Introduction

Background

1. Since 1967, the Canada Deposit Insurance Corporation has helped protect the savings of millions of Canadians. Under its enabling legislation, the Canada Deposit Insurance Corporation Act, this Crown corporation is mandated to

• provide insurance against the loss of part or all of deposits in member institutions (Exhibit 1)
• promote and otherwise contribute to the stability of the financial system in Canada
• pursue both these goals while minimizing the corporation’s exposure to loss
• act as the resolution authority for members—that is, prepare for and resolve the failure of a member institution to protect eligible deposits

2. The corporation reports to Parliament through the Minister of Finance. It is funded entirely by premiums paid by its member institutions. These include banks, trust companies, loan companies, federal credit unions, and credit associations.

3. A stable financial system is a key support for a healthy economy. A number of federal government organizations work together to provide what the corporation refers to as Canada’s “financial safety net.” Aside from itself, the corporation identifies 4 other safety net agencies:

• The Department of Finance Canada is responsible for policies and legislation related to federal financial matters.
• The Office of the Superintendent of Financial Institutions Canada supervises banks and other federally regulated financial institutions.
• The Bank of Canada generally promotes the country’s economic and financial welfare. It also oversees Canada’s clearing, payments, and settlement system.
• The Financial Consumer Agency of Canada works to strengthen oversight of consumer issues and expand consumer education in the financial sector.

4. As of 31 March 2019, the corporation had 85 member institutions. These included Canada’s 6 largest banks: the Bank of Montreal, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, the National Bank of Canada, the Royal Bank of Canada, and the Toronto-Dominion Bank. Also included were other deposit-taking institutions providing residential or commercial mortgages, business loans, consumer loans and credit cards, and fee-based services. The corporation has its headquarters in Ottawa and has approximately 120 full-time employees.

5. As of the same date, the corporation insured deposits totalling $807 billion. This compared with $512 billion of insured deposits at the time of our 2010 special examination report.

6. Since our last special examination, Parliament has amended the corporation’s enabling legislation. Some of the changes have come into effect—for example, the introduction of an additional resolution tool to be used specifically for Canada’s largest banks (see paragraph 36). Some changes have yet to come into force, such as the expansion of the corporation’s deposit insurance coverage (see Exhibit 1).

7. The past decade has brought technological developments that could have an impact on the corporation’s ability to fulfill its mandate. For example, social media platforms can spread news of instability at a member institution instantaneously, and customers can easily move their deposits to a different institution electronically. These developments heighten the risk that a large number of customers will withdraw their deposits at the same time, creating liquidity problems for the member institution.

8. The corporation has acted to adapt to its changing environment and ensure a systematic, comprehensive approach to managing a crisis. The measures it has implemented include the following:

• Since 2012, amendments to the Canada Deposit Insurance Corporation Act have provided the corporation the authority to enter into agreements with other parties to share information and coordinate actions for resolution. It has entered into information and cooperation agreements with domestic and international regulators.
• Since 2016, it has refocused its public awareness activities to keep Canadians better informed about the corporation and its deposit insurance program.
• In 2018, it appointed its first Chief Risk Officer, responsible for risk management of the corporation’s operations. In addition, it established a Centre of Excellence for Crisis Simulations in 2019 (see paragraph 38).
• In 2019, it merged its Insurance and Risk Assessment Division with its Resolution Division so that it can identify problems early and take coordinated, timely action.

Focus of the audit

9. Our objective for this audit was to determine whether the systems and practices we selected for examination at the Canada Deposit Insurance Corporation were providing it with reasonable assurance that its assets were safeguarded and controlled, its resources were managed economically and efficiently, and its operations were carried out effectively, as required by section 138 of the Financial Administration Act.

10. In addition, section 139 of the Financial Administration Act requires that we state an opinion, with respect to the criteria established, on whether there was reasonable assurance that there were no significant deficiencies in the systems and practices we examined. A significant deficiency is reported when the systems and practices examined do not meet the criteria established, resulting in a finding that the corporation could be prevented from having reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively.

11. On the basis of our risk assessment, we selected systems and practices in the following areas:

• corporate management practices
• management of operations

The selected systems and practices, and the criteria used to assess them, are found in the exhibits throughout the report.

12. More details about the audit objective, scope, approach, and sources of criteria are in About the Audit at the end of this report.

Findings, Recommendations, and Responses

Corporate management practices

The corporation had good corporate management practices, but compensation was lower for the President and Chief Executive Officer than for other executives, and there was a weakness in risk management

13. We found that the corporation had good practices for corporate governance, strategic planning, and risk management. However, we found that the compensation range for the President and Chief Executive Officer was lower than the compensation ranges for the corporation’s other executives. We also found that the corporation did not set out its risk appetite and risk tolerance levels.

14. The analysis supporting this finding discusses the following topics:

• Corporate governance
• Strategic planning
• Corporate risk management

15. The corporation’s Board of Directors consists of the Chairperson and up to 5 other private sector members. In addition, 5 director positions are reserved for

• the Governor of the Bank of Canada
• the Deputy Minister of Finance
• the Commissioner of the Financial Consumer Agency of Canada
• 2 members from the Office of the Superintendent of Financial Institutions Canada (that is, the Superintendent, and a deputy or other senior officer)

In 2018, all of the 5 private sector directors were new appointees.

16. The board has formed the following committees:

• Audit Committee
• Governance and Human Resources Committee
• Risk Committee

17. The board has a charter outlining its mandate, including operational principles and expectations.

18. The board oversees the strategic direction of the corporation and ensures that significant business risks are identified and well managed.

