Financial Market Supervision: Canada’s
Perspective
James K. Jackson
Specialist in International Trade and Finance
November 25, 2009
Congressional Research Service
7-5700
www.crs.gov
R40687
CRS Report for Congress
P
repared for Members and Committees of Congress

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Financial Market Supervision: Canada’s Perspective

Summary
The international financial crisis has spurred policymakers in the United States and elsewhere to
consider changing the way they currently supervise financial institutions and financial markets to
reduce the prospects of experiencing another global financial crisis. Canada’s financial system, in
particular is garnering attention, because it seems to be more resistant to the failures and bailouts
that have marked banks in the United States and Europe. In particular, some observers are
assessing the merits of the way Canada supervises and regulates its banks, as one possible model
for the United States. There likely are aspects of Canada’s financial supervisory framework that
may offer an approach to supervising financial markets that may be useful for the United States to
consider. However, the smaller scope of Canada’s financial system and its economy likely lessen
the transferability of systems or procedures used in Canada to the vastly more complex U.S.
financial system. This report presents an overview of Canada’s financial system and its
supervisory framework and draws some distinctions between that system and the current U.S.
framework.


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Financial Market Supervision: Canada’s Perspective

Contents
Background ................................................................................................................................ 1
The U.S. Financial Supervisory System....................................................................................... 9
Canada’s Financial System........................................................................................................ 12
Economic Effects of Canada’s Supervisory System ................................................................... 16

Figures
Figure 1. U.S. System for Supervising Financial Markets .......................................................... 10
Figure 2. Canada’s Financial System Supervisory Structure....................................................... 13

Tables
Table 1. Canada’s Actual and Projected Real GDP, Consumer Prices, and Rate of
Unemployment ........................................................................................................................ 2
Table 2. Canada’s Economic Action Plan..................................................................................... 4
Table 3. Capital Ratios of Major Banks ....................................................................................... 5
Table 4. Balance Sheet Liquidity of Major Banks ........................................................................ 6
Table 5. Depository Funding of Major Banks .............................................................................. 8
Table 6. Canada: Financial Sector Structure, End-2006.............................................................. 15

Contacts
Author Contact Information ...................................................................................................... 17

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Financial Market Supervision: Canada’s Perspective

Background
The current financial crisis is prompting U.S. and foreign leaders to search for national models
that have proven superior in supervising and regulating financial markets and for a new
international order that can help mitigate any recurrence of the crisis. Canada’s financial system,
in particular, is garnering, attention because it seems to be more resistant during the crisis to the
failures and bailouts that have marked banks in the United States and Europe. In particular, some
observers are assessing the merits of Canada’s financial system, especially the way it supervises
and regulates its banks, as one possible model for the United States. Currently, advanced
economies employ a number of institutional structures to supervise and regulate their financial
sectors.
No single model of market supervision has proven to be clearly superior, but the trend seems to
be toward more integrated arrangements. Reportedly, the Obama administration considered at one
time replacing the multiple agencies that supervise and regulate the U.S. financial system with a
single regulator.1 It has proposed instead changes to the existing system that enhances the role of
the Federal Reserve and creates two new agencies and a new Financial Services Oversight
Council.2 Members of Congress are likely to propose alternative approaches to reordering the
supervision of U.S. financial markets. A number of countries have opted for a twin peaks
approach where prudential regulation (focusing on the long-term view of market performance) is
assigned to one regulator and market conduct regulation (focusing on the day-to-day operation of
the market) to another. Great Britain employs a different model where there is a fully unified
regulator that is separate from the central bank. Others, like the United States, have opted for
specialized federal regulators, while reserving a role for state regulators in securities regulation.
Canada’s model assigns the central bank the main role of conducting monetary policy and
maintaining price stability. It has assigned the core responsibility for supervising and regulating
some aspects of the financial system to a separate federal agency, while also giving provincial
governments authority over other parts of the financial system.
While Canada has not injected capital directly into its banks to forestall a failure, the financial
crisis and global economic recession are battering the Canadian economy in ways that are similar
to those in the United States and in Europe. The International Monetary Fund (IMF) recently
forecast that the Canadian economy, as represented by gross domestic product (GDP), could
contract by 2.5% in 2009, before rebounding with a positive rate of economic growth of 1.2% in
2010, as indicated in Table 1. The Bank of Canada, however, projected that the Canadian
economy would contract by 3.0% in 2009, and then rebound in 2010 at a 2.5% annual rate of
growth.3 In comparison, the U.S. economy is forecast to decline by 2.8% in 2009 and remain flat
in 2010.4 The IMF forecast also indicates that unemployment in Canada will rise to 8.4% in 2009
and 8.8% in 2010. The slowdown in economic growth, in large part, reflects Canada’s

