Canada’s Financial Firewall: The Border

(James Bagnall — The Ottawa Citizen)

Analysis: An awful lot of things will have to go wrong — a string of financial bankruptcies, a plunge in spending — before we find ourselves in the same leaky boat as the U.S.

Should we be concerned when two of the United States' largest investment banks -- Lehman Brothers and Merrill Lynch — disappear in a single day, and when stock markets collapse another four per cent in the same 24-hour period after an already abysmal year?

To put it another way, is Canada about to lose its immunity from the financial contagion spreading out of Manhattan?

The answers, unfortunately, are simply unknowable at the moment because so much depends on psychology. If enough people become concerned about the stability of the financial system itself, and move to protect their own interests, no amount of reassurance by central bankers would be enough to stem that awful tide.

But this remains a worst-case kind of thing, requiring an awful lot of things to go wrong -- a string of financial bankruptcies, accompanied by an abrupt decline in consumer spending. And this sort of cascade seems highly improbable in Canada.

… There are a number of explanations for this state of affairs, but a key one is that Canada’s bankers have resisted copying the more aggressive U.S. financial institutions.

This stance might have been much more difficult had Canadian trade negotiators not consistently opposed the idea of opening up our financial services industry to greater foreign ownership.

For instance, had Lehman Brothers acquired control of a major Canadian bank under relaxed ownership rules, the ripple effect of its demise yesterday would now be a scary thing.

As it is, less than a handful of Canadian firms with direct links to Lehman have been caught short by the investment bank’s troubles. These include: Sun Life Financial, which said yesterday it holds more than $300 million worth of Lehman’s bonds; and Canadian Imperial Bank of Commerce, which owns $25 million worth of Lehman securities.

This counts as relatively minor exposure, especially in relation to CIBC’s market capitalization of more than $23.3 billion.

No foreign individual or institution can acquire more than 10 per cent of a major Canadian bank, without the blessing of Canada’s minister of finance.

As of June, the single biggest investor in Canada’s big banks has been a mutual fund owned by one of the other banks — usually no more than five per cent of total equity.

It’s a family compact, in other words. And while this cozy reality has driven free traders to distraction, it also created a risk-averse culture. Read the complete article.