Groundwork set for small banks to enter market

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The federal government’s vow to encourage greater competition in financial services will pave the way for a greater number of small companies to win banking licenses, according to one leading broker who believes that benefits both the industry and the consumer.

“It’s definitely a positive step forward,” Drew Donaldson of Verico Safebridge Financial told MortgageBrokerNews.ca “It’s a shocking stat that basically 95 per cent of the assets under management are held by the big six banks so if we can increase competition, we can help out the (smaller lenders) who are applying for their bank license and it’s only going to help Canadian consumers in the end; more competition the better, it drives down prices for them.”

The federal budget – a 419 page document published Tuesday – contains a section dedicated to the federal government’s commitment to encouraging competitiveness in financial services, which includes a promise to address the tribulations inherent in establishing a small bank.

“The Office of the Superintendent of Financial Institutions (OSFI) has appointed an advisor to reach out to small banks and trusts and will address challenges faced by these institutions where feasible,” the budget states. “OSFI will also review the approval process for establishing a new bank with a view towards streamlining it.”

And this can only spell good news for the broker industry, according to Donaldson.

“Brokers are going to benefit because a lot of these smaller type banks are going to need to use brokers to bring in clients when they first get going,” he said. “It’s going to help the mortgage broker channel and … it’s a positive step forward for any smaller player that wants to get their banking license, have the ability to do so and increase their market share.”

These new measures will also provide a safeguard for the Canadian economy, allowing a larger number of financial institutions to more safely and effectively distribute risk.

“Look what happened (in the United States): No one thought the Lehman Brothers would fall and that was one of the biggest takedowns and it almost took down the entire economy,” Donaldson said. “So if you have too much reliance on these Canadian banks … they’re carrying 30 per cent market share (and) if they go down, pretty much the whole Canadian economy goes down.”
 

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