Ottawa is ramping up political pressure on Washington over the so-called Volcker rule on banking reforms, warning the changes will hurt snowbirds, severely affect Canada's debt markets and create unnecessary reporting headaches for Canadian banks.
As finance ministers of the Group of 20 nations prepare to gather later this month in Mexico to take stock on the progress of global banking reforms brought in after the financial crisis of 2008, new rules that take effect later this year in the United States are drawing concern across the globe.
Canada, the European Union and Japan are among the countries raising alarms that Washington's new banking laws reach too far, interfering in transactions that have minimal connections to the U.S. economy.
For instance, Canada warns that the draft rules would force Canadian banks to seek the approval of U.S. regulators if their mutual fund clients include snowbirds who temporarily live in the United States.
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney wrote strongly worded letters to their U.S. counterparts Monday, urging Washington to reconsider before the new policies take effect this July.
"The draft rule could have serious unintended consequences for Canadian bank-sponsored mutual funds, hampering their ability to provide services to their Canadian clients," Mr. Flaherty writes. Mr. Carney warned the change might impair liquidity in markets for Canadian government debt and curb Canadian banks' risk-management activities, undermining efforts to strengthen the country's financial system.
At issue is the Volcker rule, which is a central provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, a sweeping set of financial reforms brought in after the 2008 financial crisis. The law is intended to tighten regulation of the U.S. banking sector so it never again needs another taxpayer-funded bailout. The Volcker rule aims to clearly divide proprietary trading – the higher-risk investment activities of banks aimed at boosting corporate profits – with traditional banking services.
The letters from Mr. Flaherty and Mr. Carney were part of a deluge of formal letters submitted by governments and industry lobbyists to U.S. regulators Monday, the deadline for comment on the issue.
Pushing back against these warnings was Paul Volcker himself. Mr. Volcker, the former U.S. Federal Reserve Board chairman, directly challenged the arguments put forward by Canada and others.
In an opinion piece posted Monday afternoon on the Financial Times website, Mr. Volcker suggested national regulators should be able to work out common approaches to dealing with such complex legislation. Yet he argued the concerns should not distract from the main point of the legislation, which is to ensure risky financial behaviour is not backstopped by government protection for bank deposits.
"Let us not be swayed by the smokescreen of lobbyists dedicated to protecting the interests of some highly compensated traders and their risk-prone banks," he wrote.
"In addressing liquidity, can it really be of concern that some of the largest banks in Europe, in Japan, in China and indeed in Canada cannot maintain effective markets in their own sovereign debt? U.S. chartered commercial banks could remain participants 'making markets' for their customers wherever they are," he wrote. "Let's get serious."
Douglas Landy, a former staff attorney at the New York Federal Reserve, who is now representing Canadian and other non-U.S. banks in their battle over the Volcker rule, says U.S. lawmakers are simply overreaching into the affairs of other countries.
"What we're saying is it's fair game to deal with things that really happen in the United States – U.S. banks and the U.S. arms of Canadian banks are definitely going to be covered by it – but leave the stuff that takes place outside the United States alone," he said, pointing to the example of a Toronto bank managing mutual funds for a Canadian senior spending the winter in Florida. "The fact that the investor happens to be in the United States, either temporarily or for a few months, really is kind of besides the point," he said. "It's really hard to say if something went wrong with that trade, there would be a threat to the U.S. financial system."
With files from reporter Jeremy Torobin in Ottawa.