Trump-proofing Canada means ending our dependence on SWIFT

It's time to stop staring into the headlights and respond to the fact that Canada is being eyed as a choice morsel by a much larger predator: our former ally the United States of America. In President Trump's very own words, he wants to use "economic force" to join Canada and the United States together. In anticipation of the U.S. turning its economic might against us, we need to locate all the ways in which our access points to various crucial financial networks are controlled by this predator, and switch those dependencies off, quickly, before they are used to hurt us. One of our most glaring dependencies is the SWIFT network.

Banking and payments run on networks. And network users tend to coalesce around a single dominant network, like SWIFT or the Visa and MasterCard networks. Which leaves whomever controls the dominant network, often the U.S, with tremendous power over all the network's other users. If Canada can reduce our exposure to some of these networks now, then we can't be exploited by the Trump regime down the road to weaken us economically, sap our strength, and threaten to take our resources or annex us.

I've already written about one point of failure: our dependency on the U.S.-controlled MasterCard and Visa card networks. Canada has enjoyed huge conveniences by being connected to the U.S. card networks. However, if Trump were to suddenly cut off our access, Canadian credit cards would be rendered ineffective in one stroke, throwing us into chaos.

The good news, I wrote back then, is that our MasterCard/Visa dependency can be solved by building a domestic credit card system, underpinned by Interac, our made-in-Canada interbank debit network. With a domestic fall-back in place, the threat of a Trump disconnection would no longer loom over our heads. Canada wouldn't be doing anything unique. All sorts of nations have their own indigenous credit card systems, including India, Indonesia, Brazil, France, and Japan.

The next chokepoint we need to address, and quickly, is Canada's dependence on the SWIFT network. Most Canadians don’t realize that SWIFT isn't just an international payment tool. It is deeply embedded in our domestic financial system, too.

What is the SWIFT network? Payments are really just synchronized updates of bank databases. A paying bank subtracts numbers from its database while the receiving bank credits its own. To initiate these updates, banks need to communicate with each other, which is where SWIFT comes in. Think of SWIFT as WhatsApp for bankers. It's a highly secure communications network that banks can use to coordinate bank-to-bank payments, otherwise known as wire transfers, between each other on behalf of their customers, using specialized financial languages like ISO 20022 or FIN.

The SWIFT network, owned by the Society for Worldwide Interbank Financial Telecommunication, a non-profit based in Belgium, has over the years become the global standard for banks to signal cross-border database updates. There is currently no alternative. Decades ago, everyone gravitated toward using the SWIFT network for international payments; so that's where a banker has gotta be.

Canada's SWIFT exposure is especially problematic. Many of the world's largest nations only rely on the SWIFT network for international payments; they do not use SWIFT for domestic payments. For security reasons, these nations have built their own bespoke messaging networks and require their banks to use the domestic network for making within-country wires. For example, India has the Structured Financial Messaging System (SFMS), the U.S. uses FedLine*, and Japan has the Zengin Data Telecommunication System.

Yet a group of smaller countries, including Canada, also rely on the SWIFT network for domestic payments. The UK, Australia, and South Africa are part of this group, too. (I wrote about this domestic reliance a few years ago, if you want more details.) What it boils down to is that if a Toronto-based customer of Royal Bank wants to wire $1 million to a Calgary-based customer of TD Bank, it is the SWIFT network that conducts the communications necessary to complete this within-Canada wire payment.

That is, our domestic payment system is fully reliant on a piece of Belgian infrastructure. And this domestic reliance is a huge weakness.

Cutting countries off from SWIFT has become one of the U.S.'s standard tools for disciplining enemies. Over the years North Korea, Iran, and Russia have all undergone it. Being de-SWIFTed isn't a killing blow, but it makes it much tougher for the offending nation's banks to interact with counterparties to make payments. Without SWIFT, bankers fall back on ad hoc networks of fax machines, email, and telex. Efficiency is replaced by clunky, error-prone workarounds.

In 2025, Canada suddenly finds itself in the same boat as North Korea, Iran, and Russia: we are all U.S. targets (or is Russia about to become a U.S. friend again?) And so Canada faces a genuine threat of being de-SWIFTed. Some of you are thinking: "But wait, JP. SWIFT is a European-based platform. As a liberal democracy, Europe is on Canada's side. They would never allow us to be cut off, right?"

Yes and no. The U.S. market is far bigger than the Canadian market. Given a U.S. ultimatum between disconnecting Canada's banking system and facing U.S. punishment, SWIFT and the Europeans may very well choose to take the path of least resistance and cut Canada off.

A potential European betrayal is precisely what happened to Iran when it was severed from SWIFT in 2018. Recall that the U.S., Europe and other partners had signed a nuclear deal with Iran in 2015 whereby Iran agreed to cease its efforts to get the bomb in exchange for a cessation of western sanctions. Trump reneged on the deal in 2018, enraging the Europeans, who wanted to continue honoring it. The U.S.'s 45th president began to pressure SWIFT to remove Iran from its network, threatening sanctions and travel bans on SWIFT execs. At the time, I thought SWIFT might resist Trump's pressure. Europe remained supportive of Iran, after all, and the EU's "blocking statute" makes it illegal for EU firms like SWIFT to comply with American sanction demands. But Europe caved and Iran was quietly unplugged from SWIFT.

In short, Canada, like Iran, can't rely on Europe to uphold its SWIFT access.

As I said earlier, a de-SWIFTing is doubly serious for Canada. Not only would it sever our banks from the sole communications network through which they can make foreign payments. We would also lose our ability to make local wire payments in Canadian dollars. Need to pay $500,000 by wire to close a house purchase? Too bad. It won't go through.

For those interested in visuals, the chart below illustrates our SWIFT dependence. Note how all arrows pass through the SWIFT network:

How a Canadian wire transfer works: When a Canadian bank (i.e. the "instructing agent") makes a wire payment to another Canadian bank (the "instructed agent") on behalf of a customer, it starts by initiating a PACS message. This message is sent to the SWIFT network, which notifies Lynx, Canada's high value payments system. All Canadian banks have accounts at the Bank of Canada, our nation's central bank. Lynx's role is to debit the central bank account of the first bank and credit the account of the second bank. A confirmation message then flows back from Lynx to SWIFT and on to the recipient bank. SWIFT is central to this entire flow. All arrow lead to or away from it. If SWIFT is no longer permitted to bridge Canadian banks and Lynx because of a Trump ban, then this entire payments flow ceases to function. Image source: Payments Canada

While we can't do much about losing access to SWIFT's international payments services, we do have options for mitigating the effects of lost access on local transactions. Canada must build its own proprietary domestic financial messaging network — urgently. For argument's sake I'll call it MapleFIN. Once built, the government could require domestic banks like BMO and TD Bank to support MapleFIN along with the existing SWIFT option, giving financial institutions two routes for passing on financial messages to other Canadian banks. Then if we are threatened with a de-SWIFTing, at least our domestic payments system won't be paralyzed; we can fall back on MapleFIN.

The oddest thing for me about the sudden emergence of the U.S. threat is that I've been looking to bad actors like Russia and Iran for inspiration on how Canada must harden itself. Like Canada, Russia was historically dependent on the SWIFT network for "almost all" domestic transactions. For many years it had no domestic financial messaging system. Then Russia unjustly invaded Crimea in 2014. It was only at that point that, realizing its vulnerability, the rogue nation belatedly built its own domestic messaging network: the Sistema peredachi finansovykh soobscheniy, or System for Transfer of Financial Messages (SPFS). When Russia's banks finally began to be de-SWIFTed in 2022, they were cut off from making cross-border payments, but at least they could fall back on SPFS for making domestic payments, saving its economy from all sorts of extra chaos.

