Consolidation and cartel building is the long term strategy of the Big Banks and it seems to go on without much alarm. This is partly because of their patience and partly because other players are distracted by other things; technology, risk management, new capital rules, new liquidity monitoring tools, mortgage insurance changes, etc.. But these are the ‘trees’, we must not lose sight of the forest.
When you step back and look at the financial services landscape, the last three generations have brought much change; but the dominance of the Big Banks has grown. In 1970 banks were not allowed to provide residential mortgages, they pressed for change and today they control 75% of the mortgage market in Canada. In 1980 the banks competed with trust companies in every province, changes were introduced and the trust industry was swallowed by the banks. In 1990 banks were precluded from participation in the investment brokerage business, but soon thereafter the laws were changed and today the Big Banks control @90% of the brokerage (i.e. wealth management) business in Canada. Over the last fifteen years the banks have made substantial incursions into the insurance world, but several barriers do remain.
The pattern is conventional. outlined in most micro-economics courses; buy out competitors to gain market power and, thereby, extract maximum ‘rents’ for products/services over the long term. The tendency to oligopoly or monopoly exists in most markets and is well documented.
So, what about consumer owned credit unions? Yes, credit unions are certainly a potential ‘target’ for Canada’s bankers. Almost certainly, the bankers association has been in close communication with the Department of Finance to ‘assist’ with the amendments to the Bank Act which resulted in the inclusion of a “federal credit union” as a type of bank under that act.
So, what does the bankers’ strategy likely look like? The Big Banks realized that outright offers to purchase credit unions were unlikely to work well. So, two other complementary strategies are in play. First, amend the Bank Act so that ambitious credit unions can move to federal jurisdiction and be subject to the same requirements as banks. But ensure that the Bank Act allows for federal credit unions to convert to conventional ‘joint stock’ banks. Then ensure that certain requirements for capital, that may be too hostile to the co-operative structure, are phased in over ten years. The potential for a credit union to be ‘squeezed’ for capital in year six, or seven, will lead them to convert to an investor ownership model. The result may provide better acquisition opportunities.
Second, pressure the provincial authorities to ‘better regulate’ credit unions. Banks will forcefully criticize provincial deposit insurance programs, press the Bank of Canada to withdraw access to emergency lending arrangements to credit unions, insist that Basel III capital rules be applied to provincial credit unions, and decry the ‘competence’ of provincial regulatory bodies. Ideally, bankers will recruit the federal Minister of Finance to champion these criticisms. This strategy may provide a secondary inducement to large credit unions to ‘go federal’.
In my view, this is the situation we now have. The script is written for de-mutualization and the loss of these great community-owned enterprises What I do not see is the credit union system counter-strategy.