Canadian banks are taking on significantly greater risk as they look to grow their capital-markets operations, potentially setting themselves up for big losses in the future, says to a report by Moody's Investors Service.
The Big Six mostly avoided the financial crisis of 2008 and 2009, but they may not be so fortunate next time because of their increasing focus on volatile and uncertain wholesale banking profits.
Royal Bank of Canada, the biggest capital-markets player, last week reported a 93% drop in what it called trading revenue for the third quarter, down from more than $1-billion last year to $125-million.
Canadian banks face huge challenges as they struggle to find growth in a mature domestic market. As a result, the opportunities presented by wholesale banking, especially after the retreat of many global banks, are extremely appealing.
The trouble is that the risks involved are not always easy to see, as the banks recently learned first-hand.( Phooey!) Collectively, the Big Six lost more than $20-billion during the financial crisis, nearly all of it from investments outside of Canada, Moody's says.
Several of the big banks have been building their investment-banking operations in New York and London but have disclosed little about the nature of the business or their future growth plans.