## 1canea2020008 ## Source details **Canonical URL:** [1canea2020008](https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1canea2020008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1canea2020008.pdf.json) --- ### Institutional and inter‑agency arrangements - Mission and scope - Technical Note based on mission conducted during October 29–November 14, 2018. - Substantive discussions with federal authorities, Autorité des marchés financiers (AMF) in Québec, representatives of the Canadian financial sector, and Canadian legal and accounting professions. - Current architecture and roles - Minister of Finance (MoF) has mandate of maintaining overall financial stability in Canada. - Federal agencies: Office of the Superintendent of Financial Institutions (OSFI), Canada Deposit Insurance Corporation (CDIC), Bank of Canada (BOC), Department of Finance (DOF). - Provincial/territorial authorities have crisis management and safety net arrangements; mission focused at provincial level primarily on Québec. - Coordination arrangements - Federal inter‑agency committees: - Financial Institutions Supervisory Committee (FISC) (led by OSFI)—institution‑specific/early intervention. - CDIC Board—resolution planning and distressed/failing member DTIs. - Senior Advisory Committee (SAC)—systemic matters, crisis preparedness, legislative initiatives. - SAC and sub‑SAC have no written terms of reference and should consider adopting them. - Since 2014 FSAP, BOC and CDIC entered into new MoUs with provincial authorities; OSFI has not. - Key findings - Canada has maintained financial stability for a long period; last bank failure in Canada occurred more than twenty years ago. - Coordination among federal agencies is strong, underpinned by inter‑agency committees, but additional federal‑provincial MoUs could strengthen cooperation. - Selected institutional recommendations (exact text preserved) - Increase the operational independence of CDIC. (MoF, CDIC) ¶18,36,45,46,47 — Priority: H — Timeframe: NT - Adopt terms of reference for the SAC and the sub‑SAC. (MoF) ¶21 — Priority: H — Timeframe: I - Put in place MoUs between the BOC and British Columbia and Ontario authorities. (BOC; British Columbia and Ontario authorities) ¶25 — Priority: M — Timeframe: NT - Put in place MoUs between OSFI and provincial authorities. (OSFI; provincial authorities) ¶26 — Priority: M — Timeframe: NT ### Early intervention and recovery planning - Early intervention - Early intervention embedded in OSFI’s and AMF’s supervisory approaches. - OSFI and CDIC developed a joint Guide to Intervention; Québec’s AMF has a similar framework. - Recovery planning - Recovery planning for domestic systemically important banks (D‑SIBs) is advanced; assessment embedded into OSFI’s risk‑based supervisory processes. - Québec’s domestic systemically important financial institutions (D‑SIFI) have made good progress. - Recommendation and policy actions: - Expanding the recovery planning requirement to all deposit‑taking institutions. (OSFI) ¶39 — Priority: M — Timeframe: I - Publish recovery planning guidance. (OSFI) ¶39 — Priority: M — Timeframe: I - Operational notes - OSFI requires D‑SIBs to have recovery plans; OSFI uses criteria to determine other banks required to prepare recovery plans. - OSFI’s 2012 recovery plan principles and technical notes exist but have not been published. - OSFI requires all DTIs to have a formal contingency funding plan as part of its 2012 Liquidity Principles Guideline. - Coordination in early intervention - From staging, communications and exchange of information between OSFI and CDIC increase; Strategic Alliance Agreement (2011) provides coordination detail and is being revised. - CDIC early‑stage tools include escalation to safety‑net institutions via FISC, requests to comply, court orders, termination of deposit insurance policy, differential insurance premiums, and premium surcharges. - Recommendation (governance) - The early intervention and resolution frameworks should recognize autonomy of OSFI as supervisor and CDIC as resolution authority. ### Bank resolution and liquidation - General assessment - Bank resolution regime generally compliant with international standards, but areas for improvement exist. - CDIC has autonomy in implementing resolution actions but many key actions require authorization of the Governor‑in‑Council following MoF recommendation. - CDIC mandate and statutory powers (exact powers listed) - CDIC powers include: (i) acquiring assets from a member institution, (ii) making or guaranteeing loans or advances, with or without security, to a member institution; (iii) guaranteeing a deposit or assuming liabilities of a member institution; (iv) entering into an agreement with a provincial government or its agent respecting any matter relating to deposit insurance; (v) making any investment or entering into any transaction needed for the financial management of CDIC; and (vi) paying out deposit insurance to eligible depositors. - Operational independence and constraints - Finding: CDIC does not enjoy sufficient operational independence to take resolution actions without Governor‑in‑Council authorization for key FIRP measures (vesting shares, creating bridge institution, bail‑in recapitalization for D‑SIBs). - Recommendation: CDIC should enjoy a higher degree of operational independence and be able to take resolution actions without Governor‑in‑Council order, except in specified events. - Gaps and recommended powers to add (exact policy language preserved) - Introduce powers to terminate contracts, claw back remuneration from directors, write down shares and liabilities, and require changes to improve the resolvability of financial institutions. (MoF, CDIC) ¶49,51 — Priority: M — Timeframe: NT - Introduce depositor preference. (MoF, CDIC) ¶52,73,108 — Priority: M — Timeframe: NT - Recognize the power of the resolution authority to depart from the pari passu treatment of creditors for specified reasons and subject to the no creditor worse off safeguard. (MoF, CDIC) ¶58 — Priority: M — Timeframe: NT - Extend the scope of the resolution regime to subsidiaries and branches of foreign banks. (MoF, CDIC) ¶50 — Priority: M — Timeframe: NT - Overhaul the bank liquidation regime (Winding‑Up and Restructuring Act). (DoF, Department of Innovation, Science and Economic Development) ¶67‑75, Appendix II — Priority: H — Timeframe: NT - Bail‑in and TLAC - Bail‑in applicable only to D‑SIBs; liabilities subject to bail‑in are long‑term senior unsecured debt (original maturity longer than 400 days), uninsured, tradeable and transferable; bail‑in excludes deposits, covered bonds, eligible financial contracts, and most structured notes. - NVCC conversion precedes bail‑in conversion; framework lacks express power to write down shares or liabilities. - CDIC can determine conversion rates and percentage of bail‑in‑able debt to be converted; original shares are diluted but not cancelled unless vesting order provides cancellation. - Recommendation: Further develop valuation framework for compensation and enhance transparency. (CDIC) ¶60‑66 — Priority: H — Timeframe: I - Hierarchy of claims and compensation (precise mechanics) - Compensation tied to NCWO principle: entitlement only if worse off than in hypothetical liquidation under WURA. - No specified period for valuations or compensation offers; no specified independent valuation methodology in regulations. - If creditors/shareholders representing 10 percent or more of an affected class object to CDIC offer, Governor‑in‑Council appoints an assessor (a federal judge); compensation decision by CDIC or assessor is final and not reviewable. - Recommendation: Clarify scope of compensation mechanism and enhance transparency; disclose applicable valuation framework. - WURA (liquidation) issues - WURA is outdated; recommendation to undertake a full reform rather than piecemeal amendments. - WURA commencement peculiarities (e.g., default threshold of “at least 200 Canadian dollars” (Section 4 of the WURA)) cited as examples of outdated rules. - Recommendation: Reform goals include flexibility comparable to Bankruptcy and Insolvency Act (BIA), cross‑border insolvency provisions, and recognition of special roles for supervisor and CDIC. - Scope and planning - Resolution planning extended to D‑SIBs and mid‑sized banks; CDIC expects D‑SIBs to be resolvable by March 2020. - Recommendation: Ensure resolution plans for all federally regulated financial institutions that provide critical functions. (CDIC, FISC) ¶97 — Priority: H — Timeframe: I ### Deposit insurance and resolution funding (numeric values preserved) - Federal DIS overview - CDIC operating since 1967 and "largely complies with best international practices." - Eligible deposits insured up to Can$100,000 per depositor per category and per member institution. - Approximately 97 percent of all deposit accounts are fully covered under current framework. - CDIC surveys indicate depositor confidence at 80 percent. - Premiums (Differential Premiums By‑Law exact rates) - 7.5 basis points (category 1) - 15 basis points (category 2) - 30 basis points (category 3) - 33.3 basis points (category 4) - Funding targets and current resources - Current target for ex ante funding: a minimum of 100 basis points of insured deposits. - Actual balance of CDIC’s ex ante funding: Can$4.5 billion, equivalent to 57 basis points of insured deposits as of June 30, 2018. - CDIC’s legislated borrowing limit: Can$23 billion (current limit; adjusted annually based on growth of insured deposits). - Payout and capacity metrics - CDIC’s available funds and borrowing capacity can fund a payout of the insured deposits of 48 CDIC members individually and the aggregate insured deposits of 41 members. - Provincial DIS coverage (exact table entries preserved) - British Columbia: Unlimited - Alberta: Unlimited - Saskatchewan: Unlimited - Manitoba: Unlimited - Ontario: Can$250,000; unlimited for registered deposits - New Brunswick: Can$250,000 - Nova Scotia: Can$250,000 - PEI: Can$125,000; unlimited for registered deposits - Québec: Can$100,000 - Newfoundland and Labrador: Can$250,000 - Québec specifics - Québec DIS fund around Can$740 million. - For five institutions insured by AMF: fund can cover full value of insured deposits for three institutions individually; more than 90 percent of fourth institution individually; reimbursement not expected for fifth institution (Desjardins Group) as it would be subject to resolution. - Recommendation: Québec authorities consider introducing amendments in line with federal deposit insurance review. - BOC ELA and MoF support - BOC can provide liquidity funding; ELA policy changes (December 2015) replaced solvency as eligibility criterion with requirement of a credible recovery and resolution framework; acceptance of Canadian‑dollar mortgages as collateral; clarified eligibility for provincially regulated financial institutions including need for provincial indemnity for residual losses on ELA advances. - MoF can provide loss absorption, recapitalization, and liquidity funding under arrangements in place at 2014 FSAP. - Selected funding recommendations (exact text preserved) - Continue bolstering ex ante resources; continue improving the quality and the granularity of deposit data. (CDIC) ¶106 — Priority: M — Timeframe: NT - Continue increasing the deposit insurance system’s resources; consider introducing amendments in line with the federal deposit insurance review. (Québec government, AMF) ¶113 — Priority: M — Timeframe: NT - Eliminate the power to provide open bank assistance without a change of ownership and a restructuring of the distressed deposit‑taking institution. (CDIC) ¶107 — Priority: H — Timeframe: NT - Conduct self‑assessments against best international practice. (All other provincial authorities except Québec) ¶112 — Priority: M — Timeframe: NT - Conduct an analysis of the effects of the existence of different coverage levels. (MoF, CDIC, provincial authorities) ¶112 — Priority: M — Timeframe: NT - Put in place provincial indemnity of potential emergency liquidity assistance provided by the BOC to systemically important provincially regulated deposit‑taking institutions. (BOC; British Columbia, Ontario and Québec authorities) ¶118 — Priority: H — Timeframe: I - Support steps by the Québec government to agree terms and conditions of a provincial indemnity of potential ELA provided by the BOC; seek to formalize backstop funding arrangement with the Québec government. (AMF) ¶121 — Priority: M — Timeframe: I ### Contingency planning and crisis management - Status and recent actions - Since 2014 FSAP, federal authorities and AMF upgraded internal contingency plans; testing and readiness programs ramped up. - No single body in charge of Canada‑wide crisis preparedness. - Agency actions and testing examples: - CDIC: extensive program of exercises planned on a three‑year horizon; twelve simulations since 2014; tested repo transactions with BOC and access to DOF line of credit involving actual money transfers. - BOC: developed an ELA playbook; conducted simulation in late 2017 with large banks to test ELA processes. - OSFI: updated Taking Control Playbook and Problem Situation Binder; launched operational readiness and training program in 2016; exercises in 2017 and January 2019. - AMF: written crisis contingency plan; table‑top and simulation exercises including D‑SIFI resolution simulation. - Institutional coordination and oversight - SAC should provide systematic oversight of contingency planning and testing/practice activities; consider adopting written terms of reference. - SAC should commission development of an integrated inter‑agency contingency plan and act as federal coordinator with key provincial authorities for contingency planning and testing activities for whole Canadian financial system. - Contingency recommendations (exact text preserved) - Provide systematic oversight of contingency planning and testing/practice activities of its member agencies; commission development of integrated inter‑agency contingency plan. (SAC) ¶126 — Priority: H — Timeframe: I - Act as the federal coordinator with key provincial authorities to carry out contingency planning and testing activities for the whole Canadian financial system. (SAC) ¶127 — Priority: H — Timeframe: NT - OSFI should consider establishing a formal three‑year program of testing and readiness activities similar to CDIC. ### Cross‑border and provincial interplay - Cross‑border elements - Legal framework does not include cross‑border resolution provisions; authorities rely on MoUs, Cooperation Agreements (CoAgs), and Crisis Management Groups (CMGs) to coordinate with foreign authorities. - No legal requirement to consider cross‑border effects or to communicate with home authorities before unilateral actions. - Canadian courts may recognize foreign resolution administrators by order, but absence of WURA cross‑border rules can require independent Canadian proceedings even for small foreign entities. - Recommendation: Introduce cross‑border rules in the resolution and liquidation regimes. - Provincial regimes and Québec developments - Provincial DISs vary markedly in coverage; many provinces provide unlimited coverage. - Québec reforms (Bill 141, June 2018) created Deposit Institutions and Deposit Protection Act and Regulation of the Financial Sector Act; AMF to establish Resolution Board composed of Québec’s Deputy MoF, AMF CEO, and third member appointed by Québec’s MoF. - AMF developing bail‑in, compensation regulations, TLAC guideline, and eligible financial contracts transfer regulations; draft consultations opened October 25, 2018. ### Summary of principal recommendations (excerpted, wording preserved) - Increase the operational independence of CDIC. - Adopt written terms of reference for the SAC and its permanent subcommittee, sub‑SAC. - OSFI should consider putting in place MoUs with provincial authorities. - BOC and relevant authorities in British Columbia (i.e., FICOM) and Ontario should enter into MoUs. - Expand recovery planning requirement to all DTIs and publish recovery planning guidance. - Extend resolution regime to branches of foreign banks and non‑regulated subsidiaries; add powers to terminate contracts, claw back remuneration, write down shares and liabilities, and require changes to improve resolvability. - Clarify and enhance compensation framework and valuation transparency. - Introduce depositor preference. - Overhaul the Winding‑Up and Restructuring Act (WURA). - Put in place provincial indemnities for potential BOC ELA to systemically important provincially regulated DTIs. - Ensure resolution plans in place for federally regulated financial institutions that provide critical functions. *Source: Technical Note of the 2019 Canada FSAP (mission October 29–November 14, 2018), December 20, 2019.