Iran, too, has its own domestic financial messaging system, having introduced SEPAM in 2013, so when Trump's 2018 de-SWIFTing hit, at least Iran's domestic payments still went through.

We need to do what Russia and Iran did and build domestic payments networks.

A recent design change by the European Union really drives home the point that no nation should be 100% reliant on SWIFT. Like Canada, the EU has always used SWIFT for all of its domestic financial messaging traffic. SWIFT is based in the EU, so you'd think that Europeans would be comfortable being wholly dependent on it. But they aren't. In 2023, European Central Bank modified the domestic payments system so that in addition to SWIFT, banks could also transmit payment messages via a non-SWIFT competitor, SIAnet. (I wrote two articles, here and here, on Europe's decision to reduce its SWIFT reliance).

I worry that many Canadians are still stuck in the early stages of coping with the loss of our privileged relationship with the U.S. There's plenty of anger and betrayal. Many are in denial and think things will return to normal once Trump's regime comes to an end, assuming it ever does. But if we want to safeguard our economy against the years of instability ahead, we can't just stew. We need to accept that things have changed and quickly move forward to mitigate the threat. Financial messaging systems are not irrelevant bits of financial arcanery. They are a vital part of Canada's plumbing through which a large chunk of the nation's commerce flows. If the plumbing seizes up, our financial lives go on pause. Let's fix this, now.

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*The Federal Reserve used to refer to its network as FedNet, but appears to have switched its nomenclature to FedLine.

Canadian banks as U.S. hostages?

BMO Financial Center in Milwaukee, Wisconsin. Blink twice if you're in danger, BMO.

Donald Trump has said he wants to use "economic force" against Canada. In my previous post, I worried that one way this force could be wielded was through Canada's dangerous dependence on U.S.-controlled MasterCard and Visa. But there's an even bigger risk. Canadian banks with large U.S. operations may have become unwitting financial hostages in Trump's 51st state strategy.

As recently as a few months ago, back when things still seemed normal, it was widely accepted that big Canadian banks needed a U.S. expansion strategy. If one of our Big-6 banks wasn't building its U.S. banking footprint, its stock outlook suffered. Canada is a mature, low-growth banking market, after all, whereas the U.S. market remains fragmented and ripe for consolidation.

This motivated a steady Canadian trek into U.S. branch banking. BMO entered the U.S. in the 1980s and steadily expanded, most recently acquiring Bank of the West in 2023, making it the 13th-largest U.S. bank. TD Bank entered in the early 2000s and has since climbed to 10th place. Given this trajectory, by 2030 or 2035, one of the U.S.’s five largest banks could very well have been Canadian.

This strategy hasn’t been without flaws. Royal Bank's first U.S. retail banking foray, its acquisition of Centura, eventually failed, though its second attempt has been more successful. TD just paid the largest anti-money-laundering fine in U.S. history. But overall, the move south has been profitable for Canadian banks and their shareholders, who constitute a large chunk of the Canadian population. The U.S. has benefited, too. Canadians have historically been decent bankers, having got through the 2008 credit crisis unscathed. Allowing a bigger slice of the American market to fall under the prudential management of Canadian executives probably isn't a bad thing, TD's money laundering gaff notwithstanding.

But in just a few months, Trump has upended this entire calculus.

Canada is now a U.S. enemy, or at least no longer a friend. We are somewhere on Trump's timeline to becoming the 51st state, against our wishes. Our existing border treaties are no longer valid, says the President, and need to be redrawn. Trump has threatened to use "economic force" as his weapon to achieve this. The attacks have already begun, beginning with tariffs to soften us up for final annexation.

Next up? My worry is that Canada's banking industry may become a second front in this war, and the hint is a stream of strange pronouncements from Trump and his surrogates about Canadian banking. According to Trump, the Canadian banking system is stacked against U.S. banks:

"Canada doesn’t allow American Banks to do business in Canada, but their banks flood the American Market. Oh, that seems fair to me, doesn’t it?"

This grievance is false, as I explained last month, but accuracy probably isn't the point. A charitable reading is that Trump is laying the groundwork for U.S. banks to gain more access to Canada’s banking sector—a manageable concern. My worry is that it's the reverse. His complaints may signal a shift in how Canadian banks operating in the U.S. are to be treated. Trump may have teed up a financial version of the Gulf of Tonkin incident; an imaginary affront that can serve as a pretext for justifying aggressive action against Canadian banks' U.S. subsidiaries.

After years of U.S. expansion, Canada’s largest banks now have relatively large American retail banking footprints, making them tempting financial hostages. Both TD Bank and Bank of Montreal now have more branches in the U.S. than in Canada. Nearly half of BMO's revenue (44%) come from south of the border while in TD's case it's 38%. Royal Bank also has deep ties. According to a recent Bank of Canada paper, half of the Big 6 Canadian banks' assets are now foreign, far more than the roughly 40% or so in 2014, with much of that chunk being American assets.

Just another bank doing business in Florida, or a financial hostage?

By damaging their large U.S. subsidiaries, Trump would directly weaken the Canadian parent companies, potentially causing havoc with the overall Canadian banking system. And a weakened financial sector plays right into Trump’s stated goal of economically undermining Canada in order to annex it.

How can Trump hurt Canadian banks' U.S. subsidiaries? Trump and his allies control much of the U.S. financial regulatory apparatus, and he has shown little regard for legal constraints. To begin with, he could set the FBI and Department of Justice on Canadian banks, increasing scrutiny of TD, BMO, and Royal Bank’s U.S. operations under the guise of enforcing anti-money-laundering laws. More surveillance would inevitably lead to a wave of fines. To avoid punishment, a Canadian bank operating stateside will have to spend much more on anti-money laundering measures than an equivalent U.S. bank.

Another tactic could be limiting access to shared financial infrastructure, such as government liquidity programs or bank deposit insurance. Trump could also try to increase the hoops that TD, BMO, and RBC must leap through to maintain their all-important accounts at the Federal Reserve, which provides access to Fedwire, the U.S.'s crucial large-value payments system.

Trump’s regulators could also impose higher capital requirements on Canadian banks compared to their U.S. peers, forcing the parents to divert ever more resources to their U.S. subsidiaries.

If Canadian banks are squeezed hard enough, they may eventually be forced to sell their U.S. operations at distressed prices. Trump could worsen this situation by imposing punitive exit fees, ensuring that Canadian banks take even bigger losses on the sale of their U.S. subsidiaries. The impairments caused to the parents' bank balance sheets would weaken the Canadian banking system and might even force the Federal government to step in with financial aid.

Meanwhile, the discounted assets of Canadian banks could be handed over to Trump’s preferred U.S. banking CEOs. Trump, after all, seems to be on course to building a kleptocracy, and key to that is the leader's ability to generate a series of gifts (i.e. acquisition approvals) that can be bestowed on business leaders who have demonstrated their obeisance.

To limit the damage, Canada may need to act quickly. The first step is freezing any further U.S. investment by BMO and the others. If Canadian banks are already financial hostages, deepening their exposure would be reckless. Bank executives may very well have already halted their U.S. growth plans of their own accord, but if not, high-level discussions with Canadian officials should drive home the urgency of the situation.

