Key Takeaways
- • Mark Zelmer, former deputy superintendent at OSFI and fellow-in-residence at the C.D. Howe Institute, told the Canadian Investment Review's 2025 Investment Innovation Conference that cross-border regulatory and judicial cooperation is likely to shrink as geopolitical tensions rise.
- • Zelmer cited the 1994 Confederation Life collapse, where a Michigan court order let U.S. liquidators reach foreign assets booked on the Canadian head office's books, as a precedent that could recur for an internationally active institution or asset manager.
- • He argued OSFI's capital requirements may be too lenient because they assume roughly 30 per cent of the value of branch and foreign subsidiary investments can be recovered in distress.
- • Recommended measures include requiring more assets in Canada relative to domestic claims, greater transparency on integrated operations and global liquidity, and asset managers considering holding foreign assets domestically rather than in foreign custody.
Summary
Mark Zelmer, former deputy superintendent of financial institutions at the Office of the Superintendent of Financial Institutions (OSFI) and a fellow-in-residence at the C.D. Howe Institute, said Canada's financial system, which worked well under the decades-long liberal democratic order, should be reviewed for its future structure. Speaking at a session of the Canadian Investment Review's 2025 Investment Innovation Conference, he questioned whether Canada can continue to rely on traditional cooperation among cross-border financial institutions, noting that such cooperation among regulators, courts and jurisdictions "is probably going to be a lot less in the future than it is today."
Zelmer traced the history of cross-border failures, citing the 1974 collapse of Herstatt Bank in West Germany as an early example that disrupted the global banking system. He said most post-crisis initiatives have focused on preventing failures and have made limited progress on resolving institutions that exit the market. Referring to the global financial crisis, he noted that failed institutions have generally had to be broken apart and handled country by country rather than resolved as a single global unit.
Despite reforms since the crisis, Zelmer said OSFI has moved quickly to ring-fence Canadian assets of failing foreign-bank subsidiaries, citing Maple Bank in 2016 and Silicon Valley Bank in 2023. He also highlighted the 1994 collapse of insurer Confederation Life. Although assets were moved back into Canada to serve policyholders and creditors, a Michigan court order allowed the U.S. liquidator to seize U.S. assets and foreign assets booked on the Canadian head office's books. He warned that this precedent could quickly resurface for an internationally active Canadian institution or asset manager in distress.
Zelmer said OSFI's parallel capital requirements, along with stand-alone capital requirements for the Canadian legal entity, may be lenient. "My concern about the requirements is . . . they assume you can actually get back 30 per cent of the value of the investment you have in branches and foreign subsidiaries," he said, adding that past experience and practices in other jurisdictions suggest that assumption may be optimistic.
His recommendations include stricter regulatory requirements on the level of assets held in Canada relative to potential domestic claims, greater transparency from institutions on how they integrate domestic and foreign operations, and disclosure of how liquidity and funding are distributed globally and how fungible they are across borders. For asset managers, he suggested investors evaluate whether foreign assets could be held in Canada rather than in foreign custody accounts or foreign securities depositories, warning that foreign governments could freeze assets for long periods. Zelmer concluded that if conditions become less stable, Canadian regulators and institutions should plan not only to reduce the likelihood of problems but also to manage them if they occur.
Zelmer traced the history of cross-border failures, citing the 1974 collapse of Herstatt Bank in West Germany as an early example that disrupted the global banking system. He said most post-crisis initiatives have focused on preventing failures and have made limited progress on resolving institutions that exit the market. Referring to the global financial crisis, he noted that failed institutions have generally had to be broken apart and handled country by country rather than resolved as a single global unit.
Despite reforms since the crisis, Zelmer said OSFI has moved quickly to ring-fence Canadian assets of failing foreign-bank subsidiaries, citing Maple Bank in 2016 and Silicon Valley Bank in 2023. He also highlighted the 1994 collapse of insurer Confederation Life. Although assets were moved back into Canada to serve policyholders and creditors, a Michigan court order allowed the U.S. liquidator to seize U.S. assets and foreign assets booked on the Canadian head office's books. He warned that this precedent could quickly resurface for an internationally active Canadian institution or asset manager in distress.
Zelmer said OSFI's parallel capital requirements, along with stand-alone capital requirements for the Canadian legal entity, may be lenient. "My concern about the requirements is . . . they assume you can actually get back 30 per cent of the value of the investment you have in branches and foreign subsidiaries," he said, adding that past experience and practices in other jurisdictions suggest that assumption may be optimistic.
His recommendations include stricter regulatory requirements on the level of assets held in Canada relative to potential domestic claims, greater transparency from institutions on how they integrate domestic and foreign operations, and disclosure of how liquidity and funding are distributed globally and how fungible they are across borders. For asset managers, he suggested investors evaluate whether foreign assets could be held in Canada rather than in foreign custody accounts or foreign securities depositories, warning that foreign governments could freeze assets for long periods. Zelmer concluded that if conditions become less stable, Canadian regulators and institutions should plan not only to reduce the likelihood of problems but also to manage them if they occur.
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