* ### 2018. It contains technical analysis and detailed ### 2018. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations. Further information on the FSAP can be found at http://www.imf.org/external/np/fsap/fssa.aspx December 20, 2019 ### Institutional and inter-agency arrangements - Mission and scope - The Technical Note is based on the findings of the mission conducted during October 29–November 14, 2018. - The mission had substantive discussions with federal authorities, Autorité des marchés financiers (AMF) in Québec, representatives of the Canadian financial sector, and Canadian legal and accounting professions. - Current architecture and roles - The Minister of Finance (MoF) has the mandate of maintaining overall financial stability in Canada. - Federal agencies involved: Office of the Superintendent of Financial Institutions (OSFI), Canada Deposit Insurance Corporation (CDIC), Bank of Canada (BOC), Department of Finance (DOF). - Provincial/territorial authorities have their own crisis management and safety net arrangements; the mission focused at the provincial level primarily on Québec. - Coordination arrangements - Federal inter-agency committees: Financial Institutions Supervisory Committee (FISC) (led by OSFI)—institution-specific/early intervention; CDIC Board—resolution planning and distressed/failing member DTIs; Senior Advisory Committee (SAC)—systemic matters, crisis preparedness, legislative initiatives. - SAC and sub-SAC have no written terms of reference and should consider adopting them. - Since the 2014 FSAP, BOC and CDIC have entered into new MoUs with provincial authorities; OSFI has not. - Key findings - Canada has maintained financial stability for a long period of time; the last bank failure in Canada occurred more than twenty years ago. - Coordination among the federal agencies is strong, underpinned by inter-agency committees, but additional federal-provincial MoUs could strengthen cooperation. - Selected recommendations (institutional) - Increase the operational independence of CDIC. (MoF, CDIC) ¶18,36,45,46,47 — Priority: H — Timeframe: NT - Adopt terms of reference for the SAC and the sub-SAC. (MoF) ¶21 — Priority: H — Timeframe: I - Put in place MoUs between the BOC and British Columbia and Ontario authorities. (BOC; British Columbia and Ontario authorities) ¶25 — Priority: M — Timeframe: NT - Put in place MoUs between OSFI and provincial authorities. (OSFI; provincial authorities) ¶26 — Priority: M — Timeframe: NT ### Early intervention and recovery planning - Early intervention - Early intervention is embedded in OSFI’s and AMF’s supervisory approaches. - OSFI and CDIC developed a joint Guide to Intervention to set out coordinated guidelines for the use of their intervention powers; Québec’s AMF has a similar framework. - Recovery planning - Recovery planning for domestic systemically important banks (D-SIBs) is advanced; assessment of recovery planning activities is embedded into OSFI’s risk-based supervisory processes. - Québec’s domestic systemically important financial institutions (D-SIFI) have made good progress in developing recovery plans. - Recovery planning should be expanded to all deposit-taking institutions (DTIs); OSFI’s guideline on recovery planning should be published. - Selected recommendations (early intervention & recovery) - Expanding the recovery planning requirement to all deposit-taking institutions. (OSFI) ¶39 — Priority: M — Timeframe: I - Publish recovery planning guidance. (OSFI) ¶39 — Priority: M — Timeframe: I ### Bank resolution and liquidation - General assessment - The bank resolution regime is generally compliant with international standards, but there are areas for improvement. - CDIC has autonomy in implementing resolution actions but certain decisions require authorization of the MoF and the Governor-in-Council. - Gaps and items to strengthen - Need for greater operational independence for CDIC in applying resolution tools. - Additional powers recommended: interference with contracts, write-down of liabilities, claw-back of remuneration from directors, and powers to require changes to improve resolvability. - Bail-in regime was introduced and is applicable only to D-SIBs; procedures should ensure bail-in can apply to any bank deemed systemic at the time of failure based on prevailing circumstances. - Valuation framework for compensation to bail-in-able debt holders should be further developed to increase certainty about bail-in outcomes. - Introduction of depositor preference is recommended to facilitate bridge bank or purchase and assumption transactions and minimize DIS losses. - The federal liquidation statute—the Winding-Up and Restructuring Act (WURA)—is outdated and should be modernized. - Québec is developing a full resolution regime; the same recommendations apply to that regime. - Resolution planning progress - Since the 2014 FSAP, CDIC began requiring D-SIBs to prepare their own resolution plans based on CDIC’s bail-in resolution framework. - Impediments to resolution are being addressed; D-SIBs are on track to meeting CDIC’s 2020 deadlines for ensuring resolvability. - AMF is progressing in developing a resolution plan for the D-SIFI, based on a bail-in regime. - Resolution planning should be expanded to cover DTIs that perform critical functions (e.g., custody). - FISC should oversee group-wide resolution planning for significant insurance groups with deposit-taking business to ensure comprehensiveness. - Selected recommendations (resolution and liquidation) - Extend the scope of the resolution regime to subsidiaries and branches of foreign banks. (MoF, CDIC) ¶50 — Priority: M — Timeframe: NT - Introduce powers to terminate contracts, claw back remuneration from directors, write down shares and liabilities, and require changes to improve the resolvability of financial institutions. (MoF, CDIC) ¶49,51 — Priority: M — Timeframe: NT - Further develop the valuation framework for compensation and enhance its transparency. (CDIC) ¶60-66 — Priority: H — Timeframe: I - Recognize the power of the resolution authority to depart from the pari passu treatment of creditors for specified reasons and subject to the no creditor worse off safeguard. (MoF, CDIC) ¶58 — Priority: M — Timeframe: NT - Introduce depositor preference. (MoF, CDIC) ¶52,73,108 — Priority: M — Timeframe: NT - Incorporate the same recommendations on legal framework for bank resolution regarding scope, powers, compensation, and depositor preference (Québec government, AMF) ¶80-86 — Priority: H — Timeframe: NT - Overhaul the bank liquidation regime (Winding-Up and Restructuring Act). (DoF, Department of Innovation, Science and Economic Development) ¶6 7-75, Appendix II — Priority: H — Timeframe: NT - Ensure that resolution plans are in place for all federally regulated financial institutions that provide critical functions. (CDIC, FISC) ¶97 — Priority: H — Timeframe: I ### Deposit insurance and resolution funding - Federal DIS and provincial variation - Federal DIS (CDIC) is largely aligned with best practices; provincial DISs vary markedly in coverage. - Québec’s DIS is largely aligned with federal system and harmonized coverage; other provincial DISs provide unlimited coverage of deposits. - Effects of different coverage levels on competition and risks to public finances during crises have not been assessed. - Funding arrangements - CDIC can provide resolution funding using its investment portfolio and its borrowing authority. - BOC can provide liquidity funding to support recovery and orderly resolution; BOC’s ELA framework was revised since the 2014 FSAP. - Policy changes to ELA include replacing solvency as an eligibility criterion with a requirement that the institution has a credible recovery and resolution framework, accepting Canadian-dollar mortgages as collateral, and clarifying eligibility for provincially regulated financial institutions including the need for a provincial indemnity for residual losses in case of default on ELA advances. - MoF can provide loss absorption, recapitalization, and liquidity funding under arrangements in place at the time of the 2014 FSAP. - In Québec, AMF has access to several funding sources to support resolution; AMF should continue to support steps by the Québec government to agree a provincial indemnity for potential BOC ELA and should formalize its backstop funding arrangement with the Québec finance ministry. - Selected recommendations (deposit insurance & funding) - Continue bolstering ex ante resources; continue improving the quality and the granularity of deposit data. (CDIC) ¶106 — Priority: M — Timeframe: NT - Continue increasing the deposit insurance system’s resources; consider introducing amendments in line with the federal deposit insurance review. (Québec government, AMF) ¶113 — Priority: M — Timeframe: NT - Eliminate the power to provide open bank assistance without a change of ownership and a restructuring of the distressed deposit-taking institution. (CDIC) ¶107 — Priority: H — Timeframe: NT - Conduct self-assessments against best international practice. (All other provincial authorities except Québec) ¶112 — Priority: M — Timeframe: NT - Conduct an analysis of the effects of the existence of different coverage levels. (MoF, CDIC, provincial authorities) ¶112 — Priority: M — Timeframe: NT - Put in place provincial indemnity of potential emergency liquidity assistance provided by the BOC to systemically important provincially regulated deposit-taking institutions. (BOC; British Columbia, Ontario and Québec authorities) ¶118 — Priority: H — Timeframe: I - Support steps by the Québec government to agree terms and conditions of a provincial indemnity of potential ELA provided by the BOC; seek to formalize backstop funding arrangement with the Québec government. (AMF) ¶121 — Priority: M — Timeframe: I ### Contingency planning and crisis management - Status and progress - Since the 2014 FSAP, federal authorities and AMF have upgraded internal contingency plans; testing and readiness programs have been ramped up. - No single body is in charge of Canada-wide crisis preparedness. - Recommended enhancements - SAC should oversee crisis preparedness at the federal level, providing systematic oversight of contingency planning and testing/practice activities and commissioning development of an integrated inter-agency contingency plan that is periodically tested and enhanced. - SAC should act as the federal coordinator with key provincial authorities to carry out contingency planning and testing activities for the whole Canadian financial system. - Selected recommendations (contingency planning) - Provide systematic oversight of contingency planning and testing/practice activities of its member agencies; commission development of integrated inter-agency contingency plan. (SAC) ¶126 — Priority: H — Timeframe: I - Act as the federal coordinator with key provincial authorities to carry out contingency planning and testing activities for the whole Canadian financial system. (SAC) ¶127 — Priority: H — Timeframe: NT ### Administrative and mission metadata - Technical Note preparation and leadership - Prepared by José Garrido (IMF, Legal Department) and David Scott (IMF short-term expert) under guidance of Phakawa Jeasakul (FSAP deputy mission chief). - The 2019 Canada FSAP was led by Ghiath Shabsigh (FSAP mission chief). *Source: Technical Note of the 2019 Canada FSAP (mission October 29–November 14, 2018), December 20, 2019.* ### INTRODUCTION ### INTRODUCTION ### Scope of the Note - Technical Note analyzes the failure mitigation and resolution regime for deposit-taking institutions (DTIs), and arrangements for preparing for and managing a financial crisis. - Summarizes findings of the FSAP mission undertaken during the period October 29–November 14, 2018. - Focus: federal arrangements and those in the province of Québec, including legal, policy and procedural changes adopted since the 2014 FSAP. - Topics covered: supervision of recovery planning by DTIs; early intervention in DTIs by authorities; resolution planning by resolution authorities; institutional and legal framework for the resolution and safety net of domestically systemically important bank (D-SIB) and other DTIs; authorities' preparedness for a potential system-wide crisis. - Exclusions: non-deposit-taking financial institutions and financial market infrastructures (FMIs). - Basis of assessment: analysis of legal framework and documentation, and discussions with federal and certain provincial authorities and the private sector. - Note does not represent an assessment of adherence to international standards (e.g., Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) and Core Principles for Effective Deposit Insurance Systems), though those standards serve as a frame of reference for certain recommendations. ### Financial Sector Landscape - The DTI sector is dominated by six federally regulated banks formally designated as systemically important. - Royal Bank of Canada (RBC) designated as a globally systemically important bank (G-SIB) by the Financial Stability Board (FSB) and a D-SIB by OSFI. - Five other banks designated as D-SIBs: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, and Toronto-Dominion Bank. - Together these banks have over 90 percent share of deposits of federally regulated DTIs. - The provincially regulated Desjardins Group is designated as a systemically important financial institution (D-SIFI) by Québec’s Autorité des marchés financiers (AMF) and is the sixth largest DTI in Canada. - Desjardins Group market shares in Québec: 42 percent share of the mortgage lending market and 47 percent share of the personal deposits market in Québec. - There are 54 financial groups that encompass one or more of the 83 federally regulated DTIs. - D-SIBs and the Desjardins Federation are parent entities in their respective groups, which include broker/dealers, asset managers, and life and general insurers among subsidiaries. - There are three large federally regulated insurance groups with substantial foreign operations; one such insurance group owns a medium-size federal bank. ### Legal Framework - Canadian legal framework for bank resolution and crisis management is well developed and composed of federal and provincial legislation. - Federal regime includes the legal building blocks for resolution and crisis management for federally regulated financial institutions; provincial regimes address provincially regulated institutions (credit unions and securities market intermediaries), including prudential regulation, supervision, resolution, and deposit insurance. - Minister of Finance (MoF) is responsible for federal legislation on resolution and crisis management, supported by the Department of Finance (DOF) and the Department of Justice. MoF responsibilities include general financial sector legislation (Bank Act, Insurance Companies Act, Cooperative Credit Associations Act; Trust and Loan Companies Act) which incorporate sunset clauses requiring renewal by Parliament every five years. - MoF competent over backbone laws of the resolution regime and crisis management framework: OSFI Act; Bank Act; BOC Act; CDIC Act; and Winding-Up and Restructuring Act (WURA). Note: MoF is only responsible for Parts II and III of WURA; Part I is the responsibility of the Department of Innovation, Science and Economic Development. - DOF conducts specific reviews of these laws on an ad-hoc basis (example: Deposit Insurance Review conducted in 2016). Key federal statutes and noted features: - Financial Administration Act: allows the MoF, with the authorization of the Governor-in-Council, to borrow funds or enter any contract to “promote the stability or maintain the efficiency of the financial system in Canada,” providing a government backstop for resolution. - OSFI Act: provides for establishment of OSFI, mandate to supervise federally regulated financial institutions (including DTIs and insurers, and federally incorporated pension plans), and appointment of the Superintendent. - BOC Act: prescribes mandate, organization and functions of the central bank; includes legal rules for central bank provision of liquidity assistance. - Bank Act: includes general banking regime (licensing, corporate governance, securities issued