Canada
Financial Sector Assessment Program-Basel Core Principles for Effective Banking Supervision-Detailed Assessment of Observance

This paper focuses on the IMF report on detailed assessment of observance of Basel Core Principles (BCP) for effective banking supervision in Canada. The Canadian banking supervisor (OSFI) adopts a close and cooperative approach that supports the close network of federal authorities in identifying and seeking to mitigate prudential risks to the federal system. As a world-leading regulator, OSFI could be expected to issue a comprehensive suite of risk management standards to be available to all banks, even if at a relatively high level or based largely on Basel Committee for Banking Supervision guidance.

Abstract

This paper focuses on the IMF report on detailed assessment of observance of Basel Core Principles (BCP) for effective banking supervision in Canada. The Canadian banking supervisor (OSFI) adopts a close and cooperative approach that supports the close network of federal authorities in identifying and seeking to mitigate prudential risks to the federal system. As a world-leading regulator, OSFI could be expected to issue a comprehensive suite of risk management standards to be available to all banks, even if at a relatively high level or based largely on Basel Committee for Banking Supervision guidance.

Summary, Key Findings, and Recommendations

A. Introduction

1. Canada has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). The Canadian banking system is recognized as having performed well during the turbulence of the financial crisis and subsequently. The system is highly concentrated in six domestic players, with only limited foreign presence in the market. In response to the challenges and structure of this market, the Canadian banking supervisor (OSFI) has developed and is a strong proponent of risk based, proportionate, supervisory practices and applies a “close touch” approach with its supervised entities who perceive OSFI as authoritative but accessible. Entry to the Canadian market is subject to demanding prudential entry standards and any new entrant to the market, whether domestic or foreign, has undergone an intensive process of gaining familiarity with OSFI’s expectations and developing its relationship with the supervisor.

2. OSFI’s mandate emphasizes an early intervention approach although it also works within a risk tolerance framework that does not seek to deliver a zero failure regime. The protection of the depositor’s interests is a central objective in OSFI’s mandate and motivates OSFI’s early intervention supervisory strategy. The supervisory approach is well structured, forward looking and maintained on as dynamic a basis as possible to ensure that risks in institutions are identified, prioritized and acted upon as soon as possible.

3. Although OSFI is equipped with a comprehensive range of supervisory powers, it does not resort to legal intervention quickly. Since OSFI practices close relationship supervision a rapid use of legal powers could be seen as counterproductive to the openness and effectiveness of that relationship. However, such a system does require the early identification of failure to meet minimum standards and puts a premium on maintaining direction, momentum and closure in resolving supervisory issues in a timely manner.

4. OSFI adopts a close and cooperative approach in its relationships with other authorities. OSFI’s open and collaborative attitude has contributed significantly to the respect in which it is held by its international peers. Domestically, OSFI’s cooperative approaches support the close network of federal authorities in identifying and seeking to mitigate prudential risks to the federal system. Fragilities in the consistency and quality of communication with relevant provincial regulators exist, however. A proactive approach to information sharing would be appropriate and fall within existing mandates.

5. OSFI is responding proactively to the demands of the international regulatory reform agenda and is an early adopter of many standards. By articulating its supervisory standards and expectations through the medium of guidelines, rather than legal regulations, OSFI has a great degree of nimbleness and flexibility which has enabled it to be proactive in its adoption of Basel 3 as well as the standard for D-SIBs. Guidelines, while not legally binding, are treated as such by firms not least due to OSFI’s wide range of supervisory powers of intervention in the event that a guideline is breached.

6. OSFI operates at a relatively principles-based level and does not tend to issue extensive, detailed risk management guidance. While this approach is more flexible and potentially responsive to differing institutions and risks, as a world-leading regulator, OSFI could be expected to issue a comprehensive suite of risk management standards to be available to all banks, even if at a relatively high level or based largely on BCBS guidance.

B. Information and Methodology Used for Assessment

7. This assessment of the Basel Core Principles for Effective Supervision (BCP) is part of the 2013 FSAP update for Canada. The assessment of OSFI was conducted during an IMF mission that visited Canada from June 12 to 28, 2013. 1 Canada is among the first countries to be assessed against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. In their self-assessment the authorities addressed both essential and additional criteria and the assessors based their conclusions on compliance with both criteria. The last BCP assessment was conducted in 2000, and a targeted assessment of four principles was carried out in 2008.

