BUSINESS

Lions in the land of winter

Ottawa grants official status to foreign banks but muzzles them in the process

Anthony Whittingham September 28 1981
BUSINESS

Lions in the land of winter

Ottawa grants official status to foreign banks but muzzles them in the process

Anthony Whittingham September 28 1981

Lions in the land of winter

BUSINESS

Ottawa grants official status to foreign banks but muzzles them in the process

Anthony Whittingham

For two of the more aggressive foreign bankers in Canada, their styles couldn’t be more different. Max Cartier, urbane president of Credit Suisse (Canada) Ltd., moves in a world of lean open space—the cool, high-tech detachment of chrome and glass. Directly across a downtown Toronto chasm on the 24th floor of an adjoining tower, Jennings Werner moves in a softer environment, antique wood panels and a slow Wisconsin drawl almost masking the speed with which he has hustled the Chicago-based Continental Illinois Bank (Canada) into the widening circle of Canadian corporate lending. “As bankers, we don’t necessarily work on developing a style,” Werner reflects. “But I guess each of us has one.”

Variety within the Canadian banking community is about to become almost limitless. The foreign banks have begun

to arrive. After more than a decade of operating on a limited basis in various other guises, some of the world’s largest financial institutions are this fall receiving federal permission to open up in Canada as full-fledged banks. So far 12 have been approved, with the second batch expected to receive their charters this week. As many as 60 leading U.S. and overseas banks are expected to be operating in Canada within the next year.

But Canadians won’t see a sudden proliferation of new banks on the street. In fact, the arrival of the foreign banks will hardly be noticed in everyday life— they will be operating almost exclusively as “corporate” bankers dealing strictly with business lending. Still, opening the door to foreign banks has been heralded as the start of a new era of competition and efficiency in Canadian banking. Many of the foreign banks have access to vast pools of capital available for commercial lending— sometimes at cheaper rates than the Canadian money markets can provide. This is good news for businesses shop-

ping around for competitive borrowing rates. Some are also willing to experiment with innovative and flexible lending policies—another spur toward increased competition.

Canadian consumer and corporate needs have been well served over the years by the nation’s own 11 chartered banks, particularly by the familiar Big Five, which are world-class banks in their own right.* But most agree that the arrival of foreign banks can only add further depth to the over-all Canadian banking system, as well as helping to elevate Toronto, Canada’s financial centre, to the rank of an international banking capital. “We believe the foreign banks are pleased to have official status at last,” boasts Maurice Clennett, special adviser to the office of the inspector general of banks in Ottawa. “It will be good for Canada too.”

*Canada’s Big Five chartered banks—the Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia, Toronto Dominion Bankrank 28th, 34th, 47th, 50th and 65th, respectively, among banks of the world.

Perhaps. But whether it will be good for the foreign banks is an open question. Now that the initial ribbon-cuttings and inaugural cocktail parties are coming to an end, many foreign bankers are taking a hard look at the rules Ottawa set down in last year’s revised Bank Act to govern their conduct. And many don’t like what they see. About 30 leading foreign banks were already operating in Canada long before they gained official recognition as “banks,” and many feel they were better off before the changes. The big wave of foreign—particularly U.S.—banks arrived in Canada in the mid-1970s, but some, such as the Banque Nationale de Paris have been in Canada for nearly 20 years.

Sometimes referred to sneeringly by their Canadian rivals as “suitcase bankers,” the foreign banks in the past set up operations as “near-banks.” They specialized in leasing and corporate lending services and by the time the Bank Act was passed they had devel-

oped more than $8 billion in Canadian assets, and were operating extremely profitably. They were in no rush to become banks.

In making them banks, Ottawa has effectively clipped their wings. Responding to fears that the foreign banks might just march right in and take over Canadian financial markets, the new federal legislation places a ceiling on the amount of business they are permitted to carry out. While it is common throughout the world for foreign banks to capture only a small portion of local financial markets—that is usually taken care of by the law of supply and demand-local banks maintain their grip by holding onto customer loyalty and by fighting to remain competitive. In Canada’s case, Ottawa chose to place formal restrictions on the foreign banks. They will be limited to eight per cent of the total domestic banking market—restricting them this year to about $16 billion in loans. Each bank, in turn, has a ceiling placed on its individual domestic lending capacity. This amount varies from bank to bank. Most of the

existing near-banks will be allowed to grow by about 15 per cent. It will be hardest for the new banks starting up in Canada for the first time. The amount of business they are allowed is so small—$100 million in loans—that the most income they can expect to earn before expenses is about $500,000, hardly enough to pay staff and maintain the necessary office overheads, that is, unless the bank wants to subsidize its Canadian operations. It may be harder still for the lesser-known and more obscure banks to secure funds in the money markets. “Apart from the leading U.S. and European banks,” says Julian Finn, chief money market trader for BCI Finance Ltd. (soon to become Banca Commerciale Italiana Canada), “many of the less familiar banks may have real problems finding profitable spreads.” That is a key concern, as the foreign banks—restricted to one branch each unless given special permission by Ottawa (see box)—cannot rely on the financial lifeblood of deposits as their source of funds.

Nor will the foreign banks be competing with Canada’s Big Five in the massive financing requirements associated with energy-related and other upcoming mega-projects and capital works. Because of their loan restrictions, it would take a syndicate of several dozen foreign banks to put together a loan that a single Canadian bank could au-

thorize in a matter of hours. “In that sense, there’s no way we’re any threat to the Canadian banks,” says Dennis Sherwood, president of the Canadian division of Britain’s Midland Bank. “We see our role as supplementing the service provided by Canadian banks, not trying to replace it.”

Most Canadian banks, publicly at least, supported the entry of foreign banks as a means of enhancing their

own international connections both in¡2 joint overseas loan syndications and así a means of gaining entry into coun-s tries—Japan, for example—that barred Canadian banks as long as their banks were barred from Canada.

The emphasis among Canadian banks on international banking has paid off. The Bank of Montreal, for example, though in relatively modest 47th place among banks worldwide, has become the world’s third-largest bank in foreign loan syndications.

In gaining “recognition” under the Bank Act, the foreign banks may have lost the very cutting edge of competition that made them a threat in the first place. “There’s no question they provided a real spur that got all of us going,” says Bank of Montreal ViceChairman Hartland MacDougall, referring to the first wave of near-banks in the early 1970s. Now, it seems, the cat has been belled. “It’s just not as attractive for us to do business any more,” states Larry Chamberlin, president of J.P. Morgan of Canada. Indeed, the foreign banks won’t even be as competitive among themselves, as the new formula fixes the relative size of each bank—virtually enshrining Citibank, Chemical Bank, Banque Nationale de Paris, Barclays Bank and Bank of America as the top five, while severely crimping the growth of others. So far the most bitter competition to emerge as a result of the Bank Act is the hunt for trained staff. Wining and dining, interoffice raiding and MBA seduction programs are taking up almost as much time as bankers’ hours will allow. Whether Canada’s new approach toward foreign banks is a judicious exercise of national economic priorities or a jittery policy of jingoist paranoia is still an open question to be resolved in the months ahead.