As Canadian banks increasingly buy assets around the world, Ottawa has grown concerned about them allocating too much of their capital outside Canada, backstopping foreign operations at the cost of Canadian ones.
Those concerns prompted the federal government to move to give the Finance Minister new powers of veto over foreign takeovers by a Canadian bank. Legislation introduced in the Senate on Wednesday, which stems from a review of the Bank Act, caught the banks by surprise and sent ripples throughout the sector.
Under the proposed legislation, any bank or insurance company that increased its consolidated assets by more than 10 per cent through an acquisition outside Canada would need the minister’s approval.
Asked on Friday if the banking industry pushed for the change, Mr. Flaherty said the government pursued the new rule on its own.
“I don’t think that was requested by the banking industry. That was our government’s review of what’s prudential,” Mr. Flaherty said.
Though the government has been tight-lipped about the reasons behind the ministerial veto power, it stems from concerns about the global expansion Canadian banks have been undertaking in recent years. Domestic financial institutions that are well capitalized have been taking advantage of scores of assets coming up for sale around the world to build their businesses internationally.
Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and Royal Bank of Canada have all bought assets internationally, through deals ranging from a few hundred million dollars to multibillion-dollar transactions.
But as global bank regulations are rewritten in an attempt to prevent another financial crisis, institutions are being required to hold more tier-one capital, such as cash or other assets that are easily liquidated in a crisis to backstop their lending operations.
As top-tier capital becomes more in-demand, Ottawa wants to keep a closer eye on how much of that capital is flowing outside Canada to support foreign operations, rather than backstop Canadian bank businesses to buffer them against a crisis.
RBC, TD and BMO were required to pour capital into their U.S. operations during the worst of the credit crisis. In the event of a meltdown, Ottawa is concerned about stabilizing Canadian operations first.
Before RBC sold its struggling U.S. retail bank operations last summer, the bank had injected more than $2.4-billion worth of capital into the North Carolina-based business since 2006.
“Given the amount of capital the Canadian banks had to pour into their U.S. subsidiaries in the crisis, [it is] not an unreasonable move for a government that must fear a situation in which a Canadian bank board must choose between retaining capital in Canada and injecting into foreign subsidiaries at a time when capital is scarce,” said Peter Routledge, an analyst at National Bank Financial.
Mr. Flaherty played down the proposed change Friday after a speech in Toronto. “This is just a matter of fiscal prudence, financial prudence – maintaining the integrity and reputation of our financial system and our banks in Canada.”