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Globalization’s Impact on Banks in Canada

Introduction

In the face of the globalization forces, not even the Canadian banking industry has been spared. Thanks to the current trends in capital mobility, the banking system has heavily suffered at the hands of globalization. It is no doubt that the financial markets of today have a characteristic high rate of globalization (Heffernan, 2004). The financial institutions of the present day are enjoying a global connection, and a higher rate of turnover, in comparison to the preceding years. In addition, these banks seem to have an exceedingly higher number of banking agents than in the previous years.

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Moreover, the advent of information technology, coupled with the cheap accessibility of related accessories, has ensured that the processing of banking information is at an unprecedented high speed and efficiency. Prior to the mid-1960s, the Canadian financial system had not yet opened its doors to usher in foreign competition. However, a lot more has changed in the last couple of years, thanks to globalization. As Neufeld (2000) observes, there are a lot of challenges that globalization has brought with it to the banking system in Canada.

When the banking Act of Canada was enacted in 1980, this acted as the nod for the foreign-owned financial institutions to enter into the banking system of Canada. Previously, such banks had to operate their subsidiaries through provincial legislation. The design of the bank Act was aimed at helping Canada extend its dominance and control in the banking sector, with a view to facilitating increased domestic competition (Kaufman, 1992).

In addition, there was a need also to improve the prevailing relationship between Canada and other countries. Based on this Act, the foreign-based institutions were required to conduct their operations in Canada as distinct entities, as opposed to the presence of branches.

Globalization implications for the banking system in Canada

Not only is globalization a permanent phenomenon, but it is also non-reversible. For this reason, it is important to note here that those banking services policies in Canada whose assumption is that the local banking system gets protection from external influences, as has been the cases in previous decades, will prove to be both counterproductive and ineffective. There is also a risk that tends to undermine the local banking system, as opposed to strengthening it.

In this regard, a couple of vital implications of the globalization of the Canadian banking system come to play. The manner in which the banking policies in Canada are able to handle these implications then will be the determining effect as to whether or not the banking system in Canada is able to keep pace with the rest of the world, or is left lagging behind.

A rise in foreign competition in Canada

More than ever before, the market of the banking sector in Canada stands to face a stiff challenge from foreign-based institutions. Thanks to advances in telecommunication, as well as a reduction in the costs of communication devices such as the internet, satellites, fiber optics, and microchips, the previously held barriers between the local, regional and international banking trade, are getting broken down (European Central Bank, 2006).

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These are the same barriers that had in the past ensured that institutions from the banking sectors were protected from external interferences. This rapid breakdown of boundaries on an international front will definitely see the Canadian banking sector cede a sizeable market share to foreign-based banking institutions.

Improved significance of global competitiveness

Whether or not Canadian banking institutions are able to withstand the rise in the foreign rivalry will be dependent on their level of economic efficiency compared to their competitors. Previously, the threat of foreign-based investors was not so much of a threat, as long as the government of the day was in a position to hinder the action towards a more competent system (Kaufman, 1992). In this regard, the users of such a financial system ended up paying the price, and not the banking system.

However, things have now changed, and the banking institutions that are foreign-based in Canada are able to harness the fast emerging technology with a view to offering quite competitive and reliable banking services. Given that the Canadians rank amongst the pioneer members of a society to adopt the internet services, and more so banking technology, it is not difficult then to see how they would be quite receptive to foreign-based banking institutions that have embraced information technology.

As such, the non-Canadian-based banking institutions are now better able to penetrate the market. At the same time, the Canadians will be more inclined towards dealing with the banking institutions that are able to offer fast. Reliable and efficient services, regardless of whether or not they are home-grown, or foreign-based. Clearly, this emerging competition shall be of benefit to the residents of Canada.

Nonetheless, should the non-Canadian-based banks have an edge over the local banking institutions, then the ensuing outcome may prove to be bad news for the banking system as a whole. First, it would mean that expensive governmental constraints shall have been forced on the local institutions. This will have an impact on the ultimate projections of the banking system. Secondly, the efficiency with which resources are allocated to the banking systems shall also have greatly been affected. As such, the policymakers in Canada are charged with the responsibility of helping in the removal of such related constraints.

Obsolescence in previous “Optimum Size” measures

The same forces that are responsible for the globalization of the banking sector have also been attributed to the obsolescence of previous attempts to have an optimum size in financial institutions. This was aimed at enabling these financial institutions to benefit from economies of scale. The current trend all over the world is for companies operating in the same target market to merge so that they can be able to cut their operation costs, thus enabling them to compete adequately in the face of globalization (Neufeld, 2000).

The revolution of technology is seen as a changing parameter with regard to the efficiency and size of financial institutions (Bank for International Settlements 2008). For this reason, the previous trends of relying on data guidelines on efficiency and size experiences have already been rendered ineffectual. A few years back, such a move would have raised questions as regards insufficient local competition.

