Bank Act | The Canadian Encyclopedia

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Bank Act

The Bank Act is the law passed by Parliament to regulate Canada's chartered banks. The Act has 3 main goals: protecting depositors' funds; insuring the maintenance of cash reserves (see Monetary Policy); and promoting the efficiency of the financial system through competition.

Bank Act

The Bank Act is the law passed by Parliament to regulate Canada's chartered banks. The Act has 3 main goals: protecting depositors' funds; insuring the maintenance of cash reserves (see Monetary Policy); and promoting the efficiency of the financial system through competition.

The Act divides banks into 2 groups known as Schedule I and Schedule II banks. Schedule I banks are widely held (no single owner may control more than 10% of the banks' voting stock) and mostly domestically owned. Schedule II banks are closely held and many are owned by their foreign parent companies. The Act allows the government to control the size of Schedule II banks except for US-owned Schedule II banks, which are exempt in keeping with the provisions of the Free Trade Agreement. The Act also sets out the conditions for entry into the banking business.

To start, a chartered bank must have $10 million of capital. Formerly banks were required to hold cash reserves equal to a share of all deposits except term deposits of more than one year to maturity. In the most recent version of the Act, this requirement was eliminated and banks are now completely free to determine their own level of reserves.

Additionally, the Act specifies the reporting requirements of banks to the inspector general of banks and specifies the kind of activities in which a chartered bank may be engaged. Formerly, chartered banks were not allowed to manage trusts, sell insurance or underwrite corporate securities. The latest version of the Act, however, permits chartered banks to offer a much broader range of financial services.

After passage by Parliament, the Bank Act remains in force for 10 years. This ensures that legislators will periodically update the Act in order to keep pace with changes in the Canadian financial system.

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