Canada should “lean into” efforts to increase competition and encourage new entrants in its financial sector, which is currently controlled by an “oligopoly,” a senior Bank of Canada official said.

The remarks, which Senior Deputy Governor Carolyn Rogers made at a Thursday morning event in downtown Toronto, are part of a change in tone in favour of financial competition. After decades of touting safety and stability as the main strengths of Canada’s financial system, policymakers and regulators are now shifting their focus—spurred by the U.S. trade war—toward boosting competition and productivity.

Concentration concerns: Rogers has been a prominent advocate for tackling Canada’s weak productivity, calling it an “emergency” during a speech last year and saying it’s time to “break the glass.” During her speech on Thursday, she cited the Real-Time Rail instant payments system and open banking, a framework that will require banks to provide financial data to third parties to power services at a customer’s request, as two measures that could help get Canada out of its slump. The Logic previously reported that bank executives, who also sat on the board of a non-profit that operates Canada’s payments infrastructure, have pushed back on the Real-Time Rail, although the organization behind the project denied it was unduly influenced. Open banking, which has also been a frequent flashpoint between Canada’s big banks and fintechs, has been repeatedly delayed as well.

Rogers noted Canada’s six largest banks hold about 93 per cent of all banking assets and are more profitable than their peers in other countries. “To state the obvious, this is a very high level of concentration,” Rogers said, adding that concentration has ripple effects throughout the economy.

The ‘O’ word: Rogers’ remarks are at odds with findings from a 2007 Bank of Canada report, which maintained that Canada’s financial services industry is indeed highly concentrated but also efficient and competitive. The heads of Canada’s major banks have made similar arguments. In April, National Bank CEO Laurent Ferreira said “an oligopoly is actually a good thing” because it makes it easier for lenders to coordinate in a crisis, while RBC CEO Dave McKay last year described Canada’s banking system as a “ruthlessly competitive” oligopoly. 

In a submission in advance of the November federal budget, the Canadian Bankers Association said “Canada’s banks operate in a highly competitive marketplace” and called for more regulation of fintechs, not less. Fintechs “are largely un- or under-regulated,” the lobby group argued, saying that puts the financial system at risk.

Last month, Peter Routledge, the head of Canada’s banking watchdog, made a speech that echoed some of Rogers’ concerns about financial innovation and productivity. “We’ve built up the protection walls pretty high. Maybe we can tolerate a bit more risk in the system,” he said, adding that he wants to cut red tape and make it easier for new entrants to get banking licences. In the past, the Office of the Superintendent of Financial Institutions (OSFI) has focused on financial system safety, proudly advocating for the Basel III endgame agreement, an international set of rules designed to prevent taxpayer-funded bank bailouts like the ones that took place in the U.S. during the financial crisis.

2008 looms large: Rogers said Canada should be proud of how well its banking system fared during the 2008 financial crisis and the COVID-19 pandemic. Canada’s banks emerged from those crises relatively unscathed, especially compared to the bank failures and turmoil that roiled the U.S. The country can afford to encourage innovation by leaning on that stable foundation, Rogers said. In June, OSFI held the capital cushion banks must maintain to weather potential economic shocks steady, saying Canadian banks are “well-capitalized” and in a strong position to navigate economic uncertainty.

“Greater contestability, more new entrants and more innovation in our financial sector would lead to competition that’s good for consumers, for productivity and for our economy,” Rogers said. “There are important innovations on the doorstep, and we need to get them over the finish line.”