The Canadian Bankers Association (CBA) is pleased to have this opportunity to provide the views of the banking industry as part of the five-year review of the Credit Unions and Caisses Populaires Act, 1994.

The CBA works on behalf of 60 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 and works with banks and law enforcement to help protect customers against financial crime and promote fraud awareness.

The CBA believes that a strong financial system, based on sound internal risk management and an effective prudential policy, supervisory and regulatory framework, is vital to the Canadian economy. The credit union system is an important part of Canada’s dynamic financial sector, contributing to the choice and competition available to consumers. As the global financial crisis demonstrated, disruption to the financial sector can spread quickly, even to institutions who would consider themselves immune. As a result, it is important that all financial institutions, credit unions as well as banks, operate within a robust prudential policy, supervisory and regulatory framework to ensure the continued safety and soundness of Canada’s financial system as a whole.

Credit Union Growth and Complexity

Credit unions are increasingly evolving into complex institutions that offer a wide array of products and services that are supported by operations that resemble those of banks. In Ontario, as the government’s Consultation Paper highlights, there has been much consolidation through mergers and acquisitions. This is a common trend across Canada, demonstrating that credit unions can become large and complex.

Some changes have been made to manage the growing complexity and size of credit unions. An obvious example is the 2008 merger between the Credit Union Central of Ontario and the Credit Union Central of British Columbia to create Central 1 Credit Union in order to provide appropriate liquidity and funding services, technology and payments processing, as well as government relations and trade association activities. There have also been discussions regarding additional mergers with other Centrals to support credit unions with scalable solutions that are available on a national basis. Indeed, Central 1 has grown so important that the Financial Institutions Commission of British Columbia (FICOM) has recently designated it a domestic systemically important financial institution (D-SIFI), meaning that its failure could cause significant financial and economic disruption. Institutions designated as D-SIFIs are subject to additional capital and liquidity requirements and enhanced supervision by regulatory authorities.

Prudential Policy, Supervisory and Regulatory Framework

Given the growing complexity and size of credit unions, and in order to ensure the safety and soundness of Canada’s financial system as a whole, the CBA believes that the credit union movement should operate within a robust prudential policy, supervisory and regulatory framework consistent with that of federally regulated financial institutions.

Both the Bank of Canada and the International Monetary Fund (IMF) have addressed the importance of a robust framework for credit unions. The Deputy Governor of the Bank of Canada¹ recently stated that regulators need to improve their oversight of larger credit unions if those institutions opt to perform more complex transactions and take on riskier “bank like” activities. Similarly, the IMF noted in its Financial Sector Assessment Program (FSAP) for Canada²that, as provincial deposit takers become large enough to pose systemic risks, they should also be subject to the same level of rigorous supervision and regulation as other major depository institutions in Canada.

Such a robust prudential policy, supervisory and regulatory framework would include, for example, the large number of initiatives that have been implemented by the federal government and its financial agencies since the global financial crisis. These initiatives include Basel III reforms on capital adequacy and liquidity guidelines, enhanced disclosure, mortgage underwriting practices, corporate governance, and recovery and resolution planning. In the same context as his commentary noted above, the Deputy Governor of the Bank of Canada indicated that, if provincial governments and regulators fail to adopt requirements such as Basel III and credible recovery and resolution plans, their credit unions are at risk of being labelled shadow banks.

Where provincial supervisors and regulators elect not to adopt these policies, they should publicly identify which federal prudential initiatives have not been applied and the reasons why. Furthermore, and consistent with the general supervisory and regulatory approach, the implementation of these policies should be a risk-based approach, meaning more time and resources devoted to the larger, more complex and/or riskier institutions.

The purpose of these suggestions is to improve the robustness of the prudential supervisory and regulatory framework of credit unions as well as to support credit unions that choose to transition to the federal credit union regime. Provinces should harmonize their prudential frameworks with that of federally regulated financial institutions, including the federal credit union regime. This would reduce regulatory obstacles for credit unions to migrate to the federal credit union model, enabling decisions to be made on business and prudential risk grounds.

