Strategies for Banking Sector Modernization:
Lessons from Canadian Experience
Financial Modernization Seminar
Bank of Thailand
January 22, 2002
Fred Gorbet
Director, Financial Services Program
Schulich School of Business (York University)
Agenda for this morning…
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Background on Canadian financial system
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Overview of MacKay Task Force
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Some key implications of change and key issues
outstanding
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Lessons from the Canadian experience
Background: Constitution
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Prudential Regulation:
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Banks clearly federal
Credit unions clearly provincial
Everything else shared (but mainly federal)
Market conduct
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Securities markets and licensing clearly provincial
But situation re: banks not clear (current legal
challenge)
Evolution of Financial Sector
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Clear importance of banks
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Some world-class insurance companies, growing in
importance
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But no strong second-tier deposit-takers
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Bank mergers a continuing, difficult issue for the
industry and for the government
Relative size of major Canadian banks
Domestic Banks
RBC
Share of Total Assets
of Deposit Taking
Institutions
CIBC
BMO
0
20
40
60
80
100
Evolution of Financial Sector
Nature of banks is changing
 Capital markets are increasingly global
 Banks supply less than 1/3 of corporate debt
 Consumer risk/reward tradeoff shifting and
banks becoming increasingly disintermediated
(eg., mutual funds)
Changing role of banks: deposits and mutual funds…
Personal bank deposits and mutual fund assets
($ bn.)
500
400
300
Deposits
Funds
200
100
0
1995
1997
1999
2001
Key regulatory developments…
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No bank failures from 1923-1985
Substantial change in late 1960’s
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Deposit insurance introduced
Wide ownership of banks
Two bank failures in 1985 led to
reexamination of system
OSFI created in 1986
Key regulatory developments…
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“Four pillars” broke down in late 1980’s

Banks bought major investment dealers
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Trust and loan industry essentially disappeared in
1990 recession

1992 legislative reform effectively recognized
convergence – 5 year sunset clause introduced
Recurring policy issues
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Competition versus stability
Regional sensitivity
Community and small business access
National control and ownership
Rules versus discretion
Regulatory overlap and duplication
Task Force established in 1996…
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First comprehensive look at sector since 1967
Reported in September 1998
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More than 250 submissions; 100’s of meetings;
18 research volumes; five background studies
124 recommendations.
Virtually all recommendations accepted by
government and became law in June, 2001.
Basic philosophy of Task Force

Change is pervasive – needs to be managed in public
interest

Change driven by technology, globalization, changing
consumer preferences, and demographics.

Change would continue to lead to new competitors,
pressure on existing institutions, and convergence
within the sector.
Banks are roadkill on the information highway
Bill Gates, 1995
What we now describe as banks, trust companies,
credit unions, insurance companies, mutual fund
companies and securities dealers may well
be unrecognizable within the coming decade.
(MacKay Task Force Report)
Managing Change in the Public Interest
Requires….

A vision – should be consumer driven

Leadership and flexibility in achieving this
vision
The vision of the Task Force

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Robust competition and consumer choice
Successful financial institutions headquartered
in Canada and competitive at home and abroad
Empowered consumers
Responsible financial institutions
Streamlined and effective regulation
Increasing competition
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Ownership policy
Foreign entry
Access to payments system
Easier start-up conditions
Increased business powers (rejected)
Capital tax holiday for startups (rejected)
Institutional Adaptability
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Clear and transparent merger process
Allow organizational flexibility through
regulated holding companies
New definition of wide ownership to allow
strategic investments
Expand range of permitted activities
Remove capital taxes on financial institutions
Empowering Consumers

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Improved framework for competition through
empowered consumers
Disclosure/Transparency
Privacy
No coercion (particularly tied-sales)
Easy and accessible redress through
ombudsman
Responsible Financial Institutions
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Access to basic banking services
Notice to close branches
Annual accountability statements
New framework to monitor and report on
financing of small businesses
Streamlined and Effective Regulation
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Competition vs. institutional safety
Make OSFI responsible for consumer
protection for federal institutions (new agency
instead)
Integrate consumer protection plans (rejected)
Government moved on own to give OSFI new
powers and to strengthen Ministerial oversight
of payments systems
Implications of change
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Much more competitive retail marketplace
Intensification of convergence; banks will
continue to become “less special”
Expect greater strategic diversification
Major bank mergers unlikely for some time;
but holdco’s provide new options
Consolidation will continue
Challenges for regulators
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Manage shift in balance (competition vs.
safety); mindset and culture
New rules for holding companies
Are banks still special? How to deal with
“too big to fail” issue?
Implications of North American integration
Key Issues Outstanding
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Regulatory overlap and duplication still exist,
particularly in securities markets
Implications of convergence for consumer
protection plans still need to be addressed
Corporate governance; and interaction of
regulators and boards
Continuing health of Canadian banks in an
“over-banked” marketplace
Lessons from Canadian reform experience
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Speed is important
A clear vision is essential
Build in flexibility of action
Emphasize transparency
Build an integrated regulatory structure
Staff it with the right people
Let them do their job and support them