1 Appelbaum, Binyamin, and Zachary A. Goldfarb, U.S. Weighs Single Agency to Regulate Banking Industry, The
Washington Post, May 28, 2009, p. A1.
2 Cho, David, Binyamin Appelbaum, and Zachary A. Goldfarb, Goals Shift For Reform of Financial Regulation, The
Washington Post, June 10, 2009, p. A1, Cho, David, and Zachary A. Goldfarb, Core Reforms Held Firm As Much Else
Fell Away, The Washington Post, June 18, 2009, p. A1..
3 Monetary Policy Report, The Bank of Canada, April 2009, p. 19.
4 World Economic Outlook, The International Monetary Fund, April, 2009, p. 69.
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vulnerability to spillover effects from the U.S. economy, since three-fourths of Canada’s exports
are bound for the United States and about one-fourth of Canadian corporate finance is sourced
there.5 Canadian exports of automotive products, forest products, and industrial materials posted
steep declines in the first quarter of 2009, and Canadian firms cut about 270,000 jobs in the first
quarter and reduced the average work week.6 The slowdown was especially pronounced in the
first quarter of 2009, when GDP fell by 7.1%, according to the Bank of Canada.7
Table 1. Canada’s Actual and Projected Real GDP, Consumer Prices, and Rate of
Unemployment
(Annual percentage changes and percent of labor force)
2007 2008 2009 2010
Actual
Projected
Real
GDP 2.7% 0.5% -2.5% 1.2%
Consumer
Prices
2.1 2.4 0.0 0.5
Unemployment
6.0 6.2 8.4 8.8
Source: World Economic Outlook, International Monetary Fund, April, 2009.
Canadian banks are also expected to face a number of challenges over the next year that include a
continued contraction in output, falling household incomes, and rising unemployment. Although
Canadian credit markets have improved over the first half of 2009, certain markets for asset
backed securities (ABS) remain frozen. The Bank of Canada indicated in June 2009 that the
number of such securities had fallen by about 20% since June 2007, because maturing securities
are not being replaced by new issues.8 The IMF has indicated that Canada is generally better
situated than many other countries to weather the financial crisis and the global economic
downturn. This resilience can be attributed to three factors. First, Canada positioned itself well
prior to the financial crisis through a conservative macroeconomic policy that reduced the federal
government’s debt relative to GDP and through a relatively tight monetary policy that focused on
price stability.9
Secondly, the IMF argues that Canadian banks have performed better, because Canadian
authorities acted proactively in addressing the potential economic slowdown. They did this by: 1)
adopting a major fiscal stimulus of Can$65 billion on October 30, 2008; 2) adopting an additional
fiscal stimulus program in early January 2009; and 3) easing monetary policy through a series of
cuts in key interest rates. As part of Canada’s Economic Action Plan adopted in January 2009,
officials implemented additional policy measures they can employ should further actions be
necessary. The economic plan comprises five elements: 1) funding for job and skills training; 2)
funding to stimulate housing construction; 3) investment in infrastructure; 4) support for major
export sectors, including automotive, forestry, and manufacturing; and 5) improving access to

5 Klyuev, Vladimir, Real Implications of Financial Linkages between Canada and the United States, IMF Working
Paper WP/08/23, International Monetary Fund, January 2008.
6 Monetary Policy Report, the Bank of Canada, April 2009, p. 9-10.
7 Ibid, p. 22.
8 Financial System Review, the Bank of Canada, June 2009, p. 13.
9 Concluding Statement of the IMF’s 2009 Article IV Mission to Canada, International Monetary Fund, press releaser
no. 09/73, March 11, 2009.
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financing through the Extraordinary Financing Framework. In the early stages of the financial
crisis, the Bank of Canada also provided liquidity by expanding its liquidity facilities and the
Government of Canada purchased some insured mortgages through the Canada Mortgage and
Housing Corporation.10
In addition, the Extraordinary Financing Framework is comprised of five elements: 1) providing
funding to Canadian financial institutions through the Insured Mortgage Purchase Program and
the Canada Mortgage Bond program; 2) expanding financing for Canadian businesses through
Export Development Canada and the Business Development Bank of Canada; 3) increasing
collaboration between financial Crown corporations11 and private sector lenders and credit
insurers under a business Credit Availability program; 4) designing a Canadian Secured Credit
Facility; and 5) initiating a Canadian Lenders Assurance Facility and the Canadian Life Insurers
Assurance Facility to provide insurance on the wholesale term borrowing of federally regulated
deposit-taking institutions, and life insurers. Additional measures include the ability to offer
guarantees on bank and insurance liabilities, and the authority to engage in transactions to
maintain financial stability, including providing capital injections. 12
Finally, the IMF argues that financial conditions have remained more favorable in Canada,
because Canadian banks are managed conservatively. Canadian banks are required to maintain
larger capital requirements than elsewhere, which has meant that Canadian banks had a stronger
balance sheet position as the crisis developed. The regulatory structure also discourages Canadian
banks from taking excessive risks. This system is centered around two key thresholds: minimum
risk-based capital ratios; and a maximum assets-to-capital multiple. Canada requires banks to
hold capital at rates that are higher than those set in the Basel Accords; Canada requires its banks
to hold tier 1 capital13 of at least 7% and total capital of 10%, compared with 4% and 8%,
respectively, for the Basel Accord. In addition, Canada requires that 75% of the tier 1 capital be in
the form of common equity and it restricts innovative instruments to 15% of tier 1 capital. In
addition, the assets-to-capital multiple is set at 20, which translates into a leverage ratio of 5%.
The capital requirements not only provide an enhanced capital cushion for Canadian banks, but
they restrict rapid balance sheet expansion and discourage engaging in wholesale operations.14
Nevertheless, as the financial crisis unfolded, the banks came under pressure from markets to
increase their capital ratios, which they apparently did by tapping private sources.15 In addition,
the IMF points out that Canadian banks have been more resilient, because Canada has a strong
financial regulatory and supervisory framework.16
As a result of these three factors, no Canadian bank has needed public capital injections and none
have used public guarantees.17 Nevertheless, the banks suffered a loss of 50% in the value of their
equities, similar to the experience of such equities in the United States and Europe. The Canadian

