Canadian banks as U.S. hostages?

BMO Financial Center in Milwaukee, Wisconsin. Blink twice if you're in danger, BMO.

Donald Trump has said he wants to use "economic force" against Canada. In my previous post, I worried that one way this force could be wielded was through Canada's dangerous dependence on U.S.-controlled MasterCard and Visa. But there's an even bigger risk. Canadian banks with large U.S. operations may have become unwitting financial hostages in Trump's 51st state strategy.

As recently as a few months ago, back when things still seemed normal, it was widely accepted that big Canadian banks needed a U.S. expansion strategy. If one of our Big-6 banks wasn't building its U.S. banking footprint, its stock outlook suffered. Canada is a mature, low-growth banking market, after all, whereas the U.S. market remains fragmented and ripe for consolidation.

This motivated a steady Canadian trek into U.S. branch banking. BMO entered the U.S. in the 1980s and steadily expanded, most recently acquiring Bank of the West in 2023, making it the 13th-largest U.S. bank. TD Bank entered in the early 2000s and has since climbed to 10th place. Given this trajectory, by 2030 or 2035, one of the U.S.’s five largest banks could very well have been Canadian.

This strategy hasn’t been without flaws. Royal Bank's first U.S. retail banking foray, its acquisition of Centura, eventually failed, though its second attempt has been more successful. TD just paid the largest anti-money-laundering fine in U.S. history. But overall, the move south has been profitable for Canadian banks and their shareholders, who constitute a large chunk of the Canadian population. The U.S. has benefited, too. Canadians have historically been decent bankers, having got through the 2008 credit crisis unscathed. Allowing a bigger slice of the American market to fall under the prudential management of Canadian executives probably isn't a bad thing, TD's money laundering gaff notwithstanding.

But in just a few months, Trump has upended this entire calculus.

Canada is now a U.S. enemy, or at least no longer a friend. We are somewhere on Trump's timeline to becoming the 51st state, against our wishes. Our existing border treaties are no longer valid, says the President, and need to be redrawn. Trump has threatened to use "economic force" as his weapon to achieve this. The attacks have already begun, beginning with tariffs to soften us up for final annexation.

Next up? My worry is that Canada's banking industry may become a second front in this war, and the hint is a stream of strange pronouncements from Trump and his surrogates about Canadian banking. According to Trump, the Canadian banking system is stacked against U.S. banks:

"Canada doesn’t allow American Banks to do business in Canada, but their banks flood the American Market. Oh, that seems fair to me, doesn’t it?"

This grievance is false, as I explained last month, but accuracy probably isn't the point. A charitable reading is that Trump is laying the groundwork for U.S. banks to gain more access to Canada’s banking sector—a manageable concern. My worry is that it's the reverse. His complaints may signal a shift in how Canadian banks operating in the U.S. are to be treated. Trump may have teed up a financial version of the Gulf of Tonkin incident; an imaginary affront that can serve as a pretext for justifying aggressive action against Canadian banks' U.S. subsidiaries.

After years of U.S. expansion, Canada’s largest banks now have relatively large American retail banking footprints, making them tempting financial hostages. Both TD Bank and Bank of Montreal now have more branches in the U.S. than in Canada. Nearly half of BMO's revenue (44%) come from south of the border while in TD's case it's 38%. Royal Bank also has deep ties. According to a recent Bank of Canada paper, half of the Big 6 Canadian banks' assets are now foreign, far more than the roughly 40% or so in 2014, with much of that chunk being American assets.

Just another bank doing business in Florida, or a financial hostage?

By damaging their large U.S. subsidiaries, Trump would directly weaken the Canadian parent companies, potentially causing havoc with the overall Canadian banking system. And a weakened financial sector plays right into Trump’s stated goal of economically undermining Canada in order to annex it.

