From an email message forwarding the article:

This is an example of why you want to focus on getting a publication or two out of your LL.M. Thesis in the next six months or so. This is the first publication from my dissertation–nearly 25 years later. It is not a refereed publication, but an invited submission. The editor, an early mentor, wanted to demonstrate the continuing relevance of the research direction, particularly given the current issues relating to Home Capital Corp.

One is better than none, but still…

Some of the regulation “conjectures” (to distinguish from stronger empirical findings‎) relate to regulation generally, while others are specific to financial institution regulation. If you know of someone with interests here, or interests in research development here, feel free to forward.

And, while current, still nearly 25 years late.

Contains slight post-publication edits. For example, a publication summary of the Ellen Russell study was erroneously described as a news release.


Bruce La Rochelle
Optimum, Vol. 47, Issue 2, June 2017


My interest in the impact of the regulatory delay and inaction in the world of Canadian financial institutions goes back to the 1990s. In my 1993 doctoral dissertation, Canadian Financial Institution Failures: The Pathologies of Regulatory Inaction, I studied regulatory behaviours associated with the closures of the Canadian Commercial Bank and the Northland Bank in 1985, and the closure of the Principal Group of Companies in 1987.

The conjectures or propositions formulated in this study dealt with issues that remain current. The objective in raising these points now is to lessen the possibility that history might repeat itself.

In 2012, the Canadian Centre for Policy Alternatives released a sponsored study by Wilfrid Laurier professor, Ellen Russell, on the Canadian banking industry, No More Swimming Naked: The Need for Modesty in Canadian Banking. From a publication summary concerning the report:

This report, by CCPA research associate and Wilfred Laurier professor, Ellen Russell, examines how banks work, why they are inherently prone to instability, and how banking crises spread-even to banks and banking systems that appear to be stable. The report cautions that current regulations have not eliminated problems with risk-taking and overconfident behaviour among banks, and since governments have no alternative but to support large banks when systemic stability is threatened, this additional security creates a perverse incentive for banks to increase their appetite for risk.

In 2013, Ms. Julie Dickson, the federal Superintendent of Financial Institutions, formally designated Canada’s six largest banks as “too big to fail”, involving an associated increase in regulatory oversight (Canadian Press 2013) and despite the fact that the international Financial Stability Board that same year had not identified any Canadian bank as being “systemically important”, or too big to fail. In 2014, the International Monetary Fund warned that the “too big to fail” circumstances, associated with bank concentration, was more serious in Canada than in the United States. While other countries are attempting to reduce the “too big to fail” risk through greater diversity of bank competition, bank concentration in Canada is increasing (Tencer 2014).

Thus, the issues raised in my academic work in 1993, relating to Canadian financial institution closures in 1985 and 1987, continue to be of contemporary relevance.


With respect to the closures of the Canadian Commercial Bank, the Northland Bank and the Principal Group, subsequent inquiries resulted in findings that the respective financial institutions were objectively insolvent for periods of years prior to their actual closure (Estey 1986; Code 1989). From the analyses of the three cases under consideration, various conjectures may be made as a means to explain similar behaviours in other circumstances. The term “conjectures” is a term found associated with conclusions in various behavioural studies (e.g., Feldman and March 1981: 174; Leblebici et al. 1991: 357). A dictionary definition of the term “conjecture” includes “the formation of an opinion based on incomplete information” (Oxford Living Dictionaries 2017). The term is considered to be synonymous with the term “proposition” as used by Bacharach (l989), in that the findings from the case studies are not considered to be at a level of precision to yet lend themselves to the generation of hypotheses:

Constructs may be defined as “terms which, though not observational either directly or indirectly, may be applied or even defined on the basis of the observables” (Kaplan l964: 55). A variable may be defined as an observable entity which is capable of assuming two or more values (Schwab l980). Thus, a construct may be viewed as a broad mental configuration of a given phenomenon, while a variable may be viewed as an operational configuration derived from a construct. …While both propositions and hypotheses are merely statements of relationships, propositions are the more abstract and all-encompassing of the two, and therefore relate the more abstract constructs to each other. Hypotheses are the more concrete and operational statements of these broad relationships and are therefore built from specific variables.

As Bacharach (l989: 500) points out, propositions and hypotheses are similar in nature, differing primarily in the degree of specificity which such terms lend to analysis. So what is intended through the conclusions in the dissertation is the establishment of reasonable research parameters meriting qualitative or quantitative inquiry.

