Canada’s regulatory regime does not disadvantage U.S. banks

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

President Trump recently made public statements that U.S. banks cannot do business in Canada, while Canadian banks “flood the U.S. market”. A recent article in a leading U.S. newspaper (the Article) has also suggested that foreign banks are restricted in what they can do in Canada, that they are required to follow stringent banking rules, and that they are subject to restrictions on foreign ownership¹. In this bulletin, we attempt to address these misunderstandings relating to the ability of U.S. banks to operate in Canada and explain why U.S. banks do not have a competitive disadvantage in Canada from a regulatory perspective, relative to domestic Canadian banks.

What you need to know

• Foreign banks have been permitted to incorporate banking subsidiaries in Canada since the 1980s with the same powers as domestic Canadian banks.
• Historically, Canada did impose restrictions on the foreign ownership of shares in domestic Canadian banks, but the U.S. was the first country to be exempted from these restrictions in the 1989 Canada-U.S. Free Trade Agreement.
• Although U.S. banks are not placed at a competitive disadvantage in Canada, they have not participated in recent Canadian bank acquisitions.
• Canada’s bank regulatory requirements apply equally to all banks in Canada regardless of their ownership structure or whether the bank is owned by Canadians or non-Canadians.

U.S. banks can (and do) operate in Canada

Since the 1980 amendments to the Bank Act (Canada) (the BA), foreign banks have been permitted to incorporate Schedule II banks under the BA, which have all of the same powers as a domestic Canadian bank listed in Schedule I of the BA, including the ability to take retail deposits and to be granted automatic membership in the Canada Deposit Insurance Corporation (CDIC)². A common misperception is that a Schedule I banking license is more attractive/advantageous than a Schedule II license. There is, in fact, no difference between Schedule I and II banks except that Schedule II of the BA lists banks that are subsidiaries of foreign banks and Schedule I of the BA lists banks other than banks that are subsidiaries of foreign banks.

In addition, Canada has since 1999 permitted foreign banks (including U.S. banks) to establish branches (Schedule III banks) in Canada with regulatory approval. Foreign bank branches can carry on all the same business as Schedule I and II banks, except that they are prohibited from taking retail deposits and cannot become a member of CDIC.

In fact, there are currently 16 U.S.-based bank subsidiaries and branches (with around $113 billion in assets) operating in Canada and specializing in a range of financial services, and U.S. banks make up half of all foreign bank assets in Canada³.

There are no foreign ownership restrictions on Canadian banks

A published comment in the Article states that there are “restrictions on foreign ownership” of Canadian banks. This is not the case. The amendments to the BA in 1967 prohibited any person (or associated group) from acquiring more than 10% of the shares of any bank in Canada and prohibited non-Canadian shareholders in the aggregate from owning more than 25% of a such a bank. However, the U.S. was the first country to be exempted from the foreign ownership restrictions in the 1989 Canada-U.S. Free Trade Agreement. The restrictions were subsequently removed for other jurisdictions which are members of the World Trade Organization in other trade agreements.

The current bank ownership requirements set out in the BA apply to both Canadian and foreign shareholders. Specifically, the BA prohibits any person from controlling a bank with equity greater than $12 billion⁴ (including each of the six Canadian banks designated by the Office of the Superintendent of Financial Institutions (OSFI) as domestic systemically important banks (D-SIBs))⁵, and also requires that banks exceeding this size must be widely-held (meaning that no person or group of persons acting in concert may own more than 20 percent of the issued and outstanding voting shares, or 30 percent of the issued and outstanding non-voting shares, of the bank)⁶. There is also a Minister of Finance approval required for any person (or associated group) to acquire more than 10% of the shares of any class of a bank, regardless of size⁷.

However, in general, any person (regardless of where they are domiciled) can own 10% or less of the shares of any Canadian bank (including the D-SIBs) without any regulatory approval. There are also no foreign ownership restrictions on the D-SIBs—theoretically, all the shares of a D-SIB could be owned by non-residents of Canada if it continued to be widely-held and provided that no one person (or associated group) could own more than 10% of the shares without the prior approval of the Minister.

Notwithstanding the foregoing, there are some limited exceptions to the control restriction where a bank that is already controlled by a shareholder crosses the $12 billion threshold, including where the shareholder itself is a widely-held Canadian bank. Interestingly, there is also an exception available to a shareholder that is a “foreign institution”, which would include a U.S. bank⁸—but there is no similar requirement that such U.S. bank be widely-held. In other words, the bank ownership regime in Canada may actually be more favourable to U.S. banks than Canadian shareholders.

Recent opportunities to acquire Canadian banks

There were reportedly no serious foreign bidders in the auction for the sale of HSBC Bank Canada, Canada’s 7th largest bank at the time, which the Royal Bank of Canada successfully acquired in March 2024. Similarly, we also understand that there were no foreign bidders in the sale of Canadian Western Bank (CWB), Canada’s 8th largest bank, to National Bank of Canada in February 2025. We note, however, that U.S. investment bank, JP Morgan Chase, served as investment advisor to both HSBC and the board of directors of CWB in connection with their transactions, meaning it was aware of and involved in both transactions. Additionally, as noted above, if a U.S. or other foreign bank had acquired either of HSBC Bank Canada or CWB and their equity grew past the $12 billion threshold, those foreign banks could have continued to own the Canadian bank indefinitely.

There are no additional regulatory obstacles imposed on U.S. banks

The Article suggests that “any international bank that tries to compete [in Canada] faces ‘an additional regulatory burden’ and to operate in Canada, U.S. banks are required to follow “stringent banking rules”, which creates a disincentive for U.S. banks to carry on business in Canada. We are not aware of additional restrictions on foreign banks operating in Canada as compared to domestic Canadian banks and while it may be true that “stringent banking rules” create a disincentive to operate in Canada, it does not put U.S.-owned banks at a competitive disadvantage relative to domestic Canadian banks for a couple of reasons.

First, as a general matter, Canada’s bank regulatory requirements apply equally to all banks in Canada regardless of their ownership structure or whether the bank is owned by Canadians or non-Canadians; there is no more onerous regime that applies separately to banks owned by non-Canadians.

Second, the D-SIBs are subject to certain additional regulatory requirements and expectations that the other banks operating in Canada are not subject to. For example, each D-SIB must hold additional capital as required by the Domestic Stability Buffer established by OSFI, which is currently 3.5% of risk weighed assets (1% higher than the maximum stability buffer of 2.5% established under Basel III). Since OSFI applies its requirements on a consolidated basis, this actually could put the D-SIBs at a competitive disadvantage when operating through subsidiaries in the U.S. and other countries which may have less rigorous regulatory requirements, as the Canadian banks would need to comply with both Canadian and applicable local regulatory requirements (in other words, the subsidiaries outside Canada are still subject to more stringent Canadian requirements since OSFI regulates on a consolidated basis). As a result, there is no competitive disadvantage for a U.S. bank operating in Canada and, in fact, there may be disadvantages for internationally active Canadian banks because of those more onerous requirements (although stringent banking rules should likely be seen as a plus for investors).

 
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