The Royal Bank of Canada (NYSE:TSX:RY) has received approval from the Competition Bureau for its proposed acquisition of HSBC Bank Canada, further consolidating an already heavily consolidated banking industry in the country. This decision was reached last Friday, despite concerns about the potential impact on competition.
The Competition Bureau acknowledged that the deal would eliminate one of RBC's few rivals but concluded it would not significantly exacerbate the existing lack of competition in banking. The Bureau identified three major issues: financial services are controlled by a few companies; it is challenging for newcomers to establish themselves or expand; and some parts of the business are so concentrated that there's a risk banks could coordinate their actions to the detriment of customers.
However, under Canada's current competition law, the federal watchdog has limited power to intervene in further consolidation in an already heavily consolidated industry. The Competition Act, which dates back to the 1980s, is currently under review by Ottawa, with potential changes pending.
HSBC Bank Canada, while not having a substantial impact on the banking industry overall, had a strong geographic presence in Vancouver and Toronto and had seen rapid growth in residential mortgages by offering attractive rates. Its absence is considered a loss for competition.
RBC's acquisition allows it to add 770,000 retail and 12,000 business customers without having to compete for new customers. This move fortifies its market-leading position and raises questions about the outdated competition law that enables such acquisitions.
In July, the Federal Trade Commission in the United States issued new draft merger guidelines as part of a broader shift in recent years in thinking about competition, with warnings against mergers that increase concentration in highly concentrated markets.
The final decision on RBC’s proposed takeover now lies with Finance Minister Chrystia Freeland. In the late 1990s, similar mergers among big banks were rejected by the federal government. Now, with fewer major names in banking, this loss is considered significant.
While the bureau was limited by law in its review, Freeland has more power under the Bank Act. The evolving dynamism of the banking industry and the needs of retail and business customers were urged to be carefully considered last November.
This decision highlights Canada’s weak competition law and reinforces calls for a total rewrite.
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