Front St. West and Bay St. in Toronto’s financial district.Fred Lum/The Globe and Mail
As Peter Routledge sat on international committees over his two-decade career in the Canadian financial sector, he grew increasingly curious about the divide between mounting innovation in banking in other countries and slower progress in Canada.
Mr. Routledge, now the superintendent of Canada’s banking regulator, started to question whether tight regulatory guardrails in the country’s financial sector were holding back competition and, consequently, economic growth. In conversations with fintechs and credit unions, he heard that the lengthy and cumbersome process of becoming a bank discouraged new players from joining the federally regulated financial system, contributing to Canada’s lag in innovation compared with global peers.
In June, the regulator, the Office of the Superintendent of Financial Institutions, is rolling out a pilot project that could strip years off the process to become a bank, in a bid to bring more competitors into the market to go head-to-head with Canada’s six largest lenders.
“It’s fair to say we’ve tended to prioritize safety and soundness in difficult times. It’s an asset Canadians appreciate,” Mr. Routledge said in an interview, giving the example of how Canada’s system withstood the 2008 global financial crisis.
“However, Canadians also want institutions to compete for their financial-services business – and that’s not just individual Canadians, it’s businesses as well – and we’re trying to enable that.”
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In November, The Globe and Mail reported that OSFI was considering streamlining the path to securing a banking licence, a process that dragged on for several years for recent fintech applicants. Competition in Canada’s banking sector has come under a microscope since Ottawa said in its fall budget that small- and medium-sized lenders are “critical for consumer choice.”
The domestic banking sector is dominated by six lenders – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – that hold more than 90 per cent of market share.
Advocates of the current regime credit Canada’s reputation for financial-sector stability to its concentrated market. While about 100 banks operate in Canada, the United States with its more than 4,000 lenders has sustained more frequent bank failures, including the collapse of Silicon Valley Bank and other regional institutions in 2023.
Since OSFI was established in 1987, 23 financial institutions have failed in Canada, according to the regulator. During the same period, more than 1,700 financial institutions failed in the U.S.
However, critics say a singular focus on completely stamping out risks restricts consumers and businesses to few and costly options.
Mr. Routledge has spent his career steeped in banking, previously as the chief executive of Canada Deposit Insurance Corp., after a stint at the federal Finance Department and as an analyst on Bay Street covering large Canadian banks. He believes OSFI could loosen the reins in a measured way.
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“Our system and the players are highly resilient. We have very few failures, and yet, you look at the dynamism of the U.S. economy,” Mr. Routledge said.
“They have a lot of bank failures, but I’ve always been struck by the difference in the banking systems and I’ve wondered, if we had a little bit more of a risk appetite for the occasional financial institution failure, would the system produce more credit for economic growth?”
In recent years, fintechs have been inching their way into banking. Questrade Financial Group Inc. recently became the first fintech to secure a banking licence. Koho Financial Inc. is aiming to receive approval for its application this year. But the process has taken several years for both companies.
Mr. Routledge said the regulator aims to shorten the process from the typical three years to one year.
OSFI reviews applications and makes a recommendation to the Finance Minister, who has final approval.
Currently, the application process has three phases: a preapplication requiring conversations between the regulator and the prospective bank; a formal application that OSFI reviews to make its recommendation; and finally, if the minister gives the green light, OSFI allows the applicant to launch its banking operations.
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Where the process gets bogged down is in the first two phases, when OSFI and the applicant engage in a lengthy back-and-forth for information. While fintechs and credit unions have endorsed the value of rigorous vetting to join Canada’s banking system, some have said OSFI could provide greater upfront clarity on certain standards they must meet.
The process can be costly, time-consuming and can detract from other opportunities to grow their businesses – deterring fintechs and credit unions from applying.
As part of the pilot aimed at streamlining bank licence applications, OSFI is shortening the requirement list and creating an initial assessment to help institutions determine whether they meet the criteria. Within four weeks, the regulator will let the applicant know whether they are ready to start the process.
Once OSFI receives an application, it will aim to review and provide its recommendation to the Finance Minister within 12 months. The regulator will post a public dashboard on its website, indicating the amount of time it has left to review an application.
“What happened in the old way is Phase 1 and Phase 2 tended to bleed together, and the applicant and OSFI tended to get caught in multiple cycles of: you don’t have this, you need that. And they’d come back, and we’d ask for something else, and there wasn’t a lot of structure or clarity to it,” Mr. Routledge said.
“We’re trying to be much more clear up front about what we need.”
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But OSFI will have to undergo more than just a logistical shift to bring in new entrants. Mr. Routledge will need to overhaul the regulator’s culture and reshape how OSFI’s staff perceive their roles in the financial system.
Up until now, OSFI’s stance has been firm – no bank failures could happen on its watch, and staff took that seriously. Mr. Routledge is aiming to ensure the regulator more closely adheres to its original mandate: Regulation and supervision should reduce the risk of failure, but financial institutions should be able to conduct business in a competitive environment, which could mean they experience challenges that lead to failure.
In the case that an institution ends up distressed, the regulator will require fintechs and credit unions to have an exit plan to end operations without significantly affecting the sector or customers.
“Previously, the culture within OSFI, and particularly amongst our supervisors, is if this institution comes in and fails within the first two years, it’s all our fault. So what do they naturally do? They raise the barriers and the standards, and that lengthens the application time,” Mr. Routledge said.
“OSFI’s responsibility is to ensure that institution failures, when they occur, do not pose costs on the broader financial system, and we do that through early intervention and smart supervision. That, to me, is the appropriate and matured risk appetite.”