Canada's finance minister will have new powers to veto foreign takeovers by Canadian banks, under new banking legislation introduced Wednesday by the government.
The Conservative government says the new power, previously in the hands of the Office of the Superintendent of Financial Institutions, is justified in light of risks highlighted during the global financial crisis.
Under the Financial System Review Act, introduced in the Senate, any financial institution that increased its consolidated assets by 10 per cent or more through a foreign acquisition would need the approval of the finance minister.
The government describes the bill as "mandatory and routine legislation" required because Canada's financial-institution laws would otherwise expire on April 20, 2012, but a Finance Canada official confirmed it will give the minister additional power over foreign takeovers.
Ottawa reviews the Bank Act and other laws that govern the financial services sector every five years, and the latest review must be complete by April.
This time around, Finance Minister Jim Flaherty indicated he had no appetite for major changes, given that banking reforms are being negotiated internationally, and Ottawa's legislative update would only be dealing with small technical matters. He said Ottawa had already been updating the laws during the course of the financial crisis.
But financial institutions argued that those changes were piecemeal and, despite Mr. Flaherty's sentiments, they pressed for a variety of more major changes such as the ability to get into the auto leasing business.
The new legislation includes several references to takeovers of banks owned by foreign governments. Peter Routledge, an analyst at National Bank Financial, noted there are a lot more government-owned banks than there were five years ago.
"I don't think [the legislation]presages a wave of acquisitions of distressed banks now owned by governments, but gives banks more degrees of freedom in looking at targets and funding acquisitions," he said.
The Canadian Banking Association said it was "pleased" that the government introduced the bill and that it would be reviewing it. In an e-mail, the CBA noted the government's earlier suggestions that the changes would largely amount to "fine-tuning" rather than wholesale changes.
Julie Dickson, Superintendent of OSFI, noted that the minister had previously held this power. "It's now being moved back to the Minister of Finance, and we fully support that decision," she said Wednesday, after an appearance before a Parliamentary committee. "It makes sense for the Minister of Finance to ultimately have the ability to approve. It's just going back to the way it used to be."
A number of financial institutions, most notably the life insurance sector, were asking Ottawa to change laws that ban governments and sovereign wealth funds from owning their shares, arguing that the financial crisis demonstrated the need for greater access to financing.
Executives at banks and insurers said the restrictions, which had been in place for decades, curbed their ability to raise capital. When the financial meltdown first began to take its toll on U.S. banks, the initial wave of refinancing there came from sovereign wealth funds.
While it's not clear whether the proposed changes would allow sovereign wealth funds to invest in Canadian financial institutions, it would allow Canadian institutions to use their shares to buy a stake in a foreign government-owned bank, which they could not do previously.
With files from reporters Grant Robertson in Toronto and Jeremy Torobin in Ottawa