Canada is out to open up competition in banking, and the big banks don't like it

Canada's federal government wants to open up Canada's cozy banking community to more competition. The big chartered banks are crying foul because trust companies and insurance firms will be allowed into the banking business. Banking in Canada is much different from what it is in the United States. Nationwide branch systems are permitted, and five big banks dominate the industry with 85 percent of total assets. The trust companies are concentrated, too. The five largest trust firms in Canada do 67 percent of trust company business.

The Regulation of Canadian Financial Institutions was issued in Ottawa by the minister of state for finance, Barbara McDougall. Mrs. McDougall, although a new minister, has a background in finance and was vice-president of a securities firm in Toronto before entering politics.

The new regulations are called a discussion paper, but McDougall says that ``while the details are negotiable, the principles are not.'' The government wants new banking laws before the end of this year.

Financial supermarkets will be allowed as large financial groups are able to offer all services under one roof. A lot of this had already happened, but there are restrictions on trust companies, which are permitted to have only a certain percentage of their assets in commercial lending, and on insurance firms, which are not allowed to do conventional banking.

Trust companies are mainly restricted to mortgage lending. They will now be allowed to get into floating-rate loans, but only if they start a bank.

To do all this, a new type of bank will be created, Schedule C, which can be owned by trust companies, insurance firms, and big financial groups such as Trilon, controlled by the Bronfmans, or Power Financial, controlled by Paul Desmarais of Montreal. Under the existing law those firms are not allowed to own more than 10 percent of one bank's shares.

Stockbrokers are not affected by the legislation, mainly because they come under provincial jurisdiction.

There are 14 Schedule A banks in Canada and 58 Schedule B, or foreign, banks. No one shareholder or group can own more than 10 percent of a Schedule A bank; there are no restrictions on foreign banks.

The Canadian Bankers Association is fuming that the ownership rules will not apply to the new banks. ``Highly discriminatory,'' said Robert MacIntosh, president of the association.

The chartered banks have assets of C$214 billion, or about 37 percent of the total pie. Trust companies and insurance firms each have $63 billion, or 11 percent of total assets.

The new banks will probably stick mainly to commercial lending. The foreign banks, which opened in Canada in 1981, do very little main-street business and have branches almost exclusively in the big cities.

The five big chartered banks -- Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia, and Toronto Dominion Bank -- do a little more than 80 percent of the banking in the country. And while most people agree that the big banks need competition, does Canada need more banks?

``Canada needs another bank as much as it needs another sawmill,'' says Roy Palmer, a banking analyst with the brokerage firm Alfred Bunting in Montreal. He points out that some of the smaller Schedule A banks are in trouble, such as the Canadian Commercial Bank -- which recently had to be bailed out by the federal government; the Northland Bank; and the Bank of British Columbia.

And he questions why anyone would want to start a Canadian bank. Since 1967 no new Schedule A bank has seen its shares rise above issue price. The latest example is Bank of Alberta, which issued stock last summer at $10. It is at $8 today.

Analysts also question whether the financial supermarket will work in Canada any better than it has in the United States. The Toronto Dominion Bank got into the discount brokerage business, but it has not been a roaring success.

Others say this is sour grapes on the part of the big banks. ``The government is just catching up with reality,'' says bank analyst Tom Starkey of the Capital Group, a Toronto-based brokerage.