Confirmation of Canadian Bank Law

Logo of the Office of the Superintendent
 of Financial Institutions, Ottawa

Joseph Perella of Perella Weinberg told me after the recent panel discussion on the U.S. Economy at Guild Hall in East Hampton that the Canadian bank regulatory authorities have the right to send a representative to the board meetings of large banks. What I found out online is that the Minister of Finance requires the Office of the Superintendent of Financial Institutions to send a representative to the Canada Housing and Mortgage Corporation board meetings.

I have today heard from OSFI confirming that Mr. Perella is correct and providing a citation of the law. OSFI says that attendance is their option, a RIGHT (not an obligation) to send a representative to any board meeting of any bank subject to its jurisdiction.

Here is the OSFI message:

With respect to OSFI’s right to send a representative to a meeting of the board in this particular scenario, the applicable provision would be subsection 187(1) Bank Act. Please note that this is true of not only large banks, but all banks.  Other sections of the Bank Act, such as paragraph 643(2)(b) and subsection 187(1) are also relevant. 

U.S. bank supervisory bodies should have the same right. In an article on bank examinations that I co-authored with the late George Benston in the Journal of Money, Credit and Banking, included in his collected works, we found that existing bank examination practices were inadequate and some practices were misconceived. The right to attend bank board meetings, suitably exercised from time to time, would address some of the information gaps we identified and, more important, would raise the standards of bank disclosure.

The two referenced Canada Bank Act sections read as follows:

Meeting required by Superintendent and Attendance of Superintendent
187. (1) Where in the opinion of the Superintendent it is necessary, the Superintendent may, by notice in writing, require a bank to hold a meeting of directors of the bank to consider the matters set out in the notice. (2) The Superintendent may attend and be heard at a meeting referred to in subsection (1). 

Access to records of bank
643. (2) The Superintendent or a person acting under the Superintendent’s direction
(a) has a right of access to any records, cash, assets and security held by or on behalf of a bank; and
(b) may require the directors, officers and the auditor or auditors of a bank to provide information and explanations, to the extent that they are reasonably able to do so, in respect of the condition and affairs of the bank or any entity in which the bank has a substantial investment. 

• 1999, c. 28, s. 46;
•  2001, c. 9, s. 176;
•  2012, c. 5, s. 76.

Regulating Banks and Non-Banks: One Year Later

A year ago today I wrote about financial regulation . As the G20 meeting on April 2 approaches, the topic is more relevant than ever.

I argued last year that when the Glass-Steagall wall between banking and non-bank financial institutions was torn down in 1999, the law should have extended U.S. regulatory authority beyond banking to all the other institutions.

My views were shaped by research I did at the FDIC. I developed a state credit-quality indicator, based on bank examiners' classification of loan quality at insured banks. The indicator deducted 20 percent of the loan value classified as substandard, 50 percent of loans classified as doubtful, and 100 percent of loans classified as loss. The results were included in an article I wrote with Professor George Benston published in the Journal of Money, Credit and Banking, "Bank Examiners' Evaluation of Credit".

Whatever use a state credit-quality indicator might have had as an early warning system (e.g., of mortgage-quality problems in Arizona, California, Florida and Nevada) disappeared when mortgage loans were wrapped up into securitized packages that were beyond easy classification by bank examiners and were camouflaged by AAA ratings by rating agencies and insurance companies.

The Chairman of the UK Financial Service Authority (FSA), Lord Turner, on March 18 has highlighted for the G20 socially undesirable financial innovation as a key source of the global crisis. He recommends regulation of near-bank activities such as hedge funds and credit-rating agencies, with a Europe-wide financial body to set standards and supervise. The UK seems to have joined the hawkish German and French authorities.

While the United States has been considered a dove on financial regulatory issues, the Obama administration may surprise the G20. Stephen Labaton in the NY Times on Saturday says a plan is being prepared that would

regulate the shadow banking system, with heightened standards put in place after the economy began to rebound. A broad consensus has emerged that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission.

The U.S. plan will probably give the government greater authority over large troubled companies not now regulated by Washington. The Treasury secretary would have authority to seize a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board. The government now can seize only the banking unit that controls federally insured deposits of large troubled institutions.