Instead of doubling down on the U.S., Canadian banks should pivot toward growth opportunities in Europe, the U.K., Australia, Latin America, and Asia. Our banks have histories dealing with these geographies. Bank of Nova Scotia, for instance, is one of the leading banks in the Caribbean and Central America.

Finally, there’s also a case to be made for a preemptive retreat. Bank of Montreal, Royal Bank, and TD Bank could start selling off their U.S. operations today before things escalate. It's a terribly difficult step to take; Canadian banks have spent decades painstakingly building their U.S. franchises. But by exiting now, they could secure better prices and avoid becoming tools for harming Canada down the road.

What was once a symbol of Canadian financial success—our banks’ expansion into what used to be a friendly U.S.—has become a national security risk. Hoping Trump forgets his fixation on the Canadian banking system and his dream of annexing us is not a strategy. There’s a high chance he won’t, and Canada must prepare accordingly.

Trump-proofing Canada means ditching MasterCard and Visa

We're all busy doing our best to boycott U.S. products. I can't buy Special K cereal anymore, because it's made in the U.S. by Kellogg's. But I'm still buying Shreddies, which is made in Niagara Falls, Ontario. Even that's a grey area, since Shreddies is owned by Post, a big American company. Should I be boycotting it? Probably. However, the disturbing thing is that I'm paying for my carefully-curated basket of Canadian groceries with my MasterCard.

If we really want to avoid U.S. products, we can't just vet the things we are buying. We also need to be careful about how we are doing our buying. Our Canadian credit cards are basically made-in-U.S. goods. They rely on the U.S-based Visa or MasterCard networks for processing. Each credit card transaction you make generates a few cents in revenue for these two American mega-corporations. It doesn't sound like much, but when multiplied by millions of Canadians using their cards every day, it adds up. Vigilant Canadians shouldn't be using them.

Canadians who want to boycott American card networks have two options. Go back to paying with cash, which is 100% Canadian. Or transact with your debit card. Debit card transactions are routed via the made-in-Canada Interac debit network.*

We're lucky to have a domestic debit card option. Our European friends are in a worse position, since many European countries (Poland, Sweden, the Netherlands, Finland, and Austria) are entirely reliant on MasterCard and Visa for both debit and credit card transactions. 

Unfortunately, going back to debit cards means doing without all of the consumer protection that credit cards offer in an online environment. Worse, you're giving up your credit card rewards or cash back. If you don't pay with your 2% cash back credit card, for instance, and use your debit card instead, which doesn't offer a reward, you're effectively losing out on $2 for every $100 you spend. This should illustrate to you, I hope, the golden shackles imposed on us by our U.S.-based credit cards. It's fairly easy to replace your American-grown tomatoes with Mexican ones or your U.S.-made car with a Japanese car. But networks, which tend towards monopolization, are not so easy to bypass.

Which gets us into the meatier issue of national sovereignty. The difficulty we all face boycotting the MasterCard and Visa networks reveals how Canada has let itself become over-reliant on these critical pieces of U.S financial infrastructure. My fear is that our neighbour's political leadership is only going to fall further into authoritarianism and belligerence, eventually making a play to slowly annex Canada—not by invasion, but by "Canshluss". If so, this will involve using our dependencies on U.S. systems, including the card networks, to extract concessions from us. "Canada, if you don't do x for me," says Trump in 2026, "we're TURNING OFF all your credit cards!" 

In anticipation, we need to remove this particular financial dependency, quick. We're already safe when it comes to debit cards; we've got Interac. But we need the same independence for our credit cards. More specifically, we need to pursue an end-goal in which all Canadian credit cards are "co-badged". That means our credit cards would be able to use both the Visa/Mastercard card networks and Interac (or, if Interac can't be repurposed for credit cards, some other yet-to-be-built domestic credit card network). With co-badging, if your credit card payment can't be executed by Visa because of a Trump freeze order, at least the Canadian network will still process it.

This is how the French card system works. While much of Europe suffers from a massive dependency on MasterCard and Visa, France is unique in having built a 100% French card solution. The local Carte Bancaire (CB) network can process both French debit card transactions, like Interac can, but goes one step further by also handling French credit card purchases. Before paying for their groceries with a card, French card holders get to choose which network to use, the local one or the international one.

THIS IS WHAT CANADA NEEDS: This French credit card, issued by Credite Agricole, is co-badged with the domestic Carte Bancaire (CB) network and the international MasterCard network. When incidents occur on one route (CB, for instance), traffic is automatically routed to the back-up route, MasterCard, and vice versa. I think that a Canadian solution to the Trump problem would look something like this French CB card.

The incoming Carney government should move to co-sponsor a CB-style domestic credit card network along with the big banks (perhaps a simple upgrade to Interac will do?). All Canadian financial institutions that issue credit cards would be required to co-badge them so that Canadians can connect to this new network as well as Visa or MasterCard. Even if annexation never actually occurs, at least we've got a more robust card system in place to deal with outages arising from hacking or natural disasters.

Along with France, we can take inspiration from India, which introduced their Visa/MasterCard alternative, Rupay, in 2012. Thirteen years later, RuPay is now a genuine competitor with the American card networks. I can't believe I'm saying this, but we can also use Russia as a model, which was entirely dependent on Visa and MasterCard for card payments until it deployed its Mir card network in 2016—in the nick of time before Visa and MasterCard cut ties in 2022.

Europe will have to push harder, too. The EU has been trying to rid itself of its Visa and MasterCard addiction for over a decade now, without much luck. Its first attempt, the Euro Alliance of Payment Schemes, was abandoned in 2013.  (In fact, one of the reasons the European Central Bank is exploring its own digital currency is to provide an alternative to the American card networks.) As Canada builds out its own domestic credit card workaround, we can learn from the European mistakes.

The U.S. is no longer a clear friend. Boycotting U.S. products is one thing. But if we truly want to reduce the external threat, we need to build our own card infrastructure—before it's too late.

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* In-person debit payments are processed by the Interac network. However, online debit card transactions default to the Visa or MasterCard networks. While Interac does allow for online purchases, many retailers don't offer the option, and when they do, the checkout process requires the user to log into their online banking, which is more of a hassle than using a card.

Trump claims US banks can't open in Canada—US banks disagree

In what seems to be an effort to extort Canada for additional benefits, Donald Trump complained yesterday on social media that CANADA DOESN'T EVEN ALLOW U.S. BANKS TO OPEN OR DO BUSINESS THERE. And so according to Trump, Canada doubly deserves to be disciplined with tariffs.

Well, if it's true that U.S banks aren't allowed to do business in Canada, then why in god's name is one of the U.S.'s largest banks doing business in downtown Toronto?

Citigroup Place, 123 Front St. West, Toronto, Ontario, Canada

Citi has been operating in Canada since 1919 and currently has 1,700 Canadian employees. According to OSFI, Canada's bank regulator, the bank earned C$35 million in Canada in the first three quarters of 2024 and has C$5.49 billion in Canadian assets as of September 30, 2024. 

In short, Trump was either lying, misinformed, crazy, or some combination of those three.