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Nevertheless, the trend has changed immensely, and this is no longer the case. The move has especially been championed by clients themselves, as they are now in a better position to acquire a multitude of banking services from both the local and foreign-based banking institutions. Only a few years ago, Canada had policies that opposed the bigger banking institutions, contrary to the prevailing situation in the rest of the developed nations (Kaufman, 1992). Already, there are strong signs that the banks in Canada are deficient, in terms of size, to cater to both large domestic and international banking services.

The growth of the banking system is dependent on local and international competition

If at all the banking institutions in Canada are to experience increase expansion moving on to the future, then it is important that they be competitive from an international perspective, both at home and globally. It is worth noting that the financial system in Canada is at a maturity stage. Nevertheless, this does not prevent the non-Canadian banking institutions from offering a stiff challenge to the home-based institution (Neufeld, 2000).

As a result, there is a need for the Canadian banking institutions to expand on an international scale, and more specifically, in the United States, if at all they are to achieve the projected future growth. Before this could be achieved, however, first the banks have to be globally competitive starting from their local markets (Neufeld 2000). Additionally, they should also be sizeable enough to ensure that they are able to effectively compete in the international market.

Already, the Canadian banking institutions rank poorly relative to other global banking institutions with respect to both their capital base and assets. In addition, the prevailing policies of the government are opposed to mergers between the larger financial institutions. These only act to increase the non-interest costs, that would be the case f at all the government were to allow mergers to happen. Consequently, the attempt by the big banks to gain a strong foothold in such places as the united states are hampered by costly local operations, as well as reduced capital bases.

A rise in foreign ownership is inevitable

Thanks to globalization, a lot more of the Canadian banking institutions will tech to be acquired by foreigners. In addition, there is also bound to be observed a rise in the number of non-Canadian banks. For those investors whose sole concern is a long-term gain in their investments, it is no longer necessary who owns a financial institution, as long as a return on their investment can be guaranteed. Based on this paradigm shift on the part of the investors, foreign ownership of Canadian financial institutions can only be expected to go up.

Moreover, with Canadian institutions gaining a foothold in international institutions as a result of the exchange of shares, this shall also mean that the number of foreign investors does increase too. Competing on a global scale calls for the acquiring of the best skills and manpower that an institution can be able to get hold of (Neufeld, 2000).

In light of this, a lot more of the banking institutions in Canada may have no potion but to cast their nets wider into the global market so as to solicit executive talents to man their banking institutions. As it is now, the supply of financial managers in Canada is way below the international pool.

As such, a lot more of the non-Canadian may be expected to take control of the Canadian banking sector in the years to come. Globalization, coupled with an increase in foreign-based investment shall mean also that an increased number of foreigners shall sit on the board of Canadian financial institutions (European Central Bank, 2006).

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Recommendations

In the face of globalization, there is an increased urgency on the policymakers in Canada to generate an urgent need for the financial institutions to become competitive both at the local and international levels. The reason behind such a move is so as to facilitate control and ownership, with a view to empowering the Canadian institution. If at all the Canadian banking institutions are to be counted as global entities, then it is important that they assume a global face too, in terms of both ownership, and the positions occupied by foreign-based executives.

In any case, Canada alone cannot sustain the banking workforce that would enable it to perform competitively on a global scale (Bank for International Settlements 2008). Another recommendation would be to have the government relax its standing, with regard to the merging of bigger banks that are of Canadian origin. As it is now, competition is very stiff the world over, not just in the banking industry.

A lot more of the institutions are thus finding themselves forming mergers as a cushioning effect against the competition (Bank for International Settlements 2008). Mergers also enable especially the financial institutions to amass the much-needed capital for diversification, as well as the establishment of a solid financial base. In addition, merger helps institutions to benefit from the economies of scale, and this build on their strength in an otherwise volatile market.

Furthermore, the Canadian citizens themselves have been shown to be amongst the most highly ranked members of the developed world to embrace information technology, and especially the use of this technology in the banking sector.

If the local banks are to deny them the chance of increased enjoyment of this technology wonder, what is to stand in the way of these Canadians as they engage foreign-based banking systems outside of Canada? Again, advances in technology shall prove that this is quite possible. The onus thus is on the policy makes to ensure a level playing ground that shall accommodate both the local and foreign-based banking institution, as has been facilitated by globalization.

Bibliography

  1. Bank for International Settlements (2008) Financial Globalisation, BIS Paper No 32, Basel. Web.
  2. Bank for International Settlements (2008). Fifth BIS Annual Conference
  3. Financial Globalisation, Basel. Web.
  4. European Central Bank (2006). Conference on financial globalization and integration, Frankfurt.
  5. Heffernan, S, 2004, Modern banking. New York, Wiley.
  6. Kaufman, G, 1992, “Banking structures in major countries. New York: Springer.
  7. Neufeld, E. P, 2000, “adjusting to globalization: challenges for the Canadian banking system”.

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StudyCorgi. (2021, October 18). Globalization’s Impact on Banks in Canada. Retrieved from https://studycorgi.com/globalizations-impact-on-banks-in-canada/

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StudyCorgi. "Globalization’s Impact on Banks in Canada." October 18, 2021. https://studycorgi.com/globalizations-impact-on-banks-in-canada/.

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