THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 314

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