10 Financial System Review, p. 3.
11 State-owned corporations at either the federal, state, or territorial level.
12 Canada’s Economic Action Plan, 2009 Budget, Chapter 3, Ministry of Finance.
13 Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s perspective. It generally is
comprised of common stock and disclosed reserves.
14 Rostnovski, Lev, and Rocco Huang, Why Are Canadian Banks More Resilient? IMF Working Paper WP/09/152.
International Monetary Fund, July 2009, , p. 16.
15 Financial System Review, p. 4.
16 Concluding Statement on the IMF’s 2009 Article IV Mission to Canada.
17 Financial System Review, p. 1.
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Imperial Bank of Commerce lost $2.1 billion in derivatives in 2008. The drop in commodity
prices also caused the Canadian dollar to fall relative to the U.S. dollar, which would improve the
cost competitive position of Canada’s exports, once a recovery begins. As the recovery begins,
however, demand for raw materials will increase, which, in turn, will cause the Canadian dollar to
appreciate. At the present time, the slowdown in global trade, the shake-out in the auto industry,
and a slowdown in exports of construction-related products are having far-reaching negative
effects on the Canadian economy. In January, 2009, the Canadian Government announced about a
Can$40 billion fiscal stimulus package over two years in infrastructure spending, tax decreases,
worker retraining, housing, and aid to struggling industries to spur the Canadian economy, as
indicated in Table 2. The stimulus to the Canadian economy provided by this economic package
is expected to be supplemented by spending by the provincial governments. In addition, on April
21, 2009, the Bank of Canada lowered the nation’s key interest rate to 0.25%.
Table 2. Canada’s Economic Action Plan
(in millions of Canadian dollars)
2009
2010
Total
Action to Help Canadians and Stimulate Spending
$5.880 $6.945 $12.825
Action to Stimulate Housing Construction
5,365 2,395 7,760
Housing leverage
725
750
1,475
Immediate Action to Build Infrastructure
6,224 5,605 11,829
Infrastructure leverage
4,532
4,365
8,897
Action to Support Businesses and Communities
5,272 2,255 7,527
Sectoral leverage
1,300

1,300
Total Federal Stimulus
22,742 17,200 39,942
Total Stimulus (with leverage)
29,298 22,316 51,613
Total Stimulus as a share of GDP (%)
1.5
1.1
2.5
Total Stimulus (with leverage) as a share of GDP (%)
1.9
1.4
3.2
Source: Canada’s Economic Action Plan, 2009 Budget, Chapter 3, Ministry of Finance.
A recent IMF staff report used three measures to assess the financial strength of Canada’s banks
as a way of understanding the relative success the banks experienced in avoiding the same
intensity of financial troubles that afflicted banks in other major economies. These measures
include: 1) capital-assets ratios (total equity divided by total assets), since better-capitalized banks
likely can sustain higher losses without becoming insolvent; 2) balance sheet liquidity (total
liquid assets divided by total liabilities), because a buffer of liquid assets allows banks to cover
transitory cash-flow shortfalls; and 3) the funding structure of the banks, or the share of their
funding that is derived from deposits, since deposit insurance likely improves the stability of this
source of funding. The results of the measures are presented in Table 3, Table 4, and Table 5.
The three tables also include a measure of the percentage decline from January 2007 to January
2009 in the value of the equity of the individual banks. They also provide some basic information
on the nature of any government intervention that was needed to assist the individual banks.
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Table 3, Table 4, and Table 5 indicate that Canadian banks are not exceptionally financially
strong relative to banks in other OECD countries. In some cases, the capital ratios of Canadian
banks were half or less than that of a number of U.S. firms that experienced significant liquidity
problems as the financial crisis progressed. Similarly, Canadian banks did not have balance sheet
liquidity that was significantly different from that of other banks. As indicated by the IMF report,
and as indicated in Table 5 the major difference between Canadian banks and banks in other
OECD countries is the funding source of those banks. Canadian banks generally relied much less
on wholesale funding, or borrowing short-term from money markets. Instead, the banks relied on
depository funding, much of which came from such retail sources as households, for a higher
share of their funding.18 This success in attracting household deposits may in part stem from the
ability of Canadian banks, as universal banks, to offer one-stop service in mutual funds and asset
management.19
Table 3. Capital Ratios of Major Banks
Capital
Value
Bank Country
Ratio
decline
Intervention
Hypo Real Estate Holding AG
Germany
2.1
97% Asset guarantees and public
loans
Deutsche Bank AG
Germany
2.1
81

UBS AG
Switzerland
2.3
79
Capital injection
Commerzbank AG
Germany
2.5
89
Capital injection
ABN Amro Holding NV
Netherlands
2.6
NA Nationalized (carved out
from Fortis)
Barclays Plc
United Kingdom
2.7
85

