United States President Donald Trump has made calls to ease Canadian regulatory barriers on foreign-owned banks. His criticism highlights a recurring, but often overlooked, threat to Canada: monetary sovereignty .
Author
- Dustin Fergusson-Vaux
Doctoral Candidate, Department of Political Science, University of Waterloo
Alongside his material threats to use economic force to annex Canada , Trump's repeated grievance raises concerns about Canada's ability to maintain control over its financial system at a time when such control is crucial.
U.S. pressure on Canada's banks
Over the past 50 years, Canada has maintained an exceptionally domesticated financial sector, despite repeated attempts by U.S. banks to weaken its regulatory barriers . Canada's longstanding rule prohibiting foreign ownership of large Canadian banks is one rooted in concerns about U.S. corporate takeovers amid growing economic integration between the two countries.
Since the 1980s, American pressure to remove these barriers has led to several regulatory breaks modelled after U.S. banking laws . In one notable instance, pressure from the U.S. Treasury resulted in Canada lowering federal restrictions on foreign bank subsidiaries.
U.S. negotiators have since pushed for full branching rights, which would allow American banks to operate in Canada with less effective regulatory control on their Canadian market operations than is currently the case. Some critics view this as an attempt to impose U.S. banking laws on Canadian soil .
Unlike subsidiaries, a foreign branch's parent company retains administrative control over cross-border investment decisions. In today's geopolitical climate, relaxing these restrictions could lead to the de facto takeover of Canada's financial system by U.S. entities, with significant implications for the country's economic policy.
Canada's financial stability at risk
Canada's chartered banks are key issuers of Canadian dollars; their privileges depend on government regulatory approval . A sudden increase in foreign ownership risks upsetting the regulatory balance needed to manage the creation of Canadian dollars, with potential knock-on effects for financial stability.
By way of comparison, Canada could look to Mexico, where the creation of Peso Credit occurs mainly through U.S. banks. Research suggests this has reduced the effectiveness of monetary policy with corollary risks for financial stability. Similarly, evidence suggests the effectiveness of South Korea's monetary policy response to the 2008 financial crisis was undermined by the presence of U.S. multinational banks.
Under normal circumstances, any takeover of a Canadian-owned bank must be approved by Canada's finance minister , which reduces such risks. However, Canada's streamlined regulatory system could become a target for American lobbying efforts aimed at foreign bank acquisitions.
If U.S. banks gain a greater foothold, the impact it could have on Canada's financial regulatory system is concerning, especially with an enlarged American market share. Reducing foreign banking restrictions seems unjustifiably short-sighted, particularly in an era of increasingly frequent financial crises .
Additional risks also exist in the non-bank financial sector, where " shadow banks " issue unregulated money without oversight. Canada's domesticated banking system and conservative regulatory approach allowed it to weather the 2008 crisis without relying on risky new asset classes like unregulated asset-backed commercial papers .
However, capitulating to U.S. pressure could push Canada toward a more deregulated financial environment, leading to an increase in shadow banking and heightened risks of financial crises and costly public bailouts .
A threat to Canada's autonomy
If these regulatory barriers did come down, it could hamstring Canada's ability to implement additional regulatory restrictions - sometimes called financial repression - on the financial system at large in the event of a major crisis.
Financial repression refers to regulatory policies that seek to direct domestic savings in order to finance government spending - often for the sake of deficit reduction, but also for managing the economy during systemic global crises.
This measure could be warranted in situations like runaway climate change , wars or other crises . However, it can only be effectively implemented if a country has effective control of its financial system.
Lifting these regulatory barriers could similarly undermine efforts to forge a more integrated economic union amid the spectre of U.S. expansionism .
Since regulatory authority for the repurchase agreement market - a core national funding market - is shared between levels of government , it would be immensely risky to compromise another key pillar of our credit system .
Capitulating to U.S. demands could lead to a significant loss of Canada's monetary and economic sovereignty, at a time when the U.S. is prioritizing its national interests over global co-operation .
Banking concentration in Canada
There are certainly downsides to Canada maintaining its barriers to foreign bank branching. The most notable one is the role these restrictions play in supporting a banking system that is both concentrated and under-competitive . Today, Canada's biggest six banks control 90 per cent of the banking market .
This dominance is largely because the global banking trend over the past 40 years has been more about creating large universal banks for a globalized marketplace , rather than freeing markets and increasing consumer choice. In aligning Canada's regulations with this model , federal regulators moved away from the previous era's trend toward greater domestic competitiveness .
If Canada truly wants to address its lack of banking competition, it should seek to revitalize it from below - not from above and outside. Among the proposals by Canada's Competition Bureau are calls to enhance small- and medium-bank access to brokered deposits and various anti-monopoly measures.
Regardless of whether one agrees with the merits of a concentrated banking system, the property rights that underpin it are a vital part of the public-private partnership that support Canada's monetary sovereignty. This means that the present regulatory arrangement leaves the terms and conditions of that partnership firmly in Canadian hands.
As the U.S. pushes for greater access to Canada's banking market, Canadians must weigh the steep political costs of allowing a stronger American banking presence.
Dustin Fergusson-Vaux does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