Canada allows foreign banks to enter our banking industry by requiring them to set up a domestic subsidiary and applying for a Schedule II banking charter. Schedule II banks can operate in all of the same lines of business as mainstay Canadian banks (i.e. Schedule I banks) like Royal Bank or Bank of Montreal. There are 16 Schedule II banks in Canada, three of which are American. (In addition to Citi, the other two are Amex Bank and JP Morgan.)

Some folks on social media tried to reinterpret Trump's complaint: "But JP, what Trump really meant to say is that Canada doesn't allow U.S. banks to serve retail customers." As proof they cited the fact that if you walk into a Citi office in Canada, Citi won't allow you to open a personal chequing account.

The reason that Citi won't give you a personal chequing account isn't because the rules prevent them from doing so. Rather, Citi (along with Amex and JP Morgan) have chosen not to enter the Canadian retail banking market, preferring to focus instead on other types of Canadian banking, like commercial and investment banking. If Citi, for instance, wanted to set up a retail branch network, it could. In fact, Citi once had a small five-branch retail banking network in Vancouver and Toronto, offering personal chequing and savings account, term deposits, loans, mortgages, mutual funds and RRSPs. But it sold out in 1999 to Canada Trust, which was ultimately bought by TD Bank.

Other foreign banks have also set up Schedule II banks with a retail presence, only to sell out to domestic banks. HSBC Canada, owned by its British parent, became Canada's seventh largest bank—one that was notably successful in offering mortgages to retail customers—but was recently offloaded by its parent to Royal Bank, a Schedule I bank. ING Canada, owned by Dutch-based ING Bank, created one of Canada's most popular discount retail banks, ING Direct, but sold it to Scotia Bank in 2012, which rechristened the discount bank Tangerine Bank.

The lone Schedule II foreign bank I'm aware of that still serves retail customers is ICICI Bank, which is owned by its Indian parent.

Why are U.S. and foreign banks reticent to compete in Canada's retail banking market? Contrary to perceptions that Canadian banking is slow and lazy, it's actually quite difficult to make much headway in Canada. The Big-5 banks, plus National Bank, which counts as half a big bank, have built strong retail branch networks that span the entire country. They compete rigorously for consumer deposits, offering higher interest rates than U.S. banks offer to Americans, suggesting a more cut-throat market than south of the border. In short, U.S. banks don't have the cojones to cross the border and compete head-to-head against Canada's more competitive behemoths. Citi already tried. It gave up.

By contrast, the U.S. is an easier market for a foreign bank to enter because its banking industry is more fragmented. And many Canadian banks have entered, with TD Bank and Bank of Montreal occupying 10th and 13th spot respectively on the list of largest U.S. banks. This fragmentation is the residue of the U.S.'s refusal (until recently) to allow banks to set up branches across state lines. By contrast, Canada has always had fairly permissive rules about establishing cross-country banking networks. The irony here is that Trump's complaints about lack of openness best apply to the U.S., historically the culprit when it comes to tamping down the spread of banking.

Canadian banks' U.S. and international exposure has increased over time. A recent Bank of Canada study finds that our banks now have more foreign liabilities (i.e. deposits) than domestic liabilities. (See chart below). More precisely, 57% of all Canadian banks' liabilities are now foreign. As for our banks' asset mix, foreign assets are poised to surpass domestic assets in the next year or two, if trends continue.

Rising Canadian bank exposure to the rest of the world. Source: Bank of Canada

The reason for this outward migration is clear. Canada's saturated retail banking market offers few opportunities for growth, but other parts of the world are less saturated, and so these jurisdictions offer Canadian banks ideal avenues for acquisitions and growth.

This gives us an additional vantage point for viewing Trump's absurd comments about Canadian banking. He may not be saying that Canada's banking system is closed, but that the U.S. banking system is now effectively shut off to additional acquisitions by Canadian banks, as part of some sort of America First banking policy. This implicit threat of a foreign banking blockade may explain, in part, why the price of Canadian bank stocks fell so much more than the broader Canadian market yesterday. Their avenues for growth may have just narrowed.

Your finances are being snooped on. Here's how

We all have a pretty good idea that our finances are being snooped on, but most of us aren't quite able to articulate how. We know that we're being snooped on by two groups, corporations and the government. This post will focus on how the government surveils our transactions, because democratic governments generally (but certainly not always!) tell us ahead of time what information they will gather, and how the data will be used.

Governments snoop on law abiding citizens' financial data for good reasons – they are trying to trace the money in order to catch bad guys. The government has been given the power to collect this information without having to ask a judge for approval, say by requesting a search warrant. 

I think there is a degree of acceptance among citizens that some amount of warrantless financial snooping is okay, because it reduces crime. But as the intensity of surveillance increases it eventually reaches creepy territory, at which point most of us would prefer the brakes be applied.

Where is this line? I'm a committed comparativist. To get a good sense of how one is snooped on, and whether it has passed over the line to being creepy, one needs a reference point. So in this blog post, I'll compare how two groups of citizens – Americans and Canadians – are being surveiled by their respective governments, so that both groups can better understand, by reference to each other, where they stand.

The first section focuses on the inflows of personal financial data from citizens to the government. The second section will focus on the outflows of data from the government to law enforcement.

***How citizens' personal financial data flows into the government***

Both the U.S and Canadian governments collect large amounts of financial data about their citizens. They do so by requiring banks and other financial institutions to record information about their customers and submit reports to the government about their customers' transactions when certain triggers have been met.

First, let's touch on the total amount of data being hoovered up. On this count, Canada far exceeds the U.S. In the 2022-23 reporting period, Canadian financial institutions submitted a total of 36 million reports to the government containing information about Canadians' financial transactions. That's almost one report per Canadian every year. 

Meanwhile, U.S. institutions sent 27.5 million reports to their government about Americans' financial dealings in 2023, a rate of around 0.1 report for every American, which is ten-times less intensive than in Canada. So based purely on the quantity of data collected, Canada seems to be closer to the "it's getting uncomfortable" level than the U.S. (See table below).

What accounts for this big difference in reporting intensity? In short, it's due entirely to cross-border wire transfers. In Canada, every electronic fund transfer leaving or arriving in Canada must be reported by banks to the government if it sums up to $10,000 or more. So if you've sent an $11,500 wire transfer from your Bank of Montreal account to your son or daughter who lives in London or Paris, congratulations, your name is in a Canadian government database. Or if you run a business and have received a $15,000 digital payment from a U.S. company for services rendered, your corporate data is sitting somewhere in an Ottawa government server.

If you're an American making a foreign wire transfer, your information will not get sent to a government database. The U.S. authorities do not require financial institutions to submit personal information on digital cross-border flows. (Mind you, they have been trying for some time to get the ability to collect this data.)

In the 2022-23 financial year, 27 million of these cross-border wire reports were submitted by Canadian banks, accounting for the lion's share of all 36 million reports submitted to the Canadian government that year.

Apart from cross-border transaction reporting, the nature of Canadian and U.S. eavesdropping is broadly similar.

Let's start with cash transaction reports, or CTRs. When a Canadian goes to their bank and deposits $10,000 or more in cash, the bank will generate a report that it sends to the Canadian government. U.S. banks report deposits and withdrawals of $10,000 in cash to the US government.

So if you're selling a used car and the buyer pays you $12,000 in banknotes, and you deposit that to your bank account, you're now in a government database, whether that be in Canada or the U.S.

