Following the financial crisis of 2008, harsher regulations
governing financial institutions were implemented to mitigate
future economic recessions. As discussed in an article by the Canadian Bankers Association,
new financial regulations, such as Basel III, have targeted capital
and liquidity because both affect a bank's ability to
"cushion the blow" of any losses and maintain its ability
to meet its financial responsibilities. The international
regulation, Basel III, is comprised of capital and liquidity rules,
which were implemented in Canada in 2013 and 2015 respectively.
Basel III Capital Rules:
The Basel III capital rules were introduced in Canada by
national regulators as the Capital Adequacy Requirements (CAR)
Guideline. This Guideline requires banks to have an amount of
capital that is at least 10.5% of their "risk-weighted
assets" before 2019. Also, since January 1, 2016, greater
requirements have been placed on the six largest Canadian banks in
Canada. These banks now must retain one extra percent of capital,
will be monitored more regularly than other banks and have even
more reporting obligations.
Another guideline is the Leverage Requirements Guideline, which
requires banks to have a leverage ratio that is equal to or greater
than 3 %.
Basel III Liquidity Rules
Stemming from the Basel III liquidity rules, banks are required
to comply with the following:
the Liquidity Coverage Ratio, which
has a 30-day time horizon and will be introduced from 2015 to 2018;
the Net Stable Funding Ratio, which
has a one-year time horizon and will be in effect sometime before
Effects of Rules on the Escrow Landscape
Now that banks need to report more regularly on their progress
in complying with these rules and are required to retain more of
their capital, certain effects on the escrow landscape have been
noted by SRS Acquiom:
Greater transparency of financial
institutions' abilities to weather adverse economic conditions,
which allows M&A parties to consider different options more
Some financial institutions are
shifting the extra costs associated with keeping short-term
deposits onto consumers through lower yields.
Banks are eliminating or modifying
certain deposit products as the costs of offering them have
increased. This means that there will be fewer escrow products out
there for customers, making it more difficult to arrange escrows if
the existing products do not align with their needs.
Certain banks in the United States
have already begun to warn their biggest customers that depositing
large amounts of money will now come with an extra cost. Financial
institutions are even recommending that these customers go
elsewhere to avoid the new expense of making these types of
As a result of these effects, M&A parties will likely have
to be much more cautious when considering escrow management and the
different escrow options available.
The author would like to thank Monica Wong, Summer Student,
for her assistance in preparing this legal update.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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