the results of research that
explores how both novice and experienced angel investors assess
information and make decisions about what start-up ventures to finance.
Another aspect of venture-capital financing — the labour-sponsored
venture
capital corporation (LSVCC) — is examined by Douglas Cumming from the
University of Alberta and Jeffrey MacIntosh from the University of
Toronto. Their research calculates whether LSVCCs have increased the
overall amount of venture capital available, assesses the value of
LSVCCs
as investments for individuals and examines whether the corporations
have
succeeded as a tool of public policy designed to encourage the growth of
venture capital.
At the other extreme is micro-credit — very small loans made to
individuals who are usually considered not creditworthy, to start small
businesses at the community level. Toni Williams and Iain Ramsay from
Osgoode Hall Law School at York University, Toronto report the results
of
their study of the introduction of micro-credit into Canada and whether
the experiment has succeeded.
Finally, Allan Riding, Judith Madill, George Haines Jr., Barbara
Orser,
and Miwako Nitani from Carleton University, Ottawa examine the degree to
which knowedge-based small and medium-sized businesses face
disproportionate difficulty in obtaining loans in the commercial lending
market. Their study is based on data from a recent large-scale survey of
the financing experiences of small and medium-sized businesses in Canada
—
data that was gathered as a result of a recommendation of the MacKay
task
force.
Banks are at the centre of many of these decisions to extend credit,
and
too many mistakes in financing ventures that ultimately fail can
threaten
the liquidity and survival of any financial institution. Marie-Hélène
Noiseux from Concordia University, Montreal provides an historical
perspective on Canadian bank mergers and failures in her research that
analyzes the 29 bank mergers and failures in Canada between 1900 and
1931.
John Chant of Simon Fraser University in Vancouver brings the bank
merger
and competition debate up to date with his study of the banking market
within the European Union. He assesses whether the "single banking
market"
in Europe could be adapted to Canada to allow full-service branches of
foreign banks into the Canadian banking market. Such an opening up of
the
market to foreign competition in Canada might compensate for reduced
competition for consumers at the retail branch level if some of Canada's
major banks are allowed to merge.
The aging Canadian population is also focusing increasing attention
on
the
country's pension system. Two increasingly important aspects of the
private pension system in Canada receive attention in this research
collection. Norma Nielson from the University of Calgary has assessed
the
impact of the presence of Ontario's Pension Benefit Guarantee Fund
(PBGF)
in the marketplace. The public agency will step in if a pension plan
becomes insolvent. Her study examines pension plan formation and
continuation, pension plan type and participation, funding or
underfunding, and financial performance of plans operating with the
protection of the PBGF compared to plans in provinces where no such
public
guarantees underwrite pension plans.
Tessa Hebb of Oxford University in England focuses on the activities
of
the California Public Employees Retirement System (CalPERS) to determine
how pension plans are using their power as owners of corporations to
force
changes in corporate governance practices.
Finally, no research program in financial services would be complete
without considering regulation of the sector. The need for some form of
regulation is a constant that will always be there, but like the
industry
itself it must evolve to keep pace with new trends, products, processes,
and institutions. Increasingly that is done through a combination of
public sector and private sector organizations that share responsibility
for the governance of global finance. As financial institutions move
beyond national borders where domestic regulators have no authority,
another means must be found to ensure sufficient regulation to maintain
consumer confidence in the institutions. Tony Porter from McMaster
University analyzes how globalization and technological developments
have
substantially altered and enhanced the role of the private sector in the
global governance of finance.
Edwin Neave and Lewis Johnson from Queen's University study
regulation
of
financial services in Canada from a different perspective. They propose
a
theory of financial system activity and then apply that theory to
regulation of the securities market by assessing both "risk-based" and
"rules-based" approaches to regulation.
The volume then highlights the view of three of the leading figures
in
the
Canadian financial services sector. David Brown, chairman of the Ontario
Securities Commission, provides a detailed explanation of how the
commission plans to increase its enforcement activities both within the
province and in concert with international securities regulators.
Harold MacKay, the Clifford Clark Visiting Economist at the
Department
of
Finance in Ottawa and chair of the 1998 Task Force on the Future of the
Canadian Financial Services Sector, offers a strong endorsement of the
proposal to replace provincial securities commissions with a national
securities regulator.
And David Dodge, Governor of the Bank of Canada, offers suggested
directions for the next phase of research. He highlights issues that
will
take on increasing importance in the activities and regulation of
financial services in the future. He believes strongly that more
research
is essential to guide future debate about the regulatory environment
essential for the continued success of the country's financial services
sector.
This publication is a compilation of studies that cut across the
changing
landscape of financial services, highlighting the conclusions and
recommendations from detailed and specific research, not anecdotes and
impressions about Canada's financial services sector. This collection
provides new insights into old issues and focuses attention on new
challenges for regulators, the industry, and the consumer.
The financial services industry is constantly changing, and shows no
sign
of slowing in 2004 or for the foreseeable future in the face of
globalization of opportunities and financial markets, the constant
search
by the sector for new products and services, and changing consumer
demands.
When he turned down the bank mergers in late 1998, the finance
minister
issued a news release saying that:
Looking forward, we believe our immediate priority must now be
to
focus on establishing an appropriate policy framework for the financial
sector for the 21st century.
The government will not consider any merger among major banks
until the new policy framework is in place.
But even then, new proposals will first have to demonstrate, in
the lights of the circumstances of the day, that they do not unduly
concentrate economic power, significantly reduce competition or restrict
our flexibility to address prudential concerns.
This can only be accomplished through continued study and research of
the
operations and activities of all players in Canada's financial system.
The
conclusions reached by the researchers whose work appears in this volume
are critical in assisting policymakers, regulators, and those working in
the financial services industry to determine how best to meet the
challenges that lie ahead.
* * *
I would like to take this opportunity to thank sincerely all the
authors
for their contributions and their prompt attention to the usual
inquiries
that occur when turning conference papers into a publication. Their
efforts guaranteed their research would appear in a timely fashion when
the issues they have analyzed are still at the centre of debates about
future directions for the financial services sector in Canada. As well
let
me add particular thanks to Sharon Sullivan from the John Deutsch
Institute for her tremendous attention to detail in compiling the final
versions of all the papers and then her skillful oversight of the
production of this publication.