Magazine article Ivey Business Journal Online

Globalization Restricted: The Canadian Financial System and Public Policy

Magazine article Ivey Business Journal Online

Globalization Restricted: The Canadian Financial System and Public Policy

Article excerpt

"Canadian banks hit record results," announced a headline in a recent issue of the Financial Times. For many people in the banking industry, these results probably came as no big surprise. For much of the 20th century, Canada's Big 5 banks were ranked among the Top 50 financial institutions in the world. Their success was due in part to a protective regulatory regime that set the rules for bank ownership, for entry into the sector and for cross-ownership in other sectors, such as insurance. Historically, public policy was generally pro-merger, resulting in a concentrated domestic banking industry that was globally competitive. A recent announcement by the finance minister, however, indicates that bank mergers are not a priority for the new Conservative government, suggesting that there is no end in sight for the current policy paralysis.

Ironically, this protected market ultimately discouraged globalization among the Canadian banks and led to their becoming entrenched - in North America and, subsequently, in Canada. Today, while Canadian banks are unassailable in the domestic market (despite the presence of foreign players), only Scotiabank has a global footprint. The combination of a centralized Canadian banking system and decentralized capital markets was the route to success for the banks in the 20th century. But this traditional industry model is now coming into question among those public policy - makers and corporate strategists who recognize that Canadian banks need to cultivate global financial markets. This raises important questions: what are the correct strategies for domestic banks in a global financial world?(1) What will serve the public best: a model based on a capital markets framework, or one that fosters a Canadian-owned financial industry? A new brief submitted to Finance Minister Jim Flaherty concludes that mergers could create efficiencies and make Canadian banks more competitive with their counterparts in the U.S. But where are the tradeoffs?

Global Finance: The Knowledge Game

The Boston Consulting Group published two studies of the banking industry: "Winners in the Age of the Titans: Creating Value in Banking 2004" (Titans) and "Succeeding with Growth: Creating Value in Banking 2005" (Value). The Titans, defined as banks with market caps of $120 billion and an average size of $180 billion, have reconfigured the global marketplace. U.S. banks predominate on this list: Citigroup, HSBC, Bank of America and JP Morgan Chase/Bank One all make the grade. The study notes that U.S. and U.K. banks excel in the performance rankings. "The five largest banks raised their market cap by 18 per cent per year between 1999 and 2003, increasing their share in worldwide banking from 13 per cent to 16 per cent," says the Boston Consulting Group. And size does matter, according to the Value study, which says the continuing strong market performance of the banks was fuelled by acquisitions that create new strategic options, primarily in-market mergers. The emergence of Bank of America (once Nations Bank) and JP Morgan/Chase Bank One as Titans, and the possible inclusion of Royal Bank of Scotland, clearly demonstrates the importance of in-market mergers. More tellingly, the Titan leaders come from countries with strong capital markets.

Public policy and regulatory regimes have implications beyond in-market mergers, as can be understood by looking at Citigroup in the U.S. Citigroup has a market cap several times the size of Canada's big banks and demonstrates the new vitality of U.S. financial institutions. The traditional separation of banks from other financial groups, such as insurance companies, investment banks, equity firms and credit card institutions, for instance, is an obsolete concept. Manulife, one of Canada's most successful global institutions, has already made this clear. Just as advances in communications and computers have allowed capital markets to break down geographic boundaries, so too have traditional boundaries between product lines disappeared. …

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