An important part of implementing an appropriately robust prudential framework for credit unions is ensuring that the proper supervisory resources are in place. In fact, the IMF’s FSAP for Canada noted that some large credit unions require provincial supervisors to have the capacity, on a standalone basis, to effectively supervise them and for the respective provinces to have the fiscal resources to backstop depositors and resolve any nonviable ones in an orderly fashion. Yet this can be challenging because of the wide dispersion of supervisory talent across the provinces and this is evident in some jurisdictions in Canada. For instance, the Auditor General of British Columbia highlighted in a recent review of Credit Union Supervision in British Columbia³, that FICOM is significantly constrained due to a shortage of staff, particularly in more senior and specialized roles, that is leading to supervisory work being scaled back and stalling the effectiveness of its work. This could lead to a situation where worsening circumstances at a credit union may not be detected in time to address and reduce the risk of failure.

A similar review has not taken place in Ontario though the Auditor General of Ontario recently completed an audit on the Financial Services Commission of Ontario’s (FSCO)⁴ systems and procedures for its regulation of pension plans and financial services. The Auditor General recommended that FSCO improve the effectiveness of its regulatory oversight of other types of financial entities, such as pension plans and co-operative corporations. As an extension of the Auditor General of Ontario’s recent review of FSCO, and in light of the observations and commentary from the IMF, the Bank of Canada and the Auditor General of British Columbia about the supervision and regulation of credit unions, we encourage an audit of the credit union prudential framework in Ontario to determine whether supervisors and regulators have enough resources to provide oversight of credit unions.

This need for assurance that supervisors and regulators are sufficiently resourced is increasing in importance, magnified by a number of actions taken last year by the federal government to clarify its mandate. These actions include:

• Ceasing joint supervision of provincial credit union centrals by OSFI;
• Eliminating possible recourse to CDIC loans to provincial deposit protection agencies; and,
• Offering Bank of Canada emergency lending assistance only to those credit unions and Centrals whose provinces have agreed to provide an indemnity to the Bank of Canada for any losses that may occur as a result of that assistance.

As a result of these actions, provincial governments should ensure that they have an appropriately robust prudential policy, supervisory and regulatory framework for credit unions in place as well as the resources to maintain that framework.

Recommendation: Credit unions should operate within a robust prudential policy, supervisory and regulatory framework harmonized with that of the regime for federally regulated financial institutions. Where provincial supervisors and regulators elect to not adopt and apply elements of this prudential framework, they should publicly identify which ones have not been applied and the reasons why.

Recommendation: An audit of the credit union prudential framework should be conducted in Ontario to determine whether supervisors and regulators have enough resources to provide proper oversight of credit unions.

Federal Credit Union Regime

Another acknowledgement of the growing complexity and size of credit unions is the federal credit union regime, which was created at the request of credit unions. The federal regime was created to support growth, consumer choice and seamless expansion of the Canadian credit union system across provincial boundaries, and do so within an appropriate prudential framework that protects the safety and soundness of Canada’s financial system. Federal credit unions would benefit from a robust prudential framework based on the bank model, while recognizing the unique cooperative elements of credit unions.

The federal credit union regime would best address many of the issues raised in the Consultation Paper, particularly for those credit unions that are large and systemically important. In order to support this move, the federal government last year committed to provide temporary transitional support to eligible provincial credit unions that have provincial acceptance to move to federal regulation.

The Auditor General of Ontario acknowledged in its report on FSCO⁵ that the number of credit unions and caisses populaires that FSCO oversees has declined by almost half over the last ten years. This decline is part of the motivation for the Auditor General’s recommendation that FSCO and the Ministry of Finance explore the possibility of transferring its regulatory responsibilities to the federal Office of Superintendent of Financial Institutions (OSFI) by adopting the federal regime for credit unions.

The CBA is supportive of the Auditor General’s recommendation and encourages the Government of Ontario to support credit unions, particularly those that are large and systemically important, to move to the federal charter. By adopting the federal regime, credit unions would benefit from the same regulatory and supervisory oversight regime as banks and would strengthen the financial system of Ontario.

Deposit Insurance Guarantee

Another element in the functioning of a strong financial system is a suitably designed deposit insurance system. A deposit insurance system should promote confidence and financial stability. 

