Canada’s big banks have become too powerful, and it’s time to foster more competition in the industry, says Toronto-based Hamilton Capital Partners.
In a new essay, the firm argues that, while policymakers have successfully created a strong financial sector in Canada, it may have become too strong, or at least too concentrated in the hands of the big banks. And, it would like to see three policy changes that would open them up to greater competition.
“While the current system is excellent, the ongoing concentration of power is not entirely benign to either consumers or businesses,” it says. As Hamiltion sees it, the biggest weakness of the current system is, due to the fact that the banks are effectively protected against foreign acquisitions, “wide swaths of the wealth management and investment banking sectors have also become protected, creating what is now effectively a closed market.” This has enabled the banks to achieve domestic market dominance against their smaller domestic competitors, it notes.
Hamilton would like to see three policy moves to bolster competition: prohibit in-market acquisitions once a bank achieves a 10% market share in domestic retail deposits; allow 100% foreign ownership of all banks, except for the four biggest (Royal Bank, TD bank, Bank of Nova Scotia and Bank of Montreal); and, require the banks to sell third-party domestic mutual funds in their retail branch networks.
The objective of a domestic market share cap for retail deposits would be to enhance competition by preventing excess market concentration in retail banking, it says; and, it would prevent the banks from thwarting the growth of smaller rivals into more meaningful competitors.
“Preventing further concentration is one of the most important – and simple – reforms for the system that is already extremely concentrated,” it says, adding, “there are simply no policy benefits to further concentration.”
Second, by removing foreign ownership restrictions on the smaller banks, including CIBC, the firm suggests that, “This would allow a smaller bank lacking a foreign platform to augment growth to take on a larger partner to help offset its scale and/or strategic disadvantages.” This could bolster competition in the system by strengthening the smaller banks, it says.
“Does anyone not believe that market competition would rise if the highly respected Wells Fargo acquired CIBC?” it asks. “With more than three times the assets of CIBC and an excellent reputation in retail banking, it would be a formidable partner.”
Finally, it calls for mandating the open architecture approach to third-party mutual fund sales in the banks’ retail branch networks. This, it argues, would improve the lot of bank customers, it suggests, by minimizing the conflict of interest that currently exists in captive sales forces.
“Allowing the sale of third party funds is an appropriate remedy, as it would enable the licensed financial planner to offer products that they consider the most appropriate for their client, which may or may not be an in-house product. This eliminates, or at least minimizes, this real or perceived conflict,” it says.
Hamilton says that none of these recommendations would harm the existing Canadian banks, nor would they impose costs on taxpayers, but they could help create a more competitive Canadian financial system, which should ultimately benefit consumers and businesses.
“Canadian banks are very well run organizations. However, over the past several decades, our financial system has become increasingly organized to the benefit of the five giant banks. Policy makers can take steps to impede this advancement, and ensure the system evolves in a way that serves all Canadians, not just bank shareholders. The fact that virtually all Canadian bank investors believe these are “can’t lose” stocks says a lot,” it concludes.