The capital markets segment accounts for one-quarter of Canadian banks’ earnings. But as capital markets undergo profound change—from regulatory developments affecting the CDOR rate and the CORRA rate, the electronification of markets and rising investor interest in environmental, social and governance (ESG) matters—the time is ripe for a transformation of this critical area of a bank’s business.
In this Transformation Talks audio blog, PwC Canada’s Samantha Paisley and Rani Turna, discuss how Canadian banks can chart the future of their capital market businesses, create new value and ensure continued growth.
Rani: Welcome to Transformation Talks, a PwC Canada series on the future of Canadian banks. My name is Rani Turna, PwC Canada partner. I'm joined by Samantha Paisley, PwC Canada partner and capital markets consulting leader. Welcome, Samantha.
Samantha: Thank you, Rani.
Rani: As Canadian banks continue to look for growth, why should they focus on capital markets?
Samantha: Well, two reasons really. First is, the Canadian banks play a fundamental role in both Canadian and global capital markets. And second, it is simply a very significant revenue stream for the banks.
As capital markets continue to innovate, there will always be new opportunities. We look at the most recent transition we're going through, from the evolution of how we trade, from voice to electronic. And while there have been a lot of headlines from Flash Boys, to flash crash, to meme stocks, certainly what it does bring is an incredible amount of efficiency to the capital markets. We also, of course, need them to be safe and transparent. So as we build trust in these new trading mechanisms, there will be an opportunity to take better advantage as well as embrace and mitigate the risks that it brings to create a sustained opportunity in the capital markets.
Rani: How do global peers see the opportunities for capital markets?
Samantha: When we look across the arena, all of the global players have been investing. Going into the pandemic before we knew there was one coming, there was a reduction in expenses and a reduction in investment. Fast forward that towards today, there is a 10% year over year increase in investments that have been played into the market. And so for Canadian banks to continue to play alongside their peers, they'll need to invest for growth.
Rani: So it certainly sounds like the bar is rising and there's lots of opportunity for our Canadian banks to invest in future growth.
Samantha: Absolutely. Technology innovation, the changing economy, new entrants to the market are all driving a transformational shift in the capital markets. When we look at the banks, they have four great assets; their people, their brand, their capital, and now their data. This is a once-in-a-generation moment to really think about the future strategy, the future investments, that's going to best set up capital markets and the banks for sustained growth.
Rani: Another area where we're seeing significant change in innovation is in ESG. Can you talk to us a little bit about ESG and capital markets?
Samantha: For Canada, our ESG transition will be unique in the role that we will play.
Our own Mark Carney led the pledge through GFANZ to secure $130 trillion that is required to achieve the net zero targets. When we look inward as a Canadian market, the gap for Canada is estimated to be $2 trillion. That's $2 trillion of net new dollars that needs to be raised and mobilized to the Canadian capital markets for us to achieve our own ESG targets.
Rani: In addition to ESG, there are other market changes that are coming. Can you talk to us a little bit about the transition from CDOR to CORRA?
Samantha: Yes, absolutely. We are slated for cessation when it comes to CDOR. So we're expecting to make the transition over a two-phase approach from June, 2023 and June, 2024.
Now the CDOR market is actually quite large. If the ESG transition for Canada felt big at $2 trillion, CDOR is 10 times that. It's a $20 trillion market.
Rani: That sounds very significant, Samantha. What is the expected impact of all of that?
Samantha: It certainly is. There are big changes coming ahead, and it's going to impact the entire financial system. The Canadian banks, they do have some lived experience with the LIBOR transition to date. However, the exposure for the Canadian system to LIBOR was quite limited versus where we are for CDOR. That $20 trillion market, it really is ubiquitous; it is everywhere, with everyone. So, from the banks, all the way through to the most personal aspects of our financial economy, our homes, how those are financed, and the mortgage bond market that supports them, through the CDOR reference rate, all the way through other areas of the economy. We think of workers compensation boards, and our payroll systems. All have an interconnected link to that CDOR market. So certainly it's going to be a very large transformational impact. It might not have the same brand recognition of LIBOR, but it's going to be a whole lot bigger for us.
Rani: With all of that coming down the pike, what is it that Canadian banks can do to prepare?
Samantha: There are three basic steps. First, stop adding to those CDOR exposures. Second is to get your arms around it. What exposures are you left with? And the third, start embracing the new. Build that capability to start transacting in the new CORRA-based products.
Rani: Samantha, thank you so much for joining us.
Samantha: Thank you, Rani.
"This is a once-in-a-generation moment to really think about the future strategy, the future investments, that's going to best set up capital markets and the banks for sustained growth."
Samantha Paisley is a Partner and Capital Markets Consulting Leader at PwC Canada. She brings more than 15 years of experience and has helped the world’s largest capital markets participants in areas including risk management, regulatory matters and technology programs.
Rani Turna is a Partner and Financial Services Risk Assurance Leader at PwC Canada. While she has spent most of her 30-year career in the accounting field at PwC Canada, Rani also served in a senior executive role as Chief Compliance Officer at a large Canadian financial institution.