America’s new finance rules are about to hammer Canadian banks

Collateral damage of the Volcker rule

(Sam Javanrouh)

(Sam Javanrouh)

At a 2009 Queen’s University convocation address, former Federal Reserve chairman Paul Volcker spoke admirably of Canadian banks. “The Canadian system is always thought by our Wall Street wizards to be a bit stodgy, unimaginative,” he told the graduates in Kingston, Ont. “Now, in the midst of worldwide financial crisis, that system is seen to provide a model of stability.”

Yet four years later some say Canada is the one being punished. That’s in part due to the Volcker rule, the section of the U.S. Dodd-Frank bill proposed by Volcker and meant to rein in speculative trading by banks. Lobbying by Finance Minster Jim Flaherty, former Bank of Canada governor Mark Carney and the banks themselves helped to blunt the most onerous clauses feared by Canadian banks, but they will still feel some impact.

The rule could restrict access to capital for Canadian companies, warned RBC head Gordon Nixon in a television interview days before the final wording was released in December. Banks like his say they need access to foreign capital to grow. Anything that interferes with that access could affect their ability to make loans to Canadian businesses, they argue.

A still bigger burden will be compliance, says Sheryl Kennedy, CEO of the Promontory Financial Group, an influential consulting firm. The onus is on the Canadian banks to prove that they qualify for an exemption under the rule, she says. “There is still devil in the detail, and it will still be some time before anyone knows exactly what it will mean.”

Duke University finance professor Campbell Harvey wonders if the exemptions are a good thing for Canada at all. In the short term the rule could give Canadian banks an advantage, he says, since they will still be allowed to conduct proprietary trading here. But that comes with a cost. “Banks in Canada have no business doing prop trading,” says Harvey, a Canadian who has strong views about his home country. This sort of trading distorts the market, he argues, since many of the trades conducted by the banks were only profitable because they had cheap funding backed by the government.

“I would much prefer to have a policy in place before the problem, not after,” says Harvey, who believes another crisis is only a matter of time. More than anything, the Volcker rule will be bad for bankers’ bonuses because of how much money banks make from proprietary trading, he says.

Kennedy, though, sees no need for Canada to adopt stricter rules, arguing Canada already has effective rules in place. She notes that prop trading isn’t a core part of Canadian banks’ business anyway. Regardless, bank operations that span the border could be in for some restructuring.