While Canada’s financial system was fit for purpose across decades of liberal democratic order, it’s important to look at how the system should be structured in the future, said Mark Zelmer, former deputy superintendent of financial institutions at the Office of the Superintendent of Financial Institutions and a fellow-in-residence at C.D. Howe Institute.

Speaking in a session at the Canadian Investment Review’s 2025 Investment Innovation Conference, he raised the question whether Canada will be able to rely on the traditional co-operation between financial institutions operating across borders or investing abroad or if the scope of that co-operation will be impacted as geopolitical tensions rise.

“That scope for co-operation, whether it’s by the regulators, by the court system or across jurisdictions, is probably going to be a lot less in the future than it is today.”

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Looking at the past, Zelmer cited 1974 as the first example of the collapse of a financial institution operating across borders: Herstatt Bank in West Germany failed and caused tremors in the global banking system as a result.

Over time, most of the initiatives set out to deal with these financial stressors have focused on trying to prevent a problem in the first place, he said, by aiming to increase co-operation between regulators and judicial systems, but they haven’t made much progress when an institution is exiting the marketplace.

“As a result, we learned, yet again, in the global financial crisis that when institutions die, you are basically having to break them apart and deal with them on a country-by-country basis as opposed to being able to resolve them as one global unit.”

Despite the banking reforms introduced in Canada since the crisis, Zelmer said his former colleagues at the OSFI have been quick to lock down the Canadians assets of failing institutions from subsidiaries of foreign banks, including Maple Bank in 2016 and Silicon Valley Bank in 2023.

But he also highlighted the case of insurer Confederation Life, which collapsed in 1994. Fortunately, the foreign subsidiary transferred some assets back into Canada under the nose of the Michigan regulator and there were more assets in Canada to deal with policyholders and other creditors. Unfortunately, a legal precedent was set and the Americans sued.

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“There was a court order out of Michigan that basically gave the right to the U.S. liquidator to not only grab the assets of the legal entities of Confederation Life that existed in the U.S., it also gave them the right to grab any foreign assets that the Canadian head office had directly on its books.

“This legal precedent, I’m sure, would come to life pretty fast if we had an internationally active institution in this country in trouble — or an asset manager, for that matter,” he added.

While OSFI has introduced a parallel set of capital requirements, it also imposed capital requirements on the legal entity in Canada on a stand-alone basis, said Zelmer. “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.”

Based on past experiences and the practices of other jurisdictions, he noted the OSFI requirements look a bit lenient and might be a bit optimistic in the new world.

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Turning to potential solutions, Zelmer suggested the regulators be more hard-nosed about how much assets have to exist in Canada relative to the claims that could be made in Canada. He also recommended that financial institutions be more transparent about how they integrate their operations domestically and abroad, as well as how the liquidity and funding of these institutions is distributed globally and to what extent it’s fungible across borders.

Finally, for asset managers, he said it would be useful for investors to determine whether their foreign assets could be held in Canada as opposed to leaving them in foreign custody accounts or in foreign securities and depositories. “If there ever were any concerns about you as institutions, other countries might be quick to freeze your assets and it can take a very long time to get those assets unblocked.”

For too long, said Zelmer, Canada’s financial regulators and institutions have taken many things for granted, but in a new world order, it may be time to make sure they’re well protected. “If we have to assume life is going to be a lot less comfortable going forward, now is the time to think about what changes we should make to the structure of our system so it isn’t only the likelihood of a problem being low, but also if, we have a problem, we know how to deal with it.”

Read more coverage of the 2025 Investment Innovation Conference.