An event that has the potential to reshape the future of Canadian financial regulation has passed with little notice. On June 30, the Office of the Superintendent of Financial Institutions (OSFI) announced its intention to ban the use of the terms “bank,” “banker” and “banking” by nonbank financial institutions, a practice that has been becoming more common and conflicts with the Bank Act. When a credit union trade group weighed in to oppose the ban, Minister of Finance Bill Morneau acknowledged its concerns and second-guessed OSFI by promising to take a second “look” at the issue. On August 11, OSFI suspended implementation of the ban when Finance released a consultation paper seeking views on the use of the terms. The Minister’s intervention raises two issues. Should other financial institutions be able to call themselves banks? When and how should ministers of finance pull rank on OSFI?

To add some perspective to these issues, we should recognize that OSFI, now celebrating its 30th birthday, has served Canadians well. A succession of strong leaders have been willing to take unpopular stands. For example, OSFI raised bank capital requirements sooner and higher than other national regulators, helping to save us from the worst of the 2008 financial crisis. OSFI has done its job well because of its well-defined mandate and the absence of political interference. Morneau’s actions threaten to change these favourable conditions.

The issue of who can use the term “bank” is connected to a question of jurisdiction. The British North America Act gave the federal government exclusive powers over banking and currency. This assignment of responsibility gave us the benefit of a nationwide banking system from Confederation onward. The US took a different path and opted for a divided responsibility between the federal and state governments. By doing so, it created a fragmented system with different standards for federal and state banks. It took the US more than 100 years after Canada set up its regime to sort out a national banking system. Some economists argue that the presence of a national banking system in Canada spared us from devastating bank failures like those the US suffered in the 1930s.

Credit unions now fall under provincial jurisdiction. Allowing them to continue to call themselves banks would dilute the federal government’s responsibility and set different standards for different types of banks. Some would be subject to federal standards and others, provincial standards. It is hard to understand why the federal government, which has spent over 40 years trying to unify securities regulation, would effectively share its responsibility for “banks” with the provinces. Once this has been done, just as with Humpty Dumpty, all the Minister’s resources may be unable to put things together again.

Further, there is a practical concern. Several credit union organizations have now grown large enough to be designated as systemically important, meaning that their problems could spread to affect other financial institutions. Nicholas Le Pan, a former superintendent of OSFI, has raised concern about the standards of regulation for provincial financial institutions, while noting recent improvement. In addition, the Bank of Canada has agreed to extend its Emergency Lending Assistance to credit unions in provinces that have agreed to indemnify it for any losses incurred. This source of emergency liquidity will be vital for any credit union facing a collapse of confidence. But despite this offer, some provinces with systemically important institutions have failed to reach an indemnity agreement with the bank.

The credit unions have in some sense raised a false issue. There is nothing to stop them from incorporating themselves federally as banks while still retaining their cooperative form of organization. UNI Financial Cooperation from New Brunswick has already done so, and Coast Capital Savings from BC plans to.

The Minister’s intervention threatens to move us closer to the heavily politicized system in the US, where political pressures were behind the deregulation that contributed to the 2008 financial crisis.

As for the Minister’s intervention, it challenges the agency’s independence and threatens to move us closer to the heavily politicized US system. There, the financial industry spends hundreds of millions of dollars trying to influence key politicians to act on their behalf. These political pressures were behind the deregulation that contributed to the 2008 financial crisis.

Canadians should not be too complacent with respect to the financial industry’s influence. CBC News has found that there are already roughly eight contacts a week between the banking industry and federal government officials. A pattern of ministerial second-guessing would further encourage industry to press for political influence over banking regulation.

A financial regulator needs independence from political pressures in the same way as a central bank does. After the Coyne affair in the 1960s, when the federal government tried to dismiss the bank’s governor over disagreement about monetary policy, the bank’s independence was affirmed through changes to the Bank of Canada Act. Section 14 recognizes that the finance minister and the governor should consult regularly on monetary policy. It also provides that when they disagree, the minister can issue a written directive requiring the bank to comply with the government’s wishes. This directive must be published in the Canada Gazette and laid before Parliament.

A similar protocol should govern the relationship between the minister and OSFI. This arrangement would be a nice compromise between the government’s ultimate responsibility for banking policy and the assignment of the implementation of this policy to OSFI. The government would retain the right to redirect OSFI’s actions through a directive. At the same time, the requirement that directives be publicly disclosed would ensure that they are extraordinary instruments that the government would think twice about deploying and would use only in extreme circumstances. In the meantime, unless OSFI goes off the rails, the Minister should hold his tongue.

Photo: Jeremy Rudin, Superintendent of Financial Institutions, addressing the Mortgage Professionals Canada National Conference, in Vancouver, BC, on November 28, 2016. THE CANADIAN PRESS/Darryl Dyck.

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John Chant
John Chant is an emeritus professor of economics at Simon Fraser University.

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