Canadian banks generated 8 million CTRs in 2022-23 whereas U.S. banks generated 20.8 million in 2023. Pound for pound, Canadian banks submit more cash transaction reports to their government than U.S. banks, around 0.21 per Canadian compared to 0.06 per American. I'm not sure why. The threshold for reporting a cash transaction in Canada is lower in the U.S. (CAD$10,000 is worth around US$7,300) which may explain some of the difference? Dunno.

With CTRs and cross-border wire transfers, the invasiveness is kept relatively low thanks to the objective criteria that triggers a filing. Exceed the $10,000 threshold and at least you know ahead of time that your information is going to be recorded. A law-abiding citizen who is uncomfortable having their finances being collected by the government can choose to avoid sending cross-border payments or dealing in large amounts of cash. But this objectivity doesn't exist with the next type of report: those related to suspicious activities. 

On both sides of the border, financial institutions must submit reports about transactions deemed suspicious to their respective governments. If you've made a transaction that a bank deems to be suspicious, you'll never know that you've landed in a government database. That's because banks are prohibited from notifying their customers that their activity has been snitched on.  

The determination of what qualifies as suspicious involves a fair amount of subjectivity. Canada requires that financial institutions have a reasonable grounds to suspect that a transactions is linked to terrorism or money laundering before reporting it. That means that mere hunch won't cut it – a Canadian banker must be able to articulate a clear reason for suspicion. Mind you, there's no penalty for banks that fail to attach a specific reason to a report, so the reasonable grounds to suspect standard is often ignored. 

We know that many of these hunch-based reports end up in the government's database. Over the years the Office of the Privacy Commissioner of Canada has collected a list of reports that failed to reach the reasonable grounds to suspect standard, including one case in which some individuals were suspected simply because they had Middle Eastern passports:

From the Office of the Privacy Commissioner's 2017 audit of FINTRAC [source]

My reading of the U.S. requirements for reporting a suspicious transaction suggest a looser standard than in Canada. While U.S. bankers are encouraged to provide a specific red flag in their CTRs, the implementing regulations say they can still file a report if they merely "suspect" a transaction to be associated with money laundering or terrorism, which is a lower standard then the requirement to have a "reason to suspect."

In Canada, there is no size threshold for suspicious activity reporting: even a $50 payment can be reported by a bank. By contrast, the U.S. has set a $5,000 threshold before a suspicious action report must be filed. (When suspicious activity reports were first introduced to the U.S. in 1994, the government floated the idea of not including a threshold at all, as Canada would later do in 2001, but retreated because this would impose a "burden of reporting.")

This difference in thresholds suggests Canada should have a much higher intensity of suspicious transaction reporting than the U.S. Not so. Canadian banks generated 560,858 suspicious transaction reports in 2022-23, around 1.4 reports for every 100 Canadians. Compare this to the 4.6 million reports filed by U.S. banks in 2023, which also comes out to 1.4 reports per 100 Americans. So even though bankers in the U.S. are required to ignore small suspicious transactions below $5,000, they more than make up for it by reporting a larger proportion of transactions than Canadian bankers do. I can only guess why, but this may be due to the looser standard for suspicion, discussed above.

There are several other types of transactions that must be reported to the government, including large virtual currency reports in Canada and foreign bank and financial accounts reports (FBAR) in the U.S., but the volume of this sort of reporting isn't as significant as the other types already discussed, so I won't touch on them.

So to briefly sum up, pound for pound a Canadian is more likely to appear in their government's financial database than an American is. This is because Canadian financial institutions collect personal information linked to cross-border wire transfers – the U.S. doesn't. The most privacy-invasive reports are suspicious ones. Compared to Canadian banks, U.S. banks are more trigger-happy when it comes to deeming a given transaction as suspicious, but the US$5,000 floor on reporting suspicious transactions somewhat mitigates this eagerness. 

Having dealt with what sorts of data flow in to the government, let's talk about what happens next with the data.    

***How personal financial data flows from the government to law enforcement***

The personal financial data accumulated by the two governments are managed by each nation's respective financial intelligent unit, or FIU. In Canada, this institution is known as the Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC. In the U.S., the body that collects personal financial data is known as the Financial Crime Enforcement Network, or FinCEN.

It's here with the management of harvested financial data that the policies of the two countries really start to diverge.

To begin with, let's start with the length of time that data can be kept. In the U.S., FinCEN holds data indefinitely, so its database is forever growing. Canada allows FINTRAC to keep data for at least ten years and up to fifteen years, but after that FINTRAC must destroy any identifying information if it was not disclosed to law enforcement. Since most of FINTRAC's data is not disclosed, that means large amounts of data fall out of FINTRAC's database every year, and thus the amount of personal information collected grows at a slower rate than FinCEN's data hoard.

The differences between the two countries grows even wider when it comes to the question of who has access to citizens' financial data. In brief, U.S. law enforcement is granted broad access to the raw data whereas Canadian law enforcement's ability to see the data is strictly limited.

472 different U.S. law enforcement agencies at the Federal, state, and local levels have the ability to directly query FinCEN's database of CTRs, suspicious activity reports, and more. This amounts to around 14,000 law enforcement officers who can search through the personal financial data of American citizens. In 2023, these 14,000 users conducted 2.3 million searches using FinCEN's query tool.

FinCEN's data can also be downloaded in bulk form to the in-house servers of eleven different federal agencies, including the FBI, ICE, and the IRS. Bulk access (also known as Agency Integrated Access) means that the FBI, ICE, IRS, and eight other agencies don't need to use FinCEN's query tool. This bulk data can be access by another 35,000 agents. Alas, FinCEN doesn't track how many in-house searches were conducted by these agents in 2023, but I'd guess it's in the tens if not hundreds of millions.

By contrast, Canadian law enforcement agencies do not get direct access to FINTRAC's financial data trove. Instead, FINTRAC employs an internal force of a few hundred data analysts to parse the database for clues that suggest participation in money laundering or terrorist financing. Only when FINTRAC employees have attained a reasonable grounds to suspect that a pattern of transactions has crossed the line can they pass a report on to a Canadian law enforcement body, such as the RCMP or municipal police. This report is known as a financial intelligence disclosure and includes information like the name of the transactor, their address, telephone number, criminal record, and more.

FINTRAC submitted 2,085 of these disclosures to law enforcement in 2022-2023.

So to step back for a moment, tens of thousands of U.S. law enforcement officials conduct tens of millions of searches through Americans' personal financial data to get leads. In Canada, this same database can only be accessed a small number of FinCEN FINTRAC analysts, who selectively push a few thousand reports out to Canadian law enforcement each year. 

That's quite the contrast. Put differently, unlike their U.S. equivalents the RCMP, Sûreté du Québec, Ontario Police Police, and other policy agencies do not have the power to pull personal financial data willy-nilly from the government's database. This means far fewer eyeballs on Canadian financial records. As far as protecting the financial privacy of citizens, the Canadian access model does a better job. The U.S. access model is friendlier to law enforcement and stopping crime.

A disadvantage (or advantage, depending on your tolerance for being watched) of the American system is it allows the 11 agencies with bulk access to create "data cocktails" – personal financial data downloaded from FinCEN spiked with their own data sources – in order to better investigate suspects. For instance, according to a 2009 report from the Government Accountability Office, the FBI incorporates bulk FinCEN suspicious activity reports into its Investigative Data Warehouse along with 50 other data sets from different sources. The IRS's Reveal System, portrayed below, ingests FinCEN reports along with tax data to conduct more complex investigations.

