John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
Good news for Canadian bankers: Ottawa’s reported interest in meeting with officials from the largest U.S. banks operating in Canada may signal a regulatory review process that will reduce compliance costs, unnecessary rules and make our banks more competitive in the U.S. and globally.
The initial Bloomberg report framed the proposed meeting between Department of Finance officials and U.S. bank representatives as a response to President Donald Trump’s make-believe world where American bankers can’t do business in Canada.
Finance and U.S. banks operating here have nothing to gain from sifting through the ill-informed musings the 47th president of the United States had on Canadian banking. U.S. banks are not disadvantaged by Canadian regulations.
Instead, Canadian officials should be eager to quiz U.S. bank executives on changes to American bank regulation that will drive a wedge between Canadian and U.S. bank supervision – changes that will disadvantage our banks if Finance does not take steps to level the playing field.
The most obvious divergence is on Basel III, the 2017 international regulatory reforms that Canada began implementing in the belief that the U.S. would, too – thinking which has proven credulous. Basel III is DOA in the United States. But in Canada banks face increased capital charges (higher operating costs) and endure punitive taxes over and above the usual corporate tax rate.
The differences are likely to grow.
Consider efforts to install Michelle Bowman as the new top bank regulator at the U.S. Federal Reserve Board. Ms. Bowman is a seven-year veteran of the Fed who was nominated by Mr. Trump. In her recent testimony before the U.S. Senate Banking Committee, Ms. Bowman’s agenda was clear: “The U.S. regulatory framework has grown expansively to become overly complicated and redundant, with conflicting and overlapping requirements. This growth has imposed unnecessary and significant costs on banks and their customers.”
Ms. Bowman’s agenda is being reiterated by U.S. Treasury Secretary Scott Bessent. He told a meeting of the American Bankers Association last week that the Treasury Department will play a larger role in bank supervision to ensure cost-cutting, support for economic growth and to bring greater public transparency to bank oversight. “Regulation through supervision has too often taken place behind a veil of secrecy that precludes scrutiny by the public and their elected officials.”
This is not a Trumpian exercise in presidential fiat. Demands for bank regulatory reform, from large and small U.S. banks alike, have been bubbling on the political surface for years and the outcome is here – the U.S. is about to embark on a large-scale and material streamlining of its bank regulatory system to reduce compliance costs for American banks.
Reform is needed in Canada as well, to sustain competitiveness and to better serve the public. New U.S. supervisory initiatives make those changes imperative.
Last year, the C.D. Howe Institute conducted a rigorous review of Canadian bank regulation and concluded that The Office of the Superintendent of Financial Institutions’ (OSFI) approach to rule-making is reactive and is motivated by an almost exclusive focus on “stability and consumer protection” without any effort to connect that to “innovation and competition.” As such, thorough cost-benefit assessments are not the norm when they should be, leaving banks to pay a high price for unnecessary and excessive rules.
Growing redundancies are examples of excessive rules. Bank supervision is shared between OSFI, Canada’s primary prudential supervisor, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the agency that combats money laundering and terrorist financing, and the Financial Consumer Agency of Canada (FCAC), which advocates for consumers’ interests.
Today, both FINTRAC and OSFI oversee anti-money laundering (AML) frameworks at Canadian banks, which is costly and less effective than leaving OSFI that duty and FINTRAC to devote all its resources to investigations, prosecutions and overseeing nonbank businesses.
While U.S. lawmakers complain about insufficient transparency, compared with Canada, bank regulation in America operates in the bright light of day. Canada’s Bank Act prevents OSFI from discussing all supervisory findings and remediation programs imposed on banks found non-compliant with rules. This put OSFI in an invidious spot last October when TD Bank’s U.S. AML problems were fully revealed. OSFI could say little, forcing Canadians to depend on U.S. regulators and the Department of Justice to tell them what went wrong and how it was being addressed.
Regulating banks helps ensure stability, but how supervisors do it matters. Canada now has good reason to do better.