Canada: The Banking Regulation Review, Sixth Edition: Canada Chapter


Canada has a mature, competitive and centrally regulated banking system. The Canadian banking sector is composed of domestically owned banks, subsidiaries of foreign banks operating in Canada as Canadian chartered banks (foreign bank subsidiaries), full-service branches of foreign banks, branches of foreign banks with limited access to Canadian source funding (referred to as lending branches) and foreign bank representative offices. The  six  largest  Canadian  banks  by  assets  and  market  capitalisation  are  Royal  Bank  of Canada,  the Toronto-Dominion  Bank,  The  Bank  of  Nova  Scotia,  Bank  of  Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, each of which has been designated by the Office of the Superintendent of Financial Institutions (OSFI), the Canadian federal bank regulator, as a domestic systemically important bank (D-SIB). These  six  banks  account  for  more  than  90  per  cent  of  Canada's  total  banking  assets. In addition to these domestic banks, as of 2 April 2015, there were 22 other domestic banks, 24 foreign bank subsidiaries, 26 full-service branches, three lending branches and 25 representative offices.

Canada  also  has  an  active  public  debt  market  in  which  domestic  and  foreign securities  dealers  assist  clients  in  issuing  and  placing  a  wide  variety  of  corporate  and institutional  commercial  paper,  medium-term  notes,  bonds,  debentures  and  hybrid instruments. Many of the securities dealers are bank-owned. However, the banking sector is  the  dominant  source  of  capital  for  those  seeking  conventional  financing.  Canadian banks also dominate the residential and commercial mortgage market. Canada does not have  a  deep  market  for  second-lien  loans,  mezzanine  or  venture  capital  finance,  and merchant banking financing is relatively limited when compared with other competitive financing jurisdictions. Canada also has an active credit union and non-bank financial sector.

The  Canadian  banking  sector  is  regulated  by  the  federal  government  under the  auspices  of  one  regulatory  authority,  OSFI.  OSFI  regulates  all  Canadian  federally incorporated financial institutions (FRFIs), including banks, insurance companies, trust and loan companies, and credit unions. However, banks are the only financial institutions that fall exclusively within the regulatory purview of the federal government; all other forms  of  financial  institutions  can  be  incorporated  and  regulated  at  the  Canadian provincial and territorial level. In many cases, the provinces and territories have ceded jurisdiction  on  a  de  facto  basis  to  the  federal  regulator  to  avoid  the  inefficiencies  of regulation by two levels of government.

Canadian banking regulation is characterised by prudential regulatory concerns and a focus on depositor protection. In general, OSFI has adopted a very conservative approach  in  the  regulation  of  the  Canadian  financial  services  sector,  and  the  banking sector  in  particular.  Canadian  regulatory  requirements  often  impose  higher  capital requirements and lower leverage than has been allowed in other jurisdictions. In addition, Canada has not adopted the concept of universal banking, keeping distinct differences in focus among the Canadian banking, insurance, auto leasing and securities dealing sectors of the financial economy.

This  approach  served  the  Canadian  financial  services  sector  well  during  the economic  downturn  from  2007  to  2010.  During  this  period  (and  throughout  the subsequent period to date), Canada did not experience any bankruptcies or failures among FRFIs.  Further,  the  government  did  not  have  to  bail  out  any  FRFIs  or  the  Canadian financial  services  sector  generally.  Actions  taken  by  the  government  and  the  Bank  of Canada to ease credit in the Canadian financial services sector were taken to maintain the competitiveness of Canadian financial services companies and to respond cooperatively to  initiatives  taken  in  the  United  States  and  Europe,  with  a  view  to  stabilising  the international financial services sector, promoting open markets and maintaining a level playing field and fair competition across the integrated global banking sector.


