Toronto as Centre of Global Finance?
Post-banking crisis, making the case for ruthless positioning of Canada’s biggest city to supplant New York and London
Making Toronto a top centre for global finance involves leadership and strategy by the commercial sector, governments and the academy. It requires something that we may wish to call ‘Reverse Reaganism,’ whereby governments accept the role that they ought to play in shaping their own economy, rather than yielding the planning function to unfettered markets.
Specifically, Toronto needs an industrial policy focus by all three levels of Canadian government (federal, provincial, municipal) – a focus that has not been seen in recent Canadian history. For the record: Canada’s industrial policy is dwarfed by the massive commitment that government makes, through the treasury, and as a priority, to its fiscal performance. So much of governments’ energy goes into the budgetary process; not enough goes into industrial policy. There is simply not enough priority accorded to a strategic economic vision.
Every major industry is the sum of its parts. Disruptive changes in technology, human capital and consumer demand will be driven by these industry subsets. Toronto can become the global leader in three sub-segments of financial services: e-commerce, Islamic banking and resource financing. In so doing, the Toronto financial services industry will improve its overall global competitiveness, and reverse its lagging innovation – allowing the city to fulfill its full potential as a global financial hub.
Toronto is already recognized by the Global Financial Centres Index (GFCI) as one of only eight global leaders. Toronto is home to: two of the largest 10 global life insurers (with a third insurer having significant operations in Toronto); five of the world’s largest 50 banks; the third largest exchange in North America, and seventh largest in the world; four of the top 100 global pension funds; and operations of seven of the top 10 largest global hedge fund administrators.
Having said this, Toronto ought to quickly address its competitive weaknesses. Harvard’s Michael Porter observed, in 2008, that “Toronto trails its competitors in terms of advanced university programmes dedicated to finance.” This requires prioritization by the federal and Ontario provincial governments regarding university programmes and recruiting campaigns to attract immigrants with specialized skills in the financial sector.
The good news is that governments recently moved in just that direction, announcing plans to launch a Global Risk Institute in Financial Services in Toronto, with links to Canada’s leading universities and recognized risk experts around the world. This is being done in partnership with private sector donors. Much credit for this initiative is due to the Toronto Financial Services Alliance headed by former Ontario finance minister Janet Ecker.
Porter argues for increased innovation and scale through federal changes – exposing banks to foreign competition, and indeed allowing bank mergers – and he recommends increasing acquisition activity abroad. On this logic, Toronto requires a highly targeted national strategy that levers the fact that Toronto already has world-leading capacity in financial services, IT design and population diversity. Moreover, Canada’s resource-based economy makes it a natural site for resource financing. Its equity exchanges already have particular strength in mining, energy and emerging companies, including the world’s largest segment of clean-tech companies.
There is as yet no electronic-commerce hub in the world. E-commerce consists of the buying and selling of products or services over the Internet and other computer networks. The growth of such trade has been so rapid, and on such a scale, that most statistical analysis cannot track the growth in electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange, inventory management systems, and automated data collection systems.
Toronto, which is second only to New York City in terms of number of IT design industry employees, ought to bet on e-commerce becoming the leading growth area within the financial services cluster. Combine its design and finance strengths, and Toronto becomes a natural home for e-commerce.
Regulatory harmonization, research funding, export promotion and post-secondary programme funding ought to be prioritized by governments – before e-commerce becomes the equivalent of biotech, which too many governments discovered belatedly (with moderate benefits). Leadership by government, finance and design leaders requires prioritization in funding, and strategic focus akin to that of the rigorous, ruthless approach of the Singapore Economic Development Board (discussed below).
Islamic banking complies with the principles of Islamic law (Sharia), which include emphasis on profit- and loss-sharing, and a prohibition on charging interest for loans. Islamic banking is growing globally at a rate of 10 to15 percent per year. Sharia-compliant assets reached over US $800 billion throughout the world in 2009, according to Standard & Poor’s Ratings Services; the potential market is US $4 trillion. According to CIMB Group Holdings, Islamic finance is currently the fastest-growing segment of the global financial system, and sales of Islamic bonds may rise by 24 percent to US $25 billion in 2010.
