Federal budget 2014: Ottawa plans boost for small banks

By Garry Marr, Financial Post, February 11, 2014 - Ottawa plans to make it easier for new banks to establish themselves in the financial sector while also improving the access to funding small banks get from Canada Mortgage and Housing Corp. The federal government says it plans to “improve the ability of new entrants and smaller banks to compete” while preserving the strength of the sector.

The 2014 Budget says the Office of the Superintendent of Financial Institutions has appointed someone to “reach out” to those small banks and trusts and deal with some of the challenges they face competing with the big banks.

Among the changes to ensure this happens, the government is promising to make sure small banks will have better access to funding from Canada Mortgage and Housing Corp. CMHC’s new allocation methodologies are being refocused so portfolio insurance and securitization programs are more accessible to smaller lenders.

“I sure hope [there’s more competition],” said Gregory Thomas, executive director of the Canadian Taxpayers Federation, in talking about the changes. “Canada could use one or two strong national credit unions.”

Mr. Thomas expressed his doubts about whether the government can do more to create competition in the sector.

“We’ve been down this road before with foreign banks feeling what was promised was not what was delivered. The true way to be consumer friendly is to promote more competition but having a level playing field,” said Mr. Thomas. “We hope they follow through on these hopeful expressions with concrete measures.”

One of the plans laid out in the budget to make it easier for credit unions to compete is to create a streamlined process so credit unions in different provinces can merge into one national entity.

 A government official said it means credit unions would still have to apply nationally to operate but would only have to do it once on behalf of all the entities trying to amalgamate. Each entity would still have to apply to their province, where credit unions are also regulated, to apply for national regulation.

“Canada is home to a strong financial sector, including credit unions that would like to operate across provincial boundaries to better serve their members,” the 2014 budget document noted.

Ian Lee, a professor at the Sprott School of Business at Carleton University, can’t see the government being able to do anything that will touch the dominance of the big six banks.

“The concentration ratio is such that six banks have 95% of the assets. They are so entrenched, so large that no bank from outside can compete against them,” said Mr. Lee. “They’ve got the best locations, the historical roots in Canada, the branding advantage. They are in every community in Canada.”

He doesn’t put much stock in credit unions being able to compete. “Look at their business, they will always be small,” said Mr. Lee. “I think there is a sense in Canada that our banking system is not competitive and it is because of deliberate government policy. It’s way too late to change it.”

The professor thinks the bigger news in the budget documents might be hidden in a reiteration of tightening of rules on CMHC.

Ottawa noted again it will make CMHC pay guarantee fees to the Receiver General to compensate the government for mortgage insurer risks – something private mortgage default insurers must already do. CMHC’s annual issuance of portfolio insurance is also being lowered from $11-billion to $9-billion.

“They are capping a whole bunch of lines of business,” said Mr. Lee. “I think they have a plan for CMHC which they haven’t disclosed yet. They are either going to shrink CMHC incrementively or prepare it for privatization.”

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