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U.S. financial reforms pose risks to Canada, Carney warns

Bank of Canada Governor Mark Carney speaks during a session at the World Economic Forum in Davos, Switzerland, on Wednesday.

Michel Euler/AP

Bank of Canada Governor Mark Carney has warned that a key element of the U.S. financial reforms could sideswipe Canada and other countries, leaving government bond markets badly exposed to market shocks.

Echoing the concerns of Canadian banks and regulators, Mr. Carney said the proposed Volcker rule could undermine the health of the government bond market in Canada and elsewhere.

The Volcker rule prohibits banks from most forms of so-called "proprietary trading" – that is, trading in securities for profit, using the bank's own capital. The rule exempts the U.S. Treasury market but not foreign-government securities, and federal officials worry that, as a result, it will interfere with the liquidity of Canadian and provincial government bonds, potentially driving up the cost of borrowing for governments.

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"It reaches into those markets in terms of affecting what institutions potentially can do, and we think that is inconsistent and quite probably unwise," Mr. Carney told Reuters TV Wednesday in an interview from Davos, Switzerland, where he's attending the World Economic Forum.

He argued for an exemption for foreign-government bonds. "We are in the debt market every day selling debt. We know the value of market makers in the treasury market in Canada."

Mr. Carney made it clear that he was speaking as the head of Canada's central bank, not the other hat he wears – chairman of the Financial Stability Board, a global financial market regulator.

"You … need market makers, you need people who are willing to take some risk, including risk during difficult times," Mr. Carney explained.

"It is not clear here that, as currently structured, the Volcker rule accomplishes that. It appears to have some extraterritoriality to it, so that it reaches not just to market making or proprietary trading in the United States, but into other jurisdictions, including Canada, in a way that potentially could make our markets less resilient, rather than more resilient."

Nonetheless, Mr. Carney expressed confidence that continuing discussions with the Obama administration would resolve the problem.

The U.S. Congress passed the Volcker rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, part of the response to the 2008 financial crisis.

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Other Canadian regulators, including the federal Office of the Superintendent of Financial Institutions, have also complained that the Volcker rule will make it more difficult and expensive for Ottawa and the provinces to borrow money.

Canadian banks are also seeking an exemption that would allow them to continue operating their own mutual funds.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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