Fortis
Belgium
2.8
94
Broken up, part nationalized
Dresdner Bank AG
Germany
3.0
NA Capital injection
Northern Rock Plc
United Kingdom
3.2
100
Nationalized
Dexia Belgium
3.3
89
Nationalized
ING Groep NV
Netherlands
3.3
81
Recapitalized, asset
guarantees
Lloyds TSB Group Plc
United Kingdom
3.3
78
Capital injection
HBOS Plc
United Kingdom
3.6
100
Recapitalized (part of
Lloyds)
Canadian Imperial Bank of Commerce
Canada
4.1
54

Royal Bank of Canada RBC
Canada
4.3
44

Credit Suisse Group
Switzerland
4.7
66

Banque de Montreal-Bank of Montreal
Canada
4.8
53

Bank of Nova Scotia (The)
Canada
4.9
42

Royal Bank of Scotland Group Plc
United Kingdom
5.2
96
Capital injection, asset
(The)
guarantees

18 Ratnovski, Huang, Why Are Canadian Banks More Resilient?, p. 4.
19 Ibid., p. 11.
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Capital
Value
Bank Country
Ratio
decline
Intervention
Westpac Banking Corporation
Australia
5.3
38

Commonwealth Bank of Australia
Australia
5.7
46

National Australia Bank
Australia
5.7
53

Toronto Dominion Bank
Canada
5.7
43

Australia and New Zealand Banking
Australia 5.9
54

Group
Citigroup Inc
USA
6.4
94
Recapitalized, asset
guarantees
HSBC Holdings Plc
United Kingdom
6.6
41

Washington Mutual Inc.
USA
8.5
100
Failed, taken over by FDIC
JP Morgan Chase & Co.
USA
8.6
50

Bank of America Corporation
USA
9.3
87
Capital injection, asset
guarantees
Wel s Fargo & Company
USA
9.5
47

Wachovia Corporation
USA
10.3
100
Failed, acquired by Wel s
Fargo
Capital One Financial Corporation
USA
16.9
80

Source: Ratnovski, Lev, and Rocco Huang, Why Are Canadian Banks More Resilient?, IMF Working Paper
WP/09/152, International Monetary Fund, July 2009.
Note: Capital represents bank equity divided by total assets. Value decline is a measure of the percentage
decline from January 2007 to January 2009 in the value of the equity of the respective bank. Intervention
represents some basic information about the nature of any government intervention.
Table 4. Balance Sheet Liquidity of Major Banks
Bank Country
Liquidity
Value
decline
Intervention
Capital One Financial
USA 3.70%
80%

Corporation
National City Corporation
USA
4.00
100
Acquired by PNC Bank
Citizens Financial Group Inc.
USA
4.30
NA
NA (owned by RBS)
SunTrust Banks, Inc.
USA
4.30
85

US Bancorp
USA
4.40
58

Washington Mutual Inc.
USA
4.80
100
Failed, taken over by FDIC
Regions Financial
USA 5.00
90

Corporation
Nomura Holdings Inc
JAPAN
5.60
76

Wel s Fargo & Company
USA
6.00
47

Northern Rock Plc
United
6.70 100 Nationalized
Kingdom
Kookmin Bank
Korea
7.80
56

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Bank Country
Liquidity
Value
decline
Intervention
Bank of Ireland
Ireland
8.40
96
Capital injection, liabilities
guarantee
Commonwealth Bank of
Australia 8.90
46
Australia
Australia and New Zealand
Australia 10.32 54
Banking Group
Westpac Banking
Australia 10.42 38
Corporation
Wachovia Corporation
USA
10.69
100
Failed, acquired by Wel s
Fargo
HBOS Plc
United
11.14
100
Capital injection (part of
Kingdom
Lloys)
National Australia Bank
Australia
11.15
53

Lloyds TSB Group Plc
United
15.67 78 Capital
injection
Kingdom
Banque de Montreal-Bank of
Canada 23.99
53

Montreal
Toronto Dominion Bank
Canada
24.37
43

Bank of Nova Scotia (The)
Canada
24.43
42

Royal Bank of Scotland Group United
25.11
96
Capital injection, asset
Plc (The)
Kingdom
guarantees
Bank of America Corporation USA
25.59
87
Capital injection, asset
guarantees
Canadian Imperial Bank of
Canada 26.00
54

Commerce
Royal Bank of Canada RBC
Canada
32.11
44

HSBC Holdings Plc
United
33.20 41
Kingdom
Citigroup Inc
USA
39.46
94
Recapitalized, asset
guarantees
Barclays Plc
United
40.75 85
Kingdom
JP Morgan Chase & Co.
USA
46.80
50

Credit Suisse Group
Switzerland
64.93
66

UBS AG
Switzerland
65.20
79
Capital injection
Source: Ratnovski, Lev, and Rocco Huang, Why Are Canadian Banks More Resilient?, IMF Working Paper
WP/09/152, International Monetary Fund, July 2009.
Note: Liquidity represents total liquid assets divided by total liabilities. Value decline is a measure of the
percentage decline from January 2007 to January 2009 in the value of the equity of the respective bank.
Intervention represents some basic information about the nature of any government intervention.
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Table 5. Depository Funding of Major Banks
Depository
Value
Bank Country
funding
decline
Intervention
Hypo Real Estate
Germany
24.0%
97% Asset guarantees and public loans
Holding AG
Northern Rock Plc
United Kingdom
28.7
100
Nationalized
Deutsche Bank AG
Germany
34.1
81

