The US fashion designer Tommy Hilfiger once said that it was a mistake to rely on past successes, “because then you become complacent”. Whether or not Julie Dickson, Canada’s leading financial regulator, is a dedicated follower of fashion, she is certainly not going to fall into the complacency trap.
Canada’s financial system, its banks and its regulators have been praised countless times for weathering the 2008/09 financial crisis better than any Western economy. The country had, and still has, well-capitalised and well-managed financial institutions, taking carefully calculated risks. Its banking system has been ranked the most sound in the world for the past five years by the World Economic Forum.
To cap it all, Canada's Office of the Superintendent of Financial Institutions (OSFI) keeps tight control over all matters within its remit. Ms Dickson, the superintendent, says: “OSFI has a very clear mandate which is focused on prudential issues, and I think that was relatively rare in the world prior to the crisis.”
Regulatory risks
Ms Dickson admits that there is a “huge danger” of banks and regulators becoming too relaxed about the strengths of Canada’s financial system, thereby failing to detect future problems. “At OSFI, the tone at the top matters, so we continue to preach the message that we cannot be complacent,” she says. “We talk to financial institutions about it, too, because they face the same risk of complacency that a supervisor does.”
Ms Dickson was appointed superintendent of OSFI in 2007, for a seven-year term. Before that she was acting superintendent, and before that an assistant superintendent. Prior to joining OSFI she worked in the financial institutions practice of a major consulting firm.
One of her objectives is to ensure a level regulatory playing field internationally. If other jurisdictions have regulations that are nowhere near as strict as Canada’s, it could encourage regulatory arbitrage to Canada’s detriment. In that respect, being a member of the Financial Stability Board helps. Ms Dickson sits on the board’s steering committee, chairs its Supervisory Intensity and Effectiveness Group, and sits on its Supervisory and Regulatory Co-operation Sub-Committee. With Mark Carney, governor of the Bank of Canada, as the FSB’s chairman, Canadian views are well represented.
Bankers worldwide have been suggesting that the G-20’s reform of global financial regulation – spearheaded by the FSB – should be delayed. Ms Dickson is adamant that most of the reforms must go through on time, especially the Basel III ones on capital and liquidity, which countries have until 2019 to implement anyway – “that is an eternity in the financial services sector”, she says. OSFI has decreed that Canadian banks, however, must meet the capital rules by the first quarter of 2013.
Recovery drive
As for recovery and resolution planning, Ms Dickson says banks are definitely embracing the recovery part because they can see “there’s a lot of value in it so they are certainly not pushing for a delay”. “Resolution planning is probably a bit different,” she concedes. “I can understand people suggesting this could be delayed because they don’t like to focus on their ultimate demise.”
Along with 14,000 others, OSFI lodged concerns with the US authorities about the Volcker Rule in the Dodd Frank Act limiting proprietary trading, saying it could hinder the ability of foreign financial institutions – especially Canadian – to manage their risks. The rule exempts proprietary trading in certain instruments, in particular US treasuries, and OSFI has asked that this exemption be widened to include foreign government securities.
“Obviously, the US authorities are looking at all the comments they received and are deciding how to deal with them,” says Ms Dickson, whose office has also had a meeting with US authorities on the matter.
What does she believe are the main threats to Canada’s financial system? She refers to the five “key risks” identified in the Bank of Canada’s latest Financial System Review. “The first is the European sovereign debt crisis,” she says. “If that were to escalate it would be a threat not only to us but to other countries. The second is an economic downturn in advanced economies, amