The Regulation of Banks and Banking in Canada

AuthorM.H. Ogilvie
ProfessionChancellor's Professor and Professor of Law, Carleton University
Cha pter 3
a. Int roduCtIon
Historically, the Bank Act has been the pr imary regulatory mechanism
by which Parliament has exercised its jurisdiction under sect ion 91(15)
over banks and bank ing in Canada. However, since the mid-twentieth
century, Parliament has expanded its governance of the banking sec-
tor as well as the federal f‌ina ncial institutions sector generally by en-
acting legislation regul ating particular a spects of banking t hat relate
either to the security and solvency of the national economy or to the
safety and security of customers’ deposits and other retail transactions.
Oversight is exercised either directly through the Minister of Finance
or indirectly through var ious corporations or arms length govern-
ment agencies with statutory authority over specif‌ic aspects of bank-
ing business, which in t urn report to Parliament through the Min ister
of Finance. When conducting their day-to-day business, consumers of
banking ser vices are generally not aware of the signi f‌icant role these
organizations play in en suring the security of the f‌inancial ser vices
sector. Nevertheless, the nature of this oversight and the roles these
organizations play ensure the safe, secure, and eff‌icient completion of
those millions of daily transactions.
Two organizations are especially important in the overall regula-
tion and supervision of the f‌inancial sector: the Bank of Ca nada and
the Off‌ice of the Superintendent of Financial Institutions. The former
regulates credit and currency, controls national monetary policy, and
The Regulation of B anks and Banking i n Canada 39
is the lender of last resort, whi le the latter supervises f‌inancial institu-
tions and certain pension plans to ensure that they are in sound f‌inan-
cial condition and follow sound risk management policies. Bot h oper-
ate at arm’s length from the government, although ultimately subject to
Parliament, which enacts the governing legislation for each, and both
act in an opaque way to better ensure their successful operation and
outcomes for the good of the Canadian economy as a whole.
B. Bank of Canada
The Bank of Canada came into existence as the central bank on 11 March
1935.1 In contrast to other common law countr ies, the creation of a central
bank was relatively late in C anadian economic history, probably because
many central bank functions had been accommodated within the char-
tered banks over the course of the nineteenth century. The existence of
national banks of signif‌icant commercial sophistication meant that one,
the Bank of Montreal, could car ry out some of the functions of a central
bank, particularly the management of the federal government account. A
national branch bank clearing system obviated t he clearing problems ex-
perienced, for example, in the United States prior to the establishment
of the Federal Reserve System and senior bankers advised and cooper-
ated with the government. Such cooperation was ev ident during the First
World War, when the Department of Fina nce was formed and relied on the
banking community for advice when it per formed some of the functions of
a central bank such as holding reserves and supervising bank notes.
The economic boom of the 1920s and the economic bust of the early
1930s, together with the problem of settling balances between Canada
and London once the United Kingdom abandoned the gold standard
in 1931, prompted discussion of the need for a central bank to regulate
monetary policy and settle international accounts. In 1933, the British
Law Lord, Lord Macmill an, who had recently chaired a U.K. commis-
sion on f‌inancial matters, agreed to chair the Royal Commis sion on
Banking and Currenc y in Canada which recommended the est ablish-
ment of a central bank. The Bank of Can ada began operations in March
1 For a history of ea rly origins, see George S. Watts, The Bank of Ca nada: Origins
and Early History (Ottawa: C arleton University Press, 1993), which incorporat es
articles publ ished earlier in the Bank of Cana da Review (May 1972) 14; (August
1972) 12; (November 1972) 6; (April 1973) 2; (November 1973) 2; (November
1974) 2; ( January 1976) 2.
The functions of the Bank of Canad a are set out in the preamble to
its Act:
… to regulate cred it and currency in the best intere sts of the econom-
ic life of the nation, to control and protect t he external value of t he
nationa l monetary un it and to mitig ate by its inf‌lue nce f‌luctuation s
in the general level of production, t rade, prices and employment, so
far as may be po ssible within the sc ope of monetary action, and gen-
erally to promote the economic and f‌in ancial welfare of Canada.2
The Bank of Canada is a cor poration3 established by legislation, not
a Crown corporation, department, or agency of the federal govern ment.
Its head off‌ice is in Ottawa, but it may establish other branches and
agencies within Can ada and abroad.4 It is managed by a board of direc-
tors composed of the Governor, a Deputy Governor and twelve direc-
tors, together with the Deputy Minister of Finance, who does not have
the right to vote.5
The Governor and Deputy Governor of the Bank are appointed by
the board w ith the approval of the Governor in Counc il6 for renewable
seven-year terms.7 They are to have proven f‌inancial exper ience,8 be
Canadian cit izens under seventy-f‌ive years of age, and not be employed
by any other government agency or have associations w ith any other
organization of a related nature.9 Additiona l Deputy Governors may be
appointed by the board.10 The Governor is the chief executive off‌icer of
the Bank.11
The directors are appointed by the Minister of Fin ance with the
approval of the Governor in Council for renewable three-year terms.12
A director must be a Canadian citizen ordinar ily resident in Canada,
under seventy-f‌ive years of age, and not employed by any other gov-
2 Bank of Canada Act, R .S.C. 1985, c. B-2 as a m. For current information, se e on-
3 Ibid., s. 3. Bain v. Bank of Canada, [1935] 4 D.L.R. 112 (B.C.C.A .); Walsh Advertis-
ing Co. v. R., [1962] Ex. C.R. 115; Kawneer Co. of Canada Ltd . v. Bank of Cana da
(1975), 60 D.L.R. (3d) 636 (Ont. H.C.J.); Bank of Canada v. Bank of Montreal
4 Ibid., ss. 4(1) & (2).
5 Ibid., ss. 5(1) & (2).
6 Ibid., s. 6 (1).
7 Ibid., s. 6(3).
8 Ibid., s. 6(2).
9 Ibid., s. 6(4). See s. 6(4) for particular d etails.
10 Ibid., ss. 7(1) & (2).
11 Ibid., s. 8.
12 Ibid., s. 9.

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