If you increase competition that will have a downward impact on prices & inflation over time: Hatch

Key Concepts

• Competition in Financial Services: The central theme of the discussion, focusing on the need to increase competition within Canada's financial sector.
• Credit Unions: Member-owned financial cooperatives that aim to provide an alternative to large, federally regulated financial institutions.
• Federal Market Access: The process by which provincially regulated credit unions can expand their operations nationally.
• Byzantine Process: Refers to the complex, lengthy, and expensive nature of obtaining a federal banking license for credit unions.
• Cost of Living: A major economic and political issue in Canada, with increased competition seen as a potential lever to lower prices.
• Competition Bureau: Canada's federal competition law and policy advocate, tasked with ensuring robust competition.
• Consolidation and Mergers: The process of combining financial institutions, which can have different implications for competition depending on the sector.
• Small Business Lending: A significant area where credit unions play a crucial role, often providing more accessible financing than large banks.

Liberal Government's Push for Competition in Financial Services

The Liberal government has expressed an intention to increase competition within Canada's financial services sector. While no specific legislation has been introduced yet, this initiative is seen as a positive first step by organizations like the Canadian Credit Union Association (CCUA). The primary goal is to address the perceived lack of competition, largely dominated by a few large financial institutions.

The Problem with Competition in Canadian Financial Services

Michael Hatch, Vice President of Government Relations for the CCUA, argues that Canada's financial services sector does not suffer from a surplus of competition. He highlights the dominance of major players and positions credit unions as some of the few existing competitive forces. The CCUA has been advocating for technical amendments to the federal government's approach to encourage more credit unions to enter the national market.

Barriers to Federal Market Access for Credit Unions

Currently, most credit unions are provincially regulated and confined to their respective provinces. While an option to "go federal" and join the national market has existed since 2011-2012, it has been a "lengthy process," "time consuming," and "very expensive" in terms of financial and human resources. Consequently, very few credit unions have pursued this route. The CCUA's objective is to make this process more attractive and simpler, without lowering the high standards set by the national banking regulator. This would allow more credit unions to seek deposits and members nationally, thereby enhancing competition and benefiting consumers.

Credit Unions as Established Competitors

Hatch points to large credit unions like Meridian as examples of full-service financial institutions that have operated in their communities for decades, some for over a century. These institutions, with their ATMs and branches, resemble banks and are significant competitors to the "big five or six financial institutions" in Canada. The CCUA emphasizes that competition has not been a defining characteristic of the sector historically.

Competition as a Lever for Lowering Costs

The current government is focused on competition as a strategy to address the cost of living, which is identified as the number one economic and political issue facing Canadians. While there are no easy solutions to lower prices directly, increasing competition across various sectors, including financial services, is seen as a "no cost option" that can have a downward impact on prices and inflation over time.

Competition Bureau's Support for Increased Competition

The Competition Bureau, Canada's watchdog for competition, shares the view that there is an "urgent need to ensure robust competition." Their submission last year highlighted concerns about weak Canadian productivity and the critical role of competition. The Bureau also noted the rapid increase in borrowing costs to their highest levels in a generation, which could be influenced by interest rates, fees, or bank spreads.

Consolidation and its Impact on Competition

Hatch clarifies an important distinction regarding consolidation and mergers. While in most sectors, consolidation can lead to reduced consumer choice and competition, the opposite is argued to be true for credit unions. Credit unions need to consolidate to gain the scale necessary to compete with large, federally regulated financial institutions. Therefore, mergers and consolidation within the credit union sector are seen as a way to increase their ability to compete, not diminish it. This is a key argument the CCUA makes to both the government and the Competition Bureau.

Credit Unions as Key Lenders to Small Businesses

The credit union sector is identified as the "biggest lender to small business across Canada." They provide crucial financial support to businesses like barber shops, laundromats, and restaurants in various communities. A key advantage of credit unions in this regard is their "local knowledge" and "local connection." Unlike large banks where lending decisions might be centralized in major financial hubs, credit unions have decision-making power within their communities. This allows for quicker and more tailored lending decisions for small businesses, which are deeply rooted in their local economies.

Advantages of Credit Unions for Small Business Lending

Hatch explains that credit unions are the most important lenders to small businesses due to their deep community ties and local understanding. In over 400 communities across Canada, a credit union is the only physical financial presence. This local presence and connection contribute to their strong performance in small business lending, allowing them to "punch above their weight." While not speaking for large banks, Hatch implies that the accessibility and personalized service offered by credit unions are significant factors in their success with small businesses.