Milestones: Wall Street Banks Consider Breaking For The Border


By Erik Heinrich


Toronto’s Bay Street: Future home of many US banks?

In the 1960s US draft dodgers headed north to Canada to avoid the war in Vietnam. Today, some 40 years later, Wall Street may be preparing a similar move to avoid dealing with US president Barack Obama’s stricter new banking regulations. At least that’s the buzz around Toronto’s Bay Street, a downtown thoroughfare that is home of the Toronto Stock Exchange (TSX) and the country’s biggest banks and investment dealers.

Many of Wall Street’s top names already have offices in Toronto, including Goldman Sachs, J.P. Morgan and Citi. During the commodities boom that saw Canada’s biggest resource and steel companies snapped up by foreign interests, they were busy lending money and underwriting deals.

That all came to a screeching halt with the recent recession, but now Canada is beginning to look good again as Obama prepares to put Wall Street on a short leash. US bankers are particularly concerned about protecting their proprietary (or prop) trading and hedge fund operations. Prop trading allows banks to play markets with their own money, thereby further leveraging their capital reserves, and hedge funds allow them to pool capital with financial partners to participate in mega-deals.

It’s the kind of stuff that makes Wall Street exciting—and highly lucrative. It can also lead to crisis when the tangled web of financial transactions becomes impossible to manage in the event that something goes wrong, as it did during the subprime mortgage fiasco.

But is Canada, whose banks have emerged as the best capitalized in the G-7, the right place for unbridled capitalism? “There’s nothing barring Wall Street banks from crossing the border,” says Meny Grauman, senior economist at Toronto-based CIBC World Markets. “It might make sense now.”

Canada’s regulatory system is strict when it comes to lending practices and capital requirements. It does not, however, forbid banks from participating in any investment category, such as prop trading.