by banks), parts of the disciplinary regime, and the Superintendent’s powers related to supervision of banks; contains early intervention principle and a regulation establishing disclosure requirements for financial instruments subject to bail-in. - CDIC Act: establishes CDIC as the deposit insurance system (DIS) and resolution authority for its members; includes core resolution provisions (resolution requirements, Financial Institutions Restructuring Provisions (FIRP), and other rules relevant for resolution); legal framework is further developed by regulations (e.g., on bail-in and compensation) and by-laws (e.g., by-law on resolution plans); some by-laws require MoF approval. - Winding-Up and Restructuring Act (WURA): regulates the liquidation process for financial institutions; liquidation is a judicial process overseen by the court with an appointed liquidator; a regulation under the WURA describes qualified financial contracts for purposes of the WURA (paragraph 69). Provincial framework observations: - Full picture requires considering provincial legislation; thirteen provinces/territories have different legislative regimes and institutional arrangements for crisis management and bank resolution, including separate DISs. - Most provinces embed resolution and deposit insurance frameworks in provincial legislation on credit unions; provincial statutes tend to include deposit insurance and resolution provisions within general statutes regulating provincially regulated financial institutions. - Québec regime is more sophisticated and developed: Act respecting the Autorité des marchés financiers and the Deposit Insurance Act of Québec have been amended in line with federal changes; reformed laws renamed as the Regulation of the Financial Sector Act and the Deposit Institutions and Deposit Protection Act. ### Institutional and Inter-Agency Arrangements - Federal crisis management and bank resolution responsibilities are allocated across multiple agencies: Department of Finance (DOF), Bank of Canada (BOC), Canada Deposit Insurance Corporation (CDIC), Financial Consumer Agency of Canada (FCAC), and Office of the Superintendent of Financial Institutions (OSFI). - MoF has broad policy mandate including crisis management and resolution matters; under the Financial Administration Act, MoF charged with “supervision, control and direction of all matters relating to the financial affairs of Canada not by law assigned to the Treasury Board or to any other minister” (Article 15). MoF can enter contracts and provide credit to promote financial system stability and can direct some agencies (e.g., CDIC) to take specific action to prevent adverse effects on financial stability. - DOF implements MoF ministerial policies, connects government with federal financial sector agencies, and works to achieve financial stability goals while respecting agency independence. - BOC roles: central bank with multiple roles—BOC Act does not assign an explicit financial stability mandate, but BOC develops policies for advancement of the financial system, oversees systemic aspects of payment, clearing and settlement systems (including oversight of systemically important FMIs), and provides liquidity assistance including Emergency Lending Assistance (ELA). In recovery and resolution planning for banks, BOC provides feedback to OSFI or CDIC on funding, liquidity, central bank facilities, asset pledging, and FMIs. BOC has financial, functional and operational independence; BOC staff enjoy legal protection (Section 30.1 of the BOC Act: “No action lies... for anything done or omitted to be done in good faith in the administration or discharge of any powers or duties that under this Act are intended or authorized to be executed or performed.”). - OSFI is the federal prudential supervisory agency: regulates and supervises banks, trust and loan companies, insurance companies, and pension plans. OSFI’s work is guided by preserving public confidence in the financial system (Art. 3.1 of the OSFI Act). OSFI responsible for supervision and early intervention of federally regulated DTIs and insurance companies, and its responsibilities extend to resolution planning of insurance companies (though OSFI has not been designated as the resolution authority for insurance companies). OSFI is a government office under MoF but listed as a “separate agency” (see Schedule V of the Financial Administration Act) and has a high degree of independence. Superintendent appointed by the Governor-in-Council for a seven-year term and removable only for cause; Superintendent is deputy head of OSFI and appoints executive management. OSFI staff enjoy legal protection for acts in good faith in discharge of duties (Section 39 of the OSFI Act). - CDIC is the DIS and resolution authority: federal Crown corporation with mandate to (i) provide insurance against loss of part or all of deposits; (ii) promote and otherwise contribute to the stability of the financial system in Canada; (iii) pursue the two objectives above for the benefit of persons having deposits with member institutions and in such a manner as will minimize the exposure of the Corporation to loss; and (iv) act as the resolution authority for its members (section 7 of the CDIC Act). There is no ranking or priority among these mandates; CDIC must analyze which resolution option best protects insured depositors and contributes to financial stability while minimizing CDIC’s exposure to loss. - CDIC governance: Board of Directors composed of five ex officio members representing four other federal safety-net agencies (Deputy MoF; BOC Governor; Superintendent and a Deputy Superintendent of OSFI; and FCAC Commissioner) and six private-sector members including CDIC Chairperson. CDIC reports to Parliament through the MoF. - Legal protections and liabilities: CDIC Board members and staff enjoy legal protection for acts and decisions taken in good faith under the CDIC Act; liability may exist for actions ultra vires or not in good faith. Protections extend to indemnity for costs and expenses and the possibility to hire independent counsel for litigation. *Source: INTRODUCTION (Technical Note), country report PDF content provided.* ### 17. CDIC is responsible for planning and executing the resolution of federally regulated ### 1canea2020008 - 17. CDIC is responsible for planning and executing the resolution of federally regulated DTIs ### CDIC mandate and statutory powers - CDIC is responsible for planning and executing the resolution of federally regulated DTIs. - The CDIC Act provides CDIC with numerous powers to plan and execute the resolution of its members, including, but not limited to: - (i) acquiring assets from a member institution, - (ii) making or guaranteeing loans or advances, with or without security, to a member institution; - (iii) guaranteeing a deposit or assuming liabilities of a member institution; - (iv) entering into an agreement with a provincial government or its agent respecting any matter relating to deposit insurance; - (v) making any investment or entering into any transaction needed for the financial management of CDIC; and - (vi) paying out deposit insurance to eligible depositors. - CDIC plans the resolution of its members by regulating and supervising resolution plans, performing examinations, and working on deposit data standards and funding arrangements. - Footnotes in the source: "29 The CDIC members are federally regulated DTIs and some provincially regulated DTIs where there is an agreement between the DoF and the respective province. 30" ### Legal protections and indemnities for CDIC personnel - Section 45.1(1) of the CDIC Act provides that CDIC, its directors, officers and employers and any persons acting on the behalf of the CDIC are not liable to any member institution, depositor with, or creditor or shareholder of, any member institution, or to any other person, for any damages, payment, compensation or indemnity that any such member institution, depositor, creditor, shareholder or other person may suffer or claim by reason of anything done or omitted to be done, in good faith, in the exercise, execution or performance—or the purported exercise, execution or performance—of any powers, duties and functions under the CDIC Act. - Section 119(1) of the Financial Administration Act: the Government of Canada indemnifies present and former directors of Crown corporations—including CDIC—and any person acting as a director or officer of another corporation at CDIC’s request, against costs, charges and expenses reasonably incurred in respect of any litigation, provided that the director or officer acted honestly and in good faith with a view to the best interests of the Crown corporation. In criminal or administrative actions or proceedings enforced by monetary penalty the director or officer must also have believed on reasonable grounds that their actions were lawful. - CDIC’s Corporate By-law provisions cited: - 6.01: a present or former director or officer will not be liable to CDIC for any loss, damage or expense suffered or incurred as a result of the neglect or default of any other present or former director or officer. - 6.02: a present or former director or officer will not be liable to CDIC for his or her own neglect or default in any case where he or she is entitled to be indemnified pursuant to the Financial Administration Act. - 6.04: CDIC may advance funds for expenses and cover the difference between the Financial Administration Act coverage and the actual amount of expenses. - CDIC Engagement of Independent Counsel Policy: the Board of Directors, or any one or more of its Committees, or any individual Director, may, at the expense of CDIC, engage independent counsel and other advisors, as may be considered necessary to fulfill its/his/her responsibilities. ### Operational independence and constraints on resolution actions - Finding: CDIC does not enjoy sufficient operational independence to take resolution actions. - Although CDIC has financial and functional independence from the government, CDIC requires the authorization of the Governor-in-Council, following a recommendation from the MoF, to take the most important resolution actions under the FIRP of the CDIC Act. These include: - shares of the distressed institution being vested in the CDIC and the overall take-over of the institution, - the creation of a bridge institution, or - (in the case of a D-SIB) the recapitalization of a bank through the bail-in conversion of its prescribed debt and shares. - CDIC can, without that authorization, take particular actions such as providing financial assistance to transactions affecting distressed institutions or activating open bank assistance—actions which may increase moral hazard and imply a more intensive use of financial resources. - Recommendation: As the designated resolution authority, CDIC should enjoy a higher degree of operational independence and should be able to take resolution actions without the need for an order of the Governor-in-Council. - Cross-reference: "See a more detailed description of the resolution regime in the Section on Bank Resolution and Liquidation." ### Other domestic agencies and provincial arrangements - FCAC: - FCAC is the financial consumer protection agency, a separate government agency whose mandate is to ensure that federally regulated financial institutions comply with consumer protection measures. - FCAC promotes financial education and raises consumers’ awareness of their rights and responsibilities. - FCAC participates in cross-agency committees with crisis management functions and the FCAC Commissioner is a member of the CDIC Board. - AMF (Québec): - AMF is the integrated supervisor in Québec overseeing DTIs, financial markets and securities market intermediaries. - AMF is responsible for the operation of the DIS, and deposit insurance legislation includes AMF’s resolution powers over DTIs. - AMF acts as the resolution authority which establishes the resolution plan and implements resolution operations. - The implementation in Québec will require the establishment of a Resolution Board to approve resolution plans, order and closure of the resolution operations, and authorize any resolution operation not provided for in the plans, maintaining separation between supervision and resolution functions. - The Resolution Board will be composed of three members—Québec’s Deputy MoF, the President and Chief Executive Officer (CEO) of AMF, and a third member appointed by Québec’s MoF. ### Inter-agency arrangements and coordination mechanisms - Federal coordinating bodies: - Three federal coordinating bodies: Financial Institutions Supervisory Committee (FISC), the CDIC Board and the Senior Advisory Committee (SAC). - FISC: established under the OSFI Act, chaired by the OSFI Superintendent, comprising the BOC Governor, the CDIC President and CEO, the Deputy MoF, and the FCAC Commissioner (collectively, the principals). It has written terms of reference, meets at least quarterly, and special meetings can be called by the chair or at the request of any other member. When problems become acute, the principals engage via the CDIC Board. - SAC: monitors and advises on macroprudential oversight and system-wide crisis prevention. Membership is the same as FISC; SAC is chaired by the Deputy Minister who convenes it quarterly. SAC is supported by a permanent subcommittee (sub-SAC) chaired by an Assistant Deputy Minister. The SAC and sub-SAC do not benefit from written terms of reference; consideration should be given to adopting formal terms of reference. - OSFI–CDIC coordination: - Strategic Alliance Agreement (current agreement of 2011) provides for coordination and information-sharing between CDIC and OSFI when licensing new DTIs, undertaking routine examinations and dealing with problem DTIs, including coordinating the use of the agencies’ early intervention powers. An updated agreement is currently being negotiated. - Joint Guide to Intervention (last written in 2008) sets out coordinated policies for use of their respective early intervention powers and envisions four stages of intervention, including imminent insolvency. - CDIC MoUs since the 2014 FSAP: - 2016: MoU with the Investment Industry Regulatory Organization of Canada (IIROC). - 2017: MoU with the Canadian Investor Protection Fund (CIPF). - 2018: MoU with AMF to improve collaboration and information sharing related to two banking groups. - BOC MoUs with provincial supervisors of credit unions since the 2014 FSAP: - Québec (AMF), Manitoba, and Saskatchewan. Under these MoUs, authorities share data on provincially regulated financial institutions and expertise on stress testing; meetings at least annually. - Recommendation: MoUs with Financial Institutions Commission of British Columbia (FICOM) and the Financial Services Commission of Ontario (FSCO) should be put in place. - OSFI and provincial MoUs: - OSFI has not entered into any new MoUs since the 2014 FSAP and has none in place with the provincial authorities. OSFI has a cooperation framework with AMF and is working to upgrade it. There is scope to assess whether formalized MoUs with AMF and other provincial authorities would be useful. - International cooperation fora: - Three principal forums for cooperation with foreign authorities for the Canadian G-SIB and other D-SIBs: crisis management groups (CMGs), supervisory colleges, and outreach panels. - CMG meetings are held annually with CDIC and OSFI alternating responsibility for hosting all CMG meetings in a given year. BOC and DOF also participate. The primary topic alternates between recovery (OSFI) and resolution (CDIC) each year. - OSFI convenes supervisory college meetings for each of the D-SIBs on roughly an 18-month cycle and a half-day outreach panel on an 18-month cycle; CDIC participates in outreach panels. - CDIC, OSFI, the DOF, and the BOC are developing a Cooperation Agreement (CoAg) for the Canadian G-SIB, negotiated with members of the bank’s CMG by relevant Canadian authorities. - OSFI has MoUs in place with over 30 foreign supervisory authorities. CDIC has signed MoUs with key foreign resolution authorities participating in OSFI/CDIC-led CMGs. ### Summary of recommendations (from source) - Increase the operational independence of CDIC. - Adopt written terms of reference for the SAC and its permanent subcommittee, sub-SAC. - OSFI should consider putting in place MoUs with provincial authorities. - BOC and relevant authorities in British Columbia (i.e., FICOM) and Ontario should enter into MoUs. ### Early intervention and recovery planning (overview) - The policy of early intervention is embedded in the legal framework for prudential supervision in Canada and is a fundamental part of the statutory mandate of OSFI. - The mandate enables multiple intervention powers, including the power to close a troubled institution. - OSFI’s early intervention powers include: - Conditions or limitations on the activities of the financial institution (affecting the “order approving the commencement and carrying on of business” and referring to any aspect of the business). - Capital order: the Superintendent may direct a financial institution to increase its capital and/or to provide additional liquidity. - Direction of compliance: the Superintendent may direct a financial institution to perform any acts necessary to resolve a prudentially unsound situation; the Superintendent may apply to a court to seek enforcement of a direction of compliance. - Taking control of the financial institution under specific circumstances (see Section 648(1.1) of the Bank Act for a list of circumstances). - Requesting a winding-up order: resulting in liquidation and withdrawal of the banking license of the financial institution. *Source: Excerpt from the IMF country report chapter on Canada as provided in the supplied content.