8. It should be noted that the ratings assigned during this assessment are not directly comparable to previous assessments. Gradings cannot be compared between this assessment and former assessments as each has taken place under a separate iteration of the methodology, which was revised in 2006 and again in 2012. In revising the Core Principles to reflect the lessons from the recent financial sector crisis, the BCBS has sought to raise the bar for sound supervision and to update the principles on the basis of emerging supervisory best practices. New principles have been added to the methodology along with new essential criteria (EC) for each principle that provide more detail and additional criteria (AC) that raise the bar even higher. Altogether, the revised Core Principles now contain 247 separate essential and additional criteria against which a supervisory agency may now be assessed. In particular, the revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

9. The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with officials of OSFI, and additional meetings with the BoC, Department of Finance, auditing firms, and banking sector participants. The authorities provided a comprehensive self-assessment of the CPs, as well as detailed responses to additional questionnaires, and facilitated access to supervisory documents and files, staff and systems.

10. The team appreciated the very high quality of cooperation received from the authorities. The team extends its thanks to staff of the authorities, who provided excellent cooperation, including extensive provision of documentation and technical support, at a time when many other initiatives related to domestic and global regulatory initiatives were in progress.

11. The standards were evaluated in the context of the Canadian financial system’s sophistication and complexity. The CPs must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the CP, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, and risk profile and cross-border operation of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

12. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. Furthermore, banking activities are undergoing rapid change after the crisis, prompting the evolution of thinking on, and practices for, supervision. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the Canadian authorities with an internationally consistent measure of the quality of its banking supervision in relation to the revised Core Principles, which are internationally acknowledged as minimum standards.

13. To determine the observation of each principle, the assessment has made use of five categories: compliant; largely compliant, materially noncompliant, noncompliant, and non-applicable. An assessment of “compliant” is given when all EC and ACs are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when there are only minor shortcomings, which do not raise serious concerns about the authority’s ability to achieve the objective of the principle, and there is clear intent to achieve full compliance with the principle within a prescribed period of time. A principle is considered to be “materially noncompliant” in case of severe shortcomings, despite the existence of formal rules and procedures, and there is evidence that supervision has clearly not been effective, the practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle is assessed “noncompliant” if it is not substantially implemented, several essential criteria are not complied with, or supervision is manifestly ineffective. Finally, a category of “non applicable” is reserved (though not used) for those cases that the criteria would not relate to the Canadian authorities.

C. Overview of Institutional Setting and Market Structure

14. Canada’s banking system is highly concentrated and the financial system is distributed across a small number of banks and insurance companies.2 The financial system structure described here refers to the subsystem of federally regulated financial institutions. In March 2013 OSFI designated six of the federally regulated banks as domestic systemically important banks (D-SIBSs). Besides these federally incorporated D-SIBs, the Québec-headquartered bancassurance group, DesJardins, has also been designated as a D-SIFI by the provincial supervisor. While the banks currently hold 61 percent of the federal system assets, 93 percent of the bank assets are held by the D-SIBs. Assets held by banks represented 212 percent of GDP as at end-2012. Reviewing previous FSAPs (2000 and 2008) it can be seen that, broadly, the structure of the banking sector has remained stable for an extended period, though the level of concentration in the D-SIBs has increased as has the size of the banking sector relative to GDP. The 2000 FSAP noted that the banks held 60 percent of the financial system assets and bank assets represented 150 percent of GDP, while the 2008 FSAP report (using 2006 data) noted that the concentration of assets in the D-SIBs were 85 percent of bank assets.

Table 1.

Financial Sector Structure, end 2012

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15. Canadian D-SIBs have large international operations concentrated primarily in the U.S. and the Caribbean region. The U.S. operations of Toronto Dominion, Royal Bank of Canada and Bank of Montreal constitute a large share of the consolidated business operations of these banks. The lion’s share of the D-SIBs’ international business activities is commercial banking—credit intermediation funded by local deposits—rather than global investment banking and trading operations.

16. Canada’s banking system is well capitalized and profitable with low nonperforming loans (NPLs). Banks reported solid earnings in 2012, driven by growth in consumer and commercial loan volumes, improved capital markets results, and higher fees. Tier 1 capital levels have remained above 13 percent, while leverage is still below pre-crisis levels.

