Bank Bankruptcy in Canada: A Comparative Perspective

During the Great Depression (1930-1933), over 9,000 banks failed in the United States, while not a single bank failed in Canada. In fact, there have been relatively few instances of bank bankruptcy proceedings in Canada from 1867 to present. Approximately eleven bank bankruptcies have been referenced in the case law to date. The first bank bankruptcy appears to be the Bank of Prince Edward Island (1882). Next came the Exchange Bank of Canada (1883), [FN3] followed by the Maritime Bank (1887), the Central Bank of Canada (1887), La Banque Ville Marie (1899), the Farmers Bank of Canada (1910), the Monarch Bank of Canada (1910), Ontario Bank (1910), [FN9] the Sovereign Bank of Canada (1911), the Bank of Vancouver (1916) and the Home Bank of Canada (1923). It would be another four decades before the next bank bankruptcy took place in 1967, when the Bank of Western Canada was wound up. The few Canadian banks that suffered financial difficulties through the Great Depression, World War II and its aftermath were absorbed into larger banks without creating significant difficulties for their creditors or depositors. Two decades later, Northland Bank (1985) was wound up, followed by the Canadian Commercial Bank (1985). The liquidation of both banks took over a decade to complete. Following the bankruptcies of these Western Canadian banks, Justice William Z. Estey led a commission examining the collapse of the Canadian Commercial Bank and Northland Bank (the “Estey Report”). In this 1986 report, the Commission described a set of circumstances involving severe corporate governance failures and a set of improvident lending procedures not unlike the current situation in the United States. Following the Estey Report, a number of changes were made to the regulatory framework for supervising banks in Canada. The most recent Canadian bank bankruptcy was the Bank of Credit and Commerce International in 1991. This article provides an overview of the legal regime for bank bankruptcy in Canada. The Global Bank Insolvency Initiative: Legal, Institutional, and Regulatory Framework to Deal with Insolvent Banks (“GBI”) is used as the framework for locating the Canadian system within an international context. Surprisingly little has been written about bank bankruptcies in North America, with much of the academic focus on developing countries. An obvious explanation for this is that in North America governments do not let banks (or at least major banks) fail. Even if this explanation is accurate, government solutions will often be in the shadow of the formal options for bank failure. Accordingly, an understanding of these options is crucial to comprehending and predicting government action in this regard. An analogy may be drawn to the government bail out of the automobile industry which was set into motion in 2008 and was described as “orderly bankruptcy.