Flaherty, Carney tell U.S. it is interfering in Canadian bank practices

Canada has stepped up its fight against new bank restrictions proposed by the United States which Ottawa says would adversely affect saving and borrowing costs north of the border.

In separate letters to Washington policy-makers, Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney complain that sweeping reforms under the so-called “Volcker rule” would reach well beyond their intended scope.

And in some cases, because of the differences between the two countries, the impact could be greater in Canada, making savings through mutual funds and borrowing more expensive.

“The rule, as currently drafted, would have an unprecedented extraterritorial reach and significant cross-border effects … given the close inter-linkages between the Canadian and U.S. financial systems,” Flaherty wrote Monday.

“I am particularly concerned that the proposed rule could severely impact the liquidity of Canadian government debt markets and interfere with the risk management practices of Canadian banks.”

The changes, which seek to separate the traditional deposit-taking functions of banks from their more risky investment operations, are part of wider reforms being proposed to limit risk-taking by U.S. banks in response to the abuses that led to the 2008 recession.

Flaherty and Carney say they respect the intent of the law, but not how it would impact institutions outside the country. Most Canadians banks have operations in the United States so interlinked that even strictly Canadian activities could come under the broad sweep of the changes.

“The proposed rule … imposes significant restrictions on Canadian banking entities by limiting their use of U.S.-based resources, personnel and market infrastructure and by preventing them from trading with U.S. counterparties,” Carney said in his letter.

Carney noted that market funding supplies about two-thirds of Canadian corporations’ financial needs, so the Volcker rule could have severe impact on liquidity and borrowing.

As well, while U.S. government treasury sales are exempted, Canadian government bonds are not.

And the letters say the rule could limit Canadian bank-sponsored mutual funds.

“I would encourage you, your staff, and the relevant U.S. regulatory agencies to take careful note of these submissions,” Flaherty said in his letter.

“I urge you and your colleagues to take careful consideration of any unintended consequences that U.S. rule making could have on broader financial systems around the world, including Canada.”

A spokesman for the finance minister said the letters were sent Monday because it was the last day for submitting opinions on the proposed legislation.

Other countries have also lodged protests, including the United Kingdom and Japan.

Paul Volcker, a former U.S. Federal Reserve chairman, was expected to issue a defence of his proposal, which has also come under attack from U.S. financial institutions, later in the day.