Leblebici et al. (1991: 357) refer to conjectures as “speculative arguments”. A dictionary definition of the verb “speculate” includes “(to) form a theory or conjecture about a subject, without firm evidence” (Oxford Living Dictionaries 2017). It is submitted that the degree of speculation is lessened and the factual bases enhanced when such arguments are referenced, as here, to the commonalities of more than one case. In this respect, the conjectures made are comparable in nature to those made by Feldman and March (l981: 174), which were identified as conjectures based on a review of several case studies. Based on the current study, the conjectures generally surround the circumstances of regulatory delay, given that a principal finding of the inquiries into the financial institution failures was that the regulators should reasonably have acted at earlier periods than they did. Conclusions from the cases under consideration more precisely concern delays in the actions ultimately taken, following periods of inaction.

The conjectures are grouped relative to their relationship to three principal research domains: organizational behaviour, policy, and accounting

Organizational behaviour

(1) A primary cause of regulatory inaction will be the degree of ambiguity of the subject matter of regulation.

(2) A recommendation to close a financial institution will generally be made by regulators in a period later than the period when the financial institution became factually insolvent; regulatory behaviours associated with the closure of a financial institution will generally be associated with a period of inaction and indecisiveness as to the appropriate course of action to adopt or recommend.

(3) Regulatory inaction and regulatory indecisiveness are associated with conflicts between the regulator and the regulated on matters of subjective judgment. The judgment of management of the regulated financial institution will tend to dominate the resolution of such conflicts. The degree of influence of financial institution management in conflicts with regulators will be independent of prior interactions where conflict was not present. That is, the existence of prior, non-conflicting relationships between the regulator and the regulated are largely irrelevant as predictors of the outcomes of immediate conflicts or dominance of the resolution of such conflicts by the regulated.

(4) A confrontational attitude on the part of management of the regulated is not a precondition to dominance by the regulated of the regulator-regulated relationship. However, the greater the degree of conflict between the regulator and the regulated on matters of subjective judgment, the longer will be the period of regulatory inaction. Regulator-regulated conflict on matters of subjective judgment will be more extensive and regulatory inaction will be of longer duration in circumstances (i) where the regulated has a high and favourable public profile or (ii) where the personal financial fortunes of the regulated are largely dependent on a favourable regulatory outcome. If both factors are present, regulator-regulated conflict and consequent regulatory inaction are exacerbated by the interaction.

(5) Conflicts between the regulator and the regulated will not be resolved through direct debate, but instead will involve the engagement by both the regulator and the regulated of external parties, considered to be “experts”, to render opinions in support of the respective positions. Both the regulator and the regulated will generally be aware of the use of external advisors by the other. External advisors will be relied upon by the regulator and the regulated for the purpose of maintaining an appearance of rationality and objectivity in argument, as well as for the purpose of facilitating later attribution of fault.

(6) Management of regulated financial institutions will engage in image-maintenance behaviours in relationships with regulators, accountable politicians and the general public. Similarly and by contrast, regulators will engage in image-maintenance behaviours in relationships with accountable politicians and the general public, but not with management of regulated financial institutions. Thus, the regulator will generally be reluctant to communicate or share information with other regulatory bodies, including external auditors as a regulatory component. In connection with such image-maintenance behaviours, in relationships with other regulatory bodies, and with the general public, the regulator will not wish the use of external advisors by the regulator to be known, prior to circumstances arising which are perceived to necessitate fault attribution. By contrast, as between the regulator and the regulated, the use of external advisors will generally be known.

(7) Financial institution regulators will generally view the regulated as being composed of homogenous management across institutions, with such management being generally amenable to compliance strategies. Searching for and punishing financial institution “bad apples” through deterrence strategies is not regarded as a primary regulatory function, to the extent that it is regarded as a function of financial institution regulators at all.

(8) The longer the period of regulatory inaction, the greater will be the resistance on the part of regulators to taking action. In short, inaction feeds on itself as a function of time. However, once one regulatory agency has acted decisively, related agencies will follow, irrespective of the redundancy of regulatory action.

