A bank merger that makes the case for competition law reform

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Few people have ever looked at banking in Canada, dominated by five large lenders, and thought: Wow, there’s a vibrant market brimming with competition.

Yet last Friday, after the Competition Bureau reviewed Royal Bank of Canada’s proposed takeover of HSBC Bank Canada – the industry’s largest company scooping up the seventh-largest name – the conclusion was predictable and disheartening. The deal, the bureau said, would eliminate one of Royal Bank’s few rivals but it wouldn’t make the lack of competition in banking substantially worse.

It’s not that the Competition Bureau can’t see obvious problems. It cited three big ones: financial services are controlled by a few companies; it is difficult for upstarts to gain a toehold or to expand; and some parts of the business are so concentrated that there’s a danger the banks could co-ordinate their actions to the detriment of customers.

Instead, under Canada’s inadequate competition law, the federal watchdog is able to do little more than shrug at further consolidation in an already heavily consolidated industry. The problem, as this space has argued, is the Competition Act, not the bureau. Ottawa is reviewing the law, which dates back to the 1980s when a bigger-is-better philosophy reigned. A potential overhaul is pending, changes this space strongly supports.

Watching Canada’s biggest bank further bulk up underscores the urgency for a new approach. Too little competition in banking affects all Canadians. Think of high fees for basic services such as a chequing account. Think of small businesses, which employ close to two-thirds of the country’s workers, and their struggles to find fairly priced financial services and to secure the loans they need to build and expand.

The Competition Bureau’s review suggested that HSBC Canada didn’t have an overly large impact on the banking industry. But it had geographic strength in Vancouver and Toronto and booked rapid growth in residential mortgages by offering attractive rates. Its absence, while not a disaster, is a loss for competition.

There are many holes in the Competition Act but the central problem is its fundamental approach. The law’s various provisions encourage, rather than question, mergers. It’s the Competition Bureau’s job to prove a merger will be bad for the country, instead of the companies proving their deal will benefit Canadians. The onus, especially in already concentrated markets, should be reversed.

In other situations, mergers can produce wider benefits, as companies join forces to add heft and bolster their ability to compete and to innovate. But the calculus should be the same: the companies need to make the case.

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Royal Bank could grow by competing for new customers – helping drive Canada’s lagging productivity – but because of an outdated competition law it is able to splash out some money and sweep up 770,000 retail and 12,000 business customers. It fortifies its market-leading position without having to hustle for that business.

Ottawa’s review of the law is part of a broader shift in recent years in thinking about competition, as many industries have become controlled by a small number of firms. In July, the Federal Trade Commission in the United States issued new draft merger guidelines, as the Biden Administration pushes against consolidation. Among the top new guidelines are warnings against mergers that increase concentration in highly concentrated markets and increase the risk of co-ordination among companies – two of the main problems the Competition Bureau warned of in its Royal Bank-HSBC Canada review.

The final say on Royal Bank’s proposed takeover belongs to Finance Minister Chrystia Freeland. In the late 1990s, the federal government said no to mergers among the big banks. That decision has served the country well. This deal isn’t on the same scale but with so few major names in banking, the loss of one is one too many.

The bureau was limited by the law in its review. Ms. Freeland, under the Bank Act, has much more power. Like a generation ago, Ms. Freeland can say no to further consolidation in banking. This space last November urged her to give careful consideration to the needs of retail and business customers, and that includes the evolving dynamism of the banking industry.

The bigger issue remains Canada’s weak competition law. The need for a total rewrite has never been clearer.