Canada has no need to follow Obama on banks, analysts say

Canadian regulators have no need to follow U.S. President Barack Obama’s lead in imposing tough new rules on bank risk-taking as this country’s financial institutions are already well regulated, analysts said.

“Canadian banking regulation is already good,” said Paul Harris, a portfolio manager with Avenue Investment Management. “The rules were already in place and they are very good.”

Banking stocks dropped for a second day, weighing down the benchmark TSX/500 Index, as investors struggled to assess the impact of Obama’s sweeping reform announced on Thursday.

Obama shook the banking world with proposals that will limit the overall size of banking institutions, prevent deposit-taking banks from owning hedge funds or private equity funds and stop banks from proprietary trading, the practice of banks using their own money to make trading bets.

The move was designed to avoid a repeat of the 2008 meltdown that almost led to the collapse of the financial system, requiring the U.S. government to step in to bail out banks with billions of taxpayer’s money.

Unlike rivals south of the border, no Canadian bank needed a government bailout with the lenders emerging relatively unscathed from the crisis compared with institutions in other parts of the globe.

Canadian banks with operations in the U.S., such as RBC, Bank of Montreal and TD Financial Group, may see some impact on their business, though at present the rules are too vague to make any real assessment, analysts said.

“It’s impossible to reach any firm conclusions,” said Brad Smith, head of research at CI Capital Markets. “Potentially they may need to separate capital markets from other banking activities, they may have to revisit their strategies.”

On a brighter note, he pointed out it may be an opportunity for Canadian banks to pick up disgruntled talent concerned about their positions in U.S. banks.

Laurence Booth Professor; CIT Chair in Structured Finance at the Rotman School of Management agreed.

“It may have a minor impact, but in the overall scheme of things not enough to affect profit or valuations,” he said. “This was a political move designed to hit the big five American banks.”

Neither TD or RBC immediately returned calls seeking comment.

The TSX was down about 32 points at midday trading, recovering from its morning lows. Banking stocks were the weakest sector in the market.