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To permit foreign bank branches

The government of Canada has introduced legislation, scheduled for enactment by the end of June 1999, which will permit foreign banks to establish commercially-focused branches in Canada. Foreign banks will have the option of establishing a full service branch or a lending branch. Both types of branch will have essentially the same business powers as existing foreign bank subsidiaries and domestic banks, except with respect to deposit-taking.

At present, foreign banks are required to establish separate Canadian banking subsidiaries or to obtain orders permitting them to own unregulated but restricted non-bank affiliates. While Canadian banking subsidiaries are fully empowered Canadian banks, they are limited in some of their activities, including commercial lending, by the extent of their capital in Canada. Foreign banks have indicated, occasionally by leaving the country, that existing regulatory constraints make it difficult for them to compete effectively in Canada. In future, full service and lending branches will be able to use the capital of the foreign banks to support their lending activities in Canada, allowing foreign banks to compete on a more cost-effective basis. The government hopes that the proposed branching regime will encourage new entrants and allow foreign banks currently operating in Canada to increase their lending activities. Foreign banks who wish to compete in the retail market will be able to operate both deposit-taking banking subsidiaries and full service branches (but not lending branches). Since foreign bank branches will not take retail deposits, they will face lighter Canadian regulation than foreign bank subsidiaries.

A full service branch will not be permitted to accept deposits of less than C$150,000. It will be required to maintain assets on deposit in Canada equal to a minimum of 5% of branch liabilities or C$10 million, whichever is greater, with an approved Canadian financial institution, and will be subject to a minimum yearly examination by the Office of the Superintendent of Financial Institutions.

A lending branch may accept deposit liabilities or otherwise borrow money only by means of non-transferable financial instruments from, generally speaking, Canadian or foreign financial institutions. It will also be prevented from guaranteeing any securities or accepting any bills of exchange intended by the issuer or any party to be sold or traded, except instruments sold to or traded with a financial institution which cannot subsequently be sold or traded. A lending branch will be required to maintain assets on deposit equal to C$100,000. The Superintendent will have the discretion to establish the frequency of examination of lending branches.

The requirement for non-transferable debt instruments may limit the viability of a lending branch for institutions which might normally fund in Canada with transferable instruments. The constraint appears intended to prevent financial obligations of lending branches from falling into the hands of unsophisticated persons who might require the protection of increased regulation. Hopefully the government will consider other means of achieving this goal before final enactment, perhaps by restricting transferability to other sophisticated institutions rather than preventing transferability altogether.

John G Myers

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