Don’t Panic About Proposed Bank Mergers

Commentary, Regulation, Frontier Centre

Panic over the intended merger of the Bank of Montreal and the Royal Bank might have made sense a few decades ago. But times have changed.

The days are gone when the financial industry needed to petition the Minister of Finance and his technocrats every time it underwent a change in its structure or ownership. Technically, Ottawa has the power to interfere in the process. But events beyond its control are driving the bank merger.

The revolution in information technology has collapsed transaction costs. Companies that are slow to take advantage of it have no chance for survival. Wired competitors can wipe them off the map with lower overheads.

For bankers, the implications are obvious. Fixed facilities like branches and their human infrastructure are becoming an expensive luxury. Dozens of full-service locations have closed in every province in the last few years, and the process is accelerating.

In political circles, where too many are uninformed about the relentless march of technology, this news is not always welcome. The chairman of the Liberal Party’s rural caucus stated recently that banks have "made money off rural Canada for the past 150 years and now they have an obligation to remain there and provide services."

Trouble is, the bank that makes such a quaint choice could very well lose its shirt. How many obligations can it meet if it’s out of business? It may be rewarding in some senses to head down nostalgia lane and stop the banking industry from restructuring itself, but the country will eventually lose from the effort.

Another factor that cancels the power of politicians to dictate the shape of the banking industry is the force of foreign competition. The deregulation of financial services in other countries continues to push us towards liberalization here. Banks have steadily widened their offerings beyond savings and loan functions and into insurance, stocks and mutual funds.

The development of Internet commerce, while still in its infancy, has the promise to explode traditional habits even more than creeping financial reform. The very existence of national currencies may not survive the wave. Cybercash-like smart cards will, by some estimates, replace the use of most paper and coin currencies within 15 years by a whopping rate of 60%.

In this context, the ability of central banks or their government overseers to regulate financial institutions evaporates. Moaning and groaning about this is inevitable; politicians only give up the power to control events grudgingly. But the public should not fear it.

Lawrence Solomon writes in the latest Next City magazine, Canada’s most original and provocative "new ideas" publication, that these changes will empower ordinary citizens and small business owners to hedge their finances and control risk to a degree now enjoyed only by large corporations. "Barter, once an aspect of primitive societies," he adds, "becomes efficient and largely indistinct from currency exchange in the electronic global village; national currencies, meanwhile, become primitive mediums of exchange."

In this context, the merger of two large banks turns into a puny issue indeed. At the same time that conventional branch banking is shrinking, financial choices for the general public are expanding exponentially. Even if this were not so, dozens of credit unions, trust companies and foreign banks now compete aggressively for bank customers. In a deregulated world, the chartered banks cease to be the oligarchs of the past. Risk capital proliferates.

None of this pleases the economic nationalists who want to insulate Canada from foreign, especially American influence. But their day is rapidly drawing to a close. The financial Berlin Wall they built on our borders is crashing down.

We will all be better off when it becomes a museum relic.