17. Market-based financing activities3—CP, ABCP, asset securitizations and repo finance—are comparable in size to traditional lending activities of the banks. Following pressures in particular in the ABCP sector early in the financial crisis, the Canadian non-bank ABCP market underwent industry-led restructuring based on a plan prepared by the Pan-Canadian Investors Committee. The federal government together with the provincial governments of Ontario, Québec and Alberta provided a senior funding facility to help this restructuring (completed in January 2009). Since then, several steps have been taken to improve the level of disclosure and transparency of the ABCP market.

D. Preconditions for Effective Banking Supervision

1. Sound and sustainable macroeconomic and financial sector policies

18. Canada has a well-established framework of fiscal, monetary and other macroeconomic policies. The Government of Canada prepares and publishes an annual federal government budget within the context of a medium term fiscal strategy, which is currently to return to balanced budgets by 2015–6. It publishes a debt issuance strategy and a program for debt issues. The Bank of Canada has a monetary policy strategy based on inflation targeting, flexibly applied to take account of prevailing monetary and financial conditions, including at present the deleveraging of the banking sector in response to the financial crisis. The current target is an annual rate of 2 percent.

19. Financial sector policy and legislation are subject to regular review. All financial sector legislation includes provisions requiring review and renewal five years from enactment. Unless an amendment is passed, the legislation authorizing banks to conduct business lapses due to a sunset clause, presenting a strong discipline upon government to keep to the timetable. There is consultation on prospective necessary or desirable changes during the review period.

2. Well established framework for financial stability policy formulation

Federal and provincial powers

20. The federal and provincial governments share jurisdiction over the financial services sector. Under the Canadian Constitution, the Government of Canada has exclusive jurisdiction over banks and banking, although deposit taking entities can be incorporated and regulated at provincial level.

21. Responsibilities for supervision of financial institutions and markets are divided among federal and provincial authorities. Only the securities sector is wholly regulated at the provincial level. The other financial sectors, namely insurance, trust and loan, credit unions can be incorporated and regulated at the federal or provincial level. Entities, such as trust and loan and credit unions, undertake deposit and lending activities but are not defined or regulated as banks but as provincial entities. Trust and loan companies may also be regulated by both levels of government. Companies are regulated for market conduct at the provincial level and those that are federally incorporated are regulated federally for prudential purposes by OSFI under the Trust and Loan Companies Act. Although all credit unions and caisses populaires are currently provincially incorporated and regulated, a new federal framework (established December 2012) will allow for the establishment of federal credit unions. The Credit Union Central of Canada (‘CUCC’), which is federally-incorporated and solely regulated at the federal level by OSFI, functions as the national trade association for the Canadian credit union system. Credit union centrals, which function as liquidity managers and payments processors for member credit unions, are provincially incorporated, and regulated and supervised at the provincial level. Most provincial centrals have chosen to register federally under the Cooperative Credit Associations Act (CCAA) and thus voluntarily subject themselves to federal oversight consistent with the CCAA.

Federal bodies

22. Canada has five federal agencies with distinct and complementary mandates. There are a number of mechanisms to facilitate ongoing collaboration and information sharing.

  • The Minister of Finance: responsibility for all matters relating to the financial affairs of Canada, including the overall stability of the financial system. The Minister of Finance has overarching authority over federal financial sector legislation, including the governing legislation that establishes the mandates and powers of financial sector regulatory agencies. The Department of Finance supports the Minister in fulfilling this mandate (see: http://www.fin.gc.ca/fin-eng.asp).

  • The Bank of Canada: Canada’s central bank has four main areas of responsibility: monetary policy, currency, financial system, and funds management. The Bank promotes the stability and efficiency of the Canadian financial system by providing liquidity; overseeing key domestic payment, clearing and settlement systems; participating in the development of financial system policies in Canada and globally; and assessing risks to the overall stability of the financial system.

