Global Banking Regulations and Banks in Canada
- During the 2007/08 global financial crisis, unlike banks in many other countries, no Canadian banks were bailed out or in danger of failing.
- The 2007/08 crisis resulted in a series of significant regulatory changes for the international banking sector. The implementation of these changes is ongoing.
- The World Economic Forum has ranked Canada’s banks as the most sound in the world for eight years in a row – 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, 75 per cent of Canadians provided a favourable rating.
The bottom line
Canada’s banks have been recognized as the soundest banks in the world for eight years in a row. Canada’s prudent banks, combined with effective regulation and supervision, form a model of stability in the global financial system.
During the 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. However, no Canadian bank was in danger of failing or needed a government bailout. Canada’s banks were well capitalized, well managed, and well regulated going into the global financial crisis, and remain so to this day.
While banks in Canada are extremely unlikely to fail, each bank has developed “recovery and resolution plans” that would help the bank recover from financial distress or bring about an orderly resolution in the event of their failure.
However, the global financial crisis has led to a series of significant regulatory changes to international banking rules, which are designed to reduce the risk of another financial crisis occurring. While these rules are set internationally, it is up to domestic regulators to put them in place and enforce them.
There are many important participants – including Canadian policymakers and regulators – involved in shaping and adapting these regulatory changes for Canada’s financial system. [See Table of Main Participants below.]
The most significant changes to global banking rules are in the areas of capital and liquidity. Both the quantity and quality of capital – which helps banks absorb losses – has been increased. In addition, new liquidity requirements have been put in place to help ensure that banks can meet their financial obligations, even in times of stress.
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.
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.
The most significant changes to global banking rules have occurred in the area of capital and liquidity. These changes are described in greater detail below.
A bank holds capital so that the public will have confidence in it to help protect depositors and other stakeholders against losses in the event of a default. Capital is a cushion against bank-specific and market-related activities that could have negative impacts on a bank’s ability to stay solvent.
Basel III capital rules
Global and domestic systemically important banks
Basel III is a framework that sets out global regulatory rules for bank capital and liquidity. These rules were originally published in December 2010 in response to the global financial crisis and are subject to ongoing review and updates.
The phase-in of Basel III capital rules began in 2013. Canada implemented these changes in January 2013, well ahead of many other countries and well ahead of the Basel III timeline. The phase-in of Basel III’s liquidity rules began in 2015.
Basel III was developed and agreed to by members of the Basel Committee on Banking Supervision. This is a longstanding committee of the Bank for International Settlements (BIS) that is mandated to review and develop banking guidelines and supervisory standards at a global level.
For more information, go to http://www.bis.org/.
Basel III capital rules as they relate to banks in Canada
“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
How OSFI is implementing liquidity rules for banks in Canada
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||ROLE(S) IN REGULATION|
|Bank for International Settlements (BIS)||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.|
|Basel Committee on Banking Supervision (BCBS)||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.|
|Financial Stability Board (FSB)||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.|
|Office of the Superintendent of Financial Institutions (OSFI)||The prudential regulator of Canadian banks and other federally regulated financial institutions. Also responsible for implementing Basel Committee principles and guidance in Canada. |
|Bank of Canada||Canada’s central bank, responsible for setting monetary policy and promoting a stable and efficient financial system.|
|Department of Finance||Responsible for the legislative framework governing banks and other federally regulated financial institutions in Canada.|
|Canada Deposit Insurance Corporation (CDIC)||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. |