BNP Paribas
France
36.7
65

Citigroup Inc
USA
37.8
94
Capital injection, asset guarantees
HBOS Plc
United Kingdom
41.0
100
Capital injection (part of Lloyds)
Société Générale
France
42.0
74

Banca Monte dei
Italy 44.1
68

Paschi di Siena SpA
Dexia Belgium 44.9
89
Nationalized
DnB Nor ASA
Norway
45.4
74

Danske Bank A/S
Denmark
46.3
78

Commerzbank AG
Germany
47.0
89
Capital injection
JP Morgan Chase &
USA 47.3
50

Co.
Barclays Plc
United Kingdom
47.7
85

Bank of America
USA
47.9
87
Capital injection, asset guarantees
Corporation
National Australia
Australia 51.7
53

Bank
Commonwealth Bank
Australia 53.4
46

of Australia
HSBC Holdings Plc
United Kingdom
54.9
41

Credit Suisse Group
Switzerland
55.6
66

Capital One Financial
USA 57.3
80

Corporation
Lloyds TSB Group Plc United Kingdom
58.7
78
Capital injection
Royal Bank of
United Kingdom
59.3
96
Capital injection, asset guarantees
Scotland Group Plc
(The)
Wachovia
USA
62.8
100
Failed, acquired by Wel s Fargo
Corporation
UBS AG
Switzerland
64.1
79
Capital injection
Wells Fargo &
USA 64.4
47

Company
Royal Bank of Canada Canada 65.1
44

RBC
Banque de Montreal-
Canada 65.2
53

Bank of Montreal
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Depository
Value
Bank Country
funding
decline
Intervention
Australia and New
Australia 65.4
54

Zealand Banking
Group
Toronto Dominion
Canada 67.9
43

Bank
Canadian Imperial
Canada 68.2
54

Bank of Commerce
Bank of Nova Scotia
Canada 71.4
42

(The)
Westpac Banking
Australia 74.1
38

Corporation
Washington Mutual
USA
74.6
100
Failed, taken over by FDIC
Inc.
Source: Ratnovski, Lev, and Rocco Huang, Why Are Canadian Banks More Resilient?, IMF Working Paper
WP/09/152, International Monetary Fund, July 2009.
Note: Depository funding represents the share of total bank funding that is derived from deposits. Value decline
is a measure of the percentage decline from January 2007 to January 2009 in the value of the equity of the
respective bank. Intervention represents some basic information about the nature of any government
intervention.
The U.S. Financial Supervisory System
Currently, the United States has a complex regulatory framework in which agencies have
overlapping jurisdiction, and in which there are some regulatory gaps.20 Congress and the
Administration are considering a number of changes to the supervisory framework in an effort to
improve the system and to correct weaknesses. Not all of the regulators have the authority to
address systemic risk, and no single regulator has jurisdiction over all the financial institutions
and markets. As indicated in Figure 1, financial supervision can be separated into three main
categories: supervision of banks, supervision of non-banks, and those markets that are
unregulated. For ease of presentation, the figure shows only the major lines of supervisory
responsibility. For instance, the President nominates the Governors of the Federal Reserve Board,
but the Treasury Department closely coordinates with the Federal Reserve in developing and
implementing policy. The Chairman of the Federal Reserve, however, formally reports to
Congress, so the figure shows only this line of responsibility. Similarly, the Administration
coordinates closely with many of the other independent agencies that supervise parts of the
financial system.

20 For greater detail, see: CRS Report R40249, Who Regulates Whom? An Overview of U.S. Financial Supervision, by
Mark Jickling and Edward V. Murphy.
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Figure 1. U.S. System for Supervising Financial Markets
Bank Supervision
Executive Branch
U.S. Congress
Treasury
Federal Deposit
Federal
National
Department
Insurance
Reserve
Credit Union
Corporation
Administration
Office of the
Office of
Comptroller
Thrift
State Banks
State
of the Currency
Credit
Supervision
(Non Federal
Banks
Unions
Reserve)
National
State & Federally
Banks
Chartered
Direct Supervision
Thrifts
State
Governments
Independent
Agency
Non-Bank Supervision
Securities & Exchange
Commodity Futures
Federal Housing
Commission
Trading Commision
Finance Agency
Unregulated Markets
Foreign Exchange
OTC Derivatives
Non-Bank Lenders
U.S. Treasuries (Secondary)
Private Securities Markets
Hedge Funds

Source: Developed by CRS.
The U.S. financial system is also characterized by a combination of federally chartered financial
institutions and financial institutions chartered by the individual 50 States. This system, some
observers argue, has allowed banks that faced federal regulatory action to walk away from federal
regulators and move under state supervision by converting their charters to a state charter.21
National banks are supervised by the Office of the Comptroller of the Currency that is under the
direction of the U.S. Treasury Department. The Office of Thrift Supervision, also within the
Treasury Department, supervises State and federally chartered thrift institutions. Next, the U.S.
Congress has established a number of independent agencies that supervise various parts of the
financial system. These agencies include the Federal Deposit Insurance Corporation that directly
supervises State banks that are not part of the Federal Reserve System and indirectly supervises
State and federally chartered thrifts and State banks, such as commercial banks and industrial
banks. Next, the Federal Reserve System is the central bank of the United States and is comprised
of the Board of Governors and 12 District Federal Reserve Banks. These banks supervise all State
banks that are part of the Federal Reserve System, bank holding companies, the foreign activities
of member banks, the U.S. activities of foreign banks, and Edge Act, or limited-purpose
institutions that engage in foreign banking business. The National Credit Union Administration
supervises the many credit unions. In addition to these federal entities, State entities supervise
State chartered thrifts and State banks.