The IRS's Reveal System, which ingests FinCEN CTRs along with other non-FinCEN data [source]

I don't know if the FBI and IRS data cocktails still exist, and in what form, but they certainly give a flavor of what sorts of broad access law enforcement can get to personal financial records in the U.S.

By contrast, Canadian law doesn't allow for U.S.-style data cocktails. An agency like the RCMP can't mix FINTRAC's store of personal financial data with their own bespoke data sources because the RCMP is prohibited from pulling raw CTRs, cross-border wire transfer reports, and suspicious transaction reports out of FINTRAC. Only FINTRAC gets to determine what information gets pushed out to the RCMP.

This firewall isn't accidental. As Horst Intscher, a former director of FINTRAC explains, a degree of privacy protection was purposefully built into FINTRAC's original design: "Because of the very broad range of information that the [Proceeds of Crime (Money Laundering) and Terrorist Financing Act] makes it possible for us to receive from reporting entities, it was determined at the original passage of the legislation that protections had to be built, so it would not be construed that there was a flow-through of massive amounts of personal information directed to law enforcement agencies."

In other words, FINTRAC was designed to prevent the likes of the RCMP from creating an FBI-style Investigative Data Warehouse. 

However, the wall imposed between Canadian law enforcement and FINTRAC does have a degree of porosity, enough to provide law enforcement with an indirect way for pulling data out of FINTRAC. If the RCMP is investigating a suspected money launderer, it can submit information about the suspect to FINTRAC in the form of a voluntary information record. For example, it might say that "Joe Blow and his sister-in-law Martha are the subjects of an investigation for drug trafficking and money laundering, and we just thought you should know that." This new data becomes part of FINTRAC's database, against which FINTRAC's agents will check all other data. If the agents spot a match, and it meets the bar for a "reasonable grounds for suspicion", then they must send the RCMP a disclosure containing the relevant personal financial information.  

In 2022-23 FINTRAC received 2,550 voluntary information records from Canada’s law enforcement and national security agencies (including from members of the public), a large number of these eventually boomeranging back to law enforcement in the form of a disclosure. How many? The head of FINTRAC once claimed that "65% to 70%" of FINTRAC's ultimate disclosures to law enforcement are triggered by voluntary information submitted by law enforcement, which hints at how porous the wall is.

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That sums up my comparison of the inflows and outflows of personal financial data to the U.S. and Canadian governments. This is just a cursory analysis. There are all sorts of other vectors across which to compare the scope of the two nations' data collection efforts that I haven't explored. I've focused on the factors that I think are the most important.

Readers from other countries may be curious to find out about their own FIUs to determine where they stand relative to Canada and the U.S. If so, leave your findings in the comments. My Australian readers, for instance, may be interested to note that their government collects far more private information than the U.S. and Canada combined. AUSTRAC, the Australian FIU, collected 192 million transaction reports in 2023, an astonishing 7 reports per Australian!  This is because AUSTRAC receives information on all cross-border wires, with no lower threshold.

At the outset of this article I suggested that many of us would tolerate some loss of privacy in order to make it easier for the police to catch criminals. A few of us will accept a large loss. Others will not tolerate even the smallest infringement on privacy. An individual's line in the sand is very much a personal matter. I'm going to leave it to the reader to decide which country (if either) approaches the right balance. Is Canada too lax relative to the U.S.? Does the firewall we've erected between the cops and the trove of financial information give criminals free rein? Or does the U.S. not sufficiently respect privacy? Should the FBI and its sister agencies lose some of their unfettered access to Americans' personal financial data?

What does the recent ruling on the Emergencies Act mean for your banking rights?

A Federal judge ruled last week that the emergency banking measures taken to end the Ottawa convoy protest in 2022 contravened the protestor's rights. In this post I want to provide my reading of this particular ruling and what is at stake for Canadians and their bank accounts. 

To be clear, Justice Mosley's ruling touched on far more than the banking measures, and extended to the broader legality of the government's invocation of the Emergencies Act on February 14, 2022, subsequently revoked on February 23. However, since this is a blog on money, I'm going to limit my focus to the banking bits of the court ruling.

(By the way, I've written about emergency banking measures a few times before.)

To remind you, there were two emergency banking measures enacted in February 2022 that affected regular Canadians. The most well-known measure was the freezing of bank accounts. The RCMP collected the names of protestors, and forwarded these to banks and credit unions, which used this information to locate protestors' accounts and immobilize their funds. In the end, 280 bank accounts were frozen.

The second and less well-known banking measure was the requirement that banks share protestors' personal banking information with the RCMP and the Canadian Security Intelligence Service (CSIS), including how much money the protestor had in their account and what sorts of transactions they made.

Justice Mosley has ruled that these banking measures – both the freezing and the sharing – violated the Canadian Charter of Rights and Freedoms. Specifically, they contravened Section 8 of the Charter, which specifies that everyone has the "right to be secure against unreasonable search or seizure."

The best way to think about Section 8 is that all Canadians have privacy rights. These rights cannot be trodden on by the government. The police can't conduct unjustified personal searches of your body or home, say by snooping on your credit card transactions. Nor can they seize your bank statements or your computer in order to gather potentially incriminating information on you.

This doesn't mean that a Canadian can never be subject to searches and seizures. Section 8 doesn't apply when the person who is subject to a search or seizure has no privacy rights to be violated. So for example, if I leave my old bank statements in the trash on the curb, it's likely that I've forfeited my privacy rights to them, and the police can seize and search them without violating Section 8 of the Charter.

An interesting side point here is that Canadians don't forfeit their privacy rights by giving up their personal information to third-parties, like banks. We have a reasonable expectation of privacy with respect to the information we give to our bank, and thus our bank account information is afforded a degree of protection under Section 8 of the Charter.

My American readers may find this latter feature odd, given that U.S. law stipulates the opposite, that Americans have no reasonable expectation of privacy in the information they provide to third parties, including banks, and thus one's personal bank account information isn't extended the U.S. Constitution's search and seizure protections. This is known as the third-party doctrine, and it doesn't extend north of the border.

Canadians can also be lawfully subject to searches and seizure by the police if these actions are reasonable, as stipulated in Section 8 of the Charter. There are a number of criteria for establishing reasonableness, including that a search or seizure needs to be authorized by law, say by a judge granting a warrant. In addition, the law authorizing the warrant has to be a good one. (Here is a simple explainer.)

Before we dive into why Justice Mosley ruled that the government's bank account freezes and information sharing scheme violated Canadians' rights, we need to understand the government's side of argument.

On the eve of invoking the emergency measures, Prime Minister Justin Trudeau promised that the government was "not suspending fundamental rights or overriding the Charter of Rights and Freedoms." He reiterated this a week later after the Emergencies Act had been revoked:

When we invoked the Emergencies Act on Monday of last week, we had three principles in mind: restoring peace and order, making sure the measures were proportionate and compliant with the Charter of Rights and Freedoms, and making sure it was time-limited.

— Justin Trudeau (@JustinTrudeau) February 24, 2022

But what about the legal specifics of the banking measures? Were they compliant with the Charter, and how? Government lawyers argued from the outset that the requirement for banks to share personal banking information with the RCMP and CSIS did not violate Section 8 of the Charter. While the sharing order constituted a search under Section 8, it was a reasonable search, they said, and reasonable search is legitimate.