The International Association of Deposit Insurers (IADI)⁶ suggests that the level and scope of coverage should strike a balance between sufficiently protecting the majority of depositors while leaving a meaningful proportion of the value of deposits uninsured. The Financial Stability Board (FSB)⁷ has specifically stated that unlimited deposit coverage through the complete protection of eligible deposits in institutions (such as some provincially-chartered Canadian credit unions) could lead to greater risk-taking and adversely affect the deposit insurance system effectiveness, and should be avoided.

The IADI⁸ recommends that deposit insurance coverage should be limited in order to minimize moral hazard and encourage market discipline by large-scale depositors who will have an incentive to monitor the risk-taking activities of the financial institutions. An unlimited deposit guarantee will attract large (and potentially volatile) deposits that were never intended to be protected by policy makers.

In Ontario, the deposit insurance coverage limit is $100,000 for aggregate insured accounts held by a member at each credit union. However, deposits in certain registered accounts, including registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), registered disability savings plans (RRDPs) and tax-free savings accounts (TFSAs) are insured without limit.

Ontario’s deposit insurance coverage is different from that of the Canada Deposit Insurance Corporation (CDIC) and other provincial deposit insurance guarantees. The IMF noted this high degree of heterogeneity of deposit insurance coverages across Canada saying that it may create uncertainty and confusion, and that the longer-term objective should be to introduce more uniformity across the operating standards of the provincial safety nets and convergence toward leading practice. Indeed, this heterogeneity is compounded by the actions of some credit unions outside of Ontario that are taking advantage of the unlimited deposit guarantee to solicit large deposits from other provinces through virtual deposit accounts.

The FSB⁹ recognized the CDIC as an example where an appropriate balance has been struck between covering a sufficient number of depositors while leaving a significant value of deposits uninsured. Given that the CDIC is an example of leading practice in the country and consistent with our recommendation that provincial policy, supervisory and regulatory frameworks should be aligned with those of federally regulated financial institutions (including federal credit unions), we encourage the coverage levels of deposit insurance systems to be harmonized with CDIC. It is for the reasons cited above that the unlimited coverage for certain registered accounts in Ontario be reconsidered. Depositors in Ontario would benefit from greater consistency and clarity.

The CBA recognizes that credit unions rely on retail deposits for a very large part of their funding and hence a very large part of the balance sheet will be deposit insured. We are concerned that some provinces provide unlimited deposit guarantees which not only attract large and less stable deposits but also lead to moral hazard.

Recommendation: Deposit insurance coverage for credit unions should be harmonized with that of the CDIC.

Conclusion

The financial sector is undergoing a tremendous amount of change as a result of competition, technology and the global financial crisis. As a result of these forces, credit unions are growing to become large, complex, and in some cases, systemically important financial institutions. As this trend continues, it is important that credit unions operate within a robust prudential policy, supervisory and regulatory framework – one that includes an appropriate deposit insurance guarantee system − to ensure the continued safety and soundness of Canada’s financial system as a whole.

¹ Canada’s Schembri Says Co-op Banks Need Better Risk Controls, Bloomberg News, October 7th, 2014.
² Financial Sector Stability Assessment for Canada, International Monetary Fund (IMF), IMF Country Report No. 14/29, February 2014.
³ Credit Union Supervision in British Columbia, Auditor General of British Columbia, March 2014.
⁴ Office of the Auditor General of Ontario, Financial Services Commission of Ontario – Pension Plan and Financial Service Regulatory Oversight, Section 3.03, December 9, 2014.
⁵ Ibid.
⁶ Enhanced Guidance for Effective Deposit Insurance Systems: Deposit Insurance Coverage, International Association of Deposit Insurers (IADI), March 2013.
⁷ Thematic Review on Deposit Insurance Systems: Peer Review Report, Financial Stability Board (FSB), February 9th, 2012.
⁸ Enhanced Guidance for Effective Deposit Insurance Systems: Deposit Insurance Coverage, International Association of Deposit Insurers (IADI), March 2013.
⁹ Thematic Review on Deposit Insurance Systems: Peer Review Report, Financial Stability Board (FSB), February 9th, 2012.