  • The Office of the Superintendent of Financial Institutions (OSFI): OSFI is an independent agency of the Government of Canada established in 1987 to contribute to public confidence in the Canadian financial system. OSFI supervises and regulates all banks and federally regulated life and property & casualty insurers, trust and loan companies, cooperative credit associations, fraternal benefit societies, as well as private pension plans subject to federal oversight (http://www.osfi-bsif.gc.ca). OSFI is also responsible for reviewing and monitoring the safety and soundness of Canada Mortgage and Housing Corporation’s (CMHC) commercial activities. CMHC is a Crown corporation that offers mortgage insurance and securitization products to Canadian lenders (http://www.cmhc-schl.gc.ca).

  • The Canada Deposit Insurance Corporation (CDIC): Canada’s federal deposit insurer and resolution authority for federally regulated deposit-taking institutions which includes banks, federally and provincially regulated trust and loan companies, federally regulated retail cooperative credit associations and federal credit unions. CDIC is an agent of Her Majesty in right of Canada and is a Crown corporation, established in 1967 by the Canada Deposit Insurance Corporation Act. (http://www.cdic.ca).

  • The Financial Consumer Agency of Canada (FCAC): a federal regulatory body working to protect and inform consumers of financial products and services (http://www.fcac-acfc.gc.ca).

Interagency coordination on issues of financial stability

23. Several mechanisms have been created to facilitate cooperation and information sharing across the various agencies:

  • The Financial Institutions Supervisory Committee (FISC): established in 1987, is mandated in the Office of the Superintendent of Financial Institutions Act to facilitate consultation and the exchange of information on matters relating to the supervision of financial institutions between OSFI, CDIC, the Bank of Canada, FCAC, and the Department of Finance. FISC provisions contained in the OSFI Act provide that every member of the committee is entitled to any information on matters relating directly to the supervision of financial institutions, bank holding companies or insurance holding companies that is in the possession or under the control of any other member. The Superintendent of Financial Institutions chairs the committee. It meets at least quarterly, and more often as needed. Among other roles, FISC is responsible for coordination and communication amongst federal agencies with respect to strategies and action plans for addressing problem financial institutions and other emerging issues that may have an impact on the financial system, as well as ensuring the effective coordination of responses to events and requests.

  • The Senior Advisory Committee (SAC): the same membership as FISC but is chaired by the Deputy Minister of Finance. SAC acts as a discussion forum for financial sector policy issues, including financial stability and systemic vulnerabilities in order to inform the advice provided to the Minister of Finance. When appropriate, other government agencies are invited to this discussion (e.g., the CMHC). Each SAC member formulates policies to address identified vulnerabilities consistent with their mandates. Policy issues are discussed at SAC to ensure coordination and assess how such policies may affect the banks and the financial system.

  • The CDIC Board of Directors: responsible, under the CDIC Act for making decisions and/or recommendations on the use of resolution tools for federally-regulated member institutions. The Board comprises the Deputy Minister of Finance, the Governor of the Bank of Canada, the Superintendent of Financial Institutions, a Deputy Superintendent of Financial Institutions, the Commissioner of the Financial Consumer Agency and six others drawn from the Canadian private sector, including the Chair. Use of some of CDIC’s resolution tools requires the approval of the Minister of Finance and/or the Governor-in-Council (Cabinet).

  • The Heads of Agencies (HoA) Committee: chaired by the Governor of the Bank of Canada includes the Department of Finance, OSFI, and four provincial Securities Regulators (the Ontario Securities Commission (OSC), Autorité des marchés financiers (AMF), Alberta Securities Commission (ASC), and British Columbia Securities Commission (BCSC)). This forum allows federal authorities and provincial securities market regulators to exchange information, and to coordinate actions on issues of mutual concern.

  • Members of the Canadian Securities Administrators (CSA): established a Systemic Risk Committee in October 2009 among other reasons to develop a process to identify and analyze systemic risks in the Canadian capital markets. The Committee works with other CSA committees, as well as with other domestic regulators or agencies (such as the Investment Industry Regulatory Organization of Canada (IIROC), the Bank of Canada, and OSFI) on common issues related to systemic risk.

3. Well-developed public infrastructure

24. There are four federal financial institutions statutes. The Bank Act, Trust and Loan Companies Act, Insurance Companies Act, and Cooperative Credit Associations Act, governing the operations of banks and federally chartered insurance and trust and loan companies, and cooperative credit associations. The Government, consulting broadly with stakeholders, reviews the statutes that govern federally regulated financial institutions every five years. The most recent review was completed in 2012.

