Finance Minister Jim Flaherty says he's giving himself new powers over Canadian banks because the global credit crisis showed how governments are left on the hook when the banking sector runs into trouble.
Mr. Flaherty spoke with reporters Wednesday following his first appearance before a Senate committee studying a new government bill that updates Canada's banking laws. Bill S-5 includes a new provision that gives the finance minister – rather than the Office of the Superintendent of Financial Institutions (OSFI) – the final approval for large foreign acquisitions by Canadian banks.
Unlike the United States and Europe, the Canadian banking sector has survived the global financial crisis largely unscathed as not a single Canadian bank has gone under. Yet Mr. Flaherty noted the Canadian government did step in to help the banks at the onset of the crisis.
"Ultimately, it all leads to Ottawa doesn't it?" he said. "If you look at what happened in 2008, we guaranteed the wholesale debts of the banks, we purchased insured mortgages from them. These were all decisions taken here by the government in co-operation with the Bank of Canada."
Mr. Flaherty noted that his department and OSFI will look at broader factors that banks might not consider in large acquisitions.
"The obligation of an individual bank is not to look at the system as a whole. It's to look at their bank and how they're doing and of course they all have shareholders to whom they owe some duties. The obligation of the government, on behalf of the people of Canada, is to preserve the stability of the system overall."
The legislation comes as some of Canada's big banks continue to expand abroad. Toronto-Dominion Bank aims to add about three dozen U.S. branches a year and now has more branches south of the border than it does in Canada. It is now among the top 10 largest banks in the U.S.. Last December, the Bank of Montreal completed the largest transaction in its history with a $4.1-billion (U.S.) buyout of Midwestern bank Marshall & Ilsley, and Scotiabank has expanded into Mexico, South America and Asia.
The government is required to bring in the comprehensive banking legislation in order to renew several banking laws – including the Bank Act – that are set to expire in April of 2012.
Toronto lawyer Stephen Clark, who has represented Canadian banks on acquisition files and sits on a regulatory committee of the OSFI, has reviewed the legislation closely. He says the new powers it gives to the minister are clearly aimed at avoiding future problems as healthy Canadian banks increasingly expand into an international banking world.
"I think the major theme you're watching as they amend rules is that they have the powers to ensure that what they've watched in the world doesn't happen here," he said.
Mr. Clark expressed doubt that the banking world will be thrilled by the minister's new power to approve their foreign activities, but predicted public reaction to the bill will be muted.
"I'm not sure that the captains of the big banks are going to want to throw political capital on that one," Mr. Clark said.