- 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 among the soundest in the world for the past 10 years – a fact that highlights 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
The World Economic Forum has ranked Canada’s banks as among the soundest in the world for the past 10 years. Canada’s prudent banks, combined with effective regulation and supervision, form a model of stability in the global financial system.
Significant regulatory change continues
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
- There are several categories of rules related to capital under Basel III. Taken together, these rules require banks to hold enough capital to equal at least 10.5% of their total risk-weighted assets by 2019.
Global and domestic systemically important banks
- There are currently no Canadian banks designated as “global systemically important banks” (G-SIBs).
- However, in 2013, the Office of the Superintendent of Financial Institutions (OSFI) named the six largest banks in Canada as “domestic systemically important banks” (D-SIBs). As a result, these six banks will be required to hold an additional one per cent of capital as of January 1, 2016, and will be subject to more intense supervision and enhanced disclosure requirements.
- G-SIBs and D-SIBs are treated differently by OSFI given the potential impacts that a failure of any one of them would have on global and domestic economies.
What is Basel III?
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
- The Capital Adequacy Requirements (CAR) Guideline reflects how Canadian regulators are implementing the Basel III capital rules in Canada. In December 2012, OSFI issued a revised CAR Guideline to incorporate Basel III reforms. Subsequent updates during 2014 were made for purposes of clarification and to consolidate some earlier advisories, and further updates are expected given the pace of regulatory change internationally.
- Under the CAR Guideline, OSFI already expects banks to meet target capital levels that equal or exceed the 2019 Basel III minimum capital requirements.
- Under a separate Leverage Requirements Guideline,1 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” 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 2019.2 NSFR requirements were issued in October 2014 and will be in force by 2018.3
- 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 and a revised Liquidity Adequacy Requirements (LAR) Guideline in May 2014. These guidelines 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.
- OSFI’s approach is consistent with the Basel Committee’s September 2008 Principles for Sound Liquidity Risk Management and Supervision.
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
||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.
1 “Leverage Requirements Guideline”, October 2014, http://www.osfi-bsif.gc.ca/eng/docs/lr.pdf
2 “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools”, January 2013, www.bis.org
3 “Basel III: The Net Stable Funding Ratio”, October 2014; and “Basel III International framework for liquidity risk measurement, standards and monitoring”, December 2010, www.bis.org