21 Applebaum, Binyamin, By Switching their Charters, Banks Skirt Supervision, The Washington Post, January 22,
2009, p. A1.
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In the area of non-bank supervision, the U.S. Congress has chartered three independent agencies.
These agencies include the Securities and Exchange Commission, which supervises all securities
trading and securities firms, the Commodity Futures Trading Commission, which supervises the
trading of commodities, and the Federal Housing Finance Agency, which supervises the Federal
National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Association
(Freddie Mac), and the Federal Home Loan Banks. State agencies also regulate and supervise
insurance activities. Beyond this area of supervision, there is a broad group of financial activities
that have not been directly supervised, including the rapidly growing area of derivatives trading.
On June 17, 2009, President Obama presented his plan for overhauling supervision of the
financial services sector. Prospects for the plan are uncertain, since Members of Congress likely
will propose alternative approaches to reordering the supervision of the U.S. financial markets.
The Obama Administration’s plan has a number of components. First, the Federal Reserve would
gain the authority to supervise any large firm, regardless of which specific sector of the financial
markets the firm is involved with, if the Treasury had determined that the firm poses a threat to
the overall financial system. The Fed could also require such firms to hold more reserves and to
take fewer risks. This proposal would significantly broaden the supervisory reach of the Federal
Reserve over its current responsibilities. Next, the proposal would create a new Financial
Services Oversight Council that would be chaired by the Department of the Treasury and include
the heads of the principal federal financial regulators.
Third, President Obama’s plan would create the Consumer Financial Protection Agency, which
would set and enforce regulations regarding consumer loans, including credit cards and
mortgages. Fourth, the plan would create a new National Bank Supervisor to replace the Office of
the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). Fifth, the
plan would give the Federal Deposit Insurance Corporation (FDIC) the authority to take over and
shut down financial institutions whose failure would threaten the stability of the financial system.
Sixth, the Commodities Futures Trading Commission and the Securities and Exchange
Commission would have more authority to regulate derivatives. Finally, the Securities and
Exchange Commission would also gain the authority to supervise hedge funds and mutual funds.
On March 23, 2009, Senator Collins introduced S. 664, the Financial System Stabilization and
Reform Act of 2009. A companion measure, H.R. 1754, was introduced in the House of
Representatives by Representative Castle. These proposals would create a Financial Stability
Council that would be chaired by an individual appointed by the President and confirmed by the
Senate, with the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the
Chairman of the FDIC, the chairman of the National Credit Union Administration, the Chairman
of the Securities and Exchange Commission, and the chairman of the Commodities Future
Trading Commission serving as members of the Council. In addition, the Federal Reserve would
be granted authority to examine the soundness and safety of the financial system posed by bank
holding companies.
In addition, the Securities and Exchange Commission would be required to designate a
clearinghouse for credit default swaps and to prohibit “fraudulent, deceptive, or manipulative acts
or practices” in connection with credit-default swaps. Next, the Office of Thrift Supervision
would be abolished with the functions performed by that office transferred to the Comptroller of
the Currency.
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Canada’s Financial System
In a recent assessment of Canada’s financial system, the IMF concluded that Canada’s system is
highly mature, sophisticated, and well-managed. In addition, the system is characterized by strong
prudential regulation and supervision and a well-designed system of deposit insurance and
arrangements for crisis management and resolution of failed banks. Supervisory responsibility for
the financial sector in Canada is divided among the federal government, among the provincial
governments, and among a group of agencies within the federal government. The federal
government is responsible for supervising all banks, federally incorporated insurance companies,
trust and loan companies, cooperative credit associations and federal pension plans. Regulations
separating banks, insurers, trust companies, and investment dealers in Canada were largely
eliminated in the 1980s. Also, by the 1990s, all of the major investment dealers in Canada were
owned by banks, which not only created an integrated bank model, it also placed such dealers
under close regulatory supervision. Provincial governments are responsible for supervising
securities dealers, mutual fund and investment advisors, credit unions, and provincially
incorporated trust, loan, and insurance companies. As a result, there are 13 provincial regulatory
authorities, each administering securities laws and regulations. The Minister of Finance, however,
oversees the incorporation of banks, permitting foreign bank branches, and reviews of large bank
mergers. In particular, the Minister has broad discretionary authority to disapprove mergers,
which has effectively eliminated such transactions.
Within the federal government, the Financial Institutions Supervisory Committee (FISC) acts as
the chief coordinating body that sets regulatory policy and supervises financial institutions. The
Committee is comprised of the Department of Finance of the Ministry of Finance and four
independent government agencies: the Office of the Superintendent of Financial Institutions
(OSFI); the Bank of Canada; the Canada Deposit Insurance Corporation (CDIC); and the
Financial Consumer Agency of Canada (FCAC), as indicated in Figure 2. These five semi-
official agencies report to the Minister of Finance, who is responsible to the Canadian Parliament.
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Figure 2. Canada’s Financial System Supervisory Structure
Parliament of
Reports directly
Canada
Independent Agency
Minister of Finance
Of f ice of the
Department of Finance
Bank of Canada
Superintendent of
Financial Institutions
Canada Deposit
Financial Consumer
Insurance Corporation
Agency of Canada
Financial Institutions S upervisory Committee

