Fast facts

• The 2007/08 crisis resulted in a series of significant regulatory changes for the international banking sector. Regulators are also considering the implications of the recent demise of the three U.S. institutions.
• Canadian banks remained resilient during the failure of three U.S. institutions in early 2023.

Banking is a regulated industry

In Canada and around the globe, banking is a regulated industry. Banks are licensed by governments to provide banking services to consumers and businesses, providing a foundational service for the modern economy. With that license comes extensive regulatory oversight by the government. Governments set and enforce banking rules that are intended to ensure that the banking system is strong and stable, know as prudential regulation, and to protect consumers, known as market conduct regulation, while still being competitive and innovative. 

Canada’s prudent and well-managed banks, combined with effective regulation and supervision, form a model of stability in the global financial system.

Regulation is intended to be proportional to risk

In Canada and internationally, regulators have made efforts to tailor the intensity and complexity of regulation to reflect the size and scale of the financial institutions that are being regulated. In Canada, banks are grouped into domestic systemically-important banks (D-SIBs) and small and mid-sized banks (SMSBs). In 2013, the Office of the Superintendent of Financial Institutions (OSFI) named the six largest banks in Canada as D-SIBs. As D-SIBs, they are subject to additional prudential requirements (discussed below) along with more intense supervision and enhanced disclosure requirements. All other banks are considered by OSFI to be SMSBs. For those banks, OSFI has developed proportional capital and liquidity requirements reflecting the more limited systemic risk associated with smaller financial institutions.

Prudential regulation is developed internationally and implemented domestically

In Canada, banks are regulated by the federal government. The principal bank prudential regulator is the Office of the Superintendent of Financial Institutions (OSFI). OSFI sets financial and operational rules that banks need to follow which are intended to maintain the safety and soundness of the banking system, and sets reporting and disclosure obligations to provide investors, savers, analysts and policy makers with a window into the financial status of the industry. Complementing OSFI is the Canada Deposit Insurance Corporation (CDIC), which insures deposits of up to $100,000, oversees bank resolution planning, and has the authority to intervene in a failing institution.

Canadian regulators work in collaboration with their counterparts around the globe to coordinate prudential regulation internationally. Banking is a global business, so regulators work internationally to align practices and harmonize standards, while still allowing room for tailoring to reflect national differences in economic conditions and market practices. They do this through the Basel Committee on Banking Supervisions (BCBS), which is part of the Bank for International Settlements (BIS).

Prudential regulation falls largely into three categories: capital requirements, liquidity requirements, and non-financial risk management.

Capital Requirements

“Capital” is the money that bank owners have invested in the bank through the purchase of equity shares or is generated by the bank in the form of retained earnings. A bank holds capital to help protect depositors and other stakeholders against losses. Capital is a cushion against losses, ensuring that banks stay solvent and continue to serve Canadians.

There are extensive standards related to capital under Basel III, which have been reflected in national banking regulations by OSFI in the Capital Adequacy Requirements Guideline (CAR). Taken together, as a baseline these rules now require Canadian banks to hold enough capital to equal at least 10.5 per cent of their total risk-weighted assets. In addition, the D-SIBs are required to hold an additional one per cent of capital as of January 1, 2016 (D-SIB surcharge), and are also subject to a Domestic Stability Buffer (DSB) that ranges from zero to four per cent.¹ In practice, Canadian banks hold capital well in excess of the regulatory minimum – at the end of 2023, domestic banks’ total capital ratio was 17.1 per cent.²

Complementing the Capital Adequacy Requirement Guideline, OSFI also limits the absolute amount of leverage that a bank can have relative to its size. Under the Leverage Requirements Guideline, OSFI expects institutions to maintain a leverage ratio that meets or exceeds 3 per cent at all times. OSFI also prescribes authorized leverage ratio requirements for individual institutions.

Liquidity Requirements

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

At the international level, the BCBS developed two minimum metrics 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. When used in tandem, these metrics are meant to ensure that banks have sufficient high-quality liquid assets to withstand a period of economic stress (LCR) and to ensure banks can continue to fund themselves during economically turbulent periods.

In Canada, liquidity requirements are set out in OSFI’s Liquidity Principles Guideline (B6) and the accompanying Liquidity Adequacy Requirements Guideline (LAR). These guidelines, which reflect BCBS standards, describe 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.

Non-Financial Risk Management: New Frontiers

Non-financial risk management has been a long-standing component of prudential regulation. Banks provide foundational services to individuals and businesses, so their ability to maintain service through operational challenges and recover quickly from service disruptions is a component of prudential regulation.

Historically, non-financial risk management has focused on core operational risk and resilience. OSFI continues to evolve its regulatory and supervisory approach as part of its strategic goal to improve banks’ preparedness for, and resiliency to, non-financial risks, which is embodied in Guideline E-21, Operational Resilience and Operational Risk Management. In doing so, OSFI recognizes the importance of banks continuing to provide innovative financial services to Canadians while fostering trust and confidence in the financial sector.

While core operational risk management and resilience remains an important component of non-financial risk management, banks and regulators around the world, including OSFI, are now expanding their lens to include new and evolving forms of risks in relation to:

• technological innovations (such as artificial intelligence),
• climate change, and
• integrity & security.

Managing Technology-related Risk

In 2020, as part of its work to ensure Canada’s financial sector remains resilient against emerging non-financial risks, OSFI sought feedback through a discussion paper on a broad range of issues related to technology and cyber risk.

In 2022,OSFI subsequently issued a new Guideline B-13, Technology and Cyber Risk Management and in 2023 OSFI issued a revised Guideline B-10, Third-Party Risk Management. Together, these guidelines support banks as they innovate efficiently and responsibly while managing related risks.

In 2023 and 2024, OSFI also undertook other work related to digital innovation, including in rapidly emerging areas such as AI and Machine Learning and in conjunction with other regulators such as FCAC, to ensure that OSFI remains alert to the latest developments and potential implications for Canada’s financial sector.

Managing Climate Risk

In March 2023, OSFI issued Guideline B-15 on Climate Risk Management that addresses governance and risk management expectations, as well as climate-related financial disclosures. This Guideline was updated in March 2024 to reflect the final International Sustainability Standards Board (ISSB) Climate-related Disclosures standard. OSFI has also published final Climate Risk Returns and consulted on a Standardized Climate Scenario Exercise (SCSE).

Integrity and Security

In 2023, the federal government expanded the mandate of OSFI to include ‘integrity and security’. Under its expanded mandate, OSFI is expected to supervise financial institutions to determine that they have adequate policies and procedures to protect themselves against threats to integrity and security, including foreign interference, undue influence and malicious activities. To operationalize this mandate, in January 2024 OSFI issued a new Integrity and Security Guideline with the goal of ensuring that: banks’ actions, behaviours, and decisions are consistent with the letter and intent of regulatory expectations, laws, and codes of conduct; and banks’ operations, physical premises, people, technology assets, and data and information are resilient and protected against threats.

What is Basel III?

Basel III was developed and agreed to by members of the Basel Committee on Banking Supervision (BCBS). 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.

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. In December 2017, the BCBS issued some notable updates entitled 'Basel III: Finalising post-crisis reforms'.

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. Canada began implementation of the Basel III reforms in April 2023 with the final elements of the reforms implemented in November 2023.

For more information, go to bis.org.

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.

¹ 1 As at Q2 2024 the DSB is set at 3.5%.

2 OSFI financial data for domestic banks, as at Q4 2023