How Do You Start a New Bank in Canada?
You’re here for one of two reasons. The first reason: You’re a financial service visionary about to set off an epic journey of establishing Canada’s next Schedule I bank. You’ve come armed with an entirely new banking idea that blends next-generation technology with personalized banking experiences that tech-savvy Canadians have never seen before. You’ve recognized that the relationship between people and technology has evolved faster than the traditional banking system could adapt, and you see flaws in a system that are starting to look a lot less like flaws and a lot more like opportunities.
Maybe your idea is to launch a digital banking app that caters to millennials entering the world of personal investing. Or maybe you’ve uncovered an underserved niche market and have plans to launch a semi-automated mortgage underwriting app for people interested in financing luxury motor coaches or private aircraft. There’s also a chance that you lead a major retail chain that’s thinking of launching a vertically integrated payment program, and you already know the benefits of tapping into the nominee GIC deposit market to gain quick access to an affordable funding source. If you’re here for the first reason, you’re here to learn how to start a bank in Canada.
If you’re here for the other reason, then you’ve accidentally stumbled onto this post after Googling “how to open a bank in Canada” when you really meant to search “how to open a bank account in Canada.”
Either way, you’re about to learn how to open a bank!
Breaking Down OSFI’s Three-Phased Application Process for Opening a Bank in Canada
First of all, you’re in the right place and the wrong place all at the same time. The process doesn’t start here. Every person or group interested in incorporating a bank or deposit-taking financial institution in Canada will start at the same place and follow the same application process—a three-phased approach that’s administered by the Office of the Superintendent of Financial Institutions (OSFI). That’s the place to start.
OSFI is the federal government’s agency that’s in charge of supervising and regulating all chartered banks in accordance with the Bank Act. More importantly, it’s also the agency that’s responsible for assessing applications for incorporating banks and making recommendations to the Minister of Finance. After receiving a recommendation from OSFI, the Minister of Finance has the ultimate responsibility of approving applications for federally regulated financial institutions (FRFIs) in Canada.
OSFI’s application process is broken up into the following three phases, which the agency has structured in order to provide guidance and feedback throughout the lengthy application process:
- Phase 1: Pre-Application
- Phase 2: Letters Patent
- Phase 3: Order
Phase 1: What Do You Need for OSFIs Pre-Application Process?
At this point, you should know that the application will cost somewhere in the area of $33,000. That’s the price for the letters patent of incorporation. If that feels like pocket change right now, then you’re ready to move on! There are also certain criteria you must meeting in order to become a Schedule I bank—so make sure you’re eligible first. A Schedule I bank must be Canadian-owned. On top of that, there are three categories of Schedule I banks with different ownership restrictions that are based on an institution’s equity. OSFI will also require that you have a paid-in capital of at least $5 million. The Minister of Finance may require you to have more.
Are you ready? Here we go! OSFI’s application process starts with an interview. Prior to meeting with them in person to discuss your application, you’ll need to prepare a written proposal outlining the reasons why you’re applying to become a bank. OSFI will use this proposal to facilitate and guide your conversation during the interview process. They’ll be looking for details about your business strategy, target markets, ownership structure—even your proposed management team.
If you still want to proceed with your application after the initial interview, OSFI will ask you to submit an information package. This is where things get serious. You’ll need to disclose detailed information about your institution’s ownership, including classes of shares and the percentage of shares held, along with all of your financial statements for the last three years.
OSFI will also want a finely detailed business plan covering the next five years. Your business plan should include information on what financial services you’ll be offering and in which jurisdictions, as well as an analysis of target markets, competitors, and a breakdown of opportunities and challenges and how you’ll address them. You’ll need to outline risk-based capital and leverage ratios along with pro forma financial statements of the next five years—in other words: You don’t have to see the future, but you should have the financial details of how it’ll play out.
This is your opportunity to show your financial strength, create your case on paper, and provide a detailed plan that’s strong enough to convince the regulator that you’re proposed institution will have a viable chance at success in the marketplace. So, show your cards. OSFI wants to see every detail of your business, from your trading and investment strategy to what information technology environment you’re planning to use. If you’re still reading at this point, this is where we can help you out—many banks have received their charters after proposing a Portfolio+ core banking platform.
If you satisfy OSFI’s pre-application process, you’ll receive a letter from OSFI that highlights the agency’s concerns and expectations.
Phase 2: How Do You Obtain Letters Patent of Incorporation?
If you’ve made it to Phase 2, you’re well on your way to opening a bank. This phase is all about receiving OSFI’s recommendation and obtaining letters patent of incorporation from the Minister of Finance. This phase starts with a simple publication. You must publish your notice, or intention, to apply for letters patent in the Canada Gazette—the official newspaper of the Government of Canada.
Once your notice is published, you’re ready to submit your formal application for letters patent. You’ll have to prepare a second information package that builds on your first and covers specific details about your board of directors and management structure, as well as your risk management framework, operational policies, and regulatory compliance controls. You’ll also need to provide details about your proposed IT framework, software, and any integration with third-party systems. If your business plan includes GICs or deposits, you will be required to be a member of the Canada Deposit Insurance Corporation (CDIC). You won’t have to submit a separate application to CIDC, though—OSFI will inform CDIC about you.
Based on a positive review of the information you provide, OSFI will make its recommendation for letters patent to the Minister of Finance. Your proposed bank is officially a bank when you receive your letters patent—you just can’t begin operations until you receive an Order from OSFI.
Phase 3: How to Obtain an Order for a Chartered Bank
You’re not out of the application process yet. You still need an Order. Once the letters patent are issued by the Minister of Finance, you have one year to receive an Order from OSFI. OSFI is not permitted to make an Order after one year has elapsed. OSFI may request more information during this process, and you should be ready to respond to requests in a timely manner.
The most important aspect of phase three is an onsite review. OSFI will send you a pre-commencement letter and will visit you to assess your operational readiness and ensure that you have all the controls in place that you’ve outlined throughout your application process. You will receive one final letter following the onsite review that captures any final concerns OSFI may have.
You’re almost there! OSFI wants to see meeting minutes for the first Board and shareholders meetings, as well as confirmation of amounts paid for incorporation, and a final letter from you promising that you’ll let OSFI know of any changes to your business plan.
And that’s it! Once you’ve satisfied all of the requirements, OSFI prints your Order and publishes a notice of it in the Canada Gazette. Cut it out and stick it to your fridge! You’re one of an elite few that have met the requirements of a regulator that supervises a financial system that’s considered one of the safest in the world.
View OSFI’s official “Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies” (https://www.osfi-bsif.gc.ca/Eng/fi-if/app/aag-gad/Pages/instguide.aspx).
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