Source: Office of the Superintendent of Financial Institutions.
FISC generally meets quarterly, but can meet more often if needed. In addition, FISC conducts a
legally mandated five-year review of the National Bank Act to ensure that federal regulatory
legislation is modernized periodically. Within FISC, the OSFI plays a key role in supervising
Canada’s financial sector. The OSFI supervises all domestic banks, branches of foreign banks
operating in Canada, trust and loan companies, cooperative credit companies, life insurance
companies, and property and casualty insurance companies. The OSFI has set limits on the ability
of Canadian banks to leverage their capital and has set target capital ratios that are higher then the
international standard. In broad terms, the OSFI is responsible for a number of activities
including: 1) assessing the financial conditions and operating performance of the institutions
under its jurisdiction; 2) reviewing information obtained from statutory filings, financial
reporting, and management reporting requirements; 3) conducting meetings with institutions; 4)
attending board meetings when necessary of institutions to discuss the results of supervisory
reviews; 5) providing composite risk ratings to institutions; 6) advising institutions of any
corrective measures that the institution will be requested to take; 7) monitoring any corrective
measures; and 8) reporting to the Minister of Finance on an annual basis.22
The OSFI also has considerable enforcement powers, including the authority to intervene
progressively in problem institutions under “structured early intervention” provisions that
articulate a four-stage process culminating in closure, even while an institution’s capital may
remain positive. The four-stage process is comprised of the following:

22 Guide to Intervention for Federally Regulated Deposit-Taking Institutions, Government of Canada.
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• Stage 1. – Early Warning. If an institution has been identified as Stage 1, the
OSFI has identified deficiencies in the institutions financial condition, policies,
or procedures that could lead the institution to fall into a Stage 2 category where
there is the risk of insolvency or failure.
• Stage 2.- Risk to Financial Viability or Solvency. At this stage, an institution is
judged to pose material safety and soundness concerns and is vulnerable to
adverse business and economic conditions.
• Stage 3. – Future Financial Viability is in Serious Doubt. At this stage, the
OSFI has identified that the institution has failed to remedy the problems that
were identified in Stage 2 and the situation is worsening. The situation poses
severe safety and soundness concerns and is experiencing problems that pose a
material threat to its future viability or solvency unless effectiveness corrective
measures are initiated.
• Stage 4. – Non-Viability/Insolvency is Imminent. At this stage, OSFI has
determined that the institution is experiencing severe financial difficulties and
has deteriorated to such an extent that: 1) the institution has failed to meet
regulatory capital requirements; 2) the statutory conditions for taking control
have been met; and 3) the institution has failed to develop and implement an
acceptable business plan.
In addition, the OSFI plays a key role in regulating Canada’s financial sector, providing a
nearly unified regulatory and supervisory framework. As is the case with supervision,
OSFI is responsible for regulating federal financial institutions, including banks,
insurance companies, foreign bank representative offices, and pension plans that are
under federal jurisdiction. One weakness of this system is that there are gaps in the
regulatory framework concerning such collective investment schemes as mutual funds,
where the operators of such funds have not been subject to a registration regime.
The Bank of Canada is responsible primarily for conducting monetary policy by setting interest
rate targets and adjusting the supply of credit. The Bank also serves as the key component in the
payments system by providing a check clearing function, and it serves as the traditional lender of
last resort. In its conduct of monetary policy, the Bank of Canada adopted in 2000 a system of
eight pre-set dates per year on which it announces its key policy rate – the target overnight rate of
interest. It has veered from these pre-set dates only under exceptional circumstances.23 While the
Bank of Canada reports to the Minister of Finance, this public announcement system acts as an
important element in making the Bank’s activities transparent to the public and to the financial
markets and relatively free from non-economic considerations. The Bank also has three credit
facilities at its disposal in its traditional role as the lender of last resort, including a facility to
provide liquidity to any financial or nonfinancial firm through outright purchases of a wide range
of claims in the event of “severe and unusual stress on a financial market or financial system.”
Canada’s financial system is dominated by five large banking groups (Royal Bank of Canada, TD
Canada Trust, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank) that account
for about 60% of the total assets of Canada’s financial sector, as indicated in Table 6. In
comparison, foreign banks account for about 4% of Canada’s total assets in the financial sector.

