The Rise of Canadian Banks in the United States

The 2008 Financial Crisis changed the landscape of the financial world. Cornerstone institutions like Merrill Lynch and Lehman Brothers were either paired up with commercial banks to maintain solvency or simply defaulted, leaving shareholders and clients alike to absorb most of the consequences. Even the banks who weathered the storm well, following the collapse of US Housing prices and the default of many mortgage borrowers wiping out the value of an entire market of Collateralised Debt Obligations (CDOs). The widespread impact of the event earned it the name “The Global Financial Crisis”.

However global the 2008 crash may have been, though, its impact was felt relatively little in Canada. Canadian banks, characterised by low-risk tactics and high levels of federal oversight, the Canadian financial sector has thrived since 2010, when the dust finally began to settle after the housing bubble popped. The strength of the largest Canadian Banks, particularly Royal Bank of Canada (RBC), Bank of Montreal (BMO), and Toronto-Dominion Bank (TD), have allowed them to aggressively expand their operations south of the border. RBC is now a real contender in US investment banking activities, currently collecting 3.5% of all US investment banking fees and allocating significant resources to capture even more of that market. Meanwhile, TD Bank has over 1,300 locations along the eastern coast of the US. Meanwhile, BMO Harris Bank locations can be found everywhere from Chicago to Dallas.

How did these banks, each of which denotes itself as being primarily Canadian in its name, make a successful push into the immensely competitive US financial market? The answer is a combination of sound financial regulation and a marketing campaign that leverages brand recognition among Canadian expats in the United States.

Canadian banks have long been held up as a global standard for responsible investing practices. With the “Big Five” Canadian banks (RBC, TD, BMO, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce) each controlling over $350 Billion USD in assets, these banks dominate the financial sector. The Quebec-concentrated Banque Nationale du Canada is the closest contender at $119 Billion, while HSBC Bank Canada, a subsidiary of the British financial services conglomerate, controls only $61 Billion. This level of consolidation allows financial regulators in Canada to oversee banking activities to a level that American regulators can only dream of in that fragmented market. Instead of imposing restrictions like the landmark “Volcker Rule”, which forbids commercial banks operating in the United States to engage in risky proprietary trading on their own books, Canadian regulators instead choose to regulate the securities that banks, firms, and individuals trade. Put simply, Canadian regulators have better capability to review the securities that enter the Canadian markets, and can better prevent the entry of high-risk securities. For example, while the American Securities and Exchange Commission recently approved 4x leveraged ETF securities that offer immense volatility, the highest level of leverage for ETFs trading on the Canadian exchange is 2x. This lower-risk environment meant that while highly-exposed banks across the world were dealt a staggering blow, Canadian institutions were relatively insulated.

Canadian banks also benefitted massively from Canadian fiscal policy, which had maintained budget surpluses from 1996 to 2007. This meant that when the global economy took a turn for the worse, Canada could take expansionary fiscal policy without any large risk of ballooning the federal debt level.  This, in turn, fueled the Canadian economy and fed the largest Canadian banks. Ultimately, Canadian banks found themselves able to compete head-to-head American banks, which didn’t have the resources to fight back. Moreover, Canadian banks were omitted from the news coverage reporting the immense losses experienced by the largest American banks. As such, their brands, though relatively unknown, were not dealt the same crushing blow that those of their US counterparts were.

On the retail banking front, Canadian banks like TD and BMO have taken advantage of the number of Canadian expats living in the US. Cities in the Northeast like Boston and New York boast large numbers of Canadians, who are drawn to the familiar brands, which they trust more than the American banks. Meanwhile, Canadian banks are also capturing a growing market share, building from the unique ability they have to service the needs of “snowbirds”: Canadians who live part-time in the Southern United States to enjoy the warmer winter weather. In both cases, Canadian banks make it easy to move funds across the US-Canada border, and to access accounts in both countries.

While Canadians might rejoice at the growing presence of Canadian banks in the United States, it also means that these banks are likely to lose some of that which differentiates Canadian banks from American ones. In fact, Moody’s recently downgraded its credit assessment of the six largest Canadian banks, noting growing exposure to public sector debt and a challenging operational environment. Where once Canadian banks boasted CEOs who almost invariably came from commercial and retail banking, four of the Big 5 bank CEOs come from the Investment Banking sector. Roughly 60% of RBC’s investment banking income comes from the United States. The end result is that Canadian banks are growing in the United States, but perhaps they are also growing less Canadian.

By,

Gordon Milne

Works Cited

Alexander, D. (2017, May 10). 4.5% or Bust: RBC Eyes Bigger Cut of $40 Billion in U.S. Investment-Bank Fees. Retrieved from Financial Post Web site: http://business.financialpost.com/news/fp-street/4-5-or-bust-rbc-eyes-bigger-cut-of-40-billion-in-u-s-investment-bank-fees

Conference Board of Canada. (2010). Crisis and Prevention: Lessons from the Financial Meltdown.

Misachi, J. (2017, February 24). The Largest Banks in Canada. Retrieved from World Atlas Web site: http://www.worldatlas.com/articles/the-largest-banks-in-canada.html

Moody's. (2017, May 10). Moody's Downgrades Canadian Banks. Retrieved from Moody's Investor Services Web site: https://www.moodys.com/research/Moodys-downgrades-Canadian-Banks--PR_366355

TD Bank. (2017, May 5). Company Fact Sheet. Retrieved from TD Bank Web site: http://www.tdbank.com/aboutus/company_fact_sheet.html

Picture titled, "TD Bank (7314)", taken by Jeff Harwell on October 30, 2011, obtained through Creative Commons (https://flic.kr/p/aJ7Fec