I. OSFI as regulator

OSFI was established under the Office of the Superintendent of Financial Institutions Act (Canada). OSFI works in conjunction with the Bank of Canada, which monitors and controls the money supply, and provides overnight and short-term lending facilities to banks; the Canada Deposit Insurance Corporation (CDIC), which provides deposit insurance to the general public on certain kinds of Canadian dollar-denominated deposits placed with member institutions; and the Financial Consumer Agency of Canada, which acts as a consumer protection watchdog with respect to the activities of banks in Canada as they pertain to consumers.

OSFI has very broad powers and oversight in regulating the activities of domestic and  foreign  banks  in  Canada.  Its  multifaceted  mandate  includes  ensuring  prudential regulation of FRFIs generally and the banking sector in Canada in particular, protecting depositors, and maintaining the integrity and stability of the Canadian financial services sector.

To  achieve  these  objectives,  OSFI  has  been  given  the  authority,  and  exercises control,  over  the  commencement  and  operation  of  business  by  banks  in  Canada  and their leverage and capital requirements. OSFI also monitors and ensures prudential and responsible  corporate  governance.  OSFI  regularly  publishes  guidelines,  directives  and bulletins  on  all  of  these  subjects,  and  regularly  meets  with  Canadian  banks  and  other FRFIs to ensure compliance with OSFI requirements.

At  present,  the  activities  of  securities  dealers  and  other  participants  in  the securities  market  are  regulated  at  the  provincial  and  territorial  level  by  the  provincial and territorial securities commissions. The federal government has been engaged in the process of working with provincial and territorial governments to establish a centralised single  national  securities  regulator.  However,  recent  attempts  to  implement  a  national securities regulatory regime have been struck down by the Supreme Court of Canada on constitutional grounds.

ii. Bank Act (Canada) (Bank Act)

A  bank  may  carry  on  business  in  Canada  as  a  licensed  Canadian  chartered  bank  or  a branch of a foreign bank, or by opening a subsidiary to carry on a financial service or other business. A bank may also maintain a marketing presence in Canada through the establishment of a representative office. All domestic banks in Canada and foreign bank subsidiaries, foreign bank branches, foreign bank representative offices and subsidiaries of foreign banks established to provide limited financial services or to carry on another business in Canada are subject to regulation under the Bank Act.

Incorporation  under  the  Bank  Act  is  subject  to  the  discretion  of  the  Canadian Minister of Finance (Minister) and to obtaining permission from OSFI to commence carrying on business. Canadian chartered banks may be owned and controlled by a bank holding company incorporated under the Bank Act. In such cases, the capital adequacy regime normally applied by OSFI to the balance sheet of a Canadian chartered bank is applied at the bank holding company level. As such, Canadian banks have not seen any benefit in adopting bank holding company structures similar to those seen in the United States and Europe.

The  application  processes  for  the  establishment  of  a  Canadian  chartered  bank or  for  the  establishment  of  a  foreign  bank  branch  in  Canada  are  relatively  similar.  In both cases, the application must be filed with OSFI, together with an extensive amount of information about the bank's primary shareholders or the bank itself (in the case of the  opening  of  a  branch)  together,  without  limitation,  with  a  detailed  business  plan (including pro forma financial statements and projections) with respect to its proposed business in Canada, and a list and the CVs of those persons who will serve as directors or primary officers of the Canadian bank or branch. Such individuals typically undergo a security review and background check by the Royal Canadian Mounted Police, Canada's federal  police  agency  and,  where  applicable,  the  Canadian  Security  and  Intelligence Service. In general, it can take anywhere from nine months to a year to incorporate a Canadian  chartered  bank  and  open  for  business,  and  up  to  six  months  to  establish  a foreign bank branch in Canada, from the time application materials are first submitted to OSFI. OSFI has published administrative guidelines to assist applicants in preparing materials in support of applications to be submitted for review and consideration.

