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CANADA: Bay Street to dodge Obama's bullet

John Greenwood, Financial Post, with files from Barry Critchley and Karen Mazurkewich
Published: Saturday, January 23, 2010


If U.S. proposals to limit the size and scope of banks make it into law, they would likely have negligible impact on Canadian banks operating south of the border or their trading desks on Bay Street.

On Thursday, Barack Obama, the U.S. President, unveiled plans to bar banks getting involved in trading with their own capital or owning hedge funds. While some Canadian banks with U.S. operations could find themselves under the scrutiny of U.S. regulators, any penalties would likely be immaterial because none of them have significant investment in proprietary trading, analysts said.

"The Canadian banks are very profitable in their core businesses so there's less incentive for them [to adopt risky strategies]," said Peter Routledge, senior vice president of Moody's Canada Inc. "That's an outgrowth of the fact that we have a very consolidated banking system that's an oligopoly."

In banking, proprietary trading typically refers to situations where an institution uses its own capital to trade for its own account, a practice that exploded in popularity on Wall Street, especially in the years leading up to the crisis.

While it contributed to huge profits for some players, it has also led to big problems. That includes Canadian players such as TD, which was recently hit with a $12-million fine by U.K. regulators because of past failings at its proprietary trading office in London.

Partly because of such problems, several banks including TD, Bank of Nova Scotia have taken steps to reduce their exposure to the business.

"We have very little to no exposure to prop strategies in our institutional equity strategy," said a spokesman for Scotia Capital, noting it was once "a much bigger part of the strategic focus."

None of the banks disclose what they make by trading for their own account but analysts say that even for major players such as Royal it accounts for less than 2% of total revenues.

"We are evaluating what impact, if any the President's proposal will have on TD," the bank said in a statement. "We are committed to continue to only take risks that we understand that can be managed within an acceptable level."

Analysts said that if the proposals make it into legislations, Canadian firms could benefit from an opportunity to grab market share as their U.S. rivals struggle under the new rules.

One concern for industry players in Canada is that Ottawa may feel pressured to follow suit.

Chisholm Pothier, spokesman for Finance Minister Jim Flaherty, said Canada has been well served by its financial services system. "We have a sound regulatory regime, consolidated supervision, and capital requirements for financial institutions that are well above minimum international standards."

The head of a leading Bay Street hedge fund said that while many of his investors are fearful that the U.S. rules will hurt the financial sector generally, hedge funds like his own could be advantaged because it would hurt their Wall Street competition.

"If the U.S. banks were not competing in the proprietary trading that would provide more opportunity for others, a higher risk premium," he said.


Read more: http://www.nationalpost.com/news/story.html?id=2475382#ixzz0dZrSYBiW
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