How can Trump hurt Canadian banks' U.S. subsidiaries? Trump and his allies control much of the U.S. financial regulatory apparatus, and he has shown little regard for legal constraints. To begin with, he could set the FBI and Department of Justice on Canadian banks, increasing scrutiny of TD, BMO, and Royal Bank’s U.S. operations under the guise of enforcing anti-money-laundering laws. More surveillance would inevitably lead to a wave of fines. To avoid punishment, a Canadian bank operating stateside will have to spend much more on anti-money laundering measures than an equivalent U.S. bank.

Another tactic could be limiting access to shared financial infrastructure, such as government liquidity programs or bank deposit insurance. Trump could also try to increase the hoops that TD, BMO, and RBC must leap through to maintain their all-important accounts at the Federal Reserve, which provides access to Fedwire, the U.S.'s crucial large-value payments system.

Trump’s regulators could also impose higher capital requirements on Canadian banks compared to their U.S. peers, forcing the parents to divert ever more resources to their U.S. subsidiaries.

If Canadian banks are squeezed hard enough, they may eventually be forced to sell their U.S. operations at distressed prices. Trump could worsen this situation by imposing punitive exit fees, ensuring that Canadian banks take even bigger losses on the sale of their U.S. subsidiaries. The impairments caused to the parents' bank balance sheets would weaken the Canadian banking system and might even force the Federal government to step in with financial aid.

Meanwhile, the discounted assets of Canadian banks could be handed over to Trump’s preferred U.S. banking CEOs. Trump, after all, seems to be on course to building a kleptocracy, and key to that is the leader's ability to generate a series of gifts (i.e. acquisition approvals) that can be bestowed on business leaders who have demonstrated their obeisance.

To limit the damage, Canada may need to act quickly. The first step is freezing any further U.S. investment by BMO and the others. If Canadian banks are already financial hostages, deepening their exposure would be reckless. Bank executives may very well have already halted their U.S. growth plans of their own accord, but if not, high-level discussions with Canadian officials should drive home the urgency of the situation.

Instead of doubling down on the U.S., Canadian banks should pivot toward growth opportunities in Europe, the U.K., Australia, Latin America, and Asia. Our banks have histories dealing with these geographies. Bank of Nova Scotia, for instance, is one of the leading banks in the Caribbean and Central America.

Finally, there’s also a case to be made for a preemptive retreat. Bank of Montreal, Royal Bank, and TD Bank could start selling off their U.S. operations today before things escalate. It's a terribly difficult step to take; Canadian banks have spent decades painstakingly building their U.S. franchises. But by exiting now, they could secure better prices and avoid becoming tools for harming Canada down the road.

What was once a symbol of Canadian financial success—our banks’ expansion into what used to be a friendly U.S.—has become a national security risk. Hoping Trump forgets his fixation on the Canadian banking system and his dream of annexing us is not a strategy. There’s a high chance he won’t, and Canada must prepare accordingly.

Trump-proofing Canada means ditching MasterCard and Visa

We're all busy doing our best to boycott U.S. products. I can't buy Special K cereal anymore, because it's made in the U.S. by Kellogg's. But I'm still buying Shreddies, which is made in Niagara Falls, Ontario. Even that's a grey area, since Shreddies is owned by Post, a big American company. Should I be boycotting it? Probably. However, the disturbing thing is that I'm paying for my carefully-curated basket of Canadian groceries with my MasterCard.

If we really want to avoid U.S. products, we can't just vet the things we are buying. We also need to be careful about how we are doing our buying. Our Canadian credit cards are basically made-in-U.S. goods. They rely on the U.S-based Visa or MasterCard networks for processing. Each credit card transaction you make generates a few cents in revenue for these two American mega-corporations. It doesn't sound like much, but when multiplied by millions of Canadians using their cards every day, it adds up. Vigilant Canadians shouldn't be using them.

Canadians who want to boycott American card networks have two options. Go back to paying with cash, which is 100% Canadian. Or transact with your debit card. Debit card transactions are routed via the made-in-Canada Interac debit network.*

We're lucky to have a domestic debit card option. Our European friends are in a worse position, since many European countries (Poland, Sweden, the Netherlands, Finland, and Austria) are entirely reliant on MasterCard and Visa for both debit and credit card transactions. 