As for the freezes, and here things get more complicated, the government maintained that they did not constitute seizures at all, and thus weren't protected under Section 8. The government begins with a literal argument. The funds in the 280 frozen bank accounts were not taken or seized; rather, banks were simply asked to "cease dealing" with some of their customers in such a way that these customers never lost ownership of their funds. This was a mere freeze, the government claims, rather than a harsher sort of government "taking" of funds , say like a Mareva injunction, warrant of seizure, or restraint order, all of which are seizures under Section 8 of the Charter.

As back up, the government offered a more technical argument. According to Canadian legal precedent, it is only certain types of government searches and seizures that trigger Section 8 protections. These are laid out in a case called Laroche v Quebec (Attorney General). Specifically, only those seizures occurring in the process of an investigation and prosecution of a criminal offence are protected. The government maintains that the freezes it placed in February 2022 were not related to a criminal offence – they were merely designed to "discourage" participation in the protest – and so they were not the sorts of seizures protected by the Charter. (The government's full argument that it laid out for Justice Mosley here.)

The invocation of the Emergencies Act required the independent inquiry be launched, the results of which were released in February 2023. The commissioner of that inquiry, Justice Rouleau, ended up siding with the government's assessment of the legality of the bank account freezes. The freezing of accounts was "not an infringement" of section 8 of the Charter, wrote Rouleau, because they were not a seizure.

Here I'm going to briefly inject my own personal thoughts as a citizen blogger.

Look, I think it's a good thing that the government has various financial buttons at its disposal that it can press to lock or restrict my funds, like restraint orders. But I also think its a good thing that these buttons are subject to certain controls, one of which is that they must respect my basic rights, even in an emergency situation. I find it somewhat worrying that in this particular case the government seems to be arguing that it has at its disposal a new type of "immobilize funds" button that is completely exempt from charter oversight due to the fact that it, somewhat arbitrarily, escapes definition as a seizure. This seems like a distinction without a difference to me.
 
Disagreeing with both Justice Rouleau and the government's logic, Justice Mosley in his judicial review ends up siding with the counter-arguments deployed by two civil liberties organizations that opposed the government in the case. (Their respective arguments are laid out here and here).

First, regarding the sharing of information with the RCMP and CSIS, Mosley rules this constituted a search covered by Section 8. Contra the government, these searches were not reasonable, and thus they violated the protestors' Charter rights.

While the government had argued that the searches were reasonable due to their limited duration and targeted focus, the judge finds that they lacked an "objective standard." Banks only needed a "reason to believe" that they had the property of a protestor before reporting the information to the RCMP or CSIS, but according to Mosley this criteria was too wide and ad hoc to qualify as reasonable. Would a hunch or a rumour qualify as a "reason to believe"? Perhaps.

The searches were also unreasonable, according to Justice Mosley, because they had none of the other well-defined standards for reasonable search, including a lack of prior authorization for each search by a neutral third party like a judge. In February 2022 it was bankers, not judges, that carried out the searches, assembly line-like.   

As for the freezes, Justice Mosley disagrees with the government's arguments, finding that the freezing of bank accounts did indeed constitute a seizure of the sort protected by Section 8. Adopting the viewpoint of a regular Canadian, he first argues that a "bank account being unavailable to the owner of the said account would be understood by most members of the public to be a 'seizure'."

Mosley proposes an alternative opinion that it was the forced disclosure of the financial information by banks to the RCMP and CSIS that constituted a seizure. In this reading, what was being seized was personal payments and ownership data. The protestors had a "strong expectation of privacy" in these financial records, and thus Section 8 is applicable.

So to sum up, a Federal court has deemed that the bank accounts freezes placed on protestors in February 2022 were indeed seizures, and not some other strange sort of freeze-not-a-seizure, and therefore they were subject to the Charter. As for the searches, they were unreasonable (as were the seizures). The government will be appealing to the Federal Court of Appeal, so these arguments will be re-litigated. Stay tuned.

My take is that Justice Mosley's rulings are reasonable and helpful guidelines for future governments seeking to levy banking measures in subsequent emergencies. The ruling doesn't expressly ban the levying of bank freezes, and that's probably a good thing. Let's not forget that the requirement for banks to cease dealings with protestors, albeit illegal in this particular case as per Justice Mosley, was a fairly effective measure. The threat of having their money immobilized helped get the protestors to leave, right? And not a single person was injured. Think of bank account freezes as the domestic version of foreign sanctions, a way to bloodlessly defuse an emergency situation and avoid sending in the more deadly cavalry. This seems like a good tool, no?

The catch, as Mosley suggests, is that the government needs to tighten up the the process of freezing bank accounts come next emergency so that they are constitutional. How tight? One might argue that the standard for freezes shouldn't be as high as a regular restraint order on funds during a non-emergency. On the other hand, freezes shouldn't become some sort of dark tool for circumventing the Charter.

How is the foreign expansion of Canadian banks going?

With the high profile nixing of TD Bank's purchase of First Horizon Bank last month, I thought I'd take a step back and try to visualize the last few decades of Canadian bank expansion outside of the country.

What I've done is go through the annual reports of the big-5 banks at five-year intervals in order to make a few charts out of each bank's total loan data. More specifically, I measure the big bank's foreign presence by comparing their domestic lending to lending made outside of Canada. For those who don't know, the big-5 are made up of Royal Bank, Toronto Dominion, CIBC, Scotiabank, and Bank of Montreal.

My first chart is the total amount of bank loans issued by the big-5, separated into Canadian loans and non-Canadian loans. (This category that also includes bankers' acceptances.)

Unsurprisingly, both domestic and international lending in 2022 were far higher than in 1995, with international loans rising above $1 trillion in 2022. What pops out is that while lending within Canada has advanced over all periods, there was a decline in big-5 international lending between 2000 to 2005.

In the chart below I've used a logarithmic scale instead of an arithmetic scale in order to better visualize the 2005 blip.

What happened during that period? Canadian banks were damaged by loans they had made in the late 1990s tech craze that soured in 2001 and 2002, particularly in the U.S. As a result of these setbacks, the big banks dialed back their willingness to engage in risk and that's probably why we see a pullback in their foreign lending portfolios.

The next chart shows international lending as a percentage of all big-5 lending. 

This chart further delineates the severity of the 2000-2005 episode. In 2000, international loans constituted more than 25% of the big banks' portfolios of loans. After getting stung in the early 2000s, this proportion plummeted to 18%. It would took twenty years for Canadian banks to rebuild the international side of their loan portfolios back to 25%. By 2022, international loans constituted over 30% of all Canadian bank loans, providing an answer to the title of my blog post: the foreign expansion of Canadian banks is still advancing, and is at its highest peak going back to 1995.

One thing I find interesting is that the big-5 did not contract their foreign loans after the 2008 credit crisis. I suspect this is due to the fact that most Canadian banks that operate internationally tend to focus on loans to foreign businesses and governments, not foreign individuals or consumers, and since much of the fallout in 2008 was on the U.S. residential side of things, Canadian banks escaped mostly unscathed.

In the next chart, I've broken up foreign lending by bank. 

As you can see, TD Bank was the biggest foreign lender in both 2015 and 2022, followed by Scotiabank, which had historically held the crown over the entire 1995-2022 period. Apart from the recent nixing of TD's attempted purchase of First Horizon Bank, TD has executed a very successful push into the U.S. over the last two decades starting with its acquisition of Banknorth in 2005, and now sits as the U.S.'s tenth largest bank.