19. Our recommendations in this area of examination appear at paragraphs 24, 25, and 30.

20. Analysis. We found that the corporation had good governance practices. However, the compensation range for the President and Chief Executive Officer was lower than the compensation ranges for the corporation’s other executives (Exhibit 2).

21. Weakness—Board appointments and competencies. We found that during the period covered by the audit, the compensation range for the President and Chief Executive Officer was lower than the ranges for the corporation’s other executives. The Governor in Council^{Definition i} sets the compensation range for the President and Chief Executive Officer. The Board of Directors established the compensation ranges for other executive positions on the basis of market standards.

22. This weakness matters because the discrepancy could limit the corporation’s ability to attract and retain qualified individuals to the President and Chief Executive Officer position, putting at risk the management of the corporation.

23. We also found that the corporation did not publicly disclose executive compensation—for example, in its annual report. Compensation is one of the corporation’s largest operational expenditures. Disclosing executive compensation or salary structures would promote transparency and be in accordance with the practice in government and the financial industry. Disclosure would also help stakeholders better understand salary structures and issues related to them.

24. Recommendation. The corporation should continue to engage with its responsible Minister and the Privy Council Office to address the issue related to the President and Chief Executive Officer’s compensation.

The corporation’s response. Agreed. The corporation will continue to engage with its responsible Minister and the Privy Council Office to review the total compensation structure of the President and Chief Executive Officer position in light of the expansion of the corporation’s mandate, legislative framework, and powers. The objective is to ensure that the corporation continues to have the ability to attract and retain qualified candidates for the President and Chief Executive Officer position.

25. Recommendation. The corporation should consider disclosing its compensation framework as well as the total compensation for its executive positions (for example, in its annual report), to be in line with the practice in government and the financial industry.

The corporation’s response. Agreed. The corporation will improve executive compensation transparency for Canadians while protecting the privacy of all its employees. To support this commitment, the corporation will conduct a review of the annual disclosures of both the compensation framework and the total compensation for senior executive positions of peer organizations in government and in the financial industry.

26. Analysis. We found that the corporation had good systems and practices for strategic planning (Exhibit 3).

27. Analysis. We found that the corporation had good systems and practices to manage risk. However, it had not set out its risk appetite and risk tolerance levels (Exhibit 4).

28. Weakness—Risk monitoring and reporting. We found that the corporation had not set out its risk appetite and risk tolerance levels to guide management decision making.

29. This weakness matters because risk appetite and tolerance levels would help the corporation identify a need for action; make informed, risk-based decisions; allocate resources; set priorities; and achieve corporate objectives.

30. Recommendation. The corporation should include risk appetite and risk tolerance levels in its risk identification and assessment processes.

The corporation’s response. Agreed. By March 2020, the corporation will transform its Enterprise Risk Management (ERM) program. The corporation has instituted a Risk Committee of the Board of Directors to provide oversight of the program and appointed a Chief Risk Officer to lead this effort. The corporation will articulate its risk appetite, define its risk tolerance levels, and develop an ERM framework. The corporation’s ERM program will drive strategic resource allocation and will guide management’s decision making going forward.

Management of operations

The corporation had good practices for managing its operations

31. We found that the corporation had good practices for managing its operations.

32. The analysis supporting this finding discusses the following topics:

• Management of members’ risk
• Management of resolution

33. The corporation provides deposit insurance against the loss of eligible deposits at member institutions in the event of a failure. The corporation insured deposits amounting to $807 billion as of 31 March 2019.

34. The corporation has a member risk assessment process, which actively monitors and assesses the ongoing performance of member institutions and their risk of failure. The purpose is to identify problems early so that appropriate action can be taken. The corporation uses a risk-based monitoring strategy, under which the level of monitoring is commensurate with the member institution’s level of risk. To help determine risk levels, the corporation has access to information from its member institutions and other financial safety net partners.

35. The corporation is Canada’s resolution authority—that is, to protect eligible deposits, it takes the lead in handling the possible failure of its member institutions. The corporation has a number of tools that it can use to help resolve a member institution’s failure.

36. The resolution tools used will differ depending on the size of the member institution. For example, an amendment to the Canada Deposit Insurance Corporation Act that came into force in 2018 added “bail-in” to the corporation’s suite of resolution tools. The bail-in tool is to be used only for Canada’s largest banks. The tool allows the corporation to take temporary control of a failing member institution and help restore it to viability by converting some of its debt into common shares.

37. For small to medium-sized member institutions, the corporation has various other mechanisms that it can use to protect depositors while minimizing its exposure to loss. The circumstances would determine which tool it selects. Among the factors to be considered are the size and complexity of the institution, as well as the current availability of private sector solutions. The tools available to the corporation include helping the institution become viable again, restructuring the institution, and reimbursing insured deposits.

38. The last time that the corporation experienced a member failure was in 1996. The corporation maintains a state of readiness through regular simulation exercises. These involve various scenarios featuring different sizes of member institutions, different resolution tools, different types of assets, and multiple concurrent member failures. The corporation’s readiness preparation also includes reviewing the lessons learned from failures experienced by its counterparts in other countries.

39. We made no recommendations in this area of examination.

40. Analysis. We found that the corporation had good systems and practices to manage its members’ risk (Exhibit 5).

41. Analysis. We found that the corporation had good systems and practices to manage its readiness to resolve the failure of a member institution (Exhibit 6).

Conclusion

42. In our opinion, on the basis of the criteria established, there was reasonable assurance that there were no significant deficiencies in the corporation’s systems and practices we examined. We concluded that the Canada Deposit Insurance Corporation maintained its systems and practices during the period covered by the audit in a manner that provided the reasonable assurance required under section 138 of the Financial Administration Act.