iii. Foreign banks

As  a  general  rule,  but  with  some  limited  and  rarely  utilised  exceptions,  regulated, licensed or self-identified foreign banks and entities associated with foreign banks (i.e., entities within the subject foreign bank's group or control that are not incorporated or existing under the laws of Canada or a province or territory of Canada) are prohibited under the Bank Act from carrying on any business in Canada, owning a position in a Canadian  enterprise  above  a  prescribed  threshold,  or  taking  legal  or  de  facto  control of  any  Canadian  enterprise.  Foreign  banks  cannot  undertake  such  activities  directly or  indirectly  through  an  agent  or  nominee.  The  Bank  Act  regulates  the  activities  and investments of foreign banks and entities associated with a foreign bank in relation to both banking and non-banking services in Canada.

The  concept  of  a  foreign  bank  is  broadly  construed  under  the  Bank  Act  to include,  inter  alia,  an  entity  called  a  bank  that  engages  in  the  provision  of  financial services,  whether  or  not  it  actually  maintains  a  bank  licence,  and  an  entity  that  is  a bank  or  is  regulated  as  a  bank  or  deposit-taking  institution  according  to  the  laws  of its incorporating jurisdiction or any place in which it carries on business. An entity is associated with a foreign bank if it controls, is controlled by, or is under common control with, a foreign bank.

Canada  does  not  apply  its  banking  laws  extraterritorially  to  foreign  banks. Accordingly, foreign banks are free to carry on business with Canadians and to solicit business from Canadians without offending the Bank Act as long as such activities are undertaken by the foreign bank from outside Canada. In addition, foreign banks may access the Canadian capital markets from offshore as long as they do not retain an agent for the placement of such securities in Canada and they comply with other restrictions imposed by OSFI and the Bank Act.

OSFI is vigilant in monitoring any illegal activities of foreign banks in Canada and publishes a list of offending foreign banks. OSFI also pursues such offending banks with a view to having them comply with the Bank Act or cease their activities in Canada. Foreign banks are permitted to carry on business in Canada with the permission of the Minister. The Minister has the authority to issue orders permitting a foreign bank to carry on business in Canada through the incorporation of a foreign bank subsidiary, the establishment of a branch or the ownership or control of Canadian enterprises. The Minister  also  has  the  authority  to  exempt  a  foreign  bank  from  the  application  of  the Bank Act. To our knowledge, no such blanket exemption order has been issued under the Bank Act to date.

Where a foreign bank establishes a foreign bank subsidiary, such a subsidiary is incorporated under the Bank Act and is subject to the same regulatory regime and capital requirements,  and  has  the  same  powers  and  market  access  as  domestically  owned  and controlled Canadian chartered banks.

A foreign bank may establish a full-service branch or a lending branch. In either case, the foreign bank is permitted to carry on the same business activities in Canada through  its  branches  as  the  Canadian  chartered  banks.  However,  branches  of  foreign banks are not permitted to accept retail deposits in Canada. Retail deposits are measured by a formula contained in the Bank Act, but can be loosely interpreted as deposits of under C$150,000. Lending branches differ from full-service branches in that they cannot access the Canadian capital markets or take any deposits in Canada. Foreign bank branches are exempt from regulatory capital rules applied by OSFI to Canadian chartered banks on the assumption that the capital of such foreign banks is regulated by the regulator in their home jurisdictions. In lieu of the application of Canadian regulatory capital standards, full-service branches are required to maintain a capital equivalency deposit equal to 5 per cent of their Canadian branch liabilities on deposit with a Canadian financial institution. Lending branches are only required to maintain C$100,000 on deposit.

Representative offices maintained in Canada by foreign banks are not permitted to carry on business or provide financial services in Canada. Their sole function is limited to the promotion to Canadians of the foreign bank's business outside Canada, and to acting  as  a  liaison  between  the  foreign  bank  and  Canadians  in  respect  of  the  business between them that is conducted outside Canada.

To view the full report, please click here.

Originally published in The Banking Regulation Review, Sixth Edition, June 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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