* ### 32. OSFI can generally achieve the desired results through moral suasion. The institutions ### 32. OSFI can generally achieve the desired results through moral suasion. ### Early intervention and supervisory coordination - OSFI can generally achieve desired results through moral suasion; institutions regulated by OSFI are fully aware of these powers and OSFI does not normally need to use formal intervention action to ensure cooperation. - Early intervention requires seamless coordination between OSFI and CDIC: - From the moment an institution is “staged”, communications and exchange of information between OSFI and CDIC increase. - OSFI will discuss current or planned intervention activities, including restrictions and financial requirements, the institution’s progress in remediating its problems, and initiation or updates to its recovery plan. - CDIC may place the institution on a watchlist, discuss its view of risks, and provide suggestions for supervisory activities and restrictions. - OSFI requests details on findings of any special or preparatory exams and will wish to discuss CDIC’s preliminary resolution plans. - The “Strategic Alliance Agreement” between OSFI and CDIC provides full details of cooperation in early intervention and the lead-up to resolution; OSFI and CDIC intend to revise this agreement to maintain a high level of cooperation during resolution. ### CDIC early-stage actions and incentives - CDIC may take actions at an early stage to encourage member institutions to address deficiencies or reduce risk, including: - Escalate concerns to other safety-net institutions, including OSFI, through FISC. - Request to comply: request a member to comply with any obligation established in the DIS. - Court order: request the court for a restraining or compliance order if the member does not comply with the request. - Termination of the deposit insurance policy: termination effectively prohibits taking new retail deposits in Canada (by modifying the institution’s order approving commencement and carrying on of business by the Superintendent). Demand deposits held on the termination date remain covered by the deposit insurance for a period of two years post-termination, or to maturity for term deposits. - Differential insurance premiums: a differential premiums system that signals to a member’s board and senior management the risks the member brings to the deposit insurance fund and creates incentives to reduce these risks. - Premium surcharges: impose a surcharge on the deposit insurance premium in response to certain prescribed practices that increase risk in the member institution. ### Guide to Intervention and staging - The Guide to Intervention: - Is a published document outlining the nature, extent and timing of OSFI and CDIC involvement as a financial condition deteriorates. - Specifies circumstances that may warrant “staging” an institution and intervention options at each stage. - Defines stages beyond “no significant problems/normal activities” as: (i) early warning; (ii) risk to financial viability or solvency; (iii) future financial viability in serious doubt; and (iv) non-viability/insolvency imminent. - Escalation of possible measures increases with deterioration of the institution (see Appendix 1 in the source). - In theory, CDIC may provide financial assistance at stage 3 (future financial viability in serious doubt), but such assistance should be exceptional; it would be advisable to remove a reference to routine CDIC assistance at stage 3 in a revised Guide to Intervention. ### Overlap between early intervention and resolution - Some OSFI intervention powers apply to going-concern institutions, while others fall under resolution (e.g., taking control of an institution, requesting winding-up, triggering conversion of non-viability contingent capital (NVCC)). - Early intervention may lead to private sale of a distressed institution; CDIC may provide financial assistance (loans or guarantees) to such a sale if it minimizes CDIC’s exposure to loss and/or contributes to financial stability. - CDIC can provide financial assistance to a bank resolution via a purchase and assumption (P&A) transaction even without a formal non-viability opinion from OSFI, though required financial assistance may be significant because deposits rank at the same level with other unsecured claims. - Distribution of powers between OSFI, CDIC, and the MoF in early intervention/resolution may not be entirely aligned with agency mandates: - Under subsection 39.1(3) of the CDIC Act, prior to taking control, the Superintendent would send CDIC a report, giving CDIC opportunity to object to taking control. - The MoF could override the Superintendent’s intent to take control (section 648(1)(b) of the Bank Act). - If the Superintendent does not take control (e.g., because the MoF exercised override), the reporting mechanism allows CDIC to recommend resolution actions to the MoF. - Recommendation: supervisors (OSFI) should retain ability to take control and request winding-up in cases not adequately covered by a determination of non-viability; where OSFI concludes an entity is not viable, OSFI should communicate the lack of viability to CDIC so the resolution authority determines the appropriate course of action, including liquidation. ### Québec framework - In Québec, AMF has Intervention Guidelines for Québec-Chartered Deposit Institutions Registered under the Deposit Insurance Act with the same stages of risk as the federal system; DIS, resolution and supervisory functions are under AMF but guidelines distinguish between actions in these areas. - AMF requires the Québec D-SIFI to prepare and maintain an up-to-date recovery plan; the group submitted its first plan late 2014, received three rounds of feedback, undertook an internal simulation in mid-2018, and an updated plan will be submitted by end-2018. The plan is shared with the BOC. ### Recovery planning - OSFI requirements: - All D-SIBs must have recovery plans; OSFI uses criteria to determine which other banks must prepare recovery plans. - Medium-sized and small DTIs in stage 2 or higher must generally prepare recovery plans. - OSFI provides guidance via the 2012 recovery plan principles and technical notes; these have not been published. - OSFI requires all DTIs to have a formal contingency funding plan as part of its 2012 Liquidity Principles Guideline; these contingency plans are essential components of broader recovery plans. - Implementation and supervision: - OSFI began requiring plans from D-SIBs in 2011; first submissions by mid-sized DTIs occurred in 2014 and for smaller DTIs in 2015. - Assessment of plans for D-SIBs is integrated into OSFI’s risked-based supervisory framework and recorded in the bank’s Risk Matrix yielding a composite risk rating; this integration is being pursued for mid-sized and small banks. - Both the Recovery and Resolution Plan (RRP) team and the Risk Support Services (RSS) team support implementation by supervisory teams. - External feedback and coordination: - CDIC reviews recovery plans of D-SIBs and mid-sized DTIs to support resolution planning efforts. - BOC reviews D-SIBs’ recovery plans focusing on funding, liquidity, and FMI perspectives. - Federal authorities participate in periodic recovery planning information-sharing meetings for mid-sized and small banks; OSFI-led CMG meetings involve bank presentations on recovery plans and host authorities review D-SIB plans in OSFI-led CMG context. ### Summary of recommendations - The early intervention framework and the resolution framework should recognize the autonomy of OSFI as the supervisory authority and CDIC as the resolution authority. - OSFI should consider expanding its recovery planning requirements to all DTIs. - OSFI should publish its recovery planning guidance. - OSFI should continue integrating recovery plan assessments into the mid-sized and small banks’ overall composite risk ratings. ### Bank resolution and liquidation — legal regime and entry into resolution - Legal framework: - The CDIC Act, as amended in 2016 and 2017, regulates resolution of both non-systemic and systemic DTIs; no separate regimes for systemic and non-systemic banks, though certain rules apply only to D-SIBs. - The resolution regime is administrative and applies to federally regulated DTIs, but not to branches of foreign banks or to non-regulated subsidiaries of federally regulated institutions. - A special statute (WURA) regulates liquidation of financial institutions; liquidation is a judicial process overseen by a superior court. - Entry into resolution: - Entry into resolution depends on the determination of non-viability made by the Superintendent (OSFI). - The Superintendent may form an opinion of non-viability where: - the institution is dependent to an excessive extent on loans, advances, guarantees or other financial assistance to sustain its operations; - the institution has lost the confidence of depositors and the public; - the institution’s regulatory capital is or is about to become substantially deficient; or - the institution has failed to pay any liability that has become due and payable or will not be able to pay its liabilities as they become due and payable. - The law does not prescribe the analysis or evaluation required for the Superintendent’s decision. - CDIC as resolution authority and role of Government: - After the Superintendent forms an opinion of non-viability, the CDIC Board can determine the appropriate resolution method and, depending on the method, request the MoF to recommend to the Governor-in-Council to make one or more orders directing CDIC to implement such resolution method, if the MoF considers it in the public interest. - Most resolution tools included in the FIRP of the CDIC Act can only be activated following the procedure above; use of most resolution measures requires a determination of non-viability and of public interest, where the determination of public interest is external to the resolution authority. - The assessment of public interest could be done by the resolution authority in consultation with the MoF. - CDIC must decide use of resolution tools in accordance with its objectives, which include minimizing exposure to losses and promoting and contributing to financial stability. - If there is a conflict between loss minimization and financial stability, it can be resolved in favor of financial stability by an order of the Governor-in-Council or at the direction of the MoF, after consultation with the BOC, CDIC, and OSFI. *Source: 1canea2020008 - 32. OSFI can generally achieve the desired results through moral suasion. (IMF PDF).* ### 46. CDIC should have more autonomy in taking resolution action. CDIC can take some ### 46. CDIC should have more autonomy in taking resolution action. CDIC can take some ### Autonomy of CDIC - CDIC can take some actions, such as providing financial assistance, without government authorization, but it requires an order from the Governor -in -Council for the adoption of resolution actions, even if these refer to a small institution. - CDIC can recommend the resolution approach to be followed, but it does not have the authority to take resolution actions by itself. - Recommendation: CDIC should be able to decide on the resolution/liquidation strategy to be adopted, and the government authorization should only be required in specified events (for instance, the need to preserve financial stability, the use of public funds, or other public interest considerations). ### Resolution toolbox (scope and instruments) - CDIC can use a series of resolution tools without the need of a Governor-in -Council order; these include providing financial assistance to a distressed institution and requesting the winding-up of the institution. - Most of the resolution tools are found in the FIRP, namely: - Transfer to CDIC of the shares and subordinated debt of the institution (vesting order); - Appointment of CDIC as receiver of the institution; - Creation of a bridge bank; and - Recapitalization though the bail -in of shares and liabilities (only applicable to D-SIBs). - The bail-in tool, as all the other resolution tools, should also be applicable to banks that are classified as systemic at the time of failure. ### Powers CDIC can exercise under law - Legal system allows open bank assistance and temporary public ownership (TPO) without restrictions. - CDIC powers include: - remove and replace directors and management; - assume ownership or take control of the firm to restructure it; - operate and resolve the firm, including powers to interfere with contracts; - purchase or sell assets; - ensure the continuity of essential services; - override the rights of shareholders; - transfer or sell assets and liabilities to a third party; - implement an amalgamation of the institution; and - establish a separate asset management vehicle. - CDIC can exercise these powers without shareholders’ or creditors’ consent. ### Gaps in resolution powers - CDIC does not have the power to claw back the remuneration paid to directors before the entity entered resolution or was liquidated. - CDIC does not have the power to terminate contractual relationships, when doing so would be beneficial for interests of the entity in resolution. - CDIC does not have the express power of writing down financial instruments (shares, debt securities) as part of the process to implement bail-in. - The Canadian system applies relative priority between holders of NVCC instruments and bail-in-able debt rather than absolute priority; conversion of NVCC can be done without forcing shareholders to absorb losses first. - The resolution framework does not recognize the power to require financial institutions to introduce changes in their structure or operations to improve their resolvability. ### Scope of application (recommended expansion) - Current limitation: CDIC only acts as the resolution authority for its members; the regime does not extend to bank branches of foreign entities, or to non-regulated subsidiaries of banks. - Recommendation: The resolution regime should extend to branches of foreign banks, to non-regulated subsidiaries of banks, and to other financial institutions of the same group that are not federally regulated. - Rationale: Including these entities would provide total certainty about the continuity of critical functions; maintaining provision of critical functions by subsidiaries may not always be possible through corporate rights alone, so a legal power to preserve critical functions is necessary. ### Technical adjustments to enhance powers - Power to terminate contracts: - CDIC should be able to terminate contracts as part of its restructuring powers. - Additional provisions required to specify circumstances for termination, criteria to assess damages. - There should also be an express power to maintain contracts to ensure provision of critical services. - Power to claw-back remuneration from directors: - It should be possible to recover variable remuneration that directors received before resolution, to address inaccurate financial statements and reduce moral hazard. - Power to write-down shares and liabilities: - Necessary to recognize losses—by way of a write-down—before conversion of other instruments is