25. The Canadian corporate law framework operates at both the federal and provincial levels. The framework includes, but is not limited to: the Canada Business Corporations Act; Ontario Business Corporations Act; the Bankruptcy and Insolvency Act (BIA), and the Companies’ Creditors Arrangement Act (CCAA). The BIA, the CCAA and the Winding Up and Restructuring Act (WURA) provide a strong insolvency framework and contain court administered processes for dealing with insolvencies. In addition to the overall corporate and insolvency legal framework, Canada has a well-developed contractual law framework (e.g., provincial Sale of Goods Acts).

26. Privacy and data information is protected under legislation. The Privacy Act (1983) imposes obligations on federal government departments and agencies to respect privacy rights by limiting the collection, use and disclosure of personal information. The Privacy Act also gives individuals the right to access and request correction of personal information about themselves held by these federal government organizations.

27. Canada’s consumer policy framework consists of a suite of measures to protect consumers. The financial consumer protection framework rests on disclosure, limits on practices not beneficial to consumers, the consumer’s right to exercise choice, and access to an effective and efficient complaint handling system. The Government has brought forward legislation to require all banks and authorized foreign banks to belong to an external complaints body that conducts impartial reviews of customer complaints. Government proposals in 2013 also include the development of a comprehensive financial consumer code addressing issues raised by a digital and remote banking environment, as well as the needs of vulnerable Canadians.

28. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) is the main legislative basis for Canada’s anti-money laundering and countering the financing of terrorism (AML/CFT) regime. The PCMLTFA establishes Canada’s financial intelligence unit, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) which is an independent agency that reports to the Minister of Finance and is also the competent authority for AML/CFT regulation in Canada.

An efficient and independent judiciary

29. The courts system and other legal infrastructure in Canada is highly developed and the independence of the judiciary is respected. There is a comprehensive body of business laws, including on insolvency and on contractual and property rights. All legislation must be passed by the Federal Parliament or provincial legislative assembly. The Constitution recognizes a strict separation at federal and provincial levels between the judiciary, parliament and government. The principle of judicial independence, i.e., freedom from legislative or executive interference, is secured in practice through provisions in law or in practice for security of tenure, financial security and administrative independence. A number of institutions foster judicial independence, notably the Canadian Judicial Council, the Commissioner for Federal Judicial Affairs and the National Judicial Institute.

Comprehensive and well defined accounting principles and rules that are widely accepted internationally

30. Canada has adopted the International Financial Reporting Standards. The use of IFRS became a requirement for Canadian “publicly accountable profit-oriented enterprises for financial periods beginning January 1, 2011.” This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”

31. Application of IFRS has been mandatory since 2011. For rate regulated entities and investment companies, IFRS is permitted but not required for 2011. Investment companies have a deferral until January 1, 2014. Rate regulated entities have a deferral until January 1, 2015. Many Crown Corporations or State Entities must apply IFRS. Similarly, brokerage firms and investment companies not listed but with a broad number of investors are required to apply IFRS.

A system of independent external audits

32. Banks must be audited in accordance with Generally Accepted Auditing Standards, as required under the Bank Act. The audit standards are as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA), except where otherwise specified by OSFI. The Bank Act further requires that a firm of accountants and the member of the firm designated to conduct the audit of the bank are independent of the bank. (http://laws-lois.justice.gc.ca/eng/acts/B-1.01/FullText.html).

33. The ASB is involved in the International Accounting Standards Board’s standard-setting process. Oversight of the two bodies (including nomination of members) is undertaken on a public interest basis by bodies established by the Canadian Institute of Chartered Accountants (CICA): the Accounting Standards Oversight Council and the Auditing and Assurance Standards Oversight Council.

34. The Canadian Auditing and Assurance Standards Board (AASB) establishes auditing standards based on International Standards on Auditing. The AASB adopted International Standards on Auditing (ISAs) for financial statement audits for periods ending on or after December 2010. Audits of federally-regulated financial institutions are conducted in accordance with ISAs. In particular, ISA 700 Forming an Opinion and Reporting on Financial Statements, includes the requirement that the report of the bank’s independent auditor states the auditor’s opinion on whether the financial statements present a fair view of the financial position and performance of the audited entity.

