Thursday, June 28, 2007

Banks & Insurance Companies Should Be Allowed to Merge: CD Howe

The Globe and Mail, Tara Perkins, 28 June 2007

The government urgently needs to reform the regulations governing banks and insurers in this country, says a new report released by the C.D. Howe Institute.

It calls for Ottawa to allow mergers among banks, as well as between banks and insurers, while also making it easier for foreign financial institutions to enter the Canadian market.

“Even if the two largest Canadian banks were to merge they would barely break into the list of the 25 largest banks” in the world, says the report, written by two university economics professors. “Moreover, their merged size would still put them at roughly half the size of the 10th largest bank in the world.”

Observers are unanimous in the belief that the current minority government will not take on the thorny issue of bank mergers. But this report adds another voice to the number of people who have spoken out recently in favour of regulatory reform. Last month, former progressive conservative prime minister Brian Mulroney said the banks should be allowed to merge. This month, IMF chief Rodrigo de Rato said the same thing.

The business of banking is increasingly global, but Canada's banks are at risk of missing the boat, suggested the C.D. Howe report.

None of the Canadian banks seems to be big enough to seriously compete with European-based global banks, or the top banks in the United States, when it comes to nabbing cross-border business from multinational corporations, the report said.

“A further casual comparison of size suggests that the largest Canadian banks are comparable in size to large regional American bank holding companies, and are roughly only half the size of U.S. banks that are internationally active,” it added.

The report sought to refute the idea that bank mergers would lead to fewer branches and less service for Canadian consumers.

“Even if the number of branches declined as the result of a merger, the social costs of such a decline seems overstated,” it said. The big banks decreased the number of branches they had in recent years as a result of new competition from players such as President's Choice Financial and Canadian Tire Bank that have little reliance on branches, it said.

“Moreover, a reduction of bank branches by large banks following a merger would likely be followed by an expansion of branches by smaller institutions.”

New competition could also come from foreign banks, it said. Currently, there is only one major foreign-owned bank (HSBC Bank Canada) that is actively building a significant network of retail branches, it said. And ownership rules prevent foreign banks from gobbling up the big domestic players.

Right now, the six biggest banks in Canada hold about 90 per cent of the total assets held by all chartered banks, it said.

The level of concentration is much higher than in most countries, although there are a few others with five or fewer dominant banks, such as Australia, Netherlands and Switzerland, it said.

“After domestic consolidation we expect that only some of the remaining banks will be truly internationally operating banks, with the remaining banks focused on serving mainly domestic markets,” it added.

The immediate challenge facing Canadian policy makers now is to put forward clear and transparent merger guidelines, it said.

“While the banks are in the best position to evaluate their own business strategies, they are poorly situation to judge what banking arrangement would be best for society,” it said.

“A government move to provide clear guidelines on the merger process and conditions combined with a decision to delegate the evaluation of proposed mergers to the Competition Bureau and OSFI would depoliticize the merger process and put in place the foundation for financial consolidation that could strengthen the financial sector in Canada,” concluded the report, which was written by Thorsten Koeppl, assistant professor in Queen's University's department of economics and James MacGee, assistant professor at The University of Western Ontario's economics department.