(9) The merger and sale of a financial institution will be preferred by regulators and accountable politicians, as opposed to the liquidation of a financial institution. A financial institution will be liquidated only after merger and sale options are perceived by regulators and accountable politicians to have been explored and exhausted. Having made a decision to merge or liquidate a financial institution, regulators and accountable politicians will not generally subject the decision to a later examination as to its propriety. For example, loss estimates by experts used as the basis of a closure decision will not later be assessed relative to actual losses incurred, in the interest of ex post assessment of the propriety of the closure decision.

(10) Patterns of regulatory inaction will be repeated, once circumstantial challenges to such patterns are perceived to be at an end.


(11) Regulatory inaction will be associated with (i) legislative imprecision as to the nature of the conduct to be regulated; (ii) inadequacies in the legislative mandate and legislatively-based sanctioning powers of the regulator; (iii) inadequacy of resources, relative to the regulatory mandate; and (iv) the degree of public profile of the regulator. Legislative imprecision and resource inadequacies, while subject to ex post categorizations by regulators as being of primary significance to inaction, will generally be shown to be of secondary significance; the primary cause of regulatory inaction remains the degree of ambiguity of the subject matter of regulation. With respect to the relationship of agency public profile to regulatory inaction, the lower the public profile of the agency, the longer will be the period of regulatory inaction. Factors associated with regulatory inaction are independent of the size of the regulatory agency, relative to the number or complexity of the persons or entities regulated. That is, similar patterns of regulatory inaction are to be found in both relatively smaller and in relatively larger regulatory agencies.

(12) The regulator will not act to close a financial institution in the absence of political support for so doing and irrespective of legislation enabling the regulator to act independently. The requirement of political support to close a financial institution contributes to inaction in effecting the closure. This is because politicians require similar justifications to those of regulators, through the engagement of external parties to render opinions favourable to the closure decision proposed by regulators. Politicians accountable for financial institution regulation will either (i) be uninformed or (ii) wish to be uninformed as to ongoing regulatory processes involving the potential for closure of a financial institution, in the interest that the appearance of accountability rest with the regulator.

(13) Payment of compensation by government to depositors as a result of a financial institution failure will generally be associated with and consequent upon an external finding of regulatory fault. Payment of compensation by government to depositors, as a result of a financial institution failure and prior to an external finding of regulatory fault, will be associated with (i) assurances made by the government as to the solvency of the financial institution prior to its failure and (ii) the size and institutional status of the depositor.


(14) Accounting representations as to the financial health of a financial institution will be relied upon and generally unchallenged by regulators in the absence of evidence of cash flow deficiencies on the part of a financial institution. The challenge to accounting representations will primarily be a consequence of objective financial distress. The formal challenge to such accounting representations will emanate from experts engaged by the regulators, rather than from the regulators themselves.

(15) The attitude of regulators towards accounting representations, including a lack of challenge to such information, will be independent of whether the information is in the public domain or available solely to regulators. Inaction and indecisiveness of a regulatory agency will generally be found to be associated with trust and assumptions as to shared values on the part of the regulator, with respect to financial institution management and their representatives, particularly external auditors and external legal counsel. Such trust and assumptions as to shared values will be associated with the accounting representations made by management of the financial institution.

Contributions to regulatory practice

Regulatory delay in the closure of a financial institution may generally be viewed as prejudicial to the public interest. In the three cases under consideration, delays in the closures of the financial institutions were found in subsequent inquiries to have resulted in increased taxpayer losses over those that would have occurred if the institutions had been closed in earlier periods. The conjectures from the analysis of the three financial institution failures result in suggestions for improved regulatory conduct. The suggestions are now discussed.

Regulatory history: comparative and specific

The practices of the Canadian Commercial Bank and the Northland Bank leading to their financial difficulties had been identified in the popular press shortly after their l985 closures. Throughout late l985 to the release of the report of Mr. Justice Estey in August of l986, regulatory behaviours had also been the subject of extensive press coverage and commentary. During this same period, the patterns of deferral of loan loss recognition continued on the part of Principal Group management, notwithstanding the existence of strong recommendations by regulators to close the institution, particularly as of l984. In the three cases under consideration, the appreciation by regulators of past failures and regulatory reactions to the same appear to be largely absent, leading to crisis-based reactions to immediate circumstances. In effect, regulators don’t learn from past mistakes or successes, largely because there is no memory of them in the larger regulatory body. Accordingly, it is suggested that the potential for repetitive patterns of delay be countered by a broader appreciation in regulatory bodies of their past action.

