Institutional Setting 44. Financial sector oversight is the responsibility of multiple federal and provincial authorities. The lion’s shar...
Institutional Setting 44. Financial sector oversight is the responsibility of multiple federal and provincial authorities. The lion’s share of financial institutions (particularly, banks and insurers) are federally regulated, while securities markets are overseen by provincial authorities. Some D-SIFIs are provincially regulated; e.g., Autorité des marchés financiers (AMF) supervises Québec’s major credit cooperative group. Other deposit-taking institutions (loan and trust companies, and credit unions), insurers and private pension funds can be licensed and regulated under federal or provincial regimes. At the federal level, the Office of the Superintendent of Financial Institutions (OSFI) is responsible for prudential oversight of federally regulated financial institutions. Conduct oversight of banking business is under responsibility of the Financial Consumer Agency of Canada (FCAC),
while the BOC, the DOF and three provincial securities regulators share responsibility of overseeing financial market infrastructures (FMIs) “designated” as systemically important (or as prominent payment systems). The remaining responsibilities lie with provincial authorities, including prudential oversight of provincially regulated financial institutions and conduct oversight of all nonbanking businesses. Each province/territory can set its own regulatory and supervisory frameworks. Public pension funds have independent governance structures. 45. A substantial part of the financial system is covered by federal crisis management and safety net arrangements that are well-established. By law, the Minister of Finance (MoF) has the mandate of maintaining overall financial stability in Canada. At the federal level, multiple agencies are involved in crisis management and safety net, including the BOC, the Canada Deposit Insurance Corporation (CDIC), the DOF and OSFI. CDIC is the resolution authority for its member deposittaking institutions and the federal deposit insurance system (DIS) administrator. The BOC will soon become the resolution authority for domestic designated FMIs. Each province/territory has its own crisis management and safety net arrangements. CANADA INTERNATIONAL MONETARY FUND 25 46. There are several inter-agency coordination forums for financial sector oversight and safety net. At the federal level, the Senior Advisory Committee (SAC) is the main forum to discuss financial sector policy issues and address systemic matters, including crisis preparedness. The Financial Institution Supervisory Committee (FISC) is the forum to exchange information related to supervision of federally regulated financial institutions and deal with institution-specific problems (i.e., early intervention). On resolution, the CDIC’s Board is the decision-making body of CDIC, while the BOC chairs the committee for coordinating resolution of designated FMIs. Provincial authorities also set up four associations along the line of sectoral competency. These associations mainly serve as platforms for exchanging information and coordinating policy development. The only federalprovincial forum is the Heads of Agencies Committee (HOA) for coordination largely on issues related to securities markets. 47. The responsibility for systemic risk oversight is not explicitly assigned to any specific body. At the federal level, the BOC albeit with no explicit mandate plays a leading role in systemic risk surveillance; policy discussion takes place at the SAC, which in turn provides advice to the MoF. Powers over macroprudential tools lie with the Department of Finance (DOF) and OSFI.
Systemic risk oversight at the federal level appears adequately effective, in part due to strong collegial culture and inter-agency cooperation. However, such effectiveness becomes less apparent at the provincial level or with respect to federal-provincial collaboration on these issues. Systemic Risk Oversight 48. The current arrangement seems to have worked well, but an institutional modernization is essential to ensure effective systemic risk oversight going forward. The financial system has been evolving rapidly, with new exposures and instruments, complex interconnectedness, and fintech developments blurring traditional financial sector boundaries.
Significant vulnerabilities are emerging in nonbank financial sectors. The prolonged period of benign macrofinancial conditions may have masked important gaps that could undermine policy responses at time of stress. The spread of systemic risk oversight responsibilities over multiple government layers and across sectoral boundaries has prevented the development of comprehensive Canada-wide framework for systemic risk surveillance and mitigation. These factors call for concerted efforts to modernize the current arrangement to overcome data gaps, enhance the surveillance capacity, develop and implement policies more inclusively and effectively, and increase policy transparency. 49.
Steps can be taken to improve the current system with a more formalized arrangement for systemic risk oversight. Establishing a single body with a clear mandate and appropriate powers remains a preferred recommendation, but incremental improvements within the current framework can be made. First, the BOC should lead systemic risk surveillance in cooperation Committee Statutory BOC CDIC DOF FCAC OSFI CDIC's Board Yes o O ooo Committee for resolution of designated FMIs Yes O oo o Financial Institutions Supervisory Committee (FISC) Yes o o o o O Heads of Agencies Committee (HOA) 1/ No O o o Senior Advisory Committee (SAC) No o o O o o Notation: O indicates chair; o indicates member. Inter-agency Committees at the Federal Level 1/ Membership also includes four provincial securities commissions—Alberta Securities Commission, AMF, British Columbia Securities Commission, and Ontario Securities Commission. CANADA 26 INTERNATIONAL MONETARY FUND with relevant authorities. A more unified approach to data collection needs to be developed to support Canada-wide surveillance. The BOC should report risk assessments to the existing interagency bodies and in its Financial System Review. Second, there should be a federal-provincial platform to discuss systemic risk issues and formulate policy responses. The HOA could be one option. To perform this function effectively, the HOA needs to redefine its terms of reference and expand its membership to include all relevant provincial prudential regulators. Third, while the existing competent authorities remain responsible for implementing policies within their respective mandates, the HOA should have the ability to make recommendations to all relevant authorities on a “comply or explain” basis, or similar arrangements, to strike a right balance between enhancing accountability and respecting autonomy. Fourth, a robust transparency framework should be adopted, including agencies’ roles and responsibilities, risk assessments, and policy decisions and actions. 50. Over time, the authorities should review whether systemic risk oversight under the HOA leadership with no statutory mandate is adequate. One potential challenge is that systemic threats may emerge beyond the existing competent authorities’ remit. The envisaged Capital Markets Stability Act, which would consolidate responsibilities at a single body, can further strengthen monitoring and managing systemic risk in capital markets. This can support the development of a more complete macroprudential policy framework for nonbanks. Crisis Management 51. Canada-wide crisis preparedness should be further strengthened. Since the last FSAP, federal authorities, the Canada Securities Administrators (CSA) and AMF have individually continued upgrading their contingency plans and running exercises to test their readiness. Coordination between federal and provincial authorities has also improved, with the BOC and CDIC entering new memorandums of understanding (MoUs) with key provincial authorities. Nevertheless, no single body is in charge of Canada-wide crisis preparedness. To further strengthen the existing arrangements, the SAC should play a key role in overseeing crisis preparedness at the federal level, with the objective of developing a comprehensive, functioning integrated plan. The SAC should also act as the federal coordinator with key provincial authorities to carry out Canada-wide contingency planning and testing exercises. While continuing to serve as an advisory body to the MoF, the SAC should adopt written terms of reference to clarify its roles and increase its accountability. Additional federal-provincial MoUs, particularly with OSFI, should be put in place.
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