RY to Partly Spinoff Proprietary Trading Units

Zacks

Due to regulatory pressure, Royal Bank of Canada (RY) is contemplating spinning off Global Arbitrage Trading unit. The unit deals in proprietary trading business and operates as a part of RBC Capital Markets. Notably, RBC Capital Markets is U.S.-based investment banking arm of Royal Bank of Canada.

The move is part of the global banking major’s radical change in order to comply with the new regulations. The most notable rule among these, is the Volcker Rule, which restrains banks from utilizing their own capital to speculate – in a measure to prevent huge risky bets.

Though the Volcker Rule was formed with the primary aim to curb the risky activities of American banks, it had a far-reaching impact as well. Many foreign banks have been disadvantaged by the norm.

Royal Bank of Canada is still trying to reduce the impact of the possible loss of the profitable proprietary trading but the bank is running out of options. The Global Arbitrage Trading unit is basically a hedge fund, in which the bank is the sole investor. Therefore, in the present challenging scenario, Royal Bank of Canada is compelled to either spin off the unit or move the business to other locations such as Toronto or London.

According to the Volcker Rule, banks will only be able to invest a minimal amount in hedge funds. Therefore, it will not be possible for Royal Bank of Canada to keep a significant stake in any unit that has been spun off.

Apart from Royal Bank of Canada, other Canadian banks like The Toronto-Dominion Bank (TD) and Bank of Montreal (BMO) are modifying their businesses as well to comply with the U.S. banking regulations.

The Volcker Rule has been labeled as most divisive and fiercely debated measure of post-financial crisis era of regulatory reforms as it has put a question mark on the future earnings of banks. This rule will definitely dent the top-line of banks.

Moreover, most industry players believe that the Volcker Rule could lower market liquidity, raise transaction costs and divert trading volumes to other jurisdictions, thereby making the whole economy suffer. However, it should not be forgotten that the primary aim of Volcker Rule is to limit risky activities of banks to safeguard taxpayers’ money as well as the health of the economy.

Royal Bank of Canada currently carries a Zacks Rank #4 (Sell). A better-performing foreign bank is HDFC Bank Ltd. (HDB), which has a Zacks Rank #1 (Strong Buy).

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