While the regulator may too willingly attribute a “baseline” of behaviours to financial institution management, the regulator does not generally evidence an appreciation of or incorporation of knowledge of regulatory behaviours or experiences in other jurisdictions. Since there are significant similarities in the problems facing regulators, such as the basis of loan valuation and third party accommodations, it is suggested that regulators incorporate a greater appreciation of extra-jurisdictional behaviours in their own actions.

Disaster plans

Much of the regulatory delays examined may be attributed to uncertainties as to the appropriate course of action to take, plus general unfamiliarity with the type of crisis at hand. Such unfamiliarity in situations of crisis leads regulators to wish to obtain comfort before acting, through obtaining a plethora of expert opinions and further expert opinions to substantiate earlier expert opinions. Decisiveness of action is a function of an appreciation of the risks attendant to such action and a willingness to take such risks; no one can be certain of the degree of correctness of one’s choice of action until after the fact. With respect to scientific, computer and other facilities, much is made of “disaster plans”, which can be as simple as a fire drill. The idea is that one plans for the disaster and how one would react to its occurrence. It is suggested that regulators would benefit from the formulation of similar “disaster plans”, such as by a “financial institution fire drill”.

Scepticism with respect to accounting information

From the analysis of the cases under consideration, it is clear that most management representation as to the financial health of the financial institutions were subject to the exercise of significant judgment. Examples of such judgment include the assessment of the time frame over which it was considered reasonable to defer writing down loans, as well as associated revenue recognition strategies based on assumptions as to recovery through increased security values. Notwithstanding the judgments exercised and the consequent degrees of variability of the numerical representations, regulators appeared to largely treat such representations as being representations of absolute states. This was particularly evident in regulatory audit programs which largely involved recomputations and clerical checks for the accuracy of numbers which represented but approximations. Conclusions as to solvency and insolvency were based on such recomputations. In a general sense, it is revealed in the cases that accounting representations as to solvency often masked factual insolvency, while accounting representations as to a degree of insolvency often masked factual insolvency of a far more serious degree. Accordingly, it is suggested that regulators adopt a degree of scepticism with respect to accounting representations, in recognition of its judgmental and approximate qualities. Conclusions upon which regulatory actions are based should not be primarily based on accounting representations and should evidence a willingness to challenge any such representations made.

Recognition of institutional effects and misperceptions

Institutional effects which are viewed as affecting regulatory delay include assumptions as to “baseline” or minimum conforming behaviours on the part of financial institution management, as well as general assumptions as to a homogeneous population amenable to regulatory compliance strategies. In the cases of the three financial institutions under consideration, members of management of two of the three financial institutions (the Northland Bank and the Principal Group) were, as evidenced by confrontational attitudes, clearly not amenable to compliance strategies. That being the case, it is suggested that regulators evidence a greater willingness to move along the compliance-deterrence continuum, when confrontational behaviours by the regulated are encountered.

The political dimension of closure actions: regulatory reluctance to act or inability to act?

In discussing the political dimensions of regulatory delay and in the general conjectures from the case studies, there is a general reluctance on the part of a regulator to act independently, particularly in the absence of political support. Regulators are very thorough in documenting the events and decision processes leading up to the closure of a financial institution, as is evident from the documentation filed in support of the various inquiry reports. However, while the regulator may be aware of the fallibility of political judgments, the regulator does not appear inclined to document, however respectfully, reservations with respect to those judgments. As a consequence, one is left with the impression that the regulator may be easily swayed by considerations of political eventualities in assessing the merits of particular regulatory action.


Regulatory delays become a function of political impasses, independent of legislative constraints. It has been noted that politicians are not inclined to legislatively alter or expand the powers of financial institution regulators, other than as a result of circumstances of “crisis”. Thus, it may be argued by regulators that they had the inability to act to curtail objectionable behaviours. Arguments to this effect were made by federal and provincial regulators during the course of the inquiries into the collapses of all three financial institutions. However, even within legislative constraints, compliance strategies were available to the regulators, coupled with extreme sanctioning powers under the legislation at the time. It was open to regulators of the Principal Group to revoke the licenses of the investment contract companies, at any time during their existence. Similarly, it was open to regulators of the Canadian Commercial Bank and the Northland Bank to object to the accounting policies adopted, declare the banks insolvent and to thereby void their deposit insurance coverage.

