Canadian financial institutions should not be complacent even though they fared better than their international peers during the financial crisis, the superintendent of the agency that oversees Canada’s banks warned Monday.
Julie Dickson, who heads the Office of the Superintendent of Financial Institutions, said the banks, insurers and other major financial sector players must resist the temptation to feel that, given their strength, they should be allowed more leeway.
“Regulatory policy-makers must also recognize that capital rules are only effective if they are accompanied by enhanced supervision,” she told the Economic Club of Canada in Toronto.
“Too many people are advocating increased capital as the cure-all, but it is not an effective treatment if it is not accompanied by enhanced supervision.”
Dickson also urged Canadian banks to guard against loosening historical underwriting standards in a race to compete with other lenders as low interest rates entire customers to borrow more.
“The message from OSFI to financial institutions is that current levels of interest rates have already made borrowing extremely attractive to all borrowers,” she said.
OSFI has said that Canadian banks must meet new rules for capital requirements early in the transition period, which starts in 2013.
During a closed-door meeting with bank executives last week, Bank of Canada governor Mark Carney and JP Morgan Chase chief executive Jamie Dimon clashed over the tougher financial regulations, the Financial Times reported.
Dimon has been fighting rule changes that would require the world’s largest banks to keep larger capital reserves.
The Bank of Canada confirmed Carney attended the meeting, but would not say anything about what happened.
The Canadian central bank did say it has “been engaged in constructive dialogue with a wide range of stakeholders, both domestic and international, as we move forward through the financial sector reform process.”
Terry Campbell, president and chief executive of the Canadian Bankers Association, noted that the Canadian banks are well positioned to meet the coming requirements, but worried it would place them on an uneven playing field when it came to competing with international rivals.
“It matters very much what the rest of the world does and that’s still an open question, how regulators and supervisors will interpret how to apply the rules,” he said.
Campbell noted the bigger issue for the banks isn’t just new capital rules coming into place.
“If you look at the whole range of regulatory requirements, the new rules, new measures and new standards that have come in as a result of the financial crisis, it is more a question of the sheer volume, the pacing and the sequencing of the rules,” he said.
“It’s all happening at the same time and the problem is that this is the biggest regulatory implementation exercise that Canadian banks have ever gone through.”
Rick Waugh, vice-chairman of the Institute of International Finance and president and chief executive of Scotiabank, said banks have made significant progress on capital, liquidity, risk management, and improving the quality of their assets.
“We recognize in the industry that we need to keep making progress in these areas,” he said Sunday.