Rising geopolitical tensions may make it more challenging for Canadian authorities to repatriate foreign assets of financial institutions that have large international operations if any of them were ever to fail in the future, according to a new report by the C.D. Howe Institute. The report warns of this growing risk, especially given the very large operations some major banks have in the United States, and offers ideas on how to manage these risks.
In “Home Advantage: Helping Financial Institutions Prepare for Financial Distress Amidst Rising Geopolitical Tensions,”
Mark Zelmer, Fellow-in-Residence at the C.D. Howe Institute and former
Deputy Superintendent of Financial Institutions at the Office of the
Superintendent of Financial Institutions (OSFI), stresses the importance
of encouraging Canadian financial institutions to keep more of their
surplus capital and liquidity at home.
Due to increased risks, foreign
authorities could potentially block, freeze, or ring-fence these assets
for many years until they are satisfied that the claims of all of their
local stakeholders have been addressed. This concern is heightened by
the fact that, after four decades of expansion into the United States,
operations at some banks now rival the size of their Canadian businesses
in both assets and revenues.
The paper argues that the more that major Canadian financial institutions can be encouraged to keep the assets that back their surplus capital and liquidity on the books of the parent institutions here in Canada, the better-placed Canadian authorities would be to safeguard the interests of Canadian depositors and other creditors in any cross-border resolution operations involving those institutions.
“We need to reduce the leverage foreign regulators and courts could have over us if an internationally active Canadian financial institution were ever to face stress and require an orderly wind-down,” said Zelmer.
Zelmer recommends Canadian policymakers consider steps to encourage
major banks and other internationally active financial institutions to
invest more of the assets backing their surplus capital in Canada, while
managing ring-fencing risks through targeted reforms.
These include:
enhancing disclosure by the six largest banks to allow greater market
discipline over how recovery and resolution risks are managed; reviewing
OSFI’s calibration of solo loss-absorbency requirements in light of
recent geopolitical developments; and paying closer attention to the
solo liquidity positions of major Canadian banks.
“Canada and its financial system need to adapt to a changing geopolitical environment,” concludes Zelmer. “It is better to act now in a thoughtful way while time is still on our side than to punt the issue until a crisis forces change.”
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