Global Banking

Regulations and
Banks in Canada
Fast facts
» During the 2008 global
financial crisis, unlike
banks in many other
countries, no Canadian
banks were bailed out or in
danger of failing.
» This crisis has resulted in
a series of significant
regulatory changes for the
international banking
sector. The ongoing
volume and pace of these
changes mark this as the
most profound period of
regulatory reform in recent
banking history.
» The World Economic
Forum has ranked
Canada’s banks as the
most sound in the world for
seven years in a row 1 – a
ranking that highlights the
fact that banks in Canada
are well capitalized, well
managed and well
regulated.
» Canadians
understand this: When
asked to rate the
performance of banks
in Canada on stability
and security, 79 per
cent Canadians
provided a favourable
rating. 2
The bottom line
Canada’s banks have been recognized as the soundest banks in
the world for seven years in a row. Canada’s prudent banks
combined with effective regulatory oversight form a model of
stability in the global financial system.
Profound regulatory changes are underway
During the recent global financial crisis there was
significant turmoil in the global financial system
and a number of banks in other countries
became insolvent and either failed or received
taxpayer-funded bailouts.
That crisis resulted in a series of significant
regulatory changes to the international banking
sector designed to prevent this type of global
problem from happening again.
The bulk of the changes regarding such things as
capital, liquidity and systemic risk come out of the
Basel III rules agreed to by members of the Basel
Committee on Banking Supervision (Basel
Committee). [See pull-out box.] The Financial
Stability Board, working under the direction of the
G20, sets the policy direction for these changes
and the Basel Committee turns that direction into
regulation.
While these rules are being set internationally, it
is up to domestic regulators to put them into place
and to enforce them. The pace of domestic
implementation is not consistent around the
world, although there is a global commitment to
having the rules in place by 2019.3
Taken together, the volume and pace of these
changes mark this as the most profound period of
regulatory change in recent banking history.
Financial markets are globally integrated. So in
the end, the aim is that consistent implementation
of these regulatory changes in countries around
the world will result in a better functioning global
financial system.
Entering the global financial crisis Canada’s
banks were well capitalized, well managed and
well regulated, and they remain so to this day. No
Canadian bank was in danger of failing or needed
a government bailout. And while this turmoil did
not originate in Canada, it did have an impact on
banks in Canada.
There are many important participants – including
Canadian policymakers and regulatory officials –
involved in shaping and adapting these regulatory
changes for Canada’s financial system. [See
Table of Main Participants below.]
Canada’s banks – through and with the CBA –
are working closely with domestic and global
regulatory organizations to implement all of the
international regulatory changes.

Last updated: September 2014
1
“Canadian banks hold steady in top place according to
World Economic Forum ranking: 7th year in a row”, CBA
media release, September 3, 2014, www.cba.ca.
2
From public opinion research conducted on behalf of the
Canadian Bankers Association by Abacus Data, December
2013
3
“Report to G20 Finance Ministers and Central Bank
Governors on monitoring implementation of Basel III
regulatory reform”, BIS report, April 2013, www.bis.org.
 Regulatory Changes and What is Basel III?
Rules Basel III is a framework that sets out
global regulatory rules for bank capital
While several regulatory changes are underway, there and liquidity. These rules were originally
are three important areas where rules have been set:
published in December 2010 in response
capital, liquidity and systemic risk. Regulators in
to the global financial crisis and are
Canada implement these international rules and apply
subject to ongoing review and updates.4
them domestically as part of their ongoing oversight of
the Canadian financial system. The phase-in of Basel III capital rules
began in 2013. Canada implemented
1. Capital these changes in January 2013, well
A bank holds capital so that the public will have ahead of many other countries and well
confidence in it to help protect depositors and other ahead of the Basel III timeline. The
stakeholders against losses in the event of a default. phase-in of Basel III’s liquidity rules
Capital is a cushion against bank-specific and market- begins in 2015.
related activities that could have negative impacts on a
bank’s ability to stay solvent. Basel III was developed and agreed to by
members of the Basel Committee on
Banking Supervision – commonly called
Basel III capital rules
“the Basel Committee”. This is a
 There are several categories of rules related to
capital under Basel III. Taken together, these rules longstanding committee of the Bank for
require banks to hold enough capital to equal at International Settlements (BIS) that is
least 10.5% of their total risk-weighted assets by mandated to review and develop banking
2019. guidelines and supervisory standards at a
global level.
Global and domestic systemically important
For more information, go to www.bis.org
banks
and www.financialstabilityboard.org.
o Banks that are determined to be global
systemically important banks (G-SIBs) and/or
domestic systemically important banks (D-SIBs) have to hold additional capital. Canadian D-
SIBs (i.e. the six largest banks in the country) will have to hold additional capital by January
2016.5

o G-SIBs and D-SIBs are treated differently under Basel III given the potential impacts that a
failure of any one of them would have on global and domestic economies.

