By Howard Schneider
Washington Post Foreign Service
Saturday, January 24 1998; Page D02

Canada's largest and third-largest banks said today that they would merge, hoping to forestall a takeover bid from a foreign-owned firm if Canada, as expected, further deregulates its financial industry.

The proposed deal to combine the Royal Bank of Canada and the Bank of Montreal would create one of the biggest banks in North America if it wins government approval. Even so, it raised concerns among consumers, small business groups and unions that the resulting institution would be too large and too globally oriented to properly serve its Canadian customers.

Canada has only six fully chartered banks, and the country has protected their core business against international competition. Though foreign firms have been allowed into many aspects of Canada's financial sector, they are not allowed to accept deposits and offer retail banking services.

Pressure to change that, however, has been building, as financial institutions worldwide consolidate. In addition, the availability of credit cards, mortgages and Internet banking services from abroad has made international competition a fact of life here.

In announcing their proposed merger, the heads of the two banks said they believe it is better for Canada to plan for competition today, rather than wait to be swallowed up.

"We are creating a Canadian bank that can go head to head with any bank anywhere," said Matthew Barrett, Bank of Montreal's chairman and chief executive. "What we don't plan to be is the corner hardware store waiting for Home Depot to arrive and put us out of business."

The new bank would be the 22nd largest in the world, and be among the top 10 in North America, with about $350 billion in assets, 92,000 employees and a customer base of roughly 17 million people.