A Canadian flag flies in the Bay Street financial district in Toronto on Aug. 5, 2022.Nathan Denette/The Canadian Press
John Turley-Ewart is a regulatory compliance consultant and Canadian banking historian.
The political chum that U.S. President Donald Trump shovels into his Truth Social media stream churned up interest in Canadian banking on Monday. That is when he declared “Canada doesn’t even allow U.S. banks to open or do business there.”
Au contraire. U.S. banks have long been welcome. A large U.S. retail bank operating in Canada with a national branch network would be applauded here from a competition standpoint.
It’s hard to know definitively what Mr. Trump was talking about. He did not elaborate beyond that factually incorrect line. We can only guess.
Maybe he was talking about the fact that U.S. banks don’t have much of a retail presence in Canada. But the only obstacle to U.S. banks doing business in Canada on par with our country’s big banks is common business sense, not Canadian banking rules. Although U.S. banks have operated here for more than a century, building franchises with a national network of retail branches isn’t economical in the face of the stiff competition from Canadian banks and the regulatory burden it entails.
Canada’s Big Five had first-mover advantage over U.S. banks by 50 or more years, building brands by launching regional and later national branch networks in the 19th and 20th centuries that stitched Canada’s economy together as tightly as our national railroads.
Bank failures causing instability drove policy preferences in Ottawa for a small number of large banks that are easier to supervise.
Competing against well-established bank brands with national branch networks is costly and may mean taking on more risk than is otherwise acceptable in order to win market share. It is one of the most common mistakes of upstarts, leading them down the path to lower profit margins and, in the worst cases, insolvency.
It is not that some U.S. financial entrepreneurs have not tried. At the turn of the 20th century, investors from Minnesota and South Dakota set off for Weyburn, Sask., and launched what would eventually become the Weyburn Security Bank, chartered in 1910. It opened branches, raised deposits and invested, through a subsidiary, in agricultural land, a business model that proved its undoing when the Great Depression hit. It was insolvent by 1930, and the leftovers of its business were scooped up by the Imperial Bank of Canada, now CIBC.
Other foreign banks have tried as well. HSBC Canada spent more than 40 years here investing in a national franchise with brick-and-mortar branches in various parts of the country. But thinning profit margins and evolving corporate priorities overwhelmed the business case to stay in Canada. It threw in the towel in March of 2024 and sold up to RBC.
Then there is the example of ING Direct Canada. The big Dutch financial institution launched an innovative digital bank in 1997 that was progressing nicely until the European debt crisis hit in 2009. ING Direct’s parent company was short of capital at home, and so offloaded its Canadian business to Scotiabank in 2012. Needs must.
But many U.S. banks have built successful business models in Canada outside of retail banking that play to their specific strengths, be they in capital markets, investment banking, commercial banking or private wealth management for high-net-worth Canadians.
Maybe we should take a charitable interpretation of Mr. Trump’s words. When he talked about U.S. banks being unable to “open or do business there,” he was possibly referring to rules preventing U.S. banks from taking a controlling interest in a large Canadian bank.
Canada has long maintained the principle that its big banks must be widely held (no person or individuals acting together can own more than 10 per cent of shares). This guards against a large bank becoming captive to specific domestic or foreign interests that could undermine the sovereignty or stability of the financial system.
In a highly concentrated banking system such as ours, with only six large domestic banks (compared to a great many in the U.S.), such limits on a strategically important sector are expected.
Yet Mr. Trump cannot claim Canada has not put out the welcome mat out for U.S. banks.
In 1999, the federal government revised the Bank Act to make it easier for foreign banks – U.S. banks in particular – to do business in this country. The policy change worked.
Today, 16 U.S. bank subsidiaries and branches carry on business in Canada and manage assets that exceed $100-billion, or nearly half of total foreign bank assets in the country.
These banks are all active in key parts of the Canadian economy, serving small, medium and large businesses as well as wealthy individuals and families, delivering competition that our large domestic banks must contend with. They are even members of the Canadian Bankers Association.
Their names are familiar to Canadians: JP Morgan Bank Canada, Citibank Canada, Amex Bank Canada, Bank of America and Wells Fargo, to name a few. Apparently not so much to Mr. Trump.
The “art of the deal” for U.S. banks operating in Canada has been to learn how to work with Canadians for everyone’s benefit. If only one could say the same for Mr. Trump.