THE BLOG

Is It Time to Stop Coddling Canada's Banks?

04/14/2013 11:18 EDT | Updated 06/14/2013 05:12 EDT
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The controversy over RBC's outsourcing of jobs has touched a raw nerve with Canadians, and nowhere is that clearer than in the "Boycott RBC" campaigns that have popped up online.

Clearly, many Canadians already unhappy with their banking options became much less happy to hear that at least one of Canada's iconic institutions is shipping jobs overseas.

But when public relations experts chimed in on the controversy, they declared that, for all the public outrage, RBC's bottom linewon't suffer as a result.

Well you can bet on that.

In the Old Boys' Club that is Canadian banking, almost nothing can unseat one of the big six banks from their market-dominating position. This is a matter of deliberate policy: Canada's banks are protected from foreign and domestic competition through a complex network of regulation. You can boycott RBC all you want, but your options will pretty much always be to go to another bank that is part of the same club, and will offer you largely the same services and products. (Ever notice how bank fees often jump in unison?)

Well, maybe it's time to change that.

There are basically two reasons why Canada maintains this rigid, and some would say protectionist, banking regime. The first is to prevent what the Bank of Canada describes as "the potential for solvency-threatening self-dealing" -- in other words, to prevent the casino culture that led to the sort of collapse witnessed in the U.S. in 2008.

The second reason is to ensure that Canadian banks stay Canadian, that our banking system doesn't fall into foreign hands.

It's hard to argue with the first reason, but the second one requires some examination.

Canadians are proud of their home businesses and often want to see them protected. Think of the sale of Nexen to China's CNOOC, which a vast majority of Canadians opposed, or the sale of the Toronto Stock Exchange to the financial consortium Maple Group, even though the London Stock Exchange had offered a higher bid.

But this protectionism comes with a price, which is the creation of these near-monopolies: cabals that control entire industries and set prices and effectively carve up market share between themselves. Like banks, telecoms are protected from foreign ownership, and like banks, they operate as an oligopoly, and like banks, their customers are growing frustrated with the whole thing.

So why does the government protect the big banks from foreign competition? Because we want the taxes generated by their profits and the jobs they create to stay in Canada.

But this clearly isn't happening anymore. RBC's move to outsource 45 temporary foreign workers is just the tip of the tip of the iceberg -- Canadian banks have been systematically outsourcing jobs for decades.

So why should Canadians be loyal to the banks if the banks aren't loyal to Canadians? Maybe it's time for us to be able to put our money with Deutsche Bank or BNP Paribas or any number of other global retail banks.

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After all, when it comes to foreign expansion, the big Canadian banks have been having their cake and eating it too. CIBC and Scotiabank have been dominant banks in the Caribbean for decades. BMO, RBC and TD expanded aggressively into the U.S. in recent years, buying up regional banks across the country (RBC recently sold off its U.S. operations.)

This sort of expansion would be impossible in Canada. Our banks used the capital we gave them via our deposits and interest payments and used it to expand into foreign markets, all the while being largely protected from other banks doing the same here.

To be sure, there is no rule anymore in Canada that says foreign banks can't operate here. It's not that simple. Since 1967, Canadian banks have operated under the "widely-held" rule, which stipulates that no one person or entity can own more than 10 per cent of a bank in Canada that has more than $5 billion in equity. (Recent changes to the rule allow one person or entity to own up to 20 per cent of voting shares but only with the finance minister's permission.)

What this means is that the dominance of the major banks is essentially frozen in place. If no one can own more than 10 per cent, no one can mount a takeover of a bank.

(The telecom industry operates under a similar rule: Telecoms can't have more than 10 per cent market share if they are majority foreign-owned. The Tories bent that rule to allow Wind Mobile to operate, but the Canadian telecom industry largely continues to operate like the banking industry -- as a cabal.)

Foreign banks have other options than takeovers. They can simply open a branch or branches in Canada, but if they do that they are limited to taking deposits of no less than $150,000. So essentially they are limited to corporate banking and the odd wealthy person who wants to stash their cash outside Canada.

Foreign banks can also open a subsidiary (ING Direct was one before it got swallowed up by Scotiabank), but they must adhere to strict rules regulating foreign banks' Canadian branches that "go a long way toward completely eliminating the benefit of the branch form of expansion," according to a study from the Western New England School of Law. (ING Direct never attempted to open actual branches.)

Between all those rules, there is almost no incentive for new banks to show up in Canada.

So let's seriously consider putting an end to the widely-held rule, or at least to loosen it to the point that foreign banks and upstart banks have a chance at building themselves into major players in Canada.

Doing so would be controversial, and maybe we wouldn't even have to go through with it; maybe just the threat of breaking up the banking oligopoly would make the big banks think differently about their role in Canada's economy, and what Canadians expect of them.

To be sure, breaking the bank oligopoly would come with risks. Some analysts say part of the reason Canada's banks survived the financial crisis of recent years better than banks elsewhere was the insulated nature of Canadian banking. Not feeling the pressure to compete in an open, global banking market, Canadian banks didn't take on the sorts of risks banks in the U.S. and elsewhere did -- or so the theory goes.

A more common theory is that Canada's high capital reserve requirements kept the banks relatively healthy, and that could be maintained, to an extent, even if we did allow foreign takeovers.

All the same, proceed with caution should be the rule here.

In this day and age of free market orthodoxy, the banks don't like to think of themselves as having any sort of "moral obligations," only obligations to shareholders. But the protection Canadian banks enjoy -- the same protection that has allowed them to prosper internationally -- means that the banks do not operate in a free market environment, and if they want to continue having their cake and eating it too they should accept they have responsibilities towards the Canadians who have little choice but to bank with them.

And if they don't, then let's get some foreign banks in here, and get some real competition going.

It could well be time for Canadian banking to go global. After all, Canadian banking jobs already have.