triggered, particularly to respect hierarchy between ordinary shareholders and other claimants. - Power to require changes to improve resolvability: - The resolution authority should have direct power to require financial institutions to address obstacles to resolvability by adopting changes to structure, operations, or other aspects. ### Depositor preference and its implications - Implementation of some resolution tools is affected by the lack of depositor preference. - Depositor preference supports transactions such as a P&A or a bridge bank by placing depositors in a separate creditor class. - In the absence of depositor preference: - Restructuring operations can result in discriminatory treatment of creditors of the same class and generate potential compensation claims. - In liquidation, depositor preference is necessary to implement a P&A transaction, minimizes losses of the DIS, and incentivizes other creditors to monitor the credit institution. - Note: There are several models of depositor preference (general depositor preference vs tiered depositor preference), and model choice hinges on several factors. ### Stay, interference with contracts, and continuity of services - A broad stay operates in respect of an institution—including a bridge institution—when subject to resolution by CDIC: - No creditor action may be brought against the institution, and contracts cannot be terminated by reason of entry in resolution. - CDIC can cure defaults within 60 days of the resolution order to maintain a contractual relationship. - The stay may be lifted or shortened in respect of a claim only with authorization of a superior court if found equitable or there would be material prejudice to the claimant. - Exceptions: limited exceptions to preserve functioning of payment, clearing and settlement systems. - Eligible financial contracts (swaps, derivatives and options) are not subject to the general stay; a limited stay of two business days applies to eligible financial contracts. - CDIC can interfere with contractual relationships but does not seem to have the power to terminate contracts with third parties. - The law does not allow CDIC to require other companies in the institution’s group or unaffiliated companies to provide necessary services to the institution or bridge bank, though CDIC can require group companies to provide services by using its powers as shareholder of a subsidiary. ### Bridge bank regime - Creation of a bridge bank is recognized as one of the resolution methods. - Use of a bridge bank requires that the Governor-in -Council issues an order appointing CDIC as the receiver of the DTI; the receivership order is a condition precedent for direction to the MoF to incorporate a bridge bank assuming the deposits of the resolved institution. - Eligible financial contracts can be transferred to the bridge bank. - Bridge bank stay: benefits from a stay for a period of 90 days of actions related to assets or liabilities transferred to it. - Bridge bank regulatory treatment: - Benefits from comprehensive exemptions from disclosure and other regulatory requirements. - Deadline for existence of the bridge bank is two years, extendable by the Governor-in -Council annually, for a maximum period of five years. - CDIC options post-transfer: - Liquidate the institution with assets and liabilities left behind (“bad bank”); or - Create an asset management vehicle to liquidate assets not transferred to the bridge bank. - Lack of depositor preference may require compensation to unsecured creditors left behind, as their claims rank pari passu with those of depositors. ### Bail-in framework and limitations - Bail-in recapitalization recognized only for D-SIBs. - Since the 2014 FSAP, bail-in was added as key addition for systemic banks; bail-in tool incorporated into the Canadian system after reform of the CDIC Act and adoption of bail-in regulations; introduction of a TLAC framework by OSFI applicable to D-SIBs. - TLAC requirement can be met by regulatory capital, including NVCC instruments and eligible bail-in-able debt. - Liabilities subject to bail-in are only those issued after entry into force of the bail-in regulations; bail-in has not been introduced in Canada with retroactive effects. - Canadian D-SIBs will replace existing senior debt with new issuances of debt subject to bail-in. - Liabilities subject to bail-in are long-term (i.e., original maturity longer than 400 days) senior unsecured debt securities that are uninsured, tradeable, and transferable. - Bail-in excludes deposits, covered bonds, eligible financial contracts, and most structured notes. - Canadian regime places bail-in-able securities in same creditor class as all the senior unsecured debt, including insured and uninsured deposits. - CSA issued staff notice on investment risks due to bail-in (conversion risk); regulatory regime prohibits use of term “deposits” in association with issuances of debt subject to bail-in. - Conversion of debt into shares can only be authorized in conjunction with a vesting order or a receivership order: - Bail-in recapitalization applied as part of resolution program for a D-SIB, after Governor-in -Council order giving CDIC temporary control or ownership. - Law does not recognize specific power to write down shares or liabilities, or to depart from equal treatment of creditors of same class in applying bail-in. - Bail-in mechanics: - CDIC acquires shares of the institution (vesting order) or control of the institution (as receiver). - Conversion of NVCC instruments into common shares is prerequisite for conversion of bail-in-able debt. NVCC instruments include subordinated debt and preference shares whose conversion is triggered by a determination of non-viability by the Superintendent or if the institution receives a capital injection from the federal or provincial governments. - NVCC conversion operates according to conversion rates in contracts and supporting documents. - After conversion of NVCC instruments, CDIC determines conversion of debt subject to bail-in in accordance with conversion regulations, which require CDIC to take into consideration regulatory capital requirements. - Debt subject to bail-in is only converted after junior liabilities (subordinated debt and preference shares) have been converted into common shares. - CDIC can freely establish conversion rate, with condition that conversion rate needs to be more favorable than conversion rate applied to NVCC instruments. - CDIC is free to determine percentage of bail-in-able debt to be converted and can operate conversion in one or several steps. - Because CDIC does not have power to write down shares or liabilities, original shares will be diluted, but not cancelled (unless vesting order expressly provides for cancellation of shares). - CDIC can determine degree of dilution of original shares and former NVCC holders by setting conversion rate for bail-in-able debt. - As result of conversions, regulatory capital is restored; CDIC may still hold shares if original share capital was vested in CDIC. - CDIC can sell or cancel shares it holds after conversions; preferable for CDIC to have power to write down existing shares so losses are absorbed before conversions of NVCC instruments and bail-in-able debt are triggered. *International Monetary Fund — Canada FSAP chapter on CDIC resolution framework (excerpts).* ### 58. The hierarchy of claims is not applied in an absolute way. The original shareholders are ### 58. The hierarchy of claims is not applied in an absolute way. The original shareholders are ### Hierarchy of claims, NVCC, and bail-in - Original shareholders are diluted twice: first with the conversion of NVCC instruments, and then with the conversion of bail-in-able debt. - NVCC holders receive common shares according to conversion terms that are less favorable than those applicable to more senior ranking bail-in-able debt holders. - The priority of claims is applied in a “relative” fashion and operates a certain subordination of the different classes of claims. - The framework lacks an express power to write down the value of the shares to absorb losses before any conversion of other liabilities is activated. - Those affected by bail-in will only be entitled to compensation from CDIC in accordance with the rules prescribed in the law and regulations. - The regime deviates from the FSB’s KA in that it does not allow the resolution authority to depart from the pari passu treatment of creditors, if necessary, to contain potential systemic impact or to maximize value for all creditors as a whole (KA 5.1), subject to the “no creditor worse off” (NCWO) safeguard. ### Judicial review and safeguards - Resolution actions are adopted without the intervention of the court; the orders of the Governor-in-Council are final and not subject to review (Section 39.13(6) of the CDIC Act). - Actions taken by CDIC in implementation of a resolution order are immediately executed without the need to resort to the court. - Shareholders and other affected parties cannot challenge the resolution actions before the court, except for the stay in resolution: affected parties may apply to a superior court to have the stay shortened or lifted in cases of material prejudice or other equitable grounds (see Section 39.17 of the CDIC Act). - Despite statutory exclusion of judicial review, courts retain inherent jurisdiction; the standard for judicial review would be demanding, requiring actions undertaken for a private purpose or outside the mandate of an authority. - Shareholders, creditors, and other affected parties could receive compensation for damages; CDIC is in charge of determining the amount of compensation, if any (Section 39.23(1) of the CDIC Act). ### Compensation framework, standards, and procedures - Compensation is strictly connected with the NCWO principle: persons are entitled to compensation only if they are in a worse position than they would be if the institution had been liquidated under the WURA. This standard applies to creditors and shareholders by comparing their position in resolution with a hypothetical liquidation. - Due to differences between going-concern value in resolution and reduced value of piece-meal liquidation under the WURA, prospects of compensation are limited. - The NCWO standard may not be adequate to compensate other actions (for instance, initiating resolution without proper grounds or interfering with contractual rights). - Compensation design: - CDIC can offer compensation in the form of a monetary payment or in shares. - Compensation could be awarded to creditors or shareholders affected by any or multiple resolution tools (for instance a P&A, or a bridge bank). - Compensation is not available for those who acquired their interest in shares or liabilities of the institution after resolution started, thus deterring speculation. - Regulatory specifications for compensation: - Compensation requires a comparison between resolution value and the hypothetical liquidation value creditors (or shareholders) would have received. - Parties claiming compensation cannot compare their situation to that of other claimholders. - Points of reference for comparison: - Liquidation value is determined at the moment “immediately before” the Governor-in-Council order directing the restructuring of the institution if a winding-up order for the institution had occurred at that time; - Resolution value is determined at the moment when CDIC stops exercising control over the resolved institution (i.e., the moment when CDIC “exits” temporary control or ownership of the institution). - Gaps and procedural issues: - No specified period for conduct of valuations and formulation of a compensation offer by CDIC. - Regulations do not indicate whether there will be independent valuations, how they would be conducted, or acceptable valuation methodologies. - External assessor mechanism: - After its analysis, CDIC will make a compensation offer to affected parties—this may include a determination by CDIC that the compensation is zero. - Parties can accept or reject the offer. - If creditors or shareholders representing 10 percent or more of an affected class object to CDIC’s offer, the Governor-in-Council will appoint an assessor (a federal judge) to assess CDIC’s offer and determine appropriate compensation. - The assessor will analyze the reasonableness of CDIC’s offer and the factors and information used. - The compensation decision, whether rendered by CDIC or an assessor, is final and not reviewable. - Transparency and scope recommendations: - The scope of the compensation mechanism should be clarified and all aspects of its operation should be transparent. - There should be recognition that other potential compensation claims may exist beyond NCWO metrics. - CDIC should disclose details on the applicable valuation framework underpinning the compensation mechanism. ### Bank liquidation regime (WURA): processes and deficiencies - The special liquidation regime is the alternative to resolution; WURA is a judicial process applying to financial institutions, including branches of foreign banks. - Historical and structural notes: - Original WURA adopted in 1882; current version adopted in 1985 and amended several times, but statute is outdated and in need of deeper revision. - Commencement of liquidation: - Superintendent may request the Attorney General to submit a winding-up petition after taking control in circumstances specified in the Bank Act. - CDIC can submit a winding-up petition if the institution is insolvent (according to WURA commencement standards). - For commencement purposes, CDIC is deemed to be a creditor by law. - CDIC may be required to submit a liquidation petition as part of a resolution scheme under the CDIC Act (for instance, after transferring assets and deposits to a bridge bank). - Creditors or shareholders can also request opening of winding-up proceedings. - Some WURA rules are outdated, e.g., requirement of a default of a debt of “at least 200 Canadian dollars” (Section 4 of the WURA). - Decision criteria and governance: - No specific criteria for choosing liquidation versus other alternatives; consultations between FISC partners should occur, but it is unclear how the Superintendent decides between liquidation and a declaration of non-viability that triggers resolution. - The MoF has a fundamental role with powers to override OSFI and direct CDIC to trigger resolution powers; preferable that supervisory and resolution authorities enjoy autonomy. - Liquidation mechanics: - Liquidation under WURA follows traditional insolvency approach: judicially appointed liquidator verifies claims, collects assets, sells assets, and distributes payments among creditors. - Liquidation includes comprehensive stay of creditor actions, including contract termination, except for eligible financial contracts. - Liquidation includes avoidance actions for fraudulent and preferential transactions, and recovery of unlawful dividends distributed to shareholders. - CDIC can act as liquidator, but in practice private professionals are typically appointed. - Deposit insurance and payouts: - Opening of winding-up proceedings triggers payout to depositors of their eligible deposits. - CDIC may pay out depositors from the moment OSFI takes control, and obligation arises at initiation of winding-up proceedings. - CDIC is subrogated in the rights of depositors against the insolvent institution. - Because there is no depositor preference, it is not possible to implement a P&A transaction in liquidation as an alternative to a depositor payout. - Bank operations during WURA proceedings: - Institution subject to WURA proceedings ceases banking operations; banking license not withdrawn until end of proceedings, but the bank cannot conduct operations while being liquidated except as permitted by the court. - Distributions in liquidation: - Creditors receive payments according to ranking of claims established in the Bank Act and WURA. - Ranking does not include any preference for deposits (insured or uninsured). - Assistance by CDIC in run-up to insolvency would benefit from Crown priority. - No discrimination of creditors based on nationality or location. - Functional but outdated law: - Numerous issues in WURA need revision: commencement of liquidation; appointment, remuneration, and powers of liquidator; stay of creditor actions; effects on executory contracts; submission and verification of claims; ranking of claims; liquidation operations; avoidance of antecedent transactions; limited cross-border insolvency