Bank mergers coming soon?

With a Harper government, I had a sinking feeling that bank mergers were going to come up again. We grant chartered banks a huge privilege – the expansion of credit, or the creation of money, an essential utility-like function of a modern economy – that leads to enormous profits on the part of the banks. And yet we are repeatedly berated by the banks for not letting them merge together so that they can expand more into foreign markets.

Along comes the OECD, who usually favour competition, calling for mergers. I presume that they think there is too much competition in the Canadian market, or that the competition should come from allowing greater market presence by foreign banks.

Here is the Globe and Mail report:

OECD calls for action on bank mergers

SINCLAIR STEWART

Globe and Mail Update

The Organization for Economic Co-Operation and Development is warning that Canada’s effective ban on bank mergers could be hampering the country’s productivity, and is urging Ottawa to remove the political red tape that has been choking the industry’s efforts to consolidate.

Hurting Canada’s productivity? The banks themselves have very high productivity – in terms of profits and salaries divided by total hours of work. As far as the rest of the economy goes, I’d suggest that banks regularly put the screws to account holders through service charges, and they do a terrible job at providing capital to small business. How would mergers improve this shabby record?

The OECD, which released its recommendations Monday as part of a larger economic survey of Canada, is the latest in a long line of groups that have stepped forward declaring the need for an improved merger process in the financial services sector.

Bank of Canada chairman David Dodge has speculated that the dormant merger file could be partly to blame for the industry’s weak productivity growth. An internal government report, prepared for recently appointed Finance Minister Jim Flaherty, came to a similar conclusion, as did an April study on service exports conducted by the Conference Board of Canada.

The OECD said the best option is to eliminate the Minister of Finance’s role in approving mergers, as a means of depoliticizing the process. Failing that, it recommended the Finance Department issue a clear set of guidelines that the industry could rely upon to form their proposals.

Depoliticize, as in remove democratic accountability?

“Either way,” the organization wrote, “the ongoing uncertainty is preventing possible efficiency gains from being explored and needs to be resolved.”

So far, however, all of this pro-merger agitation has fallen upon deaf ears. Mr. Flaherty has insisted that the merger file is not a priority for Prime Minister Stephen Harper and his Conservative government. Indeed, a recent white paper on financial services legislation made no mention of the issue; nor did it tackle the equally slippery subject of bank-insurance mergers, in keeping with a pre-election promise by Conservatives.

After seeing their merger hopes dashed in 1998, and then again in 2002, and then again in 2005, you’d think bankers may have finally accepted defeat. Not all of them. There is a growing optimism in some quarters of Bay Street, however cautious, that Stephen Harper is well-positioned to win a majority government if there is an election early next year. Some influential bank executives believe Mr. Harper is ideologically sympathetic to the industry’s merger ambitions, despite the populist bent of his caucus, and that with a majority hold on Parliament he would be willing to deal with the merger file early in his tenure.