The EXPORT NOW campaign, announced in Business America March 28, is designed to increase awareness in the American business community that the time and conditions for exporting are better and more promising now than ever before. The opportunities extend to virtually every country and every kind of product. Among the world markets now opening up to U.S. exporters is the financial services sector in Canada.
As a result of recent financial regulatory reform in Ontario and the hoped-for ratification of a Free Trade Agreement between the United States and Canada, opportunities for U.S. firms in the financial services sectors-banking, insurance, trust, and securities-should grow well into the 1990s.
On Oct. 3, 1987, the United States and Canada reached an agreement in principle on a Free Trade Area. This Free Trade Agreement (FTA) is aimed at eliminating all tariff and most non-tariff barriers to trade by . The financial services chapter of the FTA makes special provisions for U.S. companies wanting to enter the Canadian financial market. It removes essentially all existing discrimination faced by U.S. financial services firms, improves access between our markets, and allows financial firms on both sides of the border to compete on a more equal basis.
The Agreement covers all current and future laws, regulations, and practices relating to financial institutions in both countries. Financial institutions include commercial banks, investment banks, trust and loan companies, savings and loan institutions, certain activities of insurance companies, and other institutions so designated under the laws of each country.
Under the FTA, U.S. commercial bank subsidiaries will be exempt from the current restrictions on market share, asset growth, and capital expansion, in the same way that Canadian banks are free ftom these restraints. U.S. commercial banks will also be allowed to establish or acquire securities firms or federally-regulated Canadian insurance and trust companies, again in the same manner as Canadian banks.
The domestic assets of foreign bank subsidiaries operating in Canada (the "closely held" or Schedule B banks) are currently limited to 16 percent of all domestic assets of the Canadian banking system. Foreign bank subsidiaries also face individual capital limits and other restraints such as the sale of loans to the parent bank.
Increased competition resulting from these policy changes will lead to widespread diversification and amalgamation of the previously separate institutions within this sector. The prospect of increasing competition and diversification has led Canadian firms to attempt to increase their capital bases. According to industry sources, Canadian securities firms currently lack the capital underpinning needed to effectively compete in the practices of today's integrated world market, such as "bought deals" and 24hour-trading. "Bought deals" occur when a brokerage house assumes the risk in a new stock issue by purchasing the shares for its own account before selling privately or publicly. Implementing 24hour-trading will require major expenditures on securities trading technology. Firms must have ample capital in order to survive the costs of providing additional services; i.e., employment, salaries, facilities, and technology, as well as the probable margin slashing which will result ftom fierce competition.
Insurance companies are considered by industry experts to be the most likely beneficiaries of the new proposals, as they become able to diversify into banking, securities trading, and fiduciary activities. Canadian banks have attempted to diversify by building rather than buying, namely developing unrelated skills in-house. The enormous costs associated with acquiring an established investment operation, as well as recent loan losses to Third World countries, have led the major Canadian banks to create new companies, rather than merge with existing dealers.
During this period of fierce competition for market share and profits, the institutional sector, particularly govemment and major corporations, will continue to be the main end-user markets for financial firms in Canada. They are considered to be "best-risk" customers, who command big deals and consequently big returns. Industry experts predict that once these firms are well established within the securities markets, marketing efforts will shift to retail or smaller investment markets.
The Canadian financial services sector went through a period of adjustment during 1986 and 1987 as a result of the diversification and expansion of resident financial firms, the influx of foreign capital, and a move towards amalgamation of financial affiliates.
On April 27, 1987, the Federal Department of Finance and the Ontario Ministry of Financial Institutions ratified an agreement to deregulate Ontario's financial services sector. The thrust of the agreement is to enable Canadian financial institutions to compete in an internationally integrated market and to enhance competition domestically by welcoming foreign institutions. The Province of Quebec has already deregulated its financial sector. Ontario is considered the financial capital of Canada and therefore more critical in the deregulation process. The Province of Ontario houses more than 70 percent of Canada's securities industry and over 45 percent of total Canadian output in the financial sector. Over 40 percent of total employment in this sector is in Ontario.
Effective June 30, 1987, Ontario foreign financial institutions and non-financial firms were permitted to own stock brokerage operations. Foreign firms are permitted to purchase up to 50 percent of an existing Canadian stock brokerage firm within the first year of deregulation but are restricted to "exempt market" activities. These activities include unregulated transactions such as the trading of commercial paper and debt securities issued by various levels of govemment. Following the one-year limit, 100 percent ownership may be acquired and all restrictions on trading activities will be lifted.
In addition, ownership of one type of financial institution by another will be permitted. However, banks must establish subsidiaries in order to engage in securities trading and trust activities. Trust and insurance companies can be permitted to engage directly in "inhouse" banking activities. Trust and loan companies have been granted full consumer lending powers. Those with greater than $US 18.6 million in capital may engage in commercial lending. Affiliates or subsidiaries can be linked through common outlets or branches. This will result in one-stop financial shopping or "financial supermarkets."
In an effort to control the dealings of financial conglomerates, the new regulations stipulate that financial firms with commercial links and/or closely held ownerships and capital in excess of $560 million must divest to 65 percent ownership by selling 35 percent of all shares to the public by 1992. Furthermore, these firms cannot set up or acquire new companies unless owners reduce their shares to 10 percent. New disclosure rules will force institutions to reveal links that exist between affiliated companies when offering stocks or securities to the public.
Total assets of foreign banks have been growing at a faster pace than those of domestic operations and are expected to do so well into the 1990s. From Jan. 31, 1986 to July 31, 1987, assets of foreign banks have increased by approximately 50 percent, whereas those of domestic banks have increased by 6 percent within the same period.
Of the 58 Schedule B foreign banks operating in Canada, 16 are U.S.-controlled. As of July 31, 1987, total assets of U.S. banks in Canada were valued at $9 billion, or 29 percent of total assets. Only three of the top ten foreign banks are U.S.-controlled.
The predominant third-country competitors in Canada are the United Kingdom and Japan. As of July 31, 1987, five British-owned banks had operations in Canada, representing total assets of $7 billion or 22 percent of total foreign assets. Eleven Japanese banks have established operations in Canada, and accounted for $3.8 billion in assets as of July 31, 1987, or 12 percent of total foreign assets.
As of October 1987, all of Japan's leading investment houses were in the process of establishing or expanding their operations in Toronto to take advantage of deregulation. Since June 30, 1987, eight foreign financial firms have applied for membership on the Toronto Stock Exchange.
