Canada’s banking system has often been praised as one of the strongest in the world. But domestic and international regulations that helped preserve the strength of Canadian banks during the financial crisis of 2008-2009 have since worked to create an alarming dominance by a handful of banks.
This dominance already suppresses competition and innovation among the 88 banks operating in Canada, many of which are small regional institutions. Further, it has the potential to consume Canada’s equipment leasing and finance industry, should these banks shift their focus. Most independent equipment finance companies of size in Canada have already been acquired by banks and credit unions, resulting in a battle for market share between foreign and domestic banks with strong liquidity, low cost of capital and a desire for growth.
“Is Competition Dying in the Canadian Equipment Finance Market?” by Hugh Swandel, senior managing director of The Alta Group, in Canada, examines conditions that led to the dominance of six banks that now hold 93% of Canada’s banking assets. The article published in the Journal of Equipment Leasing and Finance explores the effect of this dominance on Canada’s finance industry generally and on the nation’s equipment finance industry specifically.
While many U.S. firms reduced their exposure to Canada as a result of the financial crisis there remains a growing expectation of equipment vendors in the U.S. to have similar options for their Canadian dealers. U.S. lessors with strong manufacturer programs should consider expanding their offerings to include the Canadian markets, Swandel says.
Here’s the background as reported in the Journal article: In 1999, the Department of Finance Canada introduced measures intended to reform the nation’s financial services sector. As a result of reforms, the number of domestic banks in Canada increased from eight to 30—but the market share of the largest six banks also grew.
More recently, smaller Canadian financial institutions have chosen to expand into the commercial equipment finance market. Laurentian Bank, Canadian Western Bank (CWB), and Meridian OneCap have made acquisitions and investments in the market over the past several years. These companies are working to grow their commercial equipment finance market share significantly. Yet, a deeper examination of the system used to determine risk and capital adequacy in Canada reveals significant competitive hurdles for smaller Canadian financial institutions.
Is there reason to be concerned, not only about Canada’s equipment finance industry, but about the future of equipment finance in the United States? The vast total market share of Canada’s six big banks is alarming, but consumers and businesses appear to have sufficient access to capital in this region. A deeper look into the competitive advantages of the big six as created by the Basel Committee on Banking Supervision, as well as by The Department of Finance Canada provides insights into economic consequences and the ways they limit the ability of small and medium-size banks to gain meaningful market share in the nation’s financial industry and to grow in equipment leasing and finance.