Canadian Banking Regulation And Its Effectiveness Studies

The banking system in Canada is widely regarded as the safest and the most efficient system in the world. The Global Competitiveness Report published by World Economic Forum has named Canadian banking system the most competitive for seven consecutive years starting 2008. The 2010 Financial Stability Assessment Report conduted by International Monetary Fund showed Canada has strong and effective banking regulation system, meeting the international practicing standard. Bloomberg Markets has compiled World’s Strongest Bank and the six largest Canadian banks were all among the list, which ranked it No.1 in the world. All Canadian banks scored extremely well on tier one capital ratio. Bank of Canada governor Mark Carney was invited to take the leadership role for Bank of England was another confirmation for excellent performance of Canadian banking regulation.As a federal state, Canada has a relatively complex financial regulatory system. In addition to the federal government, each province has also jurisdiction over the financial service industry. For the banking industry, the Canadian federal government is responsible in both aspects of prudential regulation and oversight of market behavior. When a bank, however, sets up a subsidiary to be trust executor or engaged in securities trading business, then these institutions is regulated by the province. Currently there are five regulatory bodies exercise regulatory power over Canada’s banking industry. Office of Superintendent of Financial Institutions is responsible for management and regulation of Canadaian banks; Canada Deposit Insurance Corporation (as a deposit guarantor), and the Bank of Canada (as the lender of last resort) are responsible for the supervision of commercial banks in Canada. The core of Canadian banking regulation can be simply described as prudential supervision and protection for depositors.Completely different from the highly decentralized banking system in the United States, commercial banks in Canada are highly centralized branch system, and large-scale bank oligopoly pattern is a major feature of the Canadian banking system. Canadian central bank’s monetary policy objective has adjusted from aiming at exchange rate to control inflation within the target of 1%-3%.The response of Canadian regulatory authorities dealing with the global financial crisis was rapid and effective. Because of of emphasis to prudential regulation and risk management, Canadian financial institutions suffered very limited losses during the subprime crisis. The Bank of Canada requires higher regulatory capital adequacy requirements than the international minimum standard; Basel Accord II requires banks to maintain a capital ratio and total capital ratio of 4% and 8% respectively. Office of the Superintendent of Financial Institutions OSFI explicitly requires banks and federally regulated trust and loan companies meet or exceed 7% tier one capital ratio and total capital ratio of 10%. In addition to risk-based minimum capital requirements, deposit-taking financial institutions must also meet the requirements of the assets to capital ratio, which is commonly referred to as leverage. Banks and trust and loan companies must ensure their total assets, including certain off-balance sheet assets, does not exceed 20 times its net capital. Canadian bank’s exposure to US subprime mortgage securities is not large, and there are very few similar securities in Canada. From a regulatory perspective, the Canadian legislation provides for federally regulated financial institutions issuing any high proportion of home loan, i.e. more than 80% of the home value, the borrower must buy Canadian Mortgage and Housing Corporation CMHC insurance or private housing loan insurance. The loan guarantee amount must be the full amount.The empirical study of this paper selected three dimensions legal regulation, market regulation and regulation independence as the explanatory variables for banking regulation, and selected another three dimensions banking industry scale, banking risk level and banking operating efficiency as the dependent variables to assess the implementation effect of Canadian banking regulation. The results showed that the Canadian legal regulation has considerable impact on the banking industry scale, banking risk level and banking operating efficiency, in particular, the stronger the legal regulation, the greaeter banking scale is suppressed, the banking risk level reduced, and the banking operating efficiency enhanced; market regulation had positive impact on banking industry scale; regulation independence, however, will discourage the development of the banking industry scale. In general, the overall Canadian banking regulation capability can reduce the level of banking risks and improve the banking operatging efficiency.Using the same empirical model to test the implementation effect of China’s banking regulation, we found that only legal regulation had some impact on bank risk level, the more strict the Chinese legal and regulatory compliance requirements the greater risks that banks would violating the rules; Stronger market regulation in China showed lower bank risk level; the regulation The regulation independence in China can promote the banking industry scale development, and enhance the banking sector operating efficiency. The regression results show that the China’s banking regulation have not played a significant role to development of banking industry scale, the bank’s risk level and the banking sector operating efficiency, which shows that China’s banking regulation still has much room for improvement.On lessons learned from Canadian banking regulation, this paper focuses on promoting market oversight and regulatory mechanisms to encourage banks to be more proactive disclosure of information; strengthening regulation independence, to make it more credible; and focus on protection and education of consumers for financial services. For the shadow banking regulation and internet finance regulation, Canada also has good expertise for us to learn.