Winnipeg Free Press - PRINT EDITION

Canada protests proposed U.S. bank rules

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OTTAWA -- Canada is launching a full-court press in an attempt to prevent the United States from passing bank reforms that may impact Canadian investors, financial markets and the economy.

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

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In some cases, because of the differences between the two countries' systems and exemptions that apply only in the U.S., the negative impact could be greater in Canada, officials say.

"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."

Bank of Montreal economist Douglas Porter said while the proposed changes are complex and the impacts difficult to quantify, the fact Flaherty and Carney would write their counterparts with concerns is a good indicator the effect could be severe. The Office of the Superintendent of Financial Institutions has also formally requested changes to the bill.

The United Kingdom, Japan, the European Commission and others have also complained.

For Canada, the major concern is the banks' ability to trade and make markets in government and corporate bonds could be curtailed, causing borrowing costs to rise.

"If the liquidity of corporate debt and government debt is somehow compromised, that will have a ripple effect on the economy as a whole and will impact corporations' ability to grow and create jobs," said Terry Campbell, president of the Canadian Bankers Association.

"The problem is that the rule does not just apply to Canadian bank operations in the United States, it would apply to their operations around the world."

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 recent recession.

Most Canadian banks have operations in the United States so interlinked that even strictly Canadian activities could come under the changes. As well, while U.S. government treasury sales are exempted, Canadian government bonds are not.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition February 14, 2012 B3

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