Let banks, insurers merge, feds told

The federal government should do away with restrictions on the financial services industry, including the de facto ban on bank mergers and the amalgamation of banks with insurance companies, according to the final report of the Competition Policy Review Panel.

But the panel is not quite ready to advocate a completely unrestricted marketplace. It recommends that the current requirement that large banks and insurance carriers be “widely-held” be kept in place.

This rule ensures that no single shareholder can own more than 20% of the voting shares, or 30% of non-voting shares, of any bank with more than $8 billion in equity, or any publicly traded insurer with equity of $5 billion or more.

“Canadian financial institutions participate in international markets, where they face fierce competition from rivals, many of which are much larger,” the report says. “Scale is important for Canadian financial institutions and their Canadian customers doing business abroad.”

There is no guarantee that the recommendations will be followed and there is a good chance that a different government will be in place when the Bank Act next comes up for ministerial review in 2012.

“While there is a range of opinions amongst our members on both the widely held rule and large bank and cross-pillar mergers, we told the Panel that it was important to address these issues because domestic structural policies have implications for the international competitiveness of Canadian financial institutions,” said Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association, in a press release. “It is now up to the government to decide what to do with the Panel’s recommendations and we look forward to contributing to that discussion.”

In the past, it has been politically expedient to prevent banks from merging. While many Canadians are distrustful of banks, and may think they are too powerful already, the report points out that even our largest bank — RBC — ranks no higher than 30th on the global stage, in terms of size.

The panel points out that while Canada has effectively banned major financial mergers over the past decade, the rest of the world has seen large consolidation plays create massive institutions.

“Because Canada represents 3% of world capital markets, reaching the scale of the world’s largest institutions will depend on how well Canadian banks fare in the contest to acquire foreign banks. At the same time, there may be benefits in terms of realizing efficiencies resulting from domestic mergers,” the report says.

Canadian banks have managed to avoid the worst of the problems stemming from the global credit crisis which sprang forth from the U.S. mortgage market in August 2007. While domestic banks have taken billions of dollars in asset write-downs, there is an expectation that those same assets will be “written up” in the future as liquidity returns to the market.

Meanwhile, some of the big names in the U.S. and European financial services industries have taken even bigger hits.

Aside from the collapse of Britain’s Northern Rock and the “rescue” of America’s Bear Stearns, any surviving global banks have begun cutting back. On June 23, Citigroup announced it was laying off 6,500 people from its investment banking operations. Italy’s biggest bank, UniCredit, has announced it will cut 9,000 employees in Western Europe.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(06/26/08)