Mergers Not in Public Interest -- Competition, Service Study Needed If Merger Ban Reconsidered
Monday, January 21, 2008
OTTAWA - With Canada’s big banks reporting a billion dollars more in total losses from their irresponsibly risky investments, the Canadian Community Reinvestment Coalition (CCRC) called on federal Finance Minister Jim Flaherty to take action to protect financial consumers by, at the very least, requiring banks to prove their credit card interest rates and service charges do not amount to gouging.
The federal NDP's recent proposal to regulate credit card interest rates has met with the usual response, with the Canadian Bankers Association claiming that low-interest cards are available (even though only half of applicants are given such cards), and so-called "free-market" advocates claiming the market always works (therefore interest rates must be fair). More than 30 U.S. states regulate credit card interest rates by limiting them to a set percentage above the state’s prime lending rate.
However, the truth is that no one knows for sure whether credit card rates (and basic banking service charges) are fair except the banks and other card companies. To find out whether credit card interest rates and bank service charges are fair, the Canadian Community Reinvestment Coalition (CCRC) proposes that the federal government empower and mandate the Financial Consumer Agency of Canada (FCAC) to examine for the past 15 years, and annually in the future, the levels of profit of the credit card divisions of the banks and other federally regulated companies, and from basic banking service charges. (To see details about this proposal, click here)
The FCAC would keep key company information confidential, reporting only the profit margin for these divisions of each company. If the FCAC found excessive profits (above the corporate average of 15-20 percent), the public would know, and likely that pressure alone would cause interest rates and service charges to drop. If the banks are other companies are actually charging fair rates and prices, they should not fear such an examination.
Federal Finance Minister Jim Flaherty has talked a lot about ensuring Canadians are charged fair prices for banking, but has done nothing except meet with bankers behind closed doors almost a year ago.
“No corporation has a right to gouge, especially when providing an essential service such as banking or trying to recoup self-caused losses like the banks are suffering from, so the least the Conservative government can do is protect Canadians from being gouged by requiring banks to prove their credit card interest rates and bank charges are fair,” said Duff Conacher, Chairperson of the CCRC. Every survey has shown that 90 percent of Canadians believe banking is an essential service.
Some of Canada’s big banks continue to grasp at any reason (this time their investment losses) to claim that bank mergers are both needed and advisable. In fact, there is no valid reason to allow Canada’s big banks to merge, as any merger would lessen competition (thereby increasing prices), would kill jobs, would decrease sercvice to job-creating small and medium sized businesses, and would increase riskiness (as the federal government would very likely have no choice but to bail out a mega-bank if it failed), as well as not provide shareholders with higher returns (as every study has shown that banks larger than Canada’s (in terms of equity) are less efficient).
As well, according to Fortune magazine’s 2007 Global 500 report (based on FY 2006 annual reports -- To see 2007 Global 500 report, click here), Canada’s big five banks were (before their irresponsible investing led to losses this year) all within the top 35 banks in the world in terms of profits as a percentage of revenues, and profits as a percentage of assets.
Some financial sector commentators are calling on Canadian governments to open the doors to foreign banks (showing they are unaware that the doors were opened in 1998 through the World Trade Organization Agreement on Financial Services), and to open the doors to domestic competition (showing they are unaware that all barriers to even non-banks setting up banking services were removed in 2001).
“All of the studies that have been done show that Canada’s banking sector is among the most concentrated and profitable in the world even though it is wide open to foreign and domestic competition, and that banks bigger than Canada’s big banks provide worse service at higher prices, are worse at lending to job-creating small and medium-sized businesses, and are less efficient so even shareholders’ are hurt by bank mergers,” said Conacher.
Not only should the bank merger ban be maintained, in addition to having the Financial Consumer Agency of Canada (FCAC) examine profit levels for credit cards and service charges (To see details about this proposal, click here), the federal government should finally actually regulate Canada’s banks through the following actions:
For more information contact:
To see the CCRC's analysis of Bill C-37, which changed the Bank
Act and other federal financial institution laws,
Canadian Community Reinvestment Coalition
P.O. Box 1040, Station B, Ottawa, Canada K1P 5R1
Tel: (613) 789-5753
Fax: (613) 241-4758
Copyright 2008 Canadian Community Reinvestment Coalition