Chartered banks, the Bank Act, and the other institutions

The Bank Act and its three schedules

Banks in Canada are creatures of one federal statute, the Bank Act, and every bank is listed on one of its three schedules. The schedule tells you what kind of institution it is:

• Schedule I — banks that are not subsidiaries of a foreign bank. The domestic banks: the six large ones and the smaller domestic banks. Widely held ownership is the rule for the large ones.
• Schedule II — banks that are subsidiaries of a foreign bank: a Canadian-incorporated bank owned by a foreign parent, with its own Canadian capital and its own deposits.
• Schedule III — authorized foreign banks, operating in Canada as branches of the foreign parent rather than as separately incorporated subsidiaries.

The pair the paper tests is II against III: a subsidiary is a Canadian bank with a foreign owner; a branch is the foreign bank itself, permitted in. Both are supervised federally.

Who supervises whom

All three schedules answer to the Office of the Superintendent of Financial Institutions (OSFI), the federal prudential supervisor. OSFI's list of supervised institutions runs to every bank, every foreign-bank branch, the federally incorporated trust and loan companies, the life and property-and-casualty insurers incorporated federally, and the federally registered pension plans. What is not on the list matters as much: credit unions (provincial, as the general rule), provincial trust companies, provincially registered pension plans, and every securities dealer — dealers are regulated by the provinces and territories, through the self-regulatory organisation CIRO (Lesson 4).

The Bank of Canada supervises no bank. Its functions are monetary policy, the financial system's stability, the currency, funds management for the government and, recently, the oversight of payments. It is the distractor the exam sets beside OSFI, and the way to remember the difference is that OSFI checks solvency; the Bank of Canada sets rates.

Worked example — one conglomerate, two regulators

Maritime Financial Group owns a Schedule I bank, a trust company incorporated federally, a life insurer, and an investment dealer. Follow the lines of authority:

Maritime Bank (Schedule I)            → OSFI (federal)
Maritime Trust (federal trust co.)    → OSFI (federal)
Maritime Life (federal insurer)       → OSFI for solvency; province for sales conduct
Maritime Securities (dealer)          → provincial regulator, through CIRO

The same head office reports to Ottawa for three subsidiaries and to a provincial commission, via CIRO, for the fourth. When Maritime Securities' compliance officer is asked "who is your regulator?", the answer is not OSFI, whatever the letterhead says.

The rest of the cast

• Credit unions and caisses populaires — co-operatives owned by their members; provincially regulated as the general rule (a federal credit union can exist under the Bank Act, but it is the exception).
• Trust companies — the only institutions that can act as trustee: estates, pension trusts, corporate trusteeships. They also take deposits. Federal or provincial by incorporation.
• Insurers — life and health; property and casualty. Federal insurers are supervised by OSFI for solvency; insurance sales are a provincial matter.
• Pension funds — among the largest institutional investors in the country; federal or provincial by registration.
• Asset managers — mutual fund and ETF managers, provincially regulated under securities law, because a fund unit is a security.

Six types to place

(1) A Canadian-incorporated bank owned by a European parent — Schedule II, OSFI. (2) A foreign bank's Toronto branch — Schedule III, OSFI. (3) A large domestic bank — Schedule I, OSFI. (4) A Saskatchewan credit union — provincial. (5) A federally incorporated trust company — OSFI. (6) A bank's dealer subsidiary — provincial, via CIRO.