A new study from the C.D. Howe Institute argues in favour of bank mergers, and bank-insurer mergers, to allow the Canadian financial industry to improve its international competitiveness.
The think tank’s new report laments that the federal government’s most recent legislative reform in the financial sector sidestepped significant change. “This is unfortunate because Canada urgently needs regulatory reform that would allow for the creation of a new competitive regime for financial services,” it claims.
It concludes that:
- banks should be allowed to merge as part of a larger strategy of realizing further efficiency gains and risk reductions mainly through internationalization of their operations;
- competitive pressure from internet banks or banking services offered by retail chains should be supplemented by legislative action to ensure markets remain contestable through potential foreign entry;
- mergers of insurance companies and banks should be allowed to foster competition and provide consumers and businesses with access to one-stop financial and insurance services.
The report notes that bancassurance mergers should be permitted as long as there are appropriate provisions to limit the exposure of the resulting conglomerate to large, aggregated risks from the insurance business.
“Once mergers allow large Canadian banks to play a bigger international role and further entry of foreign banks into Canada is facilitated, the Office of the Superintendent of Financial Institutions should be expected to harmonize and coordinate its regulatory oversight with other national regulators,” it adds.
Its analysis suggests that, from an economist’s perspective, banks have a strong argument that consumers, the Canadian economy as well as the banking sector would all benefit from further consolidation that creates even larger institutions and financial conglomerates. “While the past and current debate has emphasized the gains from a rationalization of bank branches as the main impetus for banks to merge, we do not believe that this is the pivotal issue. Instead, we see the need for some Canadian banks to pursue strategies that will allow them to become either international banks or specialized full-service domestic retail banks,” it says.
The report adds that new distribution channels, such as internet banks and retail-store-based banks, are already challenging the traditional banking sector; and, as long as traditional competitors, such as credit unions, smaller chartered banks and new potential entrants, are not discouraged from contesting the market, “market power for even larger Canadian banks will not be an issue”.
“As financial markets are becoming more globally integrated by the minute, pressure is mounting for the whole Canadian financial system to keep pace with this trend. Other markets have embraced these changes by integrating and consolidating national and international infrastructures such as exchanges, settlement, clearing and payment systems. At the same time, Canada is still struggling with basic issues such as harmonizing securities regulation across different provinces,” it concludes. “An important lesson to draw from the recent fiasco regarding bank mergers in Canada is that regional interests and special interest groups are likely to loom large in preventing critical steps in the right direction. Again, a different, economic perspective is needed to bring the discussion back to the transparent and unrelenting reality of economic principles.”