Canadian banks increasingly under international klieg lights

For a self-conscious country like Canada, it might even be a point of some pride that the big banks have grown in size and scale to the point where they are finding themselves in the crosshairs of global regulators. But with profit constraints on the home front, that added scrutiny is a complication that institutions like the Bank of Nova Scotia have to bear, as they continue their pursuit for growth outside the country.

Scotia’s precious metals business is the latest to have reportedly attracted attention from regulators probing price-setting in a sweep that includes multinational banks such as HSBC Holdings PLC, JP Morgan Chase & Co., France’s Societe Generale Group, and UBS.

The 17-year-old precious and base metals division, ScotiaMocatta, is part of the global banking and markets division of Canada’s third-largest bank, and it operates from 10 offices around the world, including Hong Kong, Shanghai, Dubai, London and New York. One of the world’s top bullion dealers, ScotiaMocatta boasts 160 professionals whose services include hedging, financing and physical products.

“They have a sizable business via their Mocatta subsidiary,” said Peter Routledge, a financial services analyst who tracks Scotia at National Bank Financial.

The bulk of Scotia’s precious metals business was bought in late 1997 from Standard Chartered Bank. The acquisition transformed Scotia from the biggest Canadian precious metals player to a global force. It also landed the Canadian bank a seat at the table for the prestigious London gold fixing, a twice-daily auction that served as a pricing mechanism for the precious metal.

The acquisition also brought with it some 3,000 clients that included central banks, industrial firms, mines, smelters, and car manufacturers.

Scotia and two U.S. regulators – the Department of Justice and the Commodities Futures Trading Commission – declined to comment on reports of the probe involving at least 10 major banks for possible rigging of precious metals markets, and there has been no formal allegation of wrongdoing.
But company watchers say such investigations are likely to continue in the wake of the 2008 financial crisis – and will ensnare Canadian banks as they expand their business into heavily scrutinized jurisdictions like the United States.

Last year, for example, Royal Bank of Canada was among 16 global banks including JP Morgan, Bank of America, and Citigroup that were named in a suit filed by the U.S. Federal Deposit Insurance Corp. that alleged rigging of LIBOR, a key global interest rate.

It is worth noting that despite the international presence of ScotiaMocatta, analysts don’t consider the base and precious metals business material within the context of the Bank of Nova Scotia’s overall business that spans 55 countries and regions including Asia, Latin America, and the Caribbean.

Still, an operation doesn’t have to be material to come under scrutiny in a market that draws the attention of regulators.

“If they have customers in the U.S., they fall under some U.S. financial laws, oversight and enforcement regimes,” said Bart Chilton, a former commissioner of the U.S. Commodities Futures Trading Commission.

He said cross-border expansion has climbed dramatically and presents enormous opportunities for banks, but at the same time, regulation has been stepped up and fines are on the increase.

“In light of the 2008 recession and the resultant increase in global financial regulation, it is more important than ever to ensure that such businesses [are] not only complying with rules and regulations, but look around the corner as to what may occur next,” said Mr. Chilton, who is now a senior policy adviser at Washington law firm DLA Piper.

Canadian banks have long sought growth prospects outside their domestic market. But with pressure on consumers to rein in their debt and fluctuating oil prices bound to have an impact on at least the western Canadian economies and housing market, domestic banks continue to chase growth outside Canada.

Scotia, for example, is continuing to shop for acquisitions in Latin America, while executives at Canadian Imperial Bank of Commerce, Canada’s fifth-largest bank, have said they are prepared to spend up to $2 billion on a wealth management or private banking business in the United States.

 

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