Q and A with the experts: U.S. banking in Canada

Recent rhetoric has emerged alleging that U.S. banks aren’t allowed to do business in Canada, which is untrue. U.S. banks have been operating in Canada for well over a century with 16 U.S.-based bank subsidiaries and branches managing $113 billion in assets here in the country. University of Waterloo finance professor and co-director of the Computing and Financial Management undergraduate program James Thompson explains how U.S. banks can navigate Canada’s banking sector.

What are U.S. banks allowed to do in Canada?

Canada has three different categories of banks: Schedule I are Canadian-owned banks, which are required to take deposits, and are regulated by the Office of the Superintendent of Financial Institutions (Canada’s banking regulator). Schedule II banks are foreign-owned subsidiaries, that are allowed to take deposits, engage in the same business activities as Schedule I, and are also regulated by OSFI. Schedule III banks are not required to be a subsidiary and they are not subjected to the same regulations as Schedules I and II. There are three U.S. banks among our Schedule II banks and a lot more listed under Schedule III.

Why don’t we see retail branches of U.S. banks in Canada?

First of all, our capital regulation is a bit stricter than in the U.S., so a U.S. bank would need to abide by our rules for their subsidiary. Second, our banking system has six main players with very deep branch networks. An entrant would need to start small and potentially find a niche. Others have done it in the past, but since Canada is already a small market relative to the U.S., they may look at it as a small piece of just too small of a pie. In other words, it just may not be worth it for many of the U.S. banks.

How can U.S. banks grow bigger in Canada?

Start small and build up. There are examples of foreign banks that are getting a foothold in Canada. For example, ICICI Bank is a subsidiary of an Indian multinational bank based in Mumbai, and it offers a fairly large suite of banking products to individual Canadians.

Could a U.S. bank try to acquire a Canadian bank?

This could be challenging. Schedule I banks are Canadian-owned. If a U.S. bank were to acquire a Canadian bank, for it to continue its Canadian bank operations, it would need to meet the criteria for it to be listed as Schedule II. The Canadian regulator would also need to approve the bank sale, and especially if it is one of our large banks, I think it would be difficult to accomplish. 

How does the U.S. and Canadian banking markets differ?

Our two countries have very different banking systems. The U.S. is very decentralized, having lots of small banks, some of which don't even cross state lines. Canada on the other hand, has six large banks with very deep branch networks from coast to coast. Bank failures are common in the U.S., and most of the time it does not have much of impact on the U.S. banking system. On the other hand, banking failures are rare in Canada. If a large bank were to fail here, it would be a very big problem, which is one of the reasons that we have such stringent risk requirements for banks.

This series is produced for the media, and its purpose is to share the expertise of University of Waterloo researchers. To reach this researcher, please contact Media Relations.