Vol. 138, No. 43 — October 23, 2004

Regulations Amending the Investment Limits (Banks) Regulations

Statutory authority

Bank Act

Sponsoring agency

Office of the Superintendent of Financial Institutions

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

The Bank Act prohibits a bank from investing in real property and equities where the aggregate value of the bank's investment in real property (section 476), equities (section 477) or the combined total (section 478) would exceed the prescribed percentage of the bank's regulatory capital. Sections 938, 939 and 940 of the Bank Act impose comparable prohibitions for bank holding companies. The prohibitions are generally referred to as the "investment limits." The Investment Limits (Banks) Regulations and the Investment Limits (Bank Holding Companies) Regulations prescribe these limits as 70 percent for real property, 70 percent for equities and 100 percent for the combined total.

Section 3 of the Investment Limits (Banks) Regulations exempts "large" banks (those with equity of more than five billion dollars) that are widely held or controlled by a widely held regulated entity from any investment limit by exempting them from the application of sections 476 to 478 of the Bank Act. Section 3 of the Investment Limits (Bank Holding Companies) Regulations provides a comparable exemption for "large" bank holding companies.

"Medium" banks (those with equity of one billion dollars or more but less than five billion dollars) have found themselves constrained by the investment limits in their ability to invest in equities for risk-management purposes. In turn, this has had the effect of increasing the hedging costs associated with certain investment products.

Pursuant to the regulation-making authority under paragraph 479(c) of the Bank Act, the proposed Regulations will amend section 3 of the Investment Limits (Banks) Regulations to exempt medium banks that are widely held or that are controlled by a widely held regulated entity from the application of sections 476 to 478 of the Bank Act. The exemption will continue to apply only to widely held banks so that no single shareholder could direct the bank to over-invest in equities or real property.

To ensure that a consistent framework applies to bank holding companies with regards to the investment limits, the same amendment is proposed pursuant to paragraph 941(c) of the Bank Act for section 3 of the Investment Limits (Bank Holding Companies) Regulations.

Alternatives

I. Increase the investment limits for equities and real property to 100 percent, rather than providing a full exemption.

Demand for investment products that are hedged with equity investments has been increasing, and the Office of the Superintendent of Financial Institutions (OSFI) expects that trend to continue. Therefore, increasing the investment limits to 100 percent would not be a viable long-term solution.

II. Status quo, i.e. no exemption for widely held medium banks.

The status quo constrains widely held medium banks' ability to invest in equities for risk-management purposes (i.e. hedging), thereby increasing the hedging costs associated with certain of their product offerings and compromising their competitiveness.

Benefits and costs

The amendment recognizes OSFI's mandate, which is in part to have due regard to the need to allow financial institutions to compete effectively and take reasonable risks. It also recognizes the current industry practice of investing in equities for hedging purposes.

The amendment will make it possible for widely held medium banks to increase their investments in equities or real property beyond the investment limits. It will allow these banks to hedge certain risks associated with investment products in a more cost-effective manner. As a result of the amendment, widely held medium banks will be permitted to compete more effectively while only taking on a reasonable degree of risk.

Since OSFI already monitors banks and bank holding companies' investments in equities and real property, the Regulations will not require additional resources or create any additional monitoring costs.

Consultation

The proposed Regulations have been discussed with, and endorsed by, the Canadian Bankers Association. The industry supports the proposal.

Compliance and enforcement

These changes will not have a material impact on OSFI's resources.

Contact

Mr. Emiel van der Velden, Regulations Officer, Legislation and Policy Initiatives, Office of the Superintendent of Financial Institutions, Kent Square, 16th Floor, 255 Albert Street, Ottawa, Ontario K1A 0H2, (613) 998-7479 (telephone), (613) 998-6716 (facsimile).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to paragraph 479(c) (see footnote a) of the Bank Act (see footnote b), proposes to make the annexed Regulations Amending the Investment Limits (Banks) Regulations.

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Emiel van der Velden, Regulations Officer, Legislation and Policy Initiatives, Office of the Superintendent of Financial Institutions, 255 Albert Street, Ottawa, Ontario K1A 0H2 (tel.: (613) 998-7479; fax: (613) 998-6716; e-mail: emiel. vandervelden@osfi-bsif.gc.ca).

Ottawa, October 12, 2004

EILEEN BOYD
Assistant Clerk of the Privy Council

[43-1-o]

Footnote a

S.C. 2001, c. 9, s. 127

Footnote b

S.C. 1991, c. 46

Footnote 1

SOR/2001-393

NOTICE:
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