The United States is rapidly becoming an unpredictable place for banks to do business, and Canada stands to benefit.
Some international financial institutions are weighing the possibility of moving certain people or businesses from the U.S. to Canada, or locating new operations in Toronto rather than New York, industry sources say.
Canadian banks are still trying to absorb the Obama administration's two major hits to the financial sector; Thursday's new rules on the size of banks as well as their trading operations, and the bank tax that was unveiled last week. And as they digest the moves, a number of players suggested that the uncertain operating environment is making it difficult for banks to cement business strategies.
"The heightened uncertainty around regulatory rules, tax rules and structural rules makes it very difficult for any financial institution to plan its business," said Royal Bank of Canada chief executive officer Gordon Nixon.
The proposal unveiled Thursday by U.S. President Barack Obama, if approved by Congress, would usher in substantial reform of the financial sector.
Although short on specifics, it was enough to weigh on bank stocks across North America.
Banks including Goldman and Citigroup fell more than 4 per cent, Toronto-Dominion Bank lost 2.5 per cent, and Royal Bank of Canada 1.1 per cent.
Toronto-Dominion Bank chief economist Don Drummond characterized the Obama proposal as "an added incentive for large U.S. banks, or those who wish to conduct certain operations restricted by the proposal, to expand outside the United States in order to preserve their size and range of operations."
The relatively stable and predictable environment in Canada and its close proximity to the U.S. put it in a position to attract business.
A spokesman for Finance Minister Jim Flaherty suggested Thursday that Canada does not plan to announce new rules similar to those proposed in the U.S.
"We have a sound regulatory regime, consolidated supervision, and capital requirements for financial institutions that are well above minimum international standards," said spokesman Chisholm Pothier, adding that the country is committed to the G20's plan to enhance regulation.
Ottawa's approach could catch the eye of global banks as they try to calculate the impact of the proposed overhaul. "Clearly, Canada as a destination for financial institutions is looking very positive compared to many, many jurisdictions around the world," said Nancy Hughes Anthony, CEO of the Canadian Bankers Association. "That said, people still want to do business in the U.S. market and they will have to respond to these initiatives."
The U.S. remains one of the largest and most important markets for global financial institutions, a fact that won't change in short order.
But, as Peter Aceto, the current CEO of ING Direct Canada who previously worked in the U.S., said: "I have more comfort here in Canada than I would in the United States because of the way that the regulator and the government are proceeding.
"These are very uncertain times."
Canadian banks are stuck in a holding pattern while they try to determine the implications of the recent changes. They're not entirely certain whether the new rules will apply to them at all, not to mention how significant their impact will be on their operations.
RBC, TD, and Bank of Montreal each have U.S. retail banking arms with deposits that are automatically insured by U.S. taxpayers, meaning that Thursday's proposal could apply to them, Genuity Capital Markets analyst Mario Mendonca said.
If Canadian banks were forced to choose between their consumer-focused deposit-taking businesses and their trading businesses, Toronto-Dominion Bank would likely choose the former while RBC might choose the latter, he said.
"The truth of it is, though, that I don't think any of that's going to happen," Mr. Mendonca said. "I'm not convinced this is going to get through the Senate."
A spokesman for TD said the bank was still evaluating what impact, if any, the U.S. proposal would have on it but that the bank remains committed to growing its consumer banking operations in the U.S.
Some industry players suggested the proposal could be a good thing for the Canadian banks, since proprietary trading makes up a smaller proportion of their operations than it does for many U.S. rivals.
And the stricter regulations that have historically applied to Canadian institutions, coupled with their greater reliance on consumer banking, have kept the Canadian banks away from many of the potholes that U.S. bank's proprietary trading desks fell into.
Julie Dickson, the head of Canada's banking regulator, has been involved in international discussions on the topic of proprietary trading but recently said that the Canadian banks had a better experience in that business than the U.S. did.
"With all the problems in the U.K. and the U.S., the opportunity is there for the Canadian government to seize the moment," said Ian Lee, the head of the MBA program at Carleton University's Sprott School of business and a former banker.
"This may be the moment when we look back five or 10 years from now that we saw a significant exodus of financial firms from the U.S. moving into Canada."
With files from reporters Kevin Carmichael and Boyd Erman