How can international banks operate in your jurisdiction?
Internationally headquartered banks can either operate in Canada as subsidiaries or branches. Banks that are authorized to operate on a branch basis are not permitted to accept deposits of less than $150,000, an amount used to arbitrarily distinguish between retail and wholesale deposits. Banks that are only authorized to operate as a ‘lending branch’ must further restrict their deposit-taking activities to a list of prescribed customer types.
Subsidiaries, while not generally subject to the restrictions on deposit-taking, are separate legal entities from their parents, and as such, require their own governance and risk management structures and local capital and liquidity. A branch, on the other hand, is merely a Canadian office of the internationally headquartered bank and, therefore, would not be separately capitalized or have a separate Canadian board. However, branches are required to maintain ‘capital equivalency deposits’ in Canada to provide some cushion for their Canadian liabilities. A branch must also have a principal officer in Canada who is expected to fulfil a governance role similar to that of a local board.
Canada has a two-step process for establishing a new subsidiary or branch. First, both subsidiary banks and branches must be approved by the Minister of Finance. This approval is focused on the policy implications of admitting the new competitor into the Canadian banking market. A subsidiary or a branch must also receive an order from the Office of the Superintendent of Financial Institutions (OSFI), the supervisory authority for both subsidiary banks and branches, known as an order for the commencement and carrying on of business. This second review focuses on the applicant’s capabilities for operating either the subsidiary or branch in a prudent manner in full compliance with Canadian law.
The Financial Consumer Agency of Canada (FCAC) is the market conduct regulator for all banks operating in Canada. As most consumer protection laws are directed to retail customers, the FCAC has a more limited oversight role with respect to branches than it has for subsidiaries. However, a branch can have retail lending operations, including, for example, a Canadian credit card offering. The FCAC has no formal role in the approval of a new subsidiary or branch.
The supervisory authority for money laundering and terrorist financing laws is the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). However, as OSFI considers that the failure to adequately manage money laundering and terrorist financing risks could have prudential implications, OSFI also oversees the efforts made by both subsidiaries and branches to manage these risks. Like the FCAC, FINTRAC has no formal role in the approval of a new subsidiary or branch. However, OSFI includes a review of anti-money laundering and counter terrorist financing programs as part of its operational readiness assessment.
The remainder of this analysis focuses on the requirements relating to the approval of a branch of an internationally headquartered bank by the Minister of Finance and OSFI.
What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?
Under Canadian law, the Minister of Finance (the Minister) may only permit the establishment of a branch of an internationally headquartered bank if the Minister is of the opinion, after consultation with the Superintendent, that the bank's principal activity outside of Canada is the provision of financial services or other services that a Canadian bank is permitted to provide and that the bank is regulated by its Home State regulator in a manner acceptable to the Superintendent. Additionally, if the internationally headquartered bank seeking to establish the branch is from a non-WTO Member country, the Minister must be satisfied that Canadian banks would receive treatment as favourable in the country in which the internationally headquartered bank principally carries on business, either directly or through a subsidiary.
Although the Minister may take into account any other matter that he/she considers relevant to the particular bank, they are required to consider:
- the nature and sufficiency of the financial resources of the applicant bank - as a source of continuing financial support for the carrying on of its business in Canada;
- the soundness and feasibility of the plans of the applicant bank for the future conduct and development of its business in Canada;
- the business record and past performance of the applicant bank;
- the reputation of the applicant bank for being operated in a manner that is consistent with the standards of good character and integrity;
- whether the proposed branch will be operated responsibly by persons with the competence and experience suitable for involvement in the operation of a financial institution;
- the impact of any integration of the businesses and operations in Canada of the branch with those of its affiliates in Canada on the conduct of those businesses and operations; and
- the best interests of the financial system in Canada.
The Minister is barred from permitting an internationally headquartered bank from establishing a branch in Canada if the bank controls or has a substantial investment in a Canadian entity that engages in the type of leasing activities that a Canadian bank may not undertake. Generally, this includes operating leases and leasing of certain types of personal household property, including auto leasing.
In addition, OSFI has published a list of certain minimum entry criteria that an internationally headquartered bank must meet to be eligible to establish a branch, including having:
- a risk-based capital ratio that meets the minimum international standards established by the Bank for International Settlements (BIS) and set out in OSFI's Guideline A - Capital Adequacy Requirements; and
- a sufficient size, experience and financial health, including:
- a minimum of C$5 billion in consolidated assets (this is waived for a lending only branch);
- a proven track record in international banking;
- a favourable financial performance over the last five years; and
- a widely distributed shareholder base or a controlling parent that is widely-held in its home jurisdiction.
Is resolution an important factor in your supervisor’s determination of a branch?
Although it is a statutory condition that both the Minister and OSFI be satisfied that the applicant bank be regulated in an acceptable manner, neither the statutory conditions nor the instruction guide produced by OSFI specifically reference resolution of the branch or the applicant bank as a relevant consideration. Note that OSFI has not updated its instruction guide respecting the establishment of a branch of an internationally headquartered bank since 2002.
It is also important to note that while a branch is not required to maintain capital in Canada beyond the requirement to maintain a margin of assets above its Canadian liabilities, branches are essentially subject to prudential oversight in Canada. For example, under the Bank Act (Canada), OSFI may direct a branch to cease or refrain from committing any act that OSFI considers to be an unsafe or unsound practice in relation to the business of the branch in Canada. Further, OSFI may take control of the assets of the bank in Canada in prescribed circumstances, including if OSFI is of the opinion that any circumstance exists that is materially prejudicial to creditors of the bank in Canada. Once OSFI has control of the assets, it may request a court supervised winding-up of the Canadian business of the bank. The statutory provisions do not address how this Canadian resolution regime would be coordinated with any international resolution plan applicable to the bank.
What are the regulatory reporting requirements placed on branches?
Branches of internationally headquartered banks are required to file a number of corporate and financial returns. The principal corporate return is the Annual Foreign Corporate Certification Return through which a bank must certify on a yearly basis that all the corporate information included in the bank’s organization profile has been reviewed and updated. Audited financial statements for the business in Canada of a branch must be prepared and submitted annually. In addition, a number of targeted financial reports must be submitted either on a quarterly or monthly basis.
Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?
Foreign banks may freely choose the type of establishment that they have in Canada and some foreign banks have both an authorized branch and a subsidiary. However, as there is a significant capital advantage in establishing a branch rather than a subsidiary, and as the only essential benefit of a subsidiary is the power to accept retail deposits, (deposits greater than $150,000), recently most foreign banks have elected the branch option for their Canadian operations. In fact, most of the foreign banks that have both branches and subsidiaries in Canada established their subsidiaries at a time when that was the only permitted option and have significantly reduced the size of their branch operations by transferring their commercial business to a branch.