Finance Minister Joe Oliver told a group of American financiers on Wednesday that an upcoming series of U.S. bank reforms soon to be implemented violates the North American Free Trade Agreement.
At a speech in New York City, Oliver said the so-called "Volcker Rule" in the Dodd-Frank Act reforming banking regulations goes against the North American Free Trade Agreement.
The rule, named after former Fed chief Paul Volcker, would forbid banks from engaging in a practice known as proprietary trading — when they invest using their own money, as opposed to their clients' money — in certain financial instruments.
Less liquid markets?
The specific instrument that Oliver is worried about is Canadian government debt. Under the current letter of the law, U.S. banks would be forbidden from trading such debt, which the finance minister says would increase the cost of borrowing by limiting market participants.
"By restricting how many banks can trade in Canadian government debt, the concern is that will raise the cost of debt because there will be liquidity issues," is how Michael King, a finance professor at Western's Ivey School of Business in London, Ont., described the argument in an interview Wednesday.
A previous version of the rule would have banned even foreign banks that operate in the U.S. (including theoretically some Canadian ones) from buying the debt, but that proviso was abandoned.
After being included in legislation first passed in 2010, the Volcker Rule is set to take effect later this year with a goal of reducing high-risk trading bets by big banks. Oliver says there's a strong legal basis that shows it violates the terms of NAFTA.
But King says those fears are far-fetched. "With fewer people making markets it will marginally increase the cost … but it seems to me this is more political statement."
"I'm not a lawyer but as a finance practitioner I don't think Oliver has a good case here."
King notes the law has been on the books since 2010 and faced many lobbyist volleys against it by banks and others, so it seems odd for the Government of Canada to be now wading in.
"U.S. banks can't trade in the debt of Japan, Germany or the U.K.," King said. "I doubt you see their finance ministers making statements about that because they probably understand it's going to have very little impact."
He adds that while the law as written would preclude banks from owning the debt themselves, it does nothing to stop them from helping their clients do so. Which means Canadian government debt is going to be just as viable as an investment as it ever was for major pools of money such as pension plans and other institutional investors.