23 Macklem, Tiff, Information and Analysis for Monetary Policy: Coming to a Decision, Bank of Canada Review,
Summer 2002, p. 12.
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The low representation by foreign banks is attributed to the “widely-held” rule for large banks
that limits the concentration of bank share ownership and, therefore, reduces the scope for
mergers and for foreign entry through acquisitions or mergers. This lack of competition,
combined with Canada’s financial legal framework, allows Canadian banks to concentrate more
on their low-risk, profitable domestic retail banking activities (services provided to individuals
including: deposits, savings accounts, mortgages, credit cards, etc.), generally leaving large
domestic borrowers to conduct their wholesale banking activities (services provided to
corporations, governments, and other entities) abroad. Some observers argue that this framework
also reduces incentives for innovation among Canada’s protected banks and has proved to be
difficult for small businesses and venture capitalists. Canada’s insurance sector is dominated by
three large domestic groups, which account for over 80% of the assets in this sector. The
securities sector is marked by large Canadian, as well as U.S. and UK securities firms.
Table 6. Canada: Financial Sector Structure, End-2006
Assets
Percent of Total

Billions of $Can.
Assets
Percent of GDP
Banks
$2,389.0 59.3% 166.0%
Canadian
2,214.0
54.9
153.8
Foreign
175.0
4.3
12.2
Trusts (including bank subsidiaries)
254.7 6.3 17.7
Credit unions
193.8 4.8 13.5
Life insurance companies
346.5 8.6 24.1
Canadian
331.1
8.2
23.0
Foreign
15.4
0.4
1.1
Property and casualty insurance
93.2 2.3 6.5
Mutual funds
660.2 16.4 45.9
Asset based financing and leasing
92.3 2.3 6.4
Total
4,029.7 100.0 280.0
Source: Canada: Financial System Stability Assessment – Update, International Monetary Fund, January
15, 2008, p. 11.
Unlike the United States and some European countries, subprime mortgages account for fewer
than 5% of Canadian mortgages, which sharply limited Canada’s direct exposure to the meltdown
that occurred in the subprime mortgage market. Although Canada’s mortgage markets are
somewhat less innovative than in the United States, Canadian consumers seem to be well served
and home ownership rates are comparable with those in the United States.24 In addition, Canadian
law requires that all bank-held mortgages above a loan-to-value ratio of 80% be insured, which

24 Kiff, John, Canadian Residential Mortgage Markets: Boring But Effective?, IMF Working Paper WP/09/130,
International Monetary Fund, June 2009, p. 12.
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has curtailed the securitization of mortgages by banks in Canada. About one-third of mortgages
are securitized in Canada, about half as much in percentage terms as in the United States.25 In
addition, prepayment penalties and the lack of interest deductibility reduces the demand for long-
term mortgages, so the maturity of most mortgages generally does not exceed 5 to 10 years.
Economic Effects of Canada’s Supervisory System
Canada’s financial system has been relatively more resilient during the financial crisis compared
with counterparts in the United States and Europe. Nevertheless, Canada’s financial system has
not been immune to the financial crisis nor has it escaped the economic downturn that has stalled
global economic growth. The Canadian economy is linked with the international economy. As a
result, a sharp drop in exports and a decline in commodity prices have negatively affected the
Canadian economy. Household wealth has declined, unemployment is rising, and the economy is
expected to post a negative rate of economic growth in 2009, worsening the condition of
Canada’s financial sector. So far, Canadian banks have suffered a loss of 50% in the value of their
equities. Consequently, the banks faced pressure from financial markets to increase their capital
ratios, which they apparently did by tapping private sources.
As a result of the financial crisis, aspects of Canada’s financial system are being closely
scrutinized as the United States considers ways to amend its own financial system to limit the
possibility of another financial crisis. However, the smaller scope of Canada’s financial system
and its economy likely lessen the transferability of systems or procedures used in Canada to the
vastly more complex U.S. financial system. In addition, it can be argued that Canada’s
supervisors and regulators can take a more conservative approach than their U.S. counterparts as
a result of Canada’s proximity to the U.S. capital markets. Nevertheless, Canada’s financial
supervisory system and regulatory structure have proven to be less susceptible to the bank failures
that have loomed in the United States and Europe and may offer some insight for U.S.
policymakers. Canada’s reliance at the federal level on a unified supervisor and regulator appears
to have some merits as compared to a more decentralized approach.
Canada’s approach does have some drawbacks. Specifically, Canada’s system of regulating
securities markets at the provincial level means that regulations regarding market participants and
investor protection differ by province, creating inefficiencies in the system and raising costs to
providers and consumers. Differences between provinces also mean that coordinating policy
approaches across the 13 provinces can be slow and cumbersome.
Furthermore, the nature, structure, and powers of the provincial regulators vary, which increases
the costs to financial services providers and to consumers, because financial services providers
are required to pay fees to the regulatory authorities in all of the provinces where they raise
capital. This ultimately raises the cost of capital and limits access to funding. It also inhibits the
growth and development of the markets and innovation in developing financial instruments. In
addition, while the conservative, risk-adverse approach employed by Canada’s banks helped to
shield them from some of the current financial turmoil, the approach also reduces efficiency in
the market and reduces competition. Acquisitions of Canadian banks are significantly impeded by
the rule that bank stocks be widely held and mergers are effectively prohibited. With reduced
competitiveness pressures, Canadian banks maintain low-risk balance sheets at the expense of

25 Ibid, p.5.
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greater innovation and more efficient capital allocation. This approach also means that financing
for small firms and venture capital for potentially high-growth companies is sharply reduced.

Author Contact Information

James K. Jackson

Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751


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