35. The Canadian Public Accountability Board (CPAB) oversees the quality of the work of the external audit firm. CPAB is the national body responsible for the regulation of public accounting firms and is a Federal not-for-profit corporation. CPAB was created by the Canadian Securities Administrators, the Office of the Superintendent of Financial Institutions and the Canadian Institute of Chartered Accountants. CPAB is a member of the International Forum of Independent Audit Regulators.

Availability of competent, independent and experienced professionals

36. Canada’s accounting profession is self-regulated by the Canadian Institute of Chartered Accountants (CICA) and provincial/territorial institutes. The CICA helps the Canadian accounting profession maintain an international presence through the Global Accounting Alliance and being a founding member and active participant of the International Federation of Accountants.

37. Canada’s legal profession is self-regulated by provincial/territorial law societies. For example, the Law Society of Upper Canada provides oversight for Ontario’s lawyers seeking to ensure that lawyers meet high standards of competence and professional conduct.

Well defined rules governing, and adequate supervision of, other financial markets and, where appropriate, their participants

38. Securities regulation in Canada is currently undertaken under a system of provincial and territorial regulation and supervision. Each province and territory has its own securities regulatory authority or regulator (a Securities Regulator) and its own set of securities laws and regulations, although most regulations are harmonized across the provinces. Generally, the objectives of securities legislation in each province and territory are consistent, i.e., promoting investor protection and fostering fair and efficient capital markets. Discussions continue on the possible creation of a common securities regulator to oversee Canada’s capital markets.

39. The Canadian Securities Administrators (CSA) is a voluntary umbrella organization of the Securities Regulators. CSA members except Ontario, have developed a “passport system,” through which market participants can use a “principal regulator” as a conduit for approval in all other jurisdictions in which they pay fees for the purposes of prospectus approval, discretionary exemption decisions and registration.

Efficient and effective credit bureaus that make available credit information on borrowers

40. Credit bureaus are provincially regulated, and are required to maintain accurate and up-to-date records and to permit consumers access to their credit file.

Public availability of basic economic, financial and social statistics

41. Canada’s central statistical office, Statistics Canada, is legislated to produce statistics on population, resources, economy, society and culture at provincial, territorial and federal level.

Secure, efficient, and well regulated payment and clearing systems.

42. The payment clearing and settlement infrastructure is subject to regulation and oversight by the Minister of Finance, the Bank of Canada (the Bank), OSC, AMF, ASC, and Manitoba Securities Commission (MSC). The Minister of Finance has oversight powers respecting the Canadian Payments Association, (CPA) and payments systems under the Canadian Payments Act (CP Act). The Minister oversees the CPA and its systems, the Automated Clearing and Settlement System (ACSS), Canada’s national retail payment system, and the Large Value Transfer System (LVTS), which deals with large-value Canadian-dollar payments. Under the Payment Clearing and Settlement Act, the Bank has a mandate to identify clearing and settlement systems in Canada that could be operated in a manner that could pose systemic risk. Subject to approval by the Minister of Finance the Bank oversees these systems. Five systems have been designated as systemic: the LVTS; the CDSX, (securities clearing and settlement); the Canadian Derivatives Clearing Service (CDCS); CLS Bank, (foreign-currency transactions); and LCH Clearnet’s SwapClear (OTC interest rate swaps).

4. Clear framework for crisis management, recovery and resolution

Dealing with troubled financial institutions

43. Canada has a supervisory framework that is coordinated with its intervention regime. The authorities are OSFI as the prudential regulator, the Bank of Canada which can provide liquidity to illiquid but solvent financial institutions, the CDIC which is the resolution authority for federally regulated deposit-taking institutions, and the Department of Finance which advises the Minister. These agencies, along with the FCAC, meet regularly through FISC and the CDIC Board.

44. There are a range of options for dealing with troubled financial institutions. These include supervisory actions, taking control of a federally regulated financial institution (e.g., where the Superintendent believes the institution is, or is likely, to be non-viable), as well as options open to the CDIC (noted below). Further, the Government, under the Financial Administration Act, has the power to enter into a wide variety of contracts, including purchasing, lending, selling, or pledging of securities, as well as providing loans, lines of credit, guarantees, loan insurance or credit insurance with any entity operating in Canada. This authority can only be used if the Minister of Finance is of the opinion that entering into a contract is necessary to promote the stability or maintain the efficiency of the financial system in Canada.

