Commentary: Why Canada Should Lighten Up On Foreign Banks

It would be as if the consolidation race in U.S. banking ended with only Citigroup, Bank of America, and a handful of stragglers crossing the finish line. Within the next few weeks, Canadian banking authorities are expected to rule on two proposed mergers that would spawn almost unprecedented concentration for a developed country: a pair of megabanks, each almost as big as Chase Manhattan Corp., America's third-largest, along with a smaller titan and a clutch of niche players.

Good idea? A growing number of critics say the deal only benefits the top executives of the two proposed megabanks: Royal Bank of Canada/Bank of Montreal and Canadian Imperial Bank of Commerce/Toronto-Dominion Bank. "When is big too big? When is powerful too powerful?" asks Peter Godsoe, chief executive officer of Bank of Nova Scotia, Canada's fifth-largest bank. These deals, he argues, would be anticompetitive, giving two banks control of nearly 70% of Canada's domestic banking business. A task force of the governing Liberal Party in Parliament adds that there is "virtually no constituency of support beyond the merger-seeking banks."

What to do? In the spirit of NAFTA, Ottawa should open its financial system fully to foreign banks. These outfits now come in chiefly to serve specialty markets and must contend with all but suffocating restrictions. But if U.S. banks could compete fully and fairly north of the border, Canadians would rapidly wind up with a Niagara-sized menu of financial choices.

PROMISING START. With stiff competition from outsiders to keep the home crowd honest, the merger arguments--that Canada needs players with enough heft to serve global markets--would be more convincing. At $317.2 billion in assets, Royal and Bank of Montreal would be Canada's biggest bank and among the top 25 in the world. CIBC and TD, with $313.3 billion, would rank nearby. Without such size, the banks argue persuasively, they would lose standing globally as the industry worldwide consolidates. Latest evidence: Deutsche Bank's purchase of New York's Bankers Trust Co.

With such deals on the upswing, only robust competition will protect consumers. Already, Canadians are benefiting from the limited competition permitted from foreign banks. MBNA Corp., the U.S. credit-card giant, for example, is shaking up consumer-credit markets in Canada. Through a chartered Canadian bank that MBNA created, it is blitzing homes with low-rate card offers and giving credit-card users more choice.

Yet newcomers operate in Canada under chafing restrictions. They cannot open branches of their offshore parents but must set up separately based and capitalized banks. Nor can they hold more than 10% of the shares in a large Canadian bank--a restriction on all Canadian investors, too--making takeovers impossible. Outsiders control a paltry 10% of Canadian banking assets, one of the lowest shares in the world.

BIG BRAWL. Opening up the market could have salutary effects. By either buying up Canadian outfits or picking up redundant facilities of merged giants, the American banks could ignite a financial free-for-all that would be a boon to the Canadian consumer. Hongkong Bank lately has become a force in the Canadian West by catering to the burgeoning regional immigrant market there.

But the Canadians would not be the only beneficiaries. If American banks ever do get to set up shop fully in Canada, Canadians will have a thing or two to teach them. Canadian bankers have far outdistanced their Yank counterparts in promoting debit cards, which are accepted by nearly everyone from corner convenience stores to the biggest malls. Electronic banking generally is a step ahead in Canada. Americans send staffers to study Canada's payments system to see how checks clear, often in hours.

In short, if the borders were fully opened, bankers on both sides would be forced to improve and, most important, serve the citizens of both countries better. Otherwise, the cozy Canadian banking cartel will either get a lot cozier or fade fast from the global financial scene.

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