(May 1 – 16:30 ET) – An argument played out in the past by Canada’s Big Five Canadian banks received some support today from a major U.S. rating agency.

Standard & Poor’s says the big banks simply aren’t big enough to compete on an international scale, especially with their counterparts in the United States and Europe — and the federal government is partly to blame.

“It would be extremely difficult for the investment banking operations of Canadian banks to break out of their niche strategies and compete with the major U.S. and European investment dealers on a global scale because of their lack of size, infrastructure, distribution and product breadth and depth,” says the S&P report.

And while the banks have turned in strong balance sheets for the last decade or so, there is a “concern,” says S&P, that the Canadian banks are behind their global peer group when it comes to profitability, liquidity, capital, size and scale.

It views the forthcoming financial services legislation from Ottawa as being “slightly negative” for all financial institutions, because it will increase competition and regulatory reporting, says S&P.

The federal government, it says, is partly responsible for the situation in which the banks find themselves. The rating agency says Ottawa has let the affairs of the Canadian banks remain on the political agenda, “which has reduced the pricing power of the domestic banks.

“As well, this has affected their ability to compete within the global arena because of the high level of political intervention and the slow pace of Canadian regulatory change,” it says, noting the legislation stemmed from a report published in September, 1998.

S&P released its report on the state of the Canadian banking industry as it announced new “harmonized” ratings following its merger operations with Canadian Bond Rating Service Ltd. back in October.

It rated all eight Canadian banks. All received stable outlooks, with the exception of Bank of Montreal and CIBC, which received negative outlook marks.