provisions. - In recent cases where WURA applied, liquidators and judiciary have found practical solutions to challenges. - Recommendation: undertake a full reform of the statute rather than piecemeal amendments; ideally WURA should provide flexibility comparable to the Bankruptcy and Insolvency Act (BIA) and recognize special positions of the financial supervisor and CDIC (for instance, appointment or selection of the liquidator, and reporting duties). - Reform goals: reduce costs and increase recoveries by providing maximum flexibility for sale of assets and solutions that maximize estate value; include cross-border insolvency provisions for recognition of foreign proceedings. ### Ranking of claims in liquidation (Box 1) - 1. Federal and provincial deemed trust and “requirement to pay” claims with express pre-eminence over private security interests, and real property liens for municipal taxes and utilities charges - 2. Secured claims, to the value of the security; statutory liens and deemed trusts - 3. Claims secured by statutory liens, deemed trusts and requirements to pay which do not have express pre-eminence over private security interests - 4. The costs and expenses of the liquidation (WURA) - 5. Priority payment items such as certified cheques, bank drafts and money orders (Canadian Payments Act). - 6. Non-subordinated unsecured Federal Crown claims, including CDIC claims other than subrogated depositor claimant (Bank Act). - 7. Non-subrogated unsecured Provincial Crown claims (Bank Act). - 8. Unpaid wages and salaries accrued in the 3 months prior to winding-up (WURA). - 9. All other non-subordinated unsecured claims, including uninsured deposits, CDIC as subrogated depositor claimant, trade creditors, judgment creditors and covered bond liabilities. (this class of claimants also includes bail-in-able debt) - 10. Subordinated unsecured claims. - 11. Fines and penalties. - 12. Preferred shares according to their terms. - 13. Common shares. - Note: The lack of a single provision establishing a hierarchy of claims complicates interpretation of relationships among priorities. A different creditor hierarchy applies to Trust and Loan Companies because of their distinct legal structure (see Section 422(1) of the Trust and Loan Companies Act (TLCA)). ### Cross-border aspects of the resolution regime - The Canadian legal framework for resolution does not include cross-border elements; authorities rely on MoUs, can enter CoAgs and participate in CMGs to exchange information and coordinate for resolution. - The legal framework does not require consideration of cross-border effects of resolution actions. - No legal requirement to communicate with the home authorities of an institution before taking unilateral resolution actions. - The law lacks provisions to allow recognition of or cooperation with foreign resolution actions. *Source: 1canea2020008 - 58. The hierarchy of claims is not applied in an absolute way. The original shareholders are* ### 78. Resolution actions taken by foreign authorities may be recognized in Canada by order ### 78. Resolution actions taken by foreign authorities may be recognized in Canada by order ### Cross-border recognition and limits - Canadian courts may recognize the appointment of an administrator of a foreign bank, in application of the resolution regime applicable to such foreign bank. - Recognition by Canadian courts can suffice where the foreign authority exercises corporate rights of the foreign entity, but recognition of resolution measures and support by Canadian courts and authorities could collide with public interest considerations. - The liquidation regime does not include cross-border insolvency provisions; there are no rules for the recognition of foreign insolvency proceedings in the WURA. - Recent experience shows that even the liquidation of a small foreign entity with minimal presence in Canada may require an independent liquidation proceeding. ### Provincial resolution regimes and interplay with federal regime - The federal resolution regime coexists with provincial regimes; resolution of provincial DTIs is the responsibility of provincial authorities. - Provincial DISs can provide financial assistance to distressed institutions, including financing P&A transactions. - Most provincial resolution regimes are simple and offer limited resolution tools due to prevalence of small institutions and, with few exceptions, absence of systemic institutions. - Provincial authorities can use the federal insolvency regime (BIA and Companies’ Creditors Arrangement Act) to liquidate and restructure DTIs; paradoxically, general federal legislation (the BIA and the Companies’ Creditors Arrangement Act) is described as more modern and efficient than the specialized federal legislation for bank insolvency (the WURA). ### Québec developments - Québec amended financial legislation via Bill 141 (adopted in June 2018), now embodied in the Deposit Institutions and Deposit Protection Act; the Regulation of the Financial Sector Act; and relevant sections of the Financial Services Cooperatives Act. - The reforms envisage exercise of resolution powers by AMF; as an integrated regulator AMF is the resolution authority, with triggering and closing of resolution operations to be exercised by a Resolution Board in the process of being established. - Québec legislation grants AMF resolution powers similar to federal legislation, plus the power to demutualize cooperative financial entities. - Under Québec law: the exercise of resolution powers is not subject to judicial authorization or review; the only remedy for aggrieved parties is compensation as determined by AMF. - AMF can appoint a receiver to take control of a DTI and request liquidation according to provincial winding-up regime, complemented by federal WURA. - AMF is developing the bail-in and compensation regulations, a TLAC framework aligned with the federal TLAC framework, and regulations for the transfer of eligible financial contracts in resolution. Draft guidelines and regulations have been subject to public consultation (consultation opened on October 25, 2018). - The bail-in regime requires consideration of how to demutualize the D-SIFI (a financial cooperative group) and operate bail-in, including clear sequencing to be described in disclosure statements of debt securities subject to bail-in. ### Resolution planning for D-SIBs and other banks - CDIC initiated D-SIB resolution planning in 2012 and had developed three generations of plans by 2015. - Since 2016 D-SIBs have been responsible for preparing their own resolution plans. CDIC provided guidance in February 2016; banks submitted first plans in December 2016 and now submit updated plans near year-end with CDIC feedback in the following spring. - CDIC published a consultation paper on new D-SIB Resolution Planning By-Law Requirements in February 2018; the by-law formalizes guidance and specifies plan content and notification requirements. - Plans must contain: - (i) a strategy that sets out how CDIC can carry out a resolution that supports the continuity of critical functions, - (ii) an assessment of how the strategy minimizes reliance on public sector financial assistance, - (iii) a work plan describing remedial actions to address deficiencies or impediments to resolution. - CDIC expected D-SIBs to have addressed material impediments such that CDIC is able to consider banks resolvable by March 2020. ### CDIC assessment framework and internal distribution of TLAC - CDIC’s written assessment framework addresses legal structure, quantity and location of loss absorbing capacity, access to liquidity, and operational continuity and resiliency. - The assessment process includes a completeness assessment and a qualitative assessment against CDIC guidance. - Each D-SIB’s resolution plan contains a work plan listing outstanding material impediments, incremental steps, and projected timing of remedial actions. - There is no regulatory prescription for the internal distribution of bail-in-able debt; neither OSFI nor CDIC specifies internal distribution of loss-absorbing capacity. - CDIC will assess internal distribution of debt in the context of potential losses at material legal entities and mechanisms to push losses up to the parent and/or push capital down. ### Funding in resolution, bail-in issuance, and TLAC timing - Ensuring adequate funding in resolution is critical; banks in resolution may lose market funding for an extended period. - D-SIB resolution plans must demonstrate maintenance of adequate funding during resolution, specify how funding can be stabilized, and demonstrate how reliance on public sector funding (e.g., ELA from the BOC) would be limited and temporary. - The bail-in regime and the TLAC guidance became effective in September 2018; senior debt outstanding prior to then is not subject to bail-in and cannot count towards TLAC requirements. - D-SIBs have issued bail-in-able debt since September 23, 2018 via public issuances in Canada and the United States, and private placements in Canada and Europe. - For issuances governed by foreign laws, banks must provide a legal opinion addressing enforceability of bail-in contractual provisions in the relevant jurisdiction. - Based on maturity profiles, anticipated rollover of outstanding senior debt, and banks’ funding plans, it is expected that D-SIBs will meet the TLAC requirements by OSFI’s November 2021 target date. - The D-SIBs financial year-end is October 31. ### Progress on resolvability targets and wider resolution planning - CDIC and the D-SIBs are on track to meet the 2020 resolvability target; CDIC expects all D-SIBs to have resolved, or have an acceptable plan to resolve, material impediments by March 2020. - CDIC has identified outstanding impediments and is working with banks and other bodies such as the BOC to overcome them. - CDIC has a team of 14 managers/staff engaged in tasks aimed at ensuring resolvability of all D-SIBs by the target date. - CDIC extended resolution planning to mid-sized banks in 2015; CDIC prepares resolution plans for six such banks and has formed preliminary views of preferred and fallback strategies. CDIC intends to increase focus on mid-sized bank resolution planning. - For smaller banks, CDIC applies a risk-based approach to resolution planning; all member institutions are subject to an annual CDIC risk assessment and resolution planning is undertaken at least for banks on CDIC’s watch list. - OSFI takes a similar risk-based approach to requiring recovery plans from smaller banks; the report recommends requiring recovery plans for all DTIs. - Not all federally regulated financial institutions that perform critical functions are subject to CDIC resolution planning; there is no framework for designating a resolution authority for significant insurance-led groups even where federally regulated DTIs are part of the group. - Recommendation: a systematic framework should be in place for all federally regulated financial institutions to assess whether they perform critical functions, ensure responsibility for developing resolution plans is assigned, and ensure up-to-date resolution plans are in place; consideration could be given to assigning this responsibility to the FISC. ### Interagency engagement and operational preparedness - BOC, DOF, and OSFI are kept informed of and engaged in CDIC resolution planning through CDIC Board membership and regular updates. - OSFI enforces TLAC requirements and regularly engages with CDIC; both OSFI and CDIC will receive TLAC-related data from D-SIBs. - The BOC provides feedback to CDIC on funding, liquidity, central bank facilities, asset pledging and FMIs. - CDIC has developed playbooks for bail-in and other resolution actions, published detailed information on the bail-in regime, and consulted professional firms on valuations for resolution and compensation, and mechanics of converting debt into equity in Canada and foreign jurisdictions. - D-SIBs are responsible for addressing bail-in execution in their resolution plans to ensure operational preparedness. ### AMF resolution planning for Desjardins Group - After designation of Desjardins Group as a D-SIFI in 2013, AMF is developing a resolution planning framework modeled on OSFI’s TLAC regime and CDIC’s guidance and bail-in regime. - A draft of AMF’s TLAC guideline has been developed; it establishes a risk-based TLAC ratio and a TLAC leverage ratio at the level set by OSFI. - AMF’s guidelines will be effective when resolution regulations come into force in the first quarter of 2019. - AMF initiated resolution planning with third-party experts; first iteration tested via a table-top exercise; second iteration anticipated to be completed by end of financial year 2018-2019. - AMF has a team of 10 staff engaged in resolution planning and is developing a resolution manual. - Unlike CDIC, AMF does not envision requiring the group to prepare its own resolution plan. - Recommendation: AMF should adopt the TLAC guideline and complete the resolution regime by adopting the bail-in, eligible financial contracts and compensation regulations; bail-in regime and disclosures should explain clearly the sequence of events in case of resolution. - Recommendation: AMF should continue to devote the resources necessary to ensure the resolvability of the D-SIFI. ### Summary of Recommendations (as listed) - Enhance the autonomy of CDIC in taking resolution actions. - Extend the scope of the resolution regime to branches of foreign banks, non-regulated subsidiaries of national banks, and to other financial institutions of the same group that are not federally regulated. - Introduce in the resolution toolbox the powers to terminate contracts, to claw-back remuneration from directors, to write down shares and liabilities, and to require changes to improve the resolvability of financial institutions. - Clarify the scope of the compensation regime and enhance its transparency, especially regarding valuation. - Introduce depositor preference. - Introduce and use the write-down power to avoid that shareholders would benefit from the resolution efforts undertaken by CDIC. - Recognize the power of the resolution authority to depart from the pari passu treatment of creditors for specified reasons, and subject to the NCWO safeguard. - Introduce cross-border rules in the resolution and liquidation regimes. - The same recommendations on the legal framework for bank resolution are applicable to Québec law. - Overhaul the liquidation regime (WURA). - Complete the development of factors to be considered in assessing financial stability implications of its resolution actions, including in a provincial and regional context. - Ensure that resolution plans are in place for the federally regulated financial institutions that provide critical functions to the economy or financial system. - AMF should adopt the TLAC guideline and complete the resolution regime by adopting the bail-in, eligible financial contracts and compensation regulations. The bail-in regime and disclosures should explain clearly the sequence of events in case of resolution. - AMF should continue to devote the resources necessary to ensure the resolvability of the D-SIFI. *Source: 1canea2020008 - 78. Resolution actions taken by foreign authorities may be recognized in Canada by order* ### 101. The federal DIS is well established. CDIC is in charge of the federal DIS, which has been ### 1canea2020008 - 101. The federal DIS is well established. CDIC is in charge of the federal DIS, which has been ### Overview of the federal Deposit Insurance System (DIS) - CDIC has been operating since 1967 and "largely complies with best international practices." - Membership includes banks, federally regulated credit unions, and other designated entities such as cooperative credit associations. - The DIS is pre-funded. Member institutions pay premiums in two semi-annual installments, based on the volume of insured deposits. - Premium rates (per Differential Premiums By-Law): 7.5 basis points (category 1); 15 basis points (category 2); 30 basis points (category 3); 33.3 basis points (category 4). ### Funding targets, methodology, and current resources - CDIC uses two methodologies to assess required ex ante funding: - Discretionary analysis: profile of membership and ability of specific funding levels to address hypothetical failures. - Loss estimation: statistical estimation of multiple hypothetical loss scenarios; model assumptions are regularly tested. - Ex ante funding components: provision for insurance losses and retained