Unfortunately, going back to debit cards means doing without all of the consumer protection that credit cards offer in an online environment. Worse, you're giving up your credit card rewards or cash back. If you don't pay with your 2% cash back credit card, for instance, and use your debit card instead, which doesn't offer a reward, you're effectively losing out on $2 for every $100 you spend. This should illustrate to you, I hope, the golden shackles imposed on us by our U.S.-based credit cards. It's fairly easy to replace your American-grown tomatoes with Mexican ones or your U.S.-made car with a Japanese car. But networks, which tend towards monopolization, are not so easy to bypass.

Which gets us into the meatier issue of national sovereignty. The difficulty we all face boycotting the MasterCard and Visa networks reveals how Canada has let itself become over-reliant on these critical pieces of U.S financial infrastructure. My fear is that our neighbour's political leadership is only going to fall further into authoritarianism and belligerence, eventually making a play to slowly annex Canada—not by invasion, but by "Canshluss". If so, this will involve using our dependencies on U.S. systems, including the card networks, to extract concessions from us. "Canada, if you don't do x for me," says Trump in 2026, "we're TURNING OFF all your credit cards!" 

In anticipation, we need to remove this particular financial dependency, quick. We're already safe when it comes to debit cards; we've got Interac. But we need the same independence for our credit cards. More specifically, we need to pursue an end-goal in which all Canadian credit cards are "co-badged". That means our credit cards would be able to use both the Visa/Mastercard card networks and Interac (or, if Interac can't be repurposed for credit cards, some other yet-to-be-built domestic credit card network). With co-badging, if your credit card payment can't be executed by Visa because of a Trump freeze order, at least the Canadian network will still process it.

This is how the French card system works. While much of Europe suffers from a massive dependency on MasterCard and Visa, France is unique in having built a 100% French card solution. The local Carte Bancaire (CB) network can process both French debit card transactions, like Interac can, but goes one step further by also handling French credit card purchases. Before paying for their groceries with a card, French card holders get to choose which network to use, the local one or the international one.

THIS IS WHAT CANADA NEEDS: This French credit card, issued by Credite Agricole, is co-badged with the domestic Carte Bancaire (CB) network and the international MasterCard network. When incidents occur on one route (CB, for instance), traffic is automatically routed to the back-up route, MasterCard, and vice versa. I think that a Canadian solution to the Trump problem would look something like this French CB card.

The incoming Carney government should move to co-sponsor a CB-style domestic credit card network along with the big banks (perhaps a simple upgrade to Interac will do?). All Canadian financial institutions that issue credit cards would be required to co-badge them so that Canadians can connect to this new network as well as Visa or MasterCard. Even if annexation never actually occurs, at least we've got a more robust card system in place to deal with outages arising from hacking or natural disasters.

Along with France, we can take inspiration from India, which introduced their Visa/MasterCard alternative, Rupay, in 2012. Thirteen years later, RuPay is now a genuine competitor with the American card networks. I can't believe I'm saying this, but we can also use Russia as a model, which was entirely dependent on Visa and MasterCard for card payments until it deployed its Mir card network in 2016—in the nick of time before Visa and MasterCard cut ties in 2022.

Europe will have to push harder, too. The EU has been trying to rid itself of its Visa and MasterCard addiction for over a decade now, without much luck. Its first attempt, the Euro Alliance of Payment Schemes, was abandoned in 2013.  (In fact, one of the reasons the European Central Bank is exploring its own digital currency is to provide an alternative to the American card networks.) As Canada builds out its own domestic credit card workaround, we can learn from the European mistakes.

The U.S. is no longer a clear friend. Boycotting U.S. products is one thing. But if we truly want to reduce the external threat, we need to build our own card infrastructure—before it's too late.

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* In-person debit payments are processed by the Interac network. However, online debit card transactions default to the Visa or MasterCard networks. While Interac does allow for online purchases, many retailers don't offer the option, and when they do, the checkout process requires the user to log into their online banking, which is more of a hassle than using a card.