Decisively halting Canada's march toward banking consolidation, Finance Minister Paul Martin has blocked two giant mergers that would have dramatically altered the country's banking structure.

Mr. Martin ruled Monday that Royal Bank of Canada's proposed merger with Bank of Montreal and Toronto-Dominion Bank's with Canadian Imperial Bank of Commerce would "lead to an unacceptable concentration of economic power in the hands of fewer, very large banks."

The decision is a clear setback for the banks in their efforts to fend off competition from U.S. companies. The Toronto-based banks-four of the five largest in Canada-will now be forced to reassess their strategies, observers said. And the ruling could touch off a fresh debate over the country's banking laws.

CIBC and Toronto-Dominion immediately canceled their merger, while officials of Royal and Bank of Montreal said they would review their options.

"History will judge if Mr. Martin has made the right decision for Canada," chairmen Matthew W. Barrett of Bank of Montreal and John E. Cleghorn of Royal Bank said in a joint statement.

"We are disappointed that the government has reached this decision," said CIBC chairman A.L. Flood. "We believed that this merger was vitally important to enable the Canadian financial services industry to remain competitive in an increasingly complex world of globalization, consolidation, and competition.

Royal and Bank of Montreal announced their merger plan, worth $26.6 billion, last Jan 23. CIBC and Toronto-Dominion followed on April 17, with a proposed transaction valued at $15.8 billion.

The mergers sent shock waves through a country where banking is already highly concentrated among six nationwide banks. Had the megamergers been completed, the two institutions would have held more than two-thirds of Canadian banking assets.

BankAmerica Corp., by comparison, has about 11.5% of assets held in U.S. commercial banks, according to Sheshunoff Information Services.

Analysts said the ruling would force the four banks to fight for changes in the laws-or make a more convincing case that foreign competition is hurting them.

"The banks now have to work with the legislature and the finance ministry to address regulators' concerns," said Michael Ancell, a banking analyst at Edward D. Jones & Co. "If they can do that, they can eventually get the mergers."

It is unlikely that the Canadian banks would react by pairing up with foreign buyers. Canadian law prohibits shareholders from owning more than 10% of a bank's stock. A Canadian bank must have its headquarters in Canada and a majority of its directors must be Canadian residents.

Market conditions also discourage foreign buyers. For all its size, Canada's population is slightly smaller than California's. "Buying a Canadian bank is a huge commitment that would take years to bear fruit," an investment banker said.

Canadian banks have been expanding their U.S. presence in recent years.

Bank of Montreal does substantial business in the Chicago area as the parent of Harris Bankcorp, Canadian Imperial boosted its U.S. investment banking business considerably last year by buying Oppenheimer & Co., and Royal Bank acquired the Internet-based bank Security First of Atlanta.

Other competition has crossed into Canada.

Charles Schwab Corp., for example, said Monday that it had agreed to buy two Canadian brokerage firms. ING Group of the Netherlands has been marketing an on-line banking service, MBNA Corp. and others credit cards, and Wells Fargo & Co. of San Francisco is applying direct marketing techniques to small-business lending.

Mr. Flood and Mr. Cleghorn said such activity forced Canadian banks to become more competitive, which they had hoped to do by increasing their size and paring costs.

But in its report Monday, the Canadian government disagreed that foreign competition is really harming the banks.

Even as Capital One Financial Corp. and Bank One Corp. are making inroads soliciting Canadians for credit cards, for example, a report prepared by Canada's Competition Bureau and released by Mr. Martin found that the mergers would lessen competition in the business of settling Visa transactions with merchants.

Although Wells Fargo has a large consumer finance business in Canada and has less than a 0.05% market share in small-business lending, "it is clear that it does not constitute a significant competitor today," the Competition Bureau said.

The report concluded that the mergers would result in "substantial lessening or prevention of competition that would cause higher prices and lower levels of service and choice for several key banking areas."

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