THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 317

CHAPTER 11

Banking Industry: Structure and Competition

285

Office of the Superintendent of Financial Institutions Canada on the prudential
aspects of the proposed merger. The Minister of Finance will decide whether the
proposed merger will be allowed to proceed.
The government has also indicated that it will not allow mergers between large
banks and large demutualized life insurance companies such as Manulife and Sun
Life. We would note, however, that in other countries such as Australia, Germany,
the Netherlands, Switzerland, the United Kingdom, and the United States, mergers
of banks, insurance companies, and other financial services providers are not
prohibited.

The National
Financial
Services
OmbudService

Another recent significant achievement is the creation of a National Financial Services
OmbudService (NFSO) that began operations on July 1, 2002. This service has been
created, with the support of the federal and provincial governments, by the banking
sector (through the Canadian Bankers Association), the insurance sector (through the
Insurance Bureau of Canada and the Canadian Life and Health Association of Canada),
and the securities sector (through the Investment Dealers Association of Canada, the
Mutual Funds Dealers Association, and the Investment Funds Institute of Canada).
The NFSO provides Canadian consumers and small businesses access to disputeresolution services regarding their dealings with financial institutions.
The creation of the NFSO has been viewed as a first step towards building a
national regulatory system and eliminating the overlaps among the many federal,

provincial, and territorial departments and agencies that currently regulate the different industries of the Canadian financial services sector.

Implications
for the
Canadian
Banking
Industry

A bank holding company structure (as an alternative to the current bank-as-parent
structure), new ownership rules, expanded permitted investments, expanded access
to the payments and clearance system, and a transparent merger review policy, offer
new opportunities for strategic alliances and joint ventures that have the potential to
reshape the Canadian financial services marketplace. These developments, together
with new information technologies, make possible new financial products and services and a more vibrant and dynamic market for financial services.
As we have seen, the 1991 federal financial reforms have stimulated consolidation of the Canadian banking industry. The financial consolidation process will
be even further sped up by the 2001 legislation, because the way is now open to
both mergers and acquisitions, and strategic alliances, partnerships, and joint ventures. As already noted, bank financial groups will become not only larger, but
also increasingly complex organizations, engaging in a full gamut of financial
activities.

S U M M A RY
1. The history of banking in Canada has left us with a
small number of banks chartered by the federal
government. Multiple agencies regulate chartered
banks: the Office of the Superintendent of Financial
Institutions (OSFI), the Bank of Canada, and the
Canada Deposit Insurance Corporation (CDIC).
2. The Big Six (the Royal Bank of Canada, Canadian
Imperial Bank of Commerce, Bank of Montreal,
Scotiabank, TD Canada Trust, and the National Bank

of Canada) together with the Desjardins Institutions
dominate the deposit-taking industry in Canada.

3. In the United States there is a dual banking system,
with commercial banks chartered by the states and the
federal government. Restrictive state-branching regulations that prohibited branching across state lines led
to a large number of small commercial banks in the
United States. The large number of commercial banks
in the United States reflects the past lack of competition, not the presence of vigorous competition.
4. A change in the economic environment will stimulate
financial institutions to search for financial innovations.
Changes in demand conditions, especially the rise in