Has financial sector deregulation eased competition policy concerns over big bank mergers in Canada?

By reducing competition, regulation may increase the stability of the financial system and prevent bank failures. This has been challenged in the theoretical literature, and policy makers have responded by relaxing the regulations restricting competition. The large Canadian bank merger proposals in 1998 generated a large discussion as to whether mergers of this scope should be allowed. This paper addresses whether the recent deregulation of the financial sector created an environment where large bank mergers would not be harmful to the economy. It dicusses the evolution of the financial sector through the recent revisions of the Bank Act, as well as issues relevant to competition in banking. The paper then estimates the level of competition in Canadian banking using the Bresnahan and Lau (1982) technique. The paper concludes that concerns over the potentially anti-competitive impacts of large bank mergers have not been mitigated by increases in contestability of financial markets.