THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 315

CHAPTER 11

Banking Industry: Structure and Competition

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undertaken by less-regulated, non bank-affiliated companies held by the holding
company parent rather than the regulated operating bank; and (3) the holding
company model provides bank financial groups increased flexibility to achieve
economies of scale and scope through strategic partnerships, alliances, and joint
ventures.7
The big advantage of the new regime for establishing holding companies is that
financial groups will be able to move parts of their heavily regulated business into
less-regulated affiliates under a common holding company. The holding company,
however, would be a viable option for financial groups, if the transition to a holding company would be tax-neutral and without increased costs or regulatory
burdens. If, for example, additional taxes or heavier regulation were to arise as a
result of a restructuring into a holding company, then the holding company option
wouldn t be feasible. For this reason, the new legislation also provides a set of
transitional rules to address unintended cost consequences that would be triggered
by the transition to a holding company.

Permitted
Investments

A second item of the 2001 legislation pertains to the type of investments federally
regulated financial institutions are allowed to make. At present, there is a restrictive list of activities beyond banking that banks, for example, can get involved in.
The new legislation, however, provides greater flexibility for bank involvement in
the information technology area (and, in particular, the Internet and wireless technology). It permits bank financial groups to establish and operate information services entities utilizing recent advances in Internet and wireless banking and voice
recognition technologies.
New information technologies are critical to the ability of Canadian banks
and insurance companies to provide new financial products and services and

adapt to the changing marketplace. Although bank and insurance company
involvement in the information technology area is subject to regulation, the new
permitted investment regime will enhance the ability of banks and insurance
companies to pursue strategic alliances and joint ventures and will further accelerate the technological advances that are already taking place and revolutionize
the financial services sector.

Ownership
Rules

A third policy measure that can significantly change the face of competition in
Canada s financial services marketplace is the new ownership regime that
enables investors to take a greater equity interest in widely held bank financial
groups, by expanding the definition of widely held. In particular, the 2001
legislation increased the limit (that was in place since 1967) a single shareholder
can own of a widely held financial institution (either a bank holding company
or a bank subsidiary under the holding company) from 10% of any class of
shares to 20% of voting shares and 30% of nonvoting shares. The new legislation, however, does not permit a single shareholder to own more than 10% of
both a bank holding company and a bank subsidiary under the holding company at the same time. Moreover, acquisitions of more than 10% are subject to
approval by the Minister of Finance based on a fit and proper person test.
The new legislation also includes a three-tiered ownership regime. Small banks
(those with equity capital under $1 billion) don t have to be widely held and can
be wholly owned (have one particular investor own 100% of their shares).
7

Recently, for example, the British-based banking group HSBC entered into a joint venture with the
U.S.-based securities dealer Merrill Lynch, to create a global online banking and investment company,
called Merrill Lynch HSBC.