Canada To Allow Wealth Funds To Invest In Its Financial Institutions
03/29/2012| 04:25pm US/Eastern
By Nirmala Menon
The Canadian government said Thursday it plans to introduce legislation to allow foreign and domestic sovereign wealth funds to invest in Canadian financial institutions, a move which would allow banks and insurance companies to raise capital to meet new Basel banking rules.
Canada is believed to be the only G-7 country that explicitly bars sovereign wealth funds from investing in its financial institutions, which puts lenders and insurers at a disadvantage when it comes to raising capital. The proposed legislation aims to level the playing field, and could potentially attract investments from large government-owned funds, including those from China and the Middle East
"Permitting these pools of capital to invest in Canadian financial institutions provides these institutions access to new sources of stable long-term investment, which promotes financial stability," according to budget documents.
The government didn't say when it plans to introduce the legislation. But given that Prime Minister Stephen Harper's Conservatives have a majority in the House of Commons - which means the government doesn't have to depend on support from the opposition parties to pass laws - the legislation could be introduced as early as the 2012/13 fiscal year which begins Sunday.
The proposed legislation will spell out the criteria that wealth funds have to satisfy in order to invest in Canadian financial institutions. The only criteria specified in the budget documents is that the funds must have commercial objectives.
Any such investment is subject to approval from the Finance Minister, according o budget documents.
Canadian financial institutions were better able to weather the 2008 financial crisis compared to those in many other countries because they were well-capitalized and subject to a strong regulation and supervision. No Canadian banks needed to be rescued using tax-payer money.
According to Avery Shenfeld, chief economist of CIBC World Markets, Canadian banks are for the most part already well on the road to meeting new Basel bank capital rules, and likely don't have a big need for equity at the moment.
"But to the extent that down the road, Canadian banks are expanding and want to use equity issuance as part of that, it (allowing wealth funds to invest) should help facilitate that," Shenfeld said in an interview. "A lot of the world's wealth is circulating in sovereign wealth funds so eliminating them as potential shareholders could be an issue."
The budget documents also said the government will amend the Bank Act to clarify the prohibition against banks offering life annuities or similar products.
The government will also specify in the legislation that federally-regulated banks are governed by federal rules "to avoid the creation of local and potentially inconsistent rules that threaten the uniform application of the federal banking regulatory framework."
-By Nirmala Menon, Dow Jones Newswires; 613-761-2126; email@example.com