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Canadians deserve choice in banking: Experts say foreign competition needed

[PoliticsWatch updated 1:30 p.m. July 26, 2007]

The big six banks control 90 per cent of the Canadian banking industry's assets .

OTTAWA -- While the federal government maintains its moratorium on bank mergers calls have been growing in recent months for Ottawa to make legislative changes to make it easier for foreign banks to operate in Canada.   

"There's a lot of gains, potentially, of increasing competition and throwing open the Canadian market," James MacGee, assistant professor of economics at The University of Western Ontario, told PoliticsWatch. 

"I think, in general, that's something that's going to be on the political agenda in the coming years."

MacGee co-authored a recent study for the C.D. Howe Institute on bank mergers that supported easing up regulations on foreign banks. 

"Independent of bank mergers, competitive pressure is key for ensuring
efficiency in the financial system in the long run," the study concluded. 

MacGee told PoliticsWatch greater foreign competition will provide consumers an opportunity to buy from the best providers and force domestic firms to adopt best practices. 

Canadian banks are considered to be more conservative compared to their U.S. counterparts when it comes to residential mortgages and small business loans 

"I think that American banks have been probably a little quicker at adopting some of these lending tools," said MacGee. 

He said allowing greater foreign competition would not necessarily make it easier for the average person to borrow money. "But for some people will there be gains? Probably, yes. Some people will find that maybe there is an instrument, such as a borrowing contract, to meet their needs."

Currently Canada's six major banks -- Royal Bank, CIBC, Bank of Montreal, Scotiabank, TD-Canada Trust and National Bank -- control 90 per cent of the assets in the Canadian industry. 

A Statistics Canada study found that foreign banks represented just 7.9 per cent of Canadian market share in 2004. According to the Canadian Bankers Association, there are 24 foreign bank subsidiaries and 20 full-service foreign bank branches and 6 foreign bank lending branches operating in Canada. 

The largest foreign player in Canada is HSBC Bank Canada, which is the only foreign bank with a significant retail presence. While HSBC has total assets of $60 billion, this is small in comparison to the big six Canadian banks. TD, for example, has $400 billion in assets. 

U.S. banks currently have a presence in the Canadian consumer market, but this is primarily in the consumer finance sector. Citibank, for example, offers credit cards and Wells Fargo Financial offers consumer loans and mortgages. 

Foreign banks are allowed to operate in Canada, but face regulations that prevent them from becoming major players, such as foreign ownership restrictions and a maximum threshold of capital restriction of $8 billion. 

MacGee said this $8 billion cap is "the really big barrier" to increased foreign competition that prevents any U.S. bank from entering the Canadian market in a big way. 

"I think in general moving to more foreign competition -- conditional on dealing with the regulation issue -- should be beneficial," he said. 

Earlier this month, Finance Minister Jim Flaherty named a five-person panel to examine Canada's investment and foreign ownership rules in the wake of a record year of mergers and pressure from opposition parties. 

The review will include foreign investment in industries, including financial services. 

Some are viewing this review as an opportunity for Ottawa to re-examine the issue of bank mergers and restrictions on foreign competition in the banking sector. 

"There is no reason for one sector of the economy to be treated differently from another, so foreign ownership restrictions, including those on banks and telecommunications companies, should be removed," former EnCana CEO Gwyn Morgan wrote in his column in the Globe and Mail this week. 

The Canadian Bankers Association would not provide an industry wide position on mergers or increased foreign competition to PoliticsWatch. 

However, in an email, the association said the C.D. Howe study provided "a very thorough and useful contribution to the public policy debate."

Meanwhile, the Conservative government insists revisiting the bank mergers issue is not on their agenda. 

"Bank mergers are not a priority. I have said that consistently since I was elected, and that remains the case," Flaherty recently told the Financial Post.

Outgoing Bank of Canada Governor David Dodge, former prime minister Brian Mulroney and former Liberal cabinet minister Jim Peterson have all made statements in the last year in favour of Ottawa ending its moratorium on mergers.  

: Related Links

> MP blasts Mulroney for pro bank merger remark

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