President Donald Trump and his running mate, Sen. JD Vance on the first night of the Republican National Convention at the Fiserv Forum in Milwaukee on July 15.HAIYUN JIANG/The New York Times News Service
John Turley-Ewart is a Canadian banking historian and principal at Regulatory Risk Management Inc. His clients include Royal Bank of Canada.
The U.S. has had an outsized influence on the evolution of Canada’s financial system, a reality most evident in times of great change. With Donald Trump winning the U.S. presidential election, this is one of those times – or should be if Ottawa wants Canadian banks to be competitive in what will now be a rapidly changing North American market.
Examples of such outsized influence are abundant in Canada’s past.
Canada’s first chartered bank, the Bank of Montreal, opened its doors in 1817 only because American investors opened their wallets. Our banking system with its national branch networks is a product of parliamentary debates centred on American banking models.
When the U.S. resolved to create the Federal Reserve System in 1913 to help stop runs on banks and panics, Canada took note and passed the Finance Act in 1914 on the eve of the First World War to solve the same problem here.
Today, few industries in Canada are as invested in the future of the U.S. as our banks. Three of Canada’s largest banks are big U.S. players. Toronto-Dominion is the 10th largest retail bank in the U.S., and Bank of Montreal is in the top 15. Canadian Imperial Bank of Commerce is growing its footprint in cities such as Chicago, while Bank of Nova Scotia recently bought a stake in the Cleveland, Ohio-based KeyCorp, which ranks in the top 30 largest U.S. banks.
But when New York’s stock market opened Wednesday morning after Mr. Trump’s election was certain, U.S. bank shares jumped – and Canadian bank shares only hopped.
When markets closed, BMO’s Equal Weight U.S. Banks Index ETF ZBK-T was up almost 12 per cent. In Toronto, BMO’s Equal Weight Canadian Banks Index ETF ZEB-T was up a meagre 1.17 per cent, despite the large presence of Canadian banks in the U.S.
This disparity between the two ETFs is telling. It reflects how investors measure the ability of Canadian banks to compete with U.S. rivals ahead of the expected retooling of the American economy under the Trump administration.
U.S. tax cuts for corporations and individuals initiated under the first Trump presidency in 2017, set to to expire in 2025, will almost certainly be renewed and deepened. The slow re-shoring of industries under President Joe Biden will be accelerated under Mr. Trump, hastened by the talk and imposition of tariffs on many imports.
The antitrust mindset that has hobbled large mergers and acquisitions under Mr. Biden’s government is expected to fall by the wayside, encouraging new and larger investment banking deals. Importantly for banks, markets anticipate Mr. Trump will launch a review of U.S. regulatory regimes, including bank regulation, with the intent of improving productivity.
Moreover, with continued infrastructure spending and the enthusiasm Mr. Trump has for cryptocurrencies, the stage appears set for a rally in bank earnings in the months and years to come.
Why is the outlook for Canadian banks with such a large U.S. presence so tepid?
One reason is the punitive tax regime the federal government has imposed on them over and above the corporate taxes they already pay. These are special taxes that are draining additional billions from their coffers and making them less attractive investments compared with U.S. peer banks, a point that is accentuated with Mr. Trump’s arrival.
Add to this the misguided decision by the Finance Department and Canada’s bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), to front-run Basel III global bank regulations, unlike other major jurisdictions that are waiting for the U.S. to decide if it will adopt them or not.
Much is uncertain about what Mr. Trump’s presidency will bring, but what is certain is that it will not adopt those regulations, which Wall Street and Main Street oppose with equal vigour because they threaten economic growth. Meanwhile, Canada showed up for the Basel III regulatory party only to find itself alone at the bar.
Today our banks are paying punitive, special taxes while OSFI is tying them up in ever more complex and unnecessary regulatory knots that makes them less competitive in Mr. Trump’s America. This needs to change.
Canada has a history of objectively looking at the U.S. and positioning our banking system to succeed. Now is no time to stop.