RBC-HSBC banking merger is a slide to monopoly – Canada should just say no

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Keldon Bester is a co-founder of the Canadian Anti-Monopoly Project and a fellow at the Centre for International Governance Innovation.

Where is Paul Martin when you need him?

In the late nineties, Canada’s banks had decided competition wasn’t for them. RBC and BMO announced their nuptials in January, 1998, and CIBC and TD followed suit in April of that year.

Though the scale of RBC’s proposed purchase of HSBC is nowhere near that of the proposed consolidation in the nineties, regulators should learn from then-minister of finance Paul Martin and take a firm stance against Canada’s largest bank absorbing a competitor.

The brazenness of the bank’s consolidation plans 20 years ago cannot be overstated. Canada would have gone from five major banks to two megabanks and a ticking clock on the future acquisition of their remaining competitors. But before the year was out, Mr. Martin had killed those acquisitive dreams and thrown cold water on major consolidation for the foreseeable future.

If the acquisition of HSBC by RBC is quickly blessed by regulators, it could signal an openness to the kind of consolidation considered off the table for the past quarter-century.

In Canada, the role of evaluating bank mergers is split. The Competition Bureau is responsible for analyzing the potential effects of the merger on competition, but the minister of finance has the final call on whether the merger should proceed, taking into consideration public interest factors beyond competition. This arrangement is similar to the way mergers are handled in the transportation sector, where the bureau has typically been more hawkish in their treatment of mergers than their Department of Transport counterparts.

Though each merger is considered on a case-by-case basis, consolidation begets consolidation. This occurs along two avenues. First, signals by regulators and favourable decisions in Canada’s already consolidation-friendly competition law widen the bounds of acceptable consolidation. Second, as we saw in the nineties, competitors use the mergers of others to justify their own acquisitions, claiming they need comparable scale to compete. The Competition Bureau’s light touch approach to Bell’s 2017 acquisition of MTS signalled that regional competitors in Canada’s concentrated wireless space could be up for grabs, opening the door for the continuing Rogers-Shaw merger hearings.

With its decision to leave the market, it may be that there is no alternative but for HSBC’s Canadian business to be acquired by an existing bank. And many of RBC’s rivals – not just smaller, but also fresh from prior acquisitions – might not have the cash for such a deal.

But who acquires who matters. When ING Direct exited the market in 2012, it was purchased by Scotiabank, a middle-of-the-pack player at the time. Scotiabank relaunched the brand as Tangerine, one of Canada’s first online-only banks and which had a no-fee value proposition – a competitive differentiation from its big-bank counterparts.

It is unclear whether RBC has the same incentives to follow suit and turn HSBC into an innovative challenger brand. The government needs to find a solution for HSBC’s Canadian unit that does not leave it with the country’s biggest bank.

Canada’s banking system is well regarded internationally for its stability, especially after the global financial crisis, but recent research paints a mixed picture of competition in the Canadian sector. Alongside their stability, the profitability of Canadian banks’ domestic business also consistently outperforms that of their international peers, and an increasing portion of that income comes from fees paid by consumers.

There are continuing efforts to increase competition in the sector, but key portions of those efforts have been mired in delays. The modernization of Canada’s payments infrastructure was once again delayed last month, and there is no timetable for the launch of open banking, a policy intended to make switching banks easier for Canadians. Stalled efforts to increase competition are more troubling as Canadians stand to lose a competitive force in the market with the proposed merger.

At time of writing, the Competition Bureau has confirmed that they will be reviewing the transaction. We should look for similar confirmation from the Department of Finance. The federal government has also recently launched a consultation on the Competition Act as a first step to determining whether Canada’s competition law, including our merger law, is adequately protecting Canadians.

But any competition review of RBC’s purchase of HSBC will occur under our existing laws that favour consolidation in markets across the country, and the final call will ultimately be with the minister of finance. As the cost of living continues to rise, and before Canada opens up its merger law for review, this transaction is an opportunity for regulators and elected officials to stand in defence of Canadians.