earnings. - Current target for ex ante funding: a minimum of 100 basis points of insured deposits. - Actual balance of CDIC’s ex ante funding: Can$4.5 billion, equivalent to 57 basis points of insured deposits as of June 30, 2018. - CDIC regularly reviews its funding target and premium rates to ensure the DIS remains well funded. ### Coverage and planned amendments - Eligible deposits are insured up to Can$100,000 per depositor per category and per member institution. - CDIC provides insurance to all depositors regardless of nationality or location, but coverage is limited to deposits payable in Canada. There are no excluded persons. - Deposit Insurance Review findings and planned changes: - Approximately 97 percent of all deposit accounts are fully covered under the current framework. - CDIC surveys indicate depositor confidence at 80 percent. - No member failures since 1996. - Review conclusion: Can$100,000 limit remains appropriate; major changes not required. - Proposed/legislated amendments (introduced by amendments to the CDIC Act in the Budget Implementation Act, 2018, No.1 which received royal assent on June 21, 2018) include: - Removing travelers’ cheques as eligible deposits. - Eliminating the five-year term limit on deposits. - Extending coverage to foreign-currency deposits. - Removing separate category for mortgage tax accounts. - Creating two new categories for Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs). - Note: These legal amendments are not in force; CDIC needs to adopt supporting by-laws. The increased coverage will likely delay arrival at CDIC’s minimum funding target, but resource build-up should continue. ### Data, preparedness, and operational readiness - CDIC requires members to maintain data standards to ensure timely reimbursement of deposits and conducts testing of members’ data and systems. - CDIC can conduct preparatory examinations of books and records to determine eligible deposits and produce payout determinations. - CDIC is working to improve the quality and granularity of data gathered; distinguishing deposit types (e.g., brokered deposits) is important for crisis preparedness. ### Use of deposit insurance funds and resolution powers - CDIC’s statutory powers (Section 10.1 of the CDIC Act) allow actions "necessary or incidental to the objectives of the Corporation." - Integration of depositor protection and resolution: CDIC is both DIS and resolution authority. - CDIC may use deposit insurance funds for: - Deposit payout. - Assisted sale. - Funding a bridge bank. - Other financial assistance to a bank in resolution, including direct recapitalization. - Covering costs of liquidation. - Open bank assistance (may represent a subsidy to shareholders and create moral hazard; should generally be avoided except where financial stability is at risk and then fiscal authorities should provide support). - Loss absorption and recovery: - CDIC absorbs losses via provisions for insurance losses and retained earnings. - Losses can be recouped by future premiums from member institutions. - Governor-in-Council, on advice of the MoF, can exempt CDIC from minimizing exposure to loss; any additional losses are recoverable through special premiums from members or a subset of members. - Introduction of depositor preference would reduce CDIC potential losses but requires study of impacts on banks’ funding costs and structures. ### Liquidity, borrowing capacity, and payout capacity - Main sources of liquidity available to CDIC: - Investment portfolio: currently Can$4.5 billion, invested in Government of Canada or provincial government securities. - Legislated borrowing: current limit is Can$23 billion; adjusted annually based on growth of insured deposits; borrowing activated after Ministerial approval via a standby credit facility with the MoF or access to capital markets. Borrowing under section 60.2 of the Financial Administration Act is exempt from calculation of the borrowing limit. - Parliamentary Appropriation Act: Government may request increase in legislative borrowing authority via Parliamentary Appropriation Act; requires CDIC Board approval and parliamentary procedure may involve significant time. - CDIC’s available funds and borrowing capacity can fund a payout of the insured deposits of 48 CDIC members individually and the aggregate insured deposits of 41 members. This implies CDIC can cover the failure of all member entities individually except the D-SIBs (for which a deposit payout is not a resolution strategy). ### Provincial deposit insurance systems and coordination issues - Ten Canadian provinces have separate DISs; Québec’s framework is in the Deposit Institutions and Deposit Protection Act; others incorporate DISs in credit union legislation. - Coverage across provinces is uneven; many provinces provide higher coverage than federal system, except Québec which matches federal coverage. - Table of provincial coverage (exact entries): - British Columbia: Unlimited - Alberta: Unlimited - Saskatchewan: Unlimited - Manitoba: Unlimited - Ontario: Can$250,000; unlimited for registered deposits - New Brunswick: Can$250,000 - Nova Scotia: Can$250,000 - PEI: Can$125,000; unlimited for registered deposits - Québec: Can$100,000 - Newfoundland and Labrador: Can$250,000 - Risks and recommendations: - Differences in coverage, especially unlimited provincial coverage, may generate uneven competition and moral hazard. - Federal and provincial authorities should analyze effects of different coverage levels on the federal system and engage in dialogue toward progressive convergence of DISs; analysis should focus on competition, financing of DISs, and crisis implications. - Provincial DISs should conduct self-assessments of their systems against best international practices (this recommendation does not extend to Québec, which has already conducted such assessment). ### Québec DIS specifics - AMF is responsible for DIS in Québec; the regime is largely compliant with IADI core principles. - No formal funding target yet; authorities are progressing toward setting a target and have strengthened fund resources. - Out of five institutions insured by AMF: - Current deposit fund balance can cover the full value of insured deposits held by three institutions individually. - Can cover more than 90 percent of the fourth institution individually. - For the fifth institution (Desjardins Group), which represents the vast majority of insured deposits, a reimbursement is not expected as the institution would be subject to a resolution action. - Québec’s coverage is harmonized with the federal coverage; federal changes from the deposit insurance review should be introduced in Québec law to preserve the same protection level. ### Other resolution funding and Bank of Canada (BOC) emergency liquidity assistance (ELA) - Additional official funding instruments: BOC and MoF can provide support. BOC can provide liquidity before, during, and after resolution; MoF can provide loss absorption, recapitalization, and liquidity funding. - Since the 2014 FSAP, BOC revised its ELA framework and authorities developed an inter-agency framework for liquidity assistance to D-SIBs and other banks. - BOC ELA eligibility and policy changes (December 2015): - Replaced a solvency requirement with requirement that institution has a credible recovery and resolution framework. - Expanded eligible collateral to include Canadian-dollar mortgages (in addition to non-mortgage loan portfolios). - Clarified eligibility for provincially regulated institutions, including requirement of provincial indemnity. - Credibility criteria for recovery and resolution framework: - Maintain continuity of functions critical to financial stability. - Identify implementable recovery and resolution strategies for extreme stress. - Provide coordination and information-sharing with relevant authorities. - Ensure sufficient funding and liquidity arrangements so ELA is used only after private funding is unavailable at reasonable cost. - Formal recovery or resolution plans are not necessarily required; credibility can be assessed on other elements (e.g., contingency funding plan). - Use of mortgages as collateral: - Acceptance of Canadian-dollar mortgages as ELA collateral roughly doubled available ELA collateral for D-SIBs. - Due to legal complexities and costs of securing and managing mortgage collateral, mortgages are considered a last resort; BOC retains right to accept only mortgages it can manage the associated risks. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020008.pdf* ### 118. Provincially regulated financial institutions, including the Québec D-SIFI, may also be ### 118. Provincially regulated financial institutions, including the Québec D-SIFI, may also be ### Eligibility for Emergency Liquidity Assistance (ELA) and provincial indemnities - Provincially regulated financial institutions, in addition to being members of the Payments Canada and having a credible recovery and resolution framework, must be deemed by the BOC to be important to broader financial system stability to be eligible for ELA. - The BOC assesses whether stress from a provincial cooperative system: - is materially contributing to adverse financial conditions, - is severely impairing economic activity in the region, and - is spreading or has the ability to spread through national cooperative frameworks and infrastructures. - Another eligibility criterion is a requirement that the province indemnify the BOC from any losses it might incur should the institution default. - Given the significant cooperative networks operating in British Columbia, Ontario, and Québec, these provinces should put in place indemnity arrangements with the BOC. - Recommendation: Such an indemnity agreement between the Québec Government and the BOC should be put in place. ### Federal Ministry of Finance (MoF) extraordinary support powers - Provisions adopted in 2009 remain in place. - The MoF, with Governor-in-Council authorization, can: - enter into any contracts and provide credit necessary to promote the stability of the financial system, - acquire securities, including shares, in federally regulated financial institutions to promote financial stability, - set the terms and conditions of its support. - The MoF, with approval of the Governor-in-Council, can provide effectively unlimited funding to CDIC to support resolution actions. ### Federal inter-agency liquidity funding in resolution - A framework for liquidity funding in resolution was developed under a project initiated by the sub-SAC by the BOC, CDIC, the DOF, and OSFI. - The framework: - addresses potential liquidity funding of one or more financial institutions of various sizes, - sets out the range of powers among the agencies to provide liquidity, - highlights their statutory purposes, - sets out practical considerations in sequencing the use of powers for different resolution actions. ### AMF funding sources and backstops - AMF has access to several sources of funding to support resolution: - ELA to a DTI from the BOC (subject to provincial indemnity and other conditions), - funds from AMF’s DIS, - backup funding from the Québec government, - borrowing from CDIC. - The DIS currently has funds of around Can$740 million. - AMF, via the DIS, has access to emergency backup funding from Québec’s finance minister, who may make advances to AMF, under conditions subject to government authorization, in an amount required to exercise its resolution and deposit insurance powers. - There is no agreed line-of-credit or other documentation to formalize this potential support. - Under a 1969 agreement, AMF can request loans from CDIC to meet the short-term cash requirements of its operations. - Recommendation: AMF should continue to support steps by the Québec government to agree the terms and conditions of a provincial indemnity of potential BOC’s ELA and should seek to formalize to the extent possible its backstop funding arrangement with Québec’s finance ministry. ### Summary of recommendations (from the section) - CDIC should complete its work in updating all the relevant regulations to changes introduced based on the deposit insurance review. - CDIC should continue bolstering its own ex ante funding resources. - CDIC should continue improving the quality and the granularity of deposits data. - CDIC should not be able to provide open bank assistance without a change of ownership and a restructuring of the distressed DTI. - AMF should continue increasing its resources, and the Québec authorities should consider introducing amendments in line with those enacted after the deposit insurance review. - The other provincial authorities should conduct a self-assessment of their DISs against best international practices. - The federal and provincial authorities should conduct an analysis of the effects of the existence of different coverage levels of the DISs. - Provincial indemnities of potential BOC ELA to systemically important provincially regulated DTIs should be put in place. - AMF should continue to support steps by the Québec government to agree the terms and conditions of a provincial indemnity for potential BOC’s ELA and should seek to formalize to the extent possible its backstop funding arrangement with Québec’s finance ministry. ### Contingency planning and crisis management — Key issues and recent actions - Formal contingency plans at federal and provincial authorities and an integrated national-level plan are fundamental to preparedness; regular testing and practice are essential. - Since the 2014 FSAP the federal authorities and AMF have upgraded internal contingency plans; work is ongoing. - Specific agency actions: - OSFI is reviewing and updating documents such as its Taking Control Playbook and Problem Situation Binder. - CDIC has playbooks for insured deposit payouts and assisted acquisitions; playbooks associated with the new bail-in regime are being completed; earlier playbooks (e.g., bridge banks) will be updated. - The BOC developed a playbook for provision of ELA to federally regulated financial institutions under its revised policy framework. - The four federal authorities developed the inter-agency liquidity funding framework for federally regulated DTIs. - A working group on crisis communications has been formed to develop a protocol on coordinated communication strategies (initiative of the sub-SAC). - AMF has developed a crisis management plan describing procedures and actions for recovery and resolution situations. - Testing and readiness programs have been ramped up: - CDIC has an extensive program of exercises planned on a three-year horizon; twelve simulations have been conducted since the 2014 FSAP, ranging from internal exercises to inter-agency simulations of the failure of a mid-sized bank. - CDIC conducted a table-top exercise for its Board focused on resolution of a mid-sized bank and related crisis communications. - Two inter-agency table-top exercises have been conducted with senior and working-level staff of the BOC, the DOF and OSFI. - In late 2017, the BOC conducted a simulation with large banks to test their ability to request an ELA advance and the BOC’s processing of collateral and delivery of ELA funds; lessons feed into procedural and legal changes and the ELA playbook. The BOC envisages external testing with DTIs at a regular frequency. - OSFI launched an operational readiness and training program in 2016. In 2017 it conducted an exercise simulating the failure of a mid-sized bank; the following exercise was held in January 2019. - The DOF participates in some exercises initiated by CDIC but does not have its own testing and readiness program. - AMF has a written crisis contingency plan and conducts table-top and simulation exercises (recently simulated insolvency of a life insurance company that is also a DTI, tested its insured deposit payout system, and simulated resolution of the D-SIFI). - Testing examples: - CDIC tested its operational capacity to execute repo transactions with the BOC and to access funds under its line of credit with the DOF; both tests involved actual money transfers to CDIC. - The BOC undertakes exercises with FMIs and is a member of the Joint Operational Resiliency Management Committee, which undertakes crisis simulations involving FMIs. ### Contingency planning and crisis management — Institutional coordination and oversight - The SAC should oversee federal-level contingency planning and testing activities: - Currently SAC members have internal contingency plans of varying scope; there is no comprehensive, integrated, inter-agency