At present, some 40 percent of global Sharia-compliant assets are managed by Iranian banks. The global emergence of Islamic banking is being led by Western financial institutions like HSBC, Citigroup and UBS. Although Canada’s largest bank (Royal Bank) offers Sharia-compliant products and services, very few other Canadian financial institutions have followed suit. Toronto’s diverse population, combined with its financial expertise, makes it a logical growth region for Islamic banking. Canada’s Muslim population is about 750,000 to one million people, with about half living in the Greater Toronto Area.
The federal government ought to publicly pledge its political support for the growth of Sharia banking. To date, regulatory changes have not been necessary, but fear of regulatory restrictions will slow potential growth. The strategy here simply requires leadership – public, private and academic. Economic benefits will accrue to the swift – not the politically timorous.
In respect of natural resource financing, the goal is to continue expansion in Canada; that is, to lead in financial services for energy and natural resource sectors. Said Michael Porter on this point: “Just as financial institutions in California were at the forefront of the development of oenological financial products, so should the Canadian financial sector develop specialty products designed for the country’s energy and natural resources industries. The Toronto Stock Exchange (TSX) and TSX Venture Exchange have already moved in this direction, with more than half of the 3,800 listed companies in natural resources industries (especially mining, oil and gas, and forestry). Given the enormously growing demand for both energy and natural resources, especially in developing countries, this may be a high-growth niche particularly well-suited for Ontario’s financial sector firms. The absence of a Sarbanes-Oxley equivalent makes Toronto’s stock exchange even more attractive to foreign firms.”
In conclusion, Toronto business and political leaders need to lead through rigorous focus on particular niche areas where Toronto already enjoys enormous strengths. Leadership in any of the foregoing sub-segments of the finance cluster – e-commerce, Islamic banking and resource-sector finance – could well propel Toronto’s financial destiny to the global leadership position to which it ought to aspire.
The aforementioned prescriptions can only be realized through extremely focussed leadership. Such leadership must be harnessed into a body responsible and accountable for these goals. As mentioned above, Singapore achieved this with remarkable success through the Singapore Economic Development Board. If the existing Toronto Financial Services Alliance, or some other body, is to play that role, this must be clarified and blessed by all three levels of Canadian government. The opportunity for mal-coordination cannot be underestimated.
The coordinating body, in whatever form, must be an execution shop – not a policy shop. The Singapore Economic Development Board is a one-stop catalyst, broker and financier. Toronto’s coordinating body needs analysts and researchers digging into balance sheets. Show an investor or existing company a profit. Show a company that had not been considering expansion or new investment in Toronto why Toronto is the place where they should do business. Aim for pre-packaged financing as an incentive. Animate what it looks like with economic development partners. Grab the company by the balance sheet, and their hearts and minds will follow.
Finally, Toronto business and political leaders ought to consider the establishment of a City Wealth Fund, similar to well-known sovereign wealth funds. Investors are private and public: they use their equity stake to participate in management, to keep the company in Toronto, and to create a Coke-Atlanta relationship for Toronto and the fund’s investors. The fund – totalling, say, half a billion dollars over five years – would be privately operated. The terms would be negotiated among the investors. The first deal could be done in the spring of 2011. Then deal-flow would follow, and the rest would be momentum through commercial success. The focus of the fund could be one or all of the three niche financial services areas discussed above. This idea is ambitious, but not absurd. Ten years, from now every city will have such a fund, but it will have started in Toronto.
Michael Bryant served as Minister of Economic Development for Ontario and previously as Attorney-General. He was the founding CEO of Invest Toronto, the City’s industry-promotion agency, and is currently Senior Adviser at Ogilvy Renault LLP and Adjunct Professor at the University of Toronto.