Basel III capital rules as they relate to banks in Canada

 In December 2012, OSFI issued the final version of the revised Capital Adequacy Requirements
(CAR) Guideline. This is how Canadian regulators are implementing the Basel III capital rules in
Canada.

 Under the CAR Guideline, OSFI expected banks to meet target capital levels that equal or
exceed the 2019 Basel III minimum capital requirements in 2013, well before that 2019 deadline.

Canada’s banks are among the best capitalized banks in the world in terms of both the quality and
quantity of capital, and have been judged the soundest in the world by the World Economic Forum
for the last six years. Banks in Canada did not receive nor need a government bail-out during the
global financial crisis.

4
In 1988, Basel I established a set of minimum capital requirements for banks. Basel II – initially published in 2004 – built on the
work of Basel I, especially in the areas of risk and capital. See www.bis.org for more information on all the Basel accords.
5
“Domestic Systemic Importance and Capital Targets – DTIs”, OSFI, March 2013, www.osfi-bsif.gc.ca.

Canadian Bankers Association www.cba.ca

 2. Liquidity
“Liquidity” refers to the ease with which assets can be converted into cash (i.e., liquidated) and sold.
For banks, good liquidity is important because it bolsters their resilience to internal and external
shocks.

Basel III liquidity rules

 The Basel Committee has developed two minimum rules for liquidity – the Liquidity Coverage
Ratio (LCR) that has a 30-day horizon, and the Net Stable Funding Ratio (NSFR) that has a time
horizon of one year.

 LCR requirements were confirmed as of January 2013 and will be phased in between 2015 and
6 7
2019. Details of the NSFR are still being worked out, but it will be in force by 2018.

 These rules are meant to ensure banks have sufficient, high-quality liquid assets to withstand a
period of economic stress.

How OSFI is implementing liquidity rules for banks in Canada

 OSFI issued a revised Liquidity Principles B6 Guideline in February 2012. This describes how
the regulator assesses the strength of a bank’s liquidity risk management framework and
whether the bank would have adequate liquidity under stressed conditions.

 OSFI’s approach is consistent with the Basel Committee’s September 2008 Principles for Sound
Liquidity Risk Management and Supervision

3. Management of Systemic Risk

“Systemic risk” refers to elements of risk within the global financial system and the likelihood that
those elements could lead to another global financial crisis along the lines of the crisis in 2008.
Managing systemic risk helps maintain economic stability as well as the resiliency and soundness of
individual financial institutions.

Regulatory requirements to address systemic risk

 Regulatory changes are being made to help manage systemic risk by strengthening capital,
liquidity and leverage requirements for all banks.

 Banks that are determined to be global systemically important banks (G-SIBs) and domestic
systemically important banks (D-SIBs) have to hold additional capital. Rules applying to these
institutions will go into effect in January 2016.

o These rules for G-SIBs and D-SIBs are meant to address concerns stemming from banks
whose collapse would cause significant global and/or domestic economic damage.

o Moves to ensure that these institutions have adequate recovery and resolution plans are
part of this overall reform. These plans are road maps to facilitate either the recovery of an
institution or its orderly wind-down in the event of failure. Both recovery and resolution can
be caused by severe financial stress.8

6
“Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”, January 2013, www.bis.org.
7
“Basel III International framework for liquidity risk measurement, standards and monitoring”, December 2010, www.bis.org.
8
“Building a more resilient financial sector: Reforms in the wake of the global crisis”, IMF publication, 2012, page 185.

Canadian Bankers Association www.cba.ca

 Regulatory requirements to address systemic risk as they relate to banks in
Canada
 There are currently no banks designated as G-SIBs in Canada.

 In March 2013, OSFI named the six largest banks in Canada as D-SIBs. As a result, these
banks will be required to hold an additional one per cent of capital and will be subject to more
intense supervision and enhanced disclosure.

Banks in Canada are extremely unlikely to fail. However, there are mechanisms in place to help bring
about an orderly resolution in the very unlikely event of a Canadian bank failure.