contingency plan at the federal level. - Goals for SAC oversight: - have a national inter-agency contingency plan, - ensure complementarity and consistency of individual authorities’ plans with the national plan, - maintain awareness of testing programs and endorse inter-agency exercises, - ensure routine and consistent reporting of and follow-up on results of intra- and inter-agency exercises. - The SAC might delegate responsibilities to the sub-SAC; the sub-SAC could be tasked to develop the inter-agency plan and periodically review adequacy of members’ contingency plans relevant to the inter-agency plan. - The inter-agency plan might take the form of an overlay or guided roadmap to individual authorities’ plans. - Some form of regular communication to the MoF should be envisioned, including a regularly updated summary of the national inter-agency contingency plan. - The SAC should act as the federal coordinator with key provincial authorities to carry out contingency planning and testing activities for the whole Canadian financial system: - An early task should be to review the adequacy of current bilateral MOUs between federal and provincial authorities in the context of the national inter-agency contingency plan. - Subsequent tasks include collective assessment of federal and provincial contingency plans and ensuring appropriate federal-provincial communications, information-sharing, joint analysis and decision-making are reflected in plans. - The range of joint federal-provincial testing activities could be expanded so that in a systemic crisis federal and provincial authorities share information, act collaboratively and speak with one voice. - Note: AMF already has a well-developed contingency plan and testing/practice framework in place, and FICOM is in the process of developing one. It is recognized that BOC already engages in such exercises with certain provinces. ### Contingency planning and crisis management — Summary of recommendations (from the section) - The ongoing work of the authorities in completing and enhancing their contingency plans and implementing testing and readiness programs should be continued. - OSFI should give consideration to establishing a formal three-year program of testing and readiness activities similar to the approach adopted by CDIC. - The SAC should provide more systematic oversight of the contingency planning and the testing/practice activities of its member authorities and commission development of an integrated inter-agency contingency plan. - The SAC should act as the federal coordinator with key provincial authorities to carry out contingency planning and testing activities for the whole Canadian financial system. *Source: 1canea2020008 - 118. Provincially regulated financial institutions, including the Québec D-SIFI, may also be — IMF content unit* ### Section Issue Comment/Recommendation ### 1canea2020008 - Section Issue Comment/Recommendation ### Liquidator remuneration and compromise (Sections 42(1); 65-66) - Issue: 42(1) Remuneration of the liquidator to be set by the court. - Comment/Recommendation: - A remuneration regime should establish incentives for prompt action by the liquidator, rewarding higher rates of recovery. - The creditors should decide on the remuneration. - Issue: 65-66 Compromise: the law allows a compromise between the company and its creditors (the rules for the compromise are minimal). - Comment/Recommendation: - The compromise does not fit well in a liquidation statute—creditors should decide on a liquidation plan, which may include sales of parts of the business, but not a reorganization of the entity. ### Proof of claims, deposit insurance, and set-off (Sections 71(1); 73(1); 74; 75(1)) - Issue: 71(1) Proof of claims. - Comment/Recommendation: - The law ignores the existence of deposit insurance—the claims of the deposit insurer should not be subject to the same regime of verification. - The information from the supervisor and the resolution authority should be integrated in the list of claims. - Issue: 73(1) The recognition of set-off is extremely broad and does not take into account the position of CDIC. - Comment/Recommendation: - CDIC should not be exposed to set-off as a result of the payment of insured deposits. - Issue: 74 Time for sending in claims. The court may set a date to send claims. - Comment/Recommendation: - A date for sending claims should always be determined, and the consequences of not sending the claims in time should be specified in the law. - Issue: 75(1) The liquidator may give notice in writing to creditors. - Comment/Recommendation: - The liquidator should use modern technology to notify creditors, and notification should not be at the liquidator’s discretion. ### Distributions, ranking of claims, and interest (Sections 76(1); 94; 95(1); 95(2); 158.1(2)) - Issue: 76(1) The law is not entirely clear about the regime applicable to distributions. - Comment/Recommendation: - Rules for distributions should be flexible, allowing the liquidator to make payments after a certain dividend can be satisfied. - The liquidator should create reserves for disputed claims. - Issue: 94; 95(1) The ranking of claims is incomplete. It needs to be integrated with provisions from other laws. - Comment/Recommendation: - A full ranking of claims should be introduced in the law. This ranking could recognize depositor preference. - Issue: 95(2); 158.1(2) Interest: the law states that creditors can receive full payment and five percent interest from the commencement of winding up. - Comment/Recommendation: - This rule can generate a windfall for creditors (liquidation of a solvent branch of a foreign bank). - Interest should be subordinated to principal claims (including from a foreign proceeding) and the rate should not be fixed in the law. ### Avoidance actions and director liability (Sections 96-102; 102.2; 124) - Issue: 96-102 Avoidance actions—the regime is archaic, not suitable for the operations of financial institutions. In some cases, as with fraudulent transactions (s. 99), there is no time limit and a court could potentially avoid transactions executed many years before the commencement of winding-up. - Comment/Recommendation: - The regime of avoidance actions should combine predictability, preservation of valid financial transactions, and repression of conduct that contributed to the insolvency, or favored the interests of related persons or creditors to the expense of other creditors. - Issue: 102.2; 124 The law recognizes the possibility of recovering from directors the amount for improperly declared dividends or repurchase of shares. The law also recognizes an action for “misapplication” of funds. - Comment/Recommendation: - The liability of directors should be extended to cover a wider range of improper conduct. ### Appeals, creditors’ wishes, unclaimed dividends, foreign bank branches (Sections 107; 132; 138; 157; 158) - Issue: 107 Appeal: the law recognizes an appeal to the Supreme Court of Canada when the amount involved exceeds two thousand Canadian dollars. - Comment/Recommendation: - Appeal to the Supreme Court should be restricted. - Issue: 132 The law allows the court to have regard to the “wishes of creditors, contributories, shareholders”. - Comment/Recommendation: - The rights of parties should be defined in the law. - Issue: 138 Unclaimed dividends—the regime in the law is complicated, with several stages. - Comment/Recommendation: - The rules for unclaimed deposits should be the same applicable in general law for unclaimed sums of money. - Issue: 157; 158 Insolvency of foreign bank branches—only claims related to the business in Canada can be proven. Likewise, section 158 only allows set-off with claims related to the business in Canada. - Comment/Recommendation: - The rules isolate assets in favor of the creditors of the branch, impeding international cooperation. ### Appendix III — Status of Main Recommendations From the 2014 FSAP - Coordination - Recommendation: Provide a clear mandate to an entity (i) to carry out macro-prudential oversight with participation broad enough to allow a complete view of systemic risks, and with powers to collect all necessary data for systemic risk analysis and (ii) to carry out system-wide crisis preparedness. - Status: From a financial stability and policy perspective, the Senior Advisory Committee (SAC) monitors and advises on macroprudential oversight matters and system-wide crisis prevention measures. Its membership is the same as the Financial Institutions Supervisory Committee (FISC), i.e., the Office of the Superintendent of Financial Institutions (OSFI), the Department of Finance (DOF), the Bank of Canada, the Canada Deposit Insurance Corporation (CDIC), and the Financial Consumer Agency of Canada (FCAC). The FISC is a legislated committee, whereas the SAC has no statutory recognition. - Perform regular system-wide crisis simulation exercises - Status: CDIC has conducted numerous simulation exercises with other federal safety net agencies. For example, two table-top exercises have been conducted with senior and working-level staff of the BOC, the DOF and OSFI in March 2014 and March 2016. In March 2018, CDIC conducted a table top exercise for its Board of Directors which includes heads of federal safety net agencies as ex-officio members. This session focused on a hypothetical resolution of a mid-sized member institution and crisis communication. Further tabletop simulations are planned with other agencies in November 2018, and with the CDIC Board in March 2019. CDIC has also been part of inter-agency working level simulations with the DOF and the BOC to test its ability to access funds. For example, recently CDIC participated in a simulation with the DOF and the BOC to test processes under the Crown Corporation Borrowing program, and with the BOC to test processes associated with a repurchase facility. In addition, CDIC conducts internal simulation exercises on a regular basis to test the operational readiness of organizational processes in crisis situations. - Enhance cross-sectoral coordination in the supervision and resolution of groups which span both federal and provincially regulated areas; give priority to communication and cooperation on systemically important institutions (federal and provincial) - Status: CDIC has signed MOUs with domestic regulators at both the federal and provincial level. MOUs were signed with both the Investment Industry Regulatory Organization (IIROC) and the Canadian Investment Protection Fund (CIPF) in 2016 and 2017, respectively, improving sharing of information relating to crisis management and resolution for connected firms (brokers-dealers and their parent CDIC member banks). Meetings subsequently took place with these organizations to discuss key assumptions and actions necessary to facilitate cooperation between the regulators in the event of a D-SIB resolution. CDIC has strengthened its relationship with provincial deposit insurers via more frequent communication/consultation and contact at federal-provincial forums and International Association of Deposit Insurers (IADI) events. In addition, CDIC signed an MOU with Autorité des marchés financiers (AMF) in 2018 to improve general collaboration and sharing of information specifically related to National Bank of Canada and Desjardins Group for resolution, and crisis situations. - Provincial Safety Nets - AMF recommendation: Enhance early intervention powers; increase ex-ante funding of deposit insurance fund and introduce a capitalization target and a single customer view system; establish a crisis intervention framework. - Status: AMF has broad intervention powers, in line with the federal system. The deposit insurance fund continues increasing its resources, although it does not have a formalized target. The deposit insurance fund is working towards a single customer view system. The crisis intervention framework has been overhauled with the 2018 reform, along the lines of the federal system. - Other provincial authorities: Undertake a self-assessment of the adequacy of safety nets and pursue necessary enhancements to ensure: well-funded local deposit insurance schemes, broad resolution frameworks, and operationalized contingency planning. - Status: No self-assessments have been conducted, to the best of the mission’s knowledge. - All: Review and update, where necessary, cooperation agreements and contingent operational arrangements with federal authorities. - Status: Since the 2014 FSAP three provincial cooperative system regulators (Manitoba, Québec and Saskatchewan) entered into MoUs with the BOC. In 2018 AMF entered into an MoU with CDIC. Further progress in such efforts are essential. - All: Introduce a more uniform approach on coverage levels of provincial deposit insurance schemes. - Status: The divergences of coverage between the provincial systems and the federal system (plus Québec) continue existing. - Resolution Powers - Recommendation: Improve autonomy of CDIC in activating some resolution tools. - Status: CDIC continues to require government authorization to initiate resolution action by way of the Financial Institution Restructuring Provisions (FIRP) in the CDIC Act. - Recommendation: Enhance the CDIC’s resolution powers in line with the Key Attributes, including the power to bail-in for D-SIBs. - Status: Since the 2014 FSAP, bail-in has been introduced in the federal regime (the regulations entered into force in September 2018). CDIC does not have to power to write down financial instruments, to claw back remuneration from directors and executives, and to require changes to firms’ structure and operations to improve resolvability. The legal framework does not include provisions to address cross-border resolution issues. - Recommendation: Introduce legal requirements for the preparation of resolution plans and powers to change a firm’s structure in order to enhance resolvability. - Status: Until 2016, CDIC was preparing resolution plans. Since then, the D-SIBS have been preparing their own resolution plans. In 2017 CDIC was granted formal by-law making authority to require D-SIBs to prepare resolution plans. This by-law is currently under development and is anticipated to come into force in 2019. CDIC does not have the power to require changes to firms’ structure and operations to improve resolvability. - Consider introducing some form of depositor preference - Status: The authorities reviewed the deposit insurance framework but decided against the introduction of depositor preference. - Deposit Insurance - Recommendation: Bolster the ex-ante resources of CDIC. - Status: The resources of CDIC have increased to 57 basis points of insured deposits (as of June 30, 2018) compared to 42 basis points in 2013/2014. The changes in coverage will likely delay achieving the target of 100 basis point minimum ex ante funding target. CDIC’s statutory borrowing authority is up to Can$23 billion (as of December 31, 2017). An amendment in Parliament would remove from the calculation of the borrowing cap any amounts lent by the government under the Financial Administration Act. - Recommendation: Improve data collection and analysis of depositors’ profiles. - Status: Legislative changes from the Deposit Insurance Review for foreign-currency deposits and trust deposits will add further detail to these types of accounts. Consultations with member institutions are planned to explore data options helpful to support electronic payments and depositor authentication. More work is needed to produce more granular data on deposits (e.g., identifying brokered deposits). - Recommendation: Simplify the rules for complex deposit products. - Status: The CDIC Act was amended in 2018 to change the coverage framework. The new rules entail a simplification of the framework, by removing products such as travelers’ cheques, eliminating the five-year term limit for deposits, and clarifying record-keeping requirements for trust deposits, among other changes These amendments are not in force yet, as they require the update of CDIC regulatory instruments. - Emergency Liquidity Assistance - Recommendation: Remove the legal restriction which prohibits the BOC from taking mortgages as collateral when providing liquidity assistance. - Status: In 2017, the Bank of Canada Act was amended to allow the use of mortgages as collateral for emergency liquidity assistance (ELA). *International Monetary Fund — Section Issue Comment/Recommendation (excerpt from 1canea2020008)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020008.pdf_