21.3 Role of Canadian Banks in International Markets

The financial marketplace spans the globe, with money routinely flowing across international borders. Canadian banks play an important role in global business by providing loans to foreign governments and businesses. Multinational corporations need many special banking services, such as foreign-currency exchange and funding for overseas investments. Canadian banks also offer trade-related services, such as global cash management, that help firms manage their cash flows, improve their payment efficiency, and reduce their exposure to operational risks. Sometimes consumers in other nations have a need for banking services that banks in their own countries don’t provide. Therefore, large banks often look beyond their national borders for profitable banking opportunities.

Many Canadian banks have expanded into the United States. The arena that the Boston Bruins and Celtics play out of is now called the TD Garden. They have also expanded into overseas markets by opening offices in Europe, Latin America, the Caribbean, and Asia. They often provide better customer service than local banks and have access to more sources of funding.

For Canadian banks, expanding internationally can be difficult. Banks in other nations are often subject to fewer regulations than Canadian banks, making it easier for them to undercut Canadian banks on the pricing of loans and services. Some governments also protect their banks against foreign competition. For example, the Chinese government imposes high fees and limits the amount of deposits that foreign banks can accept from customers. It also controls foreign bank deposit and loan interest rates, limiting the ability of foreign banks to compete with government-owned Chinese banks.

No Canadian banks rank among the largest banks in the world. Table 21.4 lists the 10 largest international banks as of 2024 – while JPMorgan Chase is consistently ranked as the largest bank in the world, the other top banks often change position, depending on their holdings in any given month and how their size is determined. In recent years, several Chinese banks have grown larger than other well-known banks such as BNP Paribas (France) and Mitsubishi UFJ Financial Group (Japan).

Political and economic uncertainty in other countries can make international banking a high-risk venture. For instance, European and Asian banks were not immune to the financial crisis of 2007–2009. Several countries, including Greece, Portugal, Spain, and Ireland, continue to rebound slowly from the near collapse of their economic and financial systems they experienced during that crisis. Financial bailouts spearheaded by the European Union and the International Monetary Fund have helped stabilize the European and global economy.

The World Bank and International Monetary Fund

Two international financial organizations are instrumental in fostering global trade. The World Bank offers low-interest loans to developing nations. Originally, the purpose of the loans was to help these nations build infrastructure such as roads, power plants, schools, drainage projects, and hospitals. Now, the World Bank offers loans to help developing nations relieve their debt burdens. To receive the loans, countries must pledge to lower trade barriers and aid private enterprise. In addition to making loans, the World Bank is a major source of advice and information for developing nations.

The International Monetary Fund (IMF) was founded in 1945, one year after the creation of the World Bank, to promote trade through financial cooperation and eliminate trade barriers in the process. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses. It operates as a lender of last resort for troubled nations. In exchange for these emergency loans, IMF lenders frequently extract significant commitments from the borrowing nations to address the problems that led to the crises. These steps may include curtailing imports or even devaluing the currency.

Some global financial problems do not have a simple solution. One option would be to pump a lot more funds into the IMF, giving it enough resources to bail out troubled countries and put them back on their feet. In effect, the IMF would be turned into a real lender of last resort for the world economy. The danger of counting on the IMF, though, is the “moral hazard” problem. Investors would assume that the IMF would bail them out and would, therefore, be encouraged to take bigger and bigger risks in emerging markets, leading to the possibility of even deeper financial crises in the future.

References

Forbes India. (2024, May 6). The 10 largest banks in the world in 2024.  https://www.forbesindia.com/article/explainers/the-10-largest-banks-in-the-world/86967/1

Jazib, M. (2024, January 29). Top 10 largest banks in the world 2024. Jagranjosh.com. https://www.jagranjosh.com/general-knowledge/list-of-largest-banks-in-the-world-1706509334-1

Jimenea, A., Wu, J. & Terris, H., (2024, April 30). The world’s largest banks by assets, 2024. S&P Global. https://www.spglobal.com/marketintelligence/en/news-insights/research/the-worlds-largest-banks-by-assets-2024

Attributions

“21.3 Role of Canadian Banks in International Markets” is adapted from “Chapter 7: Money and Banking” in Introduction to Business by Seneca College, licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.