Regulatory changes coming out of the United States that will

impact Canadian banks
Policymakers in the United States are taking their own approach to prudential regulation that differs
in some ways from the harmonized approach being taken globally. A number of these measures
have extraterritorial effects on Canada.

The American approach is contained in The Dodd-Frank Wall Street Reform and Consumer
Protection Act – known generally as The Dodd-Frank Act – which passed in 2010. This act covers a
very wide policy spectrum and touches banks in Canada in many significant ways, as highlighted
below.

The Volcker Rule

 The “Volcker Rule” is part of The Dodd-Frank Act.

 The Rule, named after former Federal Reserve Chairman Paul Volcker, is intended to restrict
banks operating in the United States from making certain types of investments − on the bank’s
own behalf and not on behalf of customers − because such investments are considered to be
potentially high risk.

 The Rule, in its draft version, was so broad that it captured domestic operations of Canadian-
based banks with U.S. operations as well as other foreign banks that have U.S. subsidiaries, and
would restrict Canadian banks from undertaking activities in Canada that are permitted by the
Canadian government.

 The final version of the Volcker Rule is expected to be issued in 2013.

Treatment of Foreign Banking Organizations (FBOs)

 The U.S. Federal Reserve is considering whether to require FBOs – including Canadian banks
operating in the U.S. – to incorporate under a bank holding company structure to which Basel III
capital, liquidity, stress testing, and other requirements would apply.

 In this case, capital and liquidity will be trapped in U.S. operations, thus causing the Canadian
consolidated entity to hold capital levels that far exceed prudent Basel III levels.

Canadian Bankers Association www.cba.ca


» The Canadian Bankers
Association works on behalf of
domestic banks, foreign bank
subsidiaries and foreign bank
branches operating in Canada
and their 280,000 employees.
The CBA advocates for
effective public policies that
contribute to a sound,
successful banking system that
benefits Canadians and
Canada's economy. The
Association also promotes
financial literacy to help
Canadians make informed
financial decisions.
Canadian Bankers Association
Table of Main Participants
A number of organizations are involved in aspects of the regulatory changes underway. The table
outlines the main participants and their role(s) in global regulations as it pertains to banks in Canada.
NAME OF PARTICIPANT
Global
Bank for International
Settlements (BIS)
Basel Committee on Banking
Supervision (Basel Committee)
Financial Stability Board (FSB)
Domestic
Office of the Superintendent of
Financial Institutions (OSFI)
Bank of Canada
Department of Finance
Financial Institutions
Supervisory Committee (FISC)
Canada Deposit Insurance
Corporation (CDIC)
ROLE(S) IN REGULATION
Swiss-based organization of which many central banks –
including Canada’s – are members. BIS and its committees lead
much of the global regulatory work stemming from the global
financial crisis. BIS was created in 1930.
www.bis.org
Committee of BIS members mandated to review and develop
banking guidelines and supervisory standards at a global level.
They are the lead drivers of the Basel III changes. Basel
Committee members include OSFI and the Bank of Canada. The
Basel Committee was established in 1974.
www.bis.org/bcbs
Global group created by the G20 countries in 2009 to monitor
and make recommendations about the global financial system.
Canadian FSB members include the Department of Finance,
Bank of Canada, and OSFI. FSB sets the policy direction (under
the G20) for the Basel Committee, and the latter turns that
direction into regulation.
www.financialstabilityboard.org
The prudential regulator of Canadian banks and other federally
regulated financial institutions. Also responsible for implementing
Basel Committee principles and guidance in Canada.
www.osfi-bsif.gc.ca
Canada’s central bank, responsible for setting monetary policy
and promoting a stable and efficient financial system.
www.bankofcanada.ca
Responsible for the legislative framework governing banks and
other federally regulated financial institutions in Canada.
www.fin.gc.ca
A committee of senior government representatives who meet
regularly to share information and advise the federal government
on financial system issues. FISC members are from OSFI
(Chair), the Department of Finance, Bank of Canada, Canada
Deposit Insurance Corporation (CDIC) and the Financial
Consumer Agency of Canada (FCAC).
CDIC is a federal Crown corporation created by Parliament in
1967 to protect deposits made with member financial institutions
in case of their failure. CDIC insures deposits of up to $100,000.
Among other things, CDIC officials are working on “fast
insurance determination”, a process that would ensure a rapid
review of deposit insurance issues stemming from a potential
bank failure. This complements their work in establishing a
“bridge bank” protocol to be used in the event of a bank failure,
all of which is part of the Recovery and Resolution Plan.
www.cdic.ca
www.cba.ca