The Estey Commission was an inquiry into the collapse of the CANADIAN COMMERCIAL BANK (CCB) and the Northland Bank. The Honourable Willard Z. Estey of the Supreme Court of Canada was commissioned by the federal government on 29 September 1985 to investigate the failures of the CCB and the Northland Bank, the causes of these failures and the regulatory approach to these banks, and to make recommendations to improve the regulation of the banking system.
The report issued by the commission in August 1986 claimed that management, directors, auditors and regulators were all seriously lacking in the performance of their duties. It criticized the banks' management for improvident lending policies and bizarre banking procedures, overstated income and loan values and misleading financial statements. The external auditors, the report stated, accepted financial statements that did not follow accepted banking practices nor reflect the true financial position of the banks. The commission claimed that the directors had relied heavily on management and had not performed their customary function of setting policy and directing management. The regulators, in turn, had made no independent assessment of the loan portfolio and did not support the auditors when they challenged management, relying instead on the banks' own reports and on discussions with management in what the commission termed "a wink and nod system." Furthermore, it claimed that the Inspector General of Banks had full knowledge of the situation but refused to act and therefore bore much of the blame.
All depositors were fully compensated for their losses because, according to the report, public officials continued to express confidence in both banks during the failed rescue attempt. Investors were less fortunate because there was no equity remaining. The report concluded by recommending that the office of Inspector General of Banks be combined with a strengthened Canada Deposit Insurance Corporation (CDIC) to improve the banking supervision system.
The CDIC attempted to recoup the compensation paid to depositors by realizing on the assets of the failed banks and is still seeking personal compensation from former directors beyond the amount covered by their directors' liability insurance. Despite these actions the losses were beyond its financial capacity and could only be handled by a large interjection of cash from the federal government and by increased fees from member institutions.