Banks without borders

Editorial, Toronto Globe and Mail, Tuesday 16 December 1997

NECESSITY may be the mother of invention, but it seems that calamity was the mother of last-minute persuasion in the World Trade Organization’s agreement on freeing up global financial services.

Just a month ago, Canadian and U.S. officials were worrying aloud that Asia’s economies would shy away from reaching agreement, in the false belief that growing interdependence in banking and securities is what put them in crisis. Now, some holdouts have come on board, offering to open up by March, 1999, their still formidable markets to outside competitors and, for some countries, outside investors.

The emerging markets of Asia appear to recognize the deal will help them. Besides poor domestic economic policies and politicized lending and industrial policies, the countries were also hurt by protectionism. By restricting foreign insurers, banks and brokers, the regional governments prevented domestic firms from improving through competition against experienced international players and through emulating the best international practices.

For example, the region’s closed financial services didn’t share much information with the markets—and long-term foreign investors, such as pension funds, said they stayed out as a result. Had the sector followed international best practices on financial reporting, these institutional investors might have injected their non-speculative capital into the regional markets and stayed, steadying the markets through their current crisis.

Under the deal, signatories have volunteered to extend substantial new opportunities for investment or competition. For instance, Brazil, one of the holdout countries, surprised all by fully opening its banks and securities firms to foreign ownership. This and similar openings in Southeast Asia can be a boon for ambitious Canadian companies. Already, Canada’s banks derive between 2 and 52 per cent of their income outside the country, and Canadian employees hold the vast majority of the jobs supporting that work.

Canada didn’t open up as much as Brazil, but extended to all signatories the right to open limited-service bank branches in Canada, with no need to seed those branches with new capital. For a start, the move should open Canadian financial services to competition and lower prices for loans of more than $150,000.

There are other gains from the talks. World financial services perform $2-trillion in foreign-exchange transactions per day. The more easily these transactions are performed, the easier it is for businesses to trade among each other and stimulate economic growth and jobs.

For many reasons, this is a deal to be welcomed.

Source: Canadian Bankers Association

Proportion of bank income derived outside Canada

	1994 $million total income	% outside Canada	1996 $million total income	% outside Canada
Royal Bank	1,169	38.6	1,430	51.2
Canadian Imperial Bank of Commerce	890	34.3	1,366	27.1
Bank of Montreal	825	37.6	1,168	47.0
Bank of Nova Scotia	484	72.7	1,069	42.3
Toronto Dominion Bank	683	28.6	914	25.7
National Bank	217	27.5	318	38.1