As for Royal Bank, while it may be Canada's most valuable company by market capitalization, in 2022 it was only a middling foreign lender, hitting the same level of foreign loans as the much smaller Bank of Montreal. The laggard in the group is CIBC. But CIBC was also one of the fastest growers between 2015 and 2022, albeit from a very low base, no doubt helped by its 2016 acquisition of US-based PrivateBank.

As before, here's the same chart as above, but using a logarithmic scale.

A logarithmic scale gives move insight into how leadership in foreign lending has changed since 1995. Of the big five banks, TD was the smallest foreign lender in 1995. Now it leads the pack. As for CIBC, it was one of Canada's leading foreign lenders in 1995, but between 2000-2005 it went cold turkey. Long-time Canadian bank watchers will recall that of all Canadian banks, CIBC was the most aggressive in pushing into the U.S. in the late 1990s, particularly on the investment banking side with CIBC World Markets. But it got caught up in notable failures like Enron and, chastened, retrenched back to the low-risk world of Canadian retail banking.

For my last chart, here is a bank-by-bank breakdown of international lending as a total of all bank lending. 

You can see that Canada's smallest domestic lender, the Bank of Montreal, has spent much of the last thirty or so years as Canada's most international bank, measured in terms of international lending as a proportion of all lending. This is most likely due Bank of Montreal's long and successful presence in the U.S midwest, going back the early 1980s when it bought Harris Bank. Scotiabank has also been a leader in international lending, focusing mostly on Mexico and Latin America.

Royal Bank's lack of focus on international lending can probably be partly blamed on its lacklustre experience with Centura Bank, a franchise it bought back in 2001 and expanded over the next few years with additional acquisitions, renaming it RBC Bank. But Royal's RBC effort never worked out and Royal sold it in 2012.

What to expect in the future? 

Having locked up most of the Canadian banking market, it's all but inevitable that Canada's big banks will continue to push into foreign markets, especially the highly-fragmented U.S. banking market. There will be failures such as the rotten loans made during the late 90s bubble, but as before Canadian banks will learn from these. While TD's acquisition of First Horizon was cancelled, Bank of Montreal's purchase of Bank of the West last year went through, which moves it from 23rd to 13th on the list of biggest U.S banks. 

And there is a giant waiting on the sidelines. Having relaunched its push into the U.S. with its acquisition of City National Bank in 2015, Royal Bank is probably due for another big U.S. takeover.

To conclude, by 2025 Canada's big-5 banks will likely be even more reliant on international loans, with perhaps as much as as 34-35% of all their lending being to non-Canadian sources.

Zelle vs Interac e-Transfer, or why it's so difficult to kickstart a payments network in the U.S.

It's difficult to grow a payments product to universality in the United States, and that's partly due to the fact that the U.S. has a stunning 4,127 banks, 4,760 federal credit unions, and 579 savings & thrifts institutions, for a total of 9,466 depository institutions.*

Let's compare that to Canada. The rule of ten applies to most Canadian/U.S. comparisons. That is, the U.S. has around 10 times the population, so to get Canadian equivalents just divide by ten. (For example, there are 13,515 McDonald's restaurants in the U.S. Meanwhile, Canada has 1,363. That's almost perfectly in-line with the rule of ten's prediction.)

The rule of ten suggests that if the U.S. has 9,466 depository institutions, then Canada should have 946. But that isn't the case. Canada has 81 regulated banks and around 208 credit unions, for a total of just 289 depositories. (I am counting the 213 credit unions belonging to the Desjardins co-operative federation as one entity.)**

The rule of ten particularly fails with respect to banks. Canada has just 81 banks, not 412 as suggested by the rule. Banks are more influential than credit unions because they tend to be much larger.

So why is this data relevant to payments? A payments network is really only useful if it has a lot of participants on it, but a lot of participants aren't going to be on it in the first place if it isn't useful. That's the chicken-and-egg problem of payments networks.

To solve the chicken-and-egg problem, it helps to have a few large actors – a vanguard – commit to using the network at the outset, which kickstarts its usefulness, and then everyone else gets dragged into joining up. Voila, universal payments.

When you've got 9,466 depository institutions, it's hard to build a strong vanguard group in order to drive quick adoption of a new payments network.

Take The Clearing House's Real-Time Payments (RTP) network, for instance, a U.S. payments network which was launched in 2017. Out of the U.S.'s 9,466 depositories, RTP has attracted just 285 participating institutions, effectively limiting RTP's reach to 65% of all U.S. checking accounts. (The 65% number is from RTP's website.)*** That's not bad, but it's not great.

Another example is Zelle, a U.S. bank-owned person-to-person payments network that was introduced in 2017. By 2021, Zelle boasted 1,700 banks and credit unions on its bank-to-bank payments network. That's better than RTP, but according to Zelle, this still only represented 74%, or 577 million of all U.S. checking accounts, in 2021. (As of early 2023, Zelle reports having 1,900 financial institutions on its network, so it probably now connects 75-80% of all U.S. checking accounts.)

In Canada's case, with just 81 banks and 208 credit unions, it's much easier to build a vanguard group to drive a payments network forward.

For instance, Interac e-Transfer is the Canadian equivalent to Zelle, providing instant person-to-person transfers via bank and credit unions. As of 2023, Interac e-Transfer has 250 participating banks and credit unions. (It lists Desjardin Group, a federation of 213 credit unions, as a single entity). That's almost all of Canada's 289 depositories, and effectively 100% of all Canadian chequing accounts. That's ubiquity for you.

Admittedly, Interac e-Transfer has been around a lot longer than Zelle and RTP, having debuted in 2003, and so it has had more time to spread into all the cracks. (I wrote about Canada's big head start in instant payments a few years ago.) But even at the outset of the adoption process, e-Transfer enjoyed buy-in from Canada's five biggest banks (Royal, TD, Scotiabank, CIBC, and Bank of Montreal), which together owned 86% of all Canadian banking assets at year-end 2003. That's a huge vanguard group. The chart below, which uses 2022 data, gives a good feel for how significant this is.

I made this chart to show how diffuse the U.S. banking system is compared to the Canadian one.

The assets of the top-6 🇺🇸 banks represent a much smaller proportion of total banking assets than the top-6 🇨🇦 banks. pic.twitter.com/87sd1p0kqd

— John Paul Koning (@jp_koning) April 24, 2023

The above chart also illustrates how small any U.S.-equivalent vanguard group will ever be. Zelle's 2017 group of 30 first-adopters may have seemed large on the face of it. After all, it included America's largest banks: JP Morgan Chase, Bank of America, Wells Fargo, Citibank, US Bank, PNC, and Capital One. Yet this vanguard still only constituted 52% of total U.S. banking assets, much less than the 86% committed to Interac e-Transfer on day one.

The diffuse nature of U.S. banking (and the concentrated nature of Canadian banking) will play into the upcoming launches of FedNow and Real-Time Rail (RTR), two instant retail payments system belonging to the Federal Reserve and Bank of Canada, respectively. I'd expect RTR usage to amp up quickly, given that Canada's big-5 banks will likely help sponsor it. FedNow adoption will lag. It's just not that easy to get 9,466 institutions on the same page.

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* Number of US banks and savings/thrifts is from FDIC. Data on credit unions is from the NCUA
** Number of Canadian banks is from OSFI. Number of credit unions is from CCUA
*** A tweet where I list my data source for RTP data