The Canadian Press
Kristine Owram
The spectre of more stringent banking regulations in the U.S. has pummelled financial stocks around the world, including in Canada, but Bay Street could actually reap long-term benefits and attract more foreign investment because of tighter controls on big banks south of the border.
“This is a time of great flux… but through it all Canada’s going into this debate with a much stronger and more consistently strong banking system than others and also a very strong and consistent regulatory regime,” Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association, said in an interview Friday.
“That has to be attractive to people when they’re looking around the world and saying, ‘Gee, where could I put my money?”’
Fresh from the painful loss of a strategic senate seat in Massachusetts, President Barack Obama is hoping to win back popular support by taking a stand against America’s big banks. Wall Street has been vilified for causing the financial crisis through risky lending practices, then taking taxpayers’ money only to boost compensation packages and report stabilized earnings a year later.
On Thursday, Obama vowed to limit the size and trading capabilities of big banks in an attempt to prevent future bank failures like the ones that pushed the U.S. economy to the brink of disaster in 2008.
The president’s reforms have been characterized as trying to reinstitute portions of the Glass-Steagall Act, legislation implemented during the Great Depression that introduced a variety of banking reforms, including a prohibition against banks owning other financial institutions such as insurance companies and brokerages.
That law was effectively repealed about 10 years ago during a U.S. government push towards deregulation.
This news came on top of a vow by Obama last week to impose a special tax on America’s biggest banks, and compounds international uncertainty created by a series of new regulations proposed by the Basel Committee, an international body based in Switzerland that sets global banking standards.
In Canada, a combination of better risk-management practices and stricter rules around the level of capital banks must keep on hand helped Canadian banks avoid the massive risky lending that battered many of their American counterparts. Because of this, they’re also in a better position to comply with any new global regulations under consideration for the financial sector.
Internally, Finance Minister Jim Flaherty has said that he has no intention of following in Obama’s footsteps because Canada’s banks are already well-regulated, follow more prudent lending practices and didn’t require huge bailouts to survive.
However, this doesn’t mean Canadian banks couldn’t take a hit from new banking regulations south of the border. Toronto-Dominion Bank (TSX:TD), Royal Bank of Canada (TSX:RY) and Bank of Montreal (TSX:BMO) all have both commercial and investment banking operations in the U.S., and they could be forced to separate the two — and pay higher taxes — if Obama’s proposed regulations become a reality.
“Depending on how the details of the legislation shakes out, we could see those three banks seek to separate their U.S. investment banking operations from their U.S. commercial banking operations,” said Craig Fehr, a banking analyst with Edward Jones in St. Louis.
There aren’t many details yet on Obama’s planned regulations, but if banks are indeed forced to separate their investment banking businesses from their commercial banking businesses, the Canadian banks may be forced to sell one U.S. business off, or they may be able to “silo” it as a separate operation, Fehr said.
This could prove difficult for Canada’s banks and could also hurt their bottom line, although Fehr emphasized that their U.S. revenues are a “relatively small” part of their total income.
And once the details of the regulations are hacked out, Canadian banks with U.S. businesses could actually prove to be immune, said Colin Ciezynski, an analyst at CMC Markets Canada.
“In the States our banks are more like regional banks,” Ciezynski said. “The really big things that the government’s going after here, the Canadian banks aren’t quite at that level, either in terms of size or in terms of their operations.”
Shares of regional banks, which don’t have big trading desks, actually strengthened on the news of Obama’s proposed regulations, as they could become more competitive with their larger counterparts.
Ciezynski added that if big American banks such as Bank of America, JP Morgan Chase and Citigroup are forced to divest some of their assets, Canadian banks could see some acquisition opportunities.
@page_break@Brad Smith, an analyst at CI Capital Markets, agreed that Canadian banks could actually benefit from stricter American banking regulations.
“If (the proposal) goes through as advertised… there may be some entities in the U.S. market that decide they want to be either in the capital markets or in the deposit-taking market and if they’re in both right now they may move one way or the other and sell an asset,” Smith said.
“That could end up providing an opportunity for Canadian banks to either increase their presence in the capital markets or in the retail banking market.”
For example, TD — which is focused primarily on retail banking in the northeastern states — could buy branches from a U.S. bank looking to exit the retail business in that market. Meanwhile, Royal — which is focused in the southeast — could snatch up some investment banking assets there, Smith said.
At a banking conference in Toronto last week, BMO chief executive Bill Downe said he saw acquisition opportunities in the Midwest, particularly the Chicago area, in the retail banking sector.
None of Canada’s big banks were willing to comment on the proposed U.S. regulations Friday.
Additionally, Fehr said some bankers are already starting to move to Canada from the U.S. — a reverse of the traditional “brain drain” — as they seek to avoid pay limits and a growing anti-Wall Street sentiment by government.
Despite the potential benefits to Canada, the TSX financial sector was down for the second day in a row Friday, losing 1.6 per cent after falling almost two per cent Thursday. Bank stocks in Europe and the U.S. also continued to fall.
Canada’s banking system was named the world’s soundest by the World Economic Forum in October. By comparison, the U.S. was in 40th place and Britain was in 44th.
Canadian banks could see acquisition opportunities from stricter U.S. regulations
Banks that have both commercial and investment banking operations in the U.S. could be forced to separate the two businesses
- By: Kristine Owram
- January 24, 2010 January 24, 2010
- 14:16