STOCK IMAGE - NOT ASSIGNED - Toronto, Ontario - June 2, 2014 -- BAY STREET -- A Bay street sign is seen in the financial district in Toronto.Mark Blinch/The Globe and Mail
Salvaging Canada's historic trading relationship with the United States has become a rare national cause in the age of Donald Trump.
Everyone, it seems, wants in on the act – from chief executives and provincial premiers to ordinary Canadians.
The effort makes for some strange bedfellows. Former Conservative prime minister Brian Mulroney was in Ottawa last week briefing Liberal Prime Minister Justin Trudeau and his cabinet on how to deal with the U.S. President.
Saskatchewan Premier Brad Wall – no fan of Mr. Trudeau – spent most of the week in Washington pressing Canada's case with several senior Trump administration officials, including Commerce Secretary Wilbur Ross and White House budget chief Mick Mulvaney.
At least a dozen federal cabinet ministers are fanning out across the United States this spring delivering the message that Canada is a big part of U.S. economic success – and not the other way around.
It is heartening to see this uncharacteristic show of national unity. It does not often happen outside of rooting for Team Canada at the Olympics.
But it is just a tad awkward watching power brokers in protected Canadian sectors extolling the virtues of open borders. And so it was that two of the CEOs of Canada's big banks – Bank of Nova Scotia's Brian Porter and Bank of Montreal's Bill Downe – were talking up the North American free-trade agreement last week.
"Open markets are good," Mr. Porter told reporters. "You can't give me any number or any measure that says that's just not the case."
Well, here's one number Mr. Porter should ponder: 20 per cent. That is the limit any one shareholder can hold in the voting shares of Canada's Big Banks (those with market capitalization of at least $12-billion).
In theory, Canada has no formal restrictions on foreign ownership. But the practical implication of the widely held rule makes such takeovers virtually impossible.
The ownership restrictions, which date back to the mid-1960s, were put in place specifically to block U.S. ownership of Canadian banks. It all started with the case of the Mercantile Bank of Canada, which was put on the block by its Dutch owners in 1963. U.S.-based Citibank badly wanted to buy it. But Walter Gordon, Canada's finance minister at the time, made it clear that Ottawa was not about to let Mercantile fall into American hands. Mr. Gordon told Citibank that blocking foreign takeovers was justified because "Canada was a small developing country in which banking played a more important part than in mature economies," according to a 1998 task-force report on the Canadian financial-services sector.
Canada subsequently imposed a 10-per-cent limit on share ownership and a 25-per-cent limit on foreign ownership.
Over the years, Ottawa raised the share ownership limit to 20 per cent and dropped the foreign-ownership cap. Most of Canada's key trading partners impose no similar restrictions on their banks, including the United States, Britain, France, Germany and Australia.
Ottawa now justifies the restrictions on the grounds that they enhance the soundness of the Canadian banking system and prevent self-dealing.
But the 20-per-cent rule is also a form of protectionism. And no one should forget why it exists and what effect it has on the Canadian banking landscape – least of all bank CEOs touting the benefits of free trade.
The rule entrenches the dominant and relatively cozy market position the Big Banks enjoy in Canada, even as they expand aggressively into the United States and elsewhere. Just last month, Canadian Imperial Bank of Commerce increased its bid to buy Chicago-based PrivateBancorp Inc. to $4.9-billion (U.S.).
Canadian banks still generate the bulk of their profits here in Canada, where they are partly shielded from foreign competition, particularly in their core retail and small-business banking markets. Smaller players, including foreign-owned ones, are free to operate in Canada at will. But the market share of the non-Big Six is still tiny, dampening effective competition.
Canada is not a small, developing country any more. So maybe the time has come to let the 20-per-cent rule go.
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Som Seif, president and CEO of Purpose Investments talks about what investors should be thinking about in bonds, the Canadian dollar, and the markets