THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 314

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PA R T I I I

Financial Institutions

THE 20 01 BAN K ACT RE FO RM
We have seen that fundamental structural changes make possible new financial
products and services, increasing the competitive environment in the financial
services industry and changing the financial intermediation role of banking at
Internet speed. It is against this backdrop of phenomenal change that the federal
government introduced legislation reforming the policy framework of the
Canadian financial services sector.4 This legislation took effect in October of 2001,
when Bill C-8 came into force, and is generically known as Bank Act Reform.
The new legislation is mostly based on the Report of the Task Force on the Future
of the Canadian Financial Services Sector, also known as the MacKay Report, and
it has been called one of the most significant revisions to the Bank Act in
Canadian history.
In what follows we provide an overview of the key elements of the new regulatory environment for financial institutions that has the potential to dramatically
change the face of competition in Canada s financial services marketplace.5 As you
will see, the new laws establish the regulatory framework to accelerate changes
already taking place throughout the Canadian and world economies and introduce
new opportunities for strategic alliances and partnerships, with the objective of
fostering more competition and providing more innovative products and services
to Canadians.

Bank Holding
Companies

Before Bank Act Reform, the organizational structure of Canada s bank financial
groups was based on the bank-as-parent model, where all banking functions and

all subsidiaries of the bank are subject to the same regulation. Under the new legislation, bank financial groups have the option of organizing themselves under a
holding company.6 A holding company is a corporation that owns several different companies. For example, under a holding company structure, a bank financial
group may have a banking subsidiary, an insurance subsidiary, a securities subsidiary, and another subsidiary for its unregulated businesses.
Most developed countries permit holding company structures, and the growth of
holding companies has been dramatic over the past three decades. Today, in the
United States, for example, holding companies own almost all large banks, and over
90% of all commercial bank deposits are held in banks owned by holding companies. In fact, the Gramm-Leach-Bliley Act of 1999 modernized the holding company
rules in the United States (which had been in place since 1956) to allow a new and
more flexible holding company model the financial holding company.
The holding company form of corporate ownership has important advantages
for bank financial groups in that (1) it allows them to engage in other activities
related to banking, such as the provision of investment advice, data processing
and transmission services, leasing, and credit card services; (2) a holding company
structure allows for lighter regulation throughout the bank financial group because
certain activities (those not involving retail deposit-taking and insurance) can be

4

Since 1992, the practice of reviewing legislation governing Canada s chartered banks has been
extended to reviewing legislation governing all federal financial institutions.
5
See also Fred Daniel, Recent Changes to Canada s Financial Sector Legislation, Bank of Canada
Review, Winter 2002 2003: 3 16.

6

The new legislation introduced a holding company regime for Canada s insurance companies as well.
Under the legislation, insurance holding companies are required to have an investment in at least one
life insurance company and are regulated under the Insurance Companies Act. Bank holding companies are regulated under the Bank Act and are required to have an investment in at least one bank.