What Is a Schedule I Bank?
The term Schedule I bank refers to one of the structures used to classify financial institutions in Canada. This category is associated with wholly domestic banks. As such, they neither affiliated with nor subsidiaries of foreign institutions. In order to be classified as a Schedule I bank, an institution must take customer deposits.
The Schedule I designation is part of Canada's Bank Act, which regulates all financial institutions in the country. There are 36 domestic or Schedule I banks in Canada, including the country's largest six institutions.
Understanding Schedule I Banks
The Bank Act was established in Canada in 1871 as a way to regulate the country's banks and the banking industry. This law is reviewed on a regular basis in order to meet the needs of and changes in Canada's economy and the marketplace. The act covers the type of powers banks have, formalities associated with incorporation, how they're organized, capital structure, corporate governance, and other issues.
Banks and other financial institutions are classified under three different categories—Schedule I, Schedule II, and Schedule III banks. Each category signifies a bank's ownership structure. While the last two are related to foreign banks, Schedule I banks are domestic institutions that must accept deposits from their customers. This means they are not subsidiaries of foreign banks even if there are foreign shareholders who own stock.
Canada's major chartered banks are included on the list of Schedule I banks. Also included on the list are regional banks and online institutions. The majority of credit unions and certain government-owned institutions are not on the list because these organizations are regulated by provincial and territorial governments rather than the federal government.
- A Schedule I bank is a Canadian financial institution regulated by the Federal Bank Act.
- Schedule I banks are domestic institutions that must take customer deposits.
- The big six banks, such as the National Bank of Canada and the Royal Bank, make up a large portion of Schedule I banks.
As noted above, banking regulations are reviewed and amended on a periodic basis. This is to ensure that the industry keeps up to date with changes that take place in the economy and the Canadian marketplace.
Prior to 2001, individual shareholders of Schedule I bank stock weren't able to hold more than 10% of any class of shares and were required to be widely held. But that changed with Bill C-8, which was implemented on October 24, 2001. The bill aimed to provide greater protections to consumers while promoting growth in the financial sector and boost competition in Canada. Under the bill, ownership regimes of banks are based on equity size where:
- The small banks are those with less than $1 billion in equity
- Mid-sized banks have equity ranging between $1 billion and $5 billion
- Large banks' equity exceeds $5 billion
Institutions with over $5 billion in equity are required to have no person owning more than 20% of the voting shares or 30% of the non-voting shares. Therefore, they must still be widely held. Institutions with equity of $1 billion to $5 billion have fewer restrictions on ownership as they are only subject to having a public float of 35% of voting shares. Institutions with less than $1 billion in equity have no ownership restrictions.
Banks are generally considered a safe investment, but they are prone to operational, liquidity, and market risk.
Schedule I Banks vs. Schedule II Banks vs. Schedule III Banks
As mentioned above, there are two other categories of financial institutions as per the Bank Act. Schedule II banks are subsidiaries of foreign banks that are allowed to do business in Canada.
Like Schedule I banks, these institutions also accept deposits but can be owned by non-residents. They are just as common as their Schedule I counterparts and are also regulated by Canadian banking laws. Changes to banking structures under Bill C-8 also affected Schedule II banks. Shareholders of large Schedule II banks—those with more than $5 billion in equity—are not allowed to own more than 20% of voting shares or 30% of non-voting shares.
Schedule III banks, on the other hand, are foreign institutions that are authorized to do business in Canada with certain restrictions. These banks, though, are not regulated under the Bank Act.
Examples of Schedule II banks include Citibank Canada and Amex Bank of Canada. Schedule III banks include Bank of America and Capital One.
Examples of Schedule I Banks
As indicated earlier, the list of Schedule I banks includes the country's major chartered banks. Collectively, they're known as the Big Six Banks. They are as follows:
- Bank of Montreal (BMO), which was established in 1817
- Bank of Nova Scotia (Scotiabank), the third-largest Canadian bank by deposits and market capitalization
- Canadian Imperial Bank of Commerce (CIBC), which was established in 1961 through the merger of the Canadian Bank of Commerce and the Imperial Bank of Canada
- National Bank of Canada, the sixth-largest commercial bank in the country
- Royal Bank of Canada (RBC), which is a diversified financial services company
- Toronto Dominion Bank (TD), which is one of the top online financial services firms, serving more than 25 million customers worldwide