When U.S. President Donald Trump told reporters last week he was angry that U.S. banks are unable to operate in Canada, experts were quick to point out his error: There is no such prohibition.

But the broader issue about the difficulties for foreign banks to enter and compete in Canada’s insulated banking market is harder to refute. As Ottawa heads into negotiations for a new trade deal, Mr. Trump’s call to ease barriers to entry in banking could be the first salvo in a more sustained attack.

The mounting threat has phones ringing across Bay Street as regulatory experts sort out what this could mean for unleashing competition in the banking sector – a debate that has been raging for years, but has made little progress.

Canada’s financial services system is dominated by six big banks, and the bar for entry is high not only for foreign lenders, but for smaller Canadian challengers. The process of opening a new bank – requiring extensive approvals from government and regulatory officials – is aimed at protecting the stability of the financial system, but it comes with the added side effect of snuffing out competition.

Financial technology startups have long warned that regulatory barriers stifle digital innovation, allowing the major banks to keep an iron grip on their customers. In the past, foreign banks have tried to edge into the consumer banking business, but ultimately left after struggling to gain enough market share to make the endeavour worthwhile.

Proponents of Canada’s banking system, meanwhile, attribute the sector’s global reputation for stability to the country’s tight regulatory environment and the concentration of power among a handful of immensely large banks with diversified business streams.

The country’s banking regulator “has prioritized the safety and soundness of Canada’s financial system for a long time, which is why the application requirements are onerous,” Gowling partner and financial services regulation lawyer Alana Scotchmer said in an interview. “We look at Canadian entrants to the banking scene as well, and it’s a long process for them too.”

U.S. lenders can and do operate in Canada, albeit at a smaller scale. America’s largest lender, JPMorgan Chase & Co. JPM-N, for example, provides commercial banking and wealth-management services and employs more than 600 people in this country.

In total, 16 U.S. banks operate in Canada and hold a combined $113-billion in assets, making up half of all foreign bank assets, according to the Canadian Bankers Association.

Canada’s six largest lenders – Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Bank of Montreal BMO-T, Bank of Nova Scotia BNS-T, Canadian Imperial Bank of Commerce CM-T and National Bank NA-T – dominate more than 90 per cent of the country’s market.

While the regulatory process to open a bank in the U.S. is similar to Canada’s system, RBC, TD and BMO have been able to establish significant businesses in the U.S., where the market is larger and more fragmented, offering smaller banks greater opportunities for growth.

With Donald Trump, a new era of banking regulation is coming to Canada

The federal government also caps ownership of a Canadian bank at no more than 10 per cent to prevent foreign takeovers of the country’s largest lenders. It also ensures that a single investor cannot take a dominant ownership stake and wield significant influence over a financial institution.

The process of applying for a banking licence is a difficult task that typically takes between three to five years – and a three-year turnaround would be “very fast,” according to Ms. Scotchmer.

“Many folks start the process or start looking into it, and then they lose steam somewhere in the application process,” she said.

Six years ago, Spain-based Banco Santander applied for a Canadian banking licence. Last year, the Finance Minister issued a key approval required to complete the process.

The requirements are just as strenuous for Canadian financial technology startups. Last January, mobile banking provider Koho Financial Inc. moved into the second of three phases in securing a bank licence after more than two years of discussions with officials. In 2019, online trading platform provider Questrade Financial Group Inc. filed an application, but is still going through approvals.

Canada’s banking regulator requires applicants to present a business plan, as well as an exit strategy if that plan fails. The Office of the Superintendent of Financial Institutions also asks lenders to demonstrate that they have sufficient capital levels to withstand economic shocks, and can manage other operational and financial risks.

The federal Finance Department says it is considering ways to make the market more competitive.

“Foreign financial institutions have a wide range of options for doing business in Canada and are given the same opportunities to offer financial services in Canada as domestic institutions,” Finance Department deputy spokesperson Marie-France Faucher said in an e-mail. The department is currently reviewing comments from a stakeholder consultation on “a range of potential proposals” that could support a “competitive market structure and expands consumer choice.”

The federal government has attempted to open up Canada’s banking sector in the past. In the 1990s, Ottawa implemented new rules aimed at increasing competition by allowing more foreign banks to enter the market.

At the time, U.S.-based Citibank – which has operated in Canada for more than 100 years – tried its hand at consumer banking, but struggled to compete against the dominance of the big banks. It ultimately sold its last five Canadian branches to Canada Trust in 1999, which was acquired by TD shortly thereafter.

Other banks have also tried to launch in Canada, only to depart. Amsterdam-based ING Bank opened a no-fee online bank in Canada in 1997, but sold the business to Scotiabank in 2012.

The crown jewel of foreign banks was HSBC Bank Canada, which was Canada’s seventh-largest lender. Last year, Britain-based HSBC Holdings PLC sold its Canadian subsidiary to RBC when the parent company decided to reallocate resources to regions where it believes it has greater opportunities for growth.

Competing in Canadian banking typically requires poaching clients from rivals. That’s a challenging task, as switching banks can be quite difficult and Canadians tend to stick with one bank.

“The Big Six are the Big Six for a reason. This is years of them building these assets,” Borden Ladner Gervais financial services lawyer Suhuyini Abudulai said in an interview. “I don’t foresee a situation where it would be comparable, where a foreign bank would come and have that type of dominance here.”

The sector has continued to consolidate in recent years. Earlier this month, National Bank scooped up Edmonton-based Canadian Western Bank, the country’s ninth-largest lender.

Proponents of Canada’s banking system point to the devastation reaped by the collapse of California-based Silicon Valley Bank and other regional lenders in 2023, and the financial crisis of 2008. Canada’s banks emerged from those tumultuous periods relatively unscathed.

Analysts and industry experts attributed the resilience to the dominance of large banks, suggesting that regulatory restrictions on largely untested new entrants help shield the financial system from failures and the contagion that could ensue.

Some even proposed that consolidating the more than 4,000 banks in the U.S. could help fortify the financial system and prevent further failures.

“When you talk about the requirements being stringent, they’re there for a reason because of the understanding of what the position and the role is that the banks play in the financial sector,” Ms. Abudulai said. “We need to have appropriate parameters in place so that these policy objectives are achieved.”

A similar debate is going on in Britain. In January, the country’s finance minister called on regulators to reduce barriers to economic growth by building a regulatory environment that not only enforces stability, but also boosts innovation.

In response, Britain’s finance watchdog said it would take on more risk, but cautioned that the shift could cause harm to businesses and consumers.

Last month, the Bank of England’s deputy governor said Britain should avoid engaging in a “race to the bottom” on financial regulation as the U.S. abandons regulatory reforms aimed at strengthening the global banking system.

OSFI has also referred to a need to boost competition in Canada, in particular in digital financial services. At a conference in November, Superintendent Peter Routledge said that the country may need to forgo its conservative risk approach to avoid suppressing innovation.

“We have historically had a fairly significant conservative risk appetite for institutional failure. Not every innovator succeeds; some do, some don’t,” Mr. Routledge said. “If we want to truly encourage innovation, our mindset and our risk appetite for institution entry and institution exit – we need to change it if we want to get the benefits of innovation in our system.”