45. The Government comprehensive risk management framework for Canada’s systemically important banks is planned to be consistent with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions. It is proposed that it will include a “bail-in” regime. The Government will consult stakeholders on how best to implement such a regime.

Early Intervention Framework

46. An early intervention policy forms part of OSFI’s statutory objectives, The statue requires that it “promptly advise the management and board of a financial institution in the event the institution is not in sound financial condition or is not complying with its governing statute law or supervisory requirements under that law and, in such a case, to take, or require the management or board to take, the necessary corrective measures or series of measures to deal with the situation in an expeditious manner”. OSFI’s powers of intervention are discussed in more detail in CP11.

Emergency Lending Assistance

47. The Bank of Canada can provide Emergency Lending Assistance (ELA) to any member of the CPA that is facing serious and persistent liquidity problems and that the Superintendent judges to be solvent. Lending may be against a range of collateral that is broader than it is for typical operations, and is subject to a maximum term-to-maturity of six months. These loans can be renewed as often as the Bank deems appropriate.

Resolution powers

48. CDIC is the resolution authority for CDIC-member financial institutions. CDIC’s statutory mandate is to provide deposit insurance, and promote and contribute to financial stability. Tools available to resolve a failing member institution include: liquidation and payout, agency agreement (an administrative arrangement whereby an agent, on a fee paid basis, will dispose of the assets and honor deposits and other liabilities as they come due); assisted transaction; forced sale (share or asset); open bank assistance; (assistance can range from a one-time, finite loan to a blanket guarantee for all creditors of the institution); and bridge bank arrangements. Canada’s largest banks have been required to develop recovery plans and CDIC has developed resolution plans. Both recovery and resolution plans will be reviewed, updated and enhanced regularly.

5. Appropriate level of systemic protection (or public safety net)

49. Canada’s system of deposit insurance includes both federal and provincial schemes. The CDIC is the federal Crown Corporation that insures eligible deposits up to a maximum of $100,000 per depositor, per member institution. Deposits with provincially regulated cooperative financial institutions (i.e., credit unions) are covered by provincial deposit insurance programs.

50. Mortgage default insurance is an important component of Canada’s financial stability framework. Federally regulated lenders are required by law to obtain insurance on their residential mortgage loans when borrowers provide less than 20 percent of the equity. Mortgage default insurance in Canada is provided either by the Canada Mortgage and Housing Corporation (CMHC) or by private mortgage insurers. CMHC is a Crown corporation and as such its liabilities are fully backed by the Government of Canada. The Government also provides a 90 percent guarantee of the mortgage insurance obligations made by the private insurers.

6. Effective market discipline

51. Canada has well-developed arrangements promoting market discipline. General corporate governance requirements are set out in Canadian federal and provincial corporate statutes, including the Canada Business Corporations Act (CBCA). The statutes prescribe certain requirements in respect of the structure of the board of directors, basic qualifications of directors and requirements for a minimum number of independent directors. Securities laws set out other requirements in relation to companies issuing securities, including requirements for disclosure of governance arrangements. Institutional investors actively monitor corporate governance practices at Canadian public corporations. The Toronto Stock Exchange sets governance and disclosure requirements as conditions of listing. Financial analysis is widely available from media, rating agencies, brokers etc. Canadian regulatory authorities set disclosure requirements on federally regulated institutions (see, for example CP 28). Banks are expected to comply with the BCBS Pillar 3 requirements.

52. More stringent public disclosure obligations apply to Domestically Systemically Important Banks (D-SIBs). OSFI has outlined, among other requirements, more stringent public disclosure obligations that explicitly referenced the recommendations of the Financial Stability Board’s Enhanced Disclosure Task Force (EDTF). Canadian D-SIBs are expected to have public information disclosure practices covering their financial condition and risk management activities that are among the best of their international peers. Moreover, D-SIBs are expected to adopt the EDTF disclosure recommendations in the banking arena, as well as evolving domestic and international bank risk disclosure best practices.

53. OSFI publishes institution-specific data on its website for public access. This includes balance sheet and income statement data, capital and derivative components, and premiums written, among other financial information, for various federally regulated financial institutions.

Detailed Assessment

A. Supervisory Powers, Responsibilities, and Functions

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