OTTAWA and TORONTO -- Throughout the financial crisis, Canada's financial authorities and bankers have earned praise for their conservative approach to policy and lending. Emboldened, they are now trying to make the global regulatory system look a little more Canadian.
Bank of Nova Scotia chief executive officer Rick Waugh says the "world can learn from Canada," a forceful statement that comes a week after Bank of Canada Governor Mark Carney called on U.S. and European bankers to change an attitude he says borders on hubris.
Both speeches come ahead of the next attempt by international policy makers to further define the broader pledges they've made to overhaul financial regulation in the name of avoiding another credit crisis. Finance ministers and central bank governors from the Group of 20 are set to meet in St. Andrews, Scotland, on Friday and Saturday as they work toward a deadline of next year to implement the first phase of rule changes their leaders demanded at their summit in Pittsburgh in September.
"As we rebuild the global financial system and the new regulatory framework, international regulators and policy setters could learn a lot from Canada's example of a system that survived the crisis in good shape," Mr. Waugh said in the text of his speech to the Canadian Club in Toronto yesterday.
Mr. Waugh and Finance Minister Jim Flaherty have good reason to attempt to assert themselves in the debate over new regulatory standards. On some issues, such as leverage ratios and reserve capital, G20 negotiators are trying to catch up with the Canadian standards. But on others, such as guarding against systemic risk, Canada's banks risk getting swept up in changes that U.S. and European officials deem to be necessary to control their much bigger banks and assuage their far more cynical voters.
This new Canadian assertiveness is most evident around the debate about what to do with financial institutions that play so large a role in the financial system that they are "too big to fail."
One of the most difficult aspects of the G20 debate on financial regulation is how to avoid the collapse of institutions such as Lehman Brothers and the resulting drain on the public treasury. Proposals for avoiding a repeat of such a catastrophe range from breaking large banks into smaller companies, to having these institutions draw up "living wills" that would describe how their debts would be settled in the event of bankruptcy.
While sympathetic to the intent, Canadian officials and bankers are increasingly vocal in their skepticism about the wisdom of designating any financial institution as systemically important.
"We're going to have some discussion about this whole issue of financial institutions that are, so-called, too big to fail," Mr. Flaherty said yesterday of the upcoming G20 talks, according to Reuters. "We need to talk more about that. We don't want to create moral hazard in the financial systems around the world."
Julie Dickson, the head of Canada's banking regulator, is even more adamant, saying in an interview last week that "there should not be" a policy that designates institutions as a systemic risk, noting that credit-rating agencies already give higher scores to banks that are perceived as being too big for government to allow to fail.
Mr. Waugh, who is a member of the board of directors of the Washington-based Institute of International Finance, an association that represents most of the world's major banks, said yesterday that "we must allow for big and small institutions to fail, but in an orderly and controlled fashion."
To deal with the risk of a major financial institution collapsing, Mr. Waugh proposed something akin to international bankruptcy rules that would make clear to everyone what happens after a failure.
But Canada's efforts to reverse the drift toward designating banks as too big to fail could fall victim to the priorities of the U.S. and Britain, where governments are under political pressure to restrain their lenders.
Canada's policy makers and bankers are still earning praise for trying. "The Canadian reaction to what is being proposed is caution, and I think that's right," said Bill Robson, president of the Toronto-based C.D. Howe Institute.
"Designating institutions as systemically important kind of misses the point. For Canada to sign on would be adopting a remedy quite different from what our experience suggests is needed."