Management of the three financial institutions showed an attitude that such extreme measures were highly unlikely to be adopted by regulators. It is suggested that the extremity of the sanctioning measures, coupled with the regulator’s uncertainty, exacerbated by alarmist scenarios of systemic financial chaos predicted by the regulated, result in regulatory reluctance to act effectively becoming an inability to act. The regulator becomes catatonic, evidencing extreme discomfort with respect to making absolute decisions, given a knowledge that if anyone will be blamed for negative consequences, it will likely be the regulator.

Based on the foregoing, it is suggested that regulators should be more willing to force responsibility to political levels, given that closure responsibilities are effectively at that level, as demonstrated by the case studies. From the case studies, it is observed that direct political knowledge of problems with a regulated financial institution is most evident with respect to the Principal Group. By contrast, political knowledge of the financial difficulties of the Canadian Commercial Bank and the Northland Bank only became evident at the time when bank management directly appealed to politicians for financial assistance. In the case of the Principal Group, various inquiries found fault at both the political and regulatory levels, while with respect to the Canadian Commercial Bank and the Northland Bank, attributions of fault were largely limited to regulatory actions, including the external auditors as a regulatory component. The absence of findings in relation to the auditors of the Principal Group was a function of the restrictions in the inquiry mandate.

Since ultimate accountability for regulatory actions is at the political level, it is suggested that regulators may wish to more readily document their own reservations with respect to political decisions. The reason for such documentation: a successful political deflection of responsibility is to attribute fault to the regulator, based on such factors as (i) ignorance at a political level to the “true” state of affairs, and (ii) lack of objections from regulators as to the political actions taken.

Looking forward

Regulatory forbearance is regarded as a matter of contemporary fact and concern, in relation to the timing of closures of insolvent banks (Cole and White 2017). There is a comparable interest in other jurisdictions in relation to the history of delays in financial institution closures, and the causes of such delays (Gordon and Sutton 1994). It is therefore hoped that the foregoing findings will be of interest to contemporary regulatory theory and practice, both in relation to financial institution regulation, as well as generally.

Bruce La Rochelle Ph.D. practises law in Ottawa. He is also a Chartered Professional Accountant and a part-time instructor at the Telfer School of Management.



Bacharach, S.B.
l989 Organizational theories: Some criteria for evaluation. Academy of Management Review 14: 496-515.

Canadian Press
2013 “Canada’s big 6 banks are too big to fail, regulator says“, Canadian Press via CBC News, March 26.

Code, W.E.
1989 Final Report of The Inspector. Edmonton, AB: Government of Alberta Publications.

Cole, R.A. and L.J. White
2017 “When Time Is Not on Our Side: The Costs of Regulatory Forbearance in the Closure of Insolvent Banks”. Journal of Banking and Finance, forthcoming.

Estey, Hon. W.Z.
1986 Report of The Inquiry Into The Collapse of The CCB [sic] and Northland Bank. Ottawa, ON: Supply and Services Canada.

Feldman, M.S. and J.G. March
l981 Information in Organizations as Signal and Symbol. Administrative Science Quarterly 26: 171-186.

Gordon, P.L. and T. Sutton
1994 The changing business of banking: a study of failed banks from 1987 to 1992. Washington, D.C.: U.S. Congressional Budget Office.

Kaplan, A.
1964 The Conduct of Inquiry. San Francisco, CA: Chandler Press.

Leblebici, H., G.R. Salancik, A. Copay and T. King
1991 Institutional Change and the Transformation of Interorganizational Fields: An Organizational History of the U.S. Radio Broadcasting Industry. Administrative Science Quarterly 36: 333-363.

Russell, Ellen 2012 No More Swimming Naked: The Need for Modesty in Canadian Banking. Toronto, ON: Canadian Centre for Policy Alternatives.

Schwab, D.P.
l980 Construct validity in organizational behavior. Contained in B.M. Staw and L.L. Cummings (Eds.), Research in Organizational Behavior, Vol. 2, 3-43. Greenwich, CT: JAI Press.

Tencer, Daniel
2014 “Canada’s ‘Too Big To Fail’ Bank Problem Is Worse Than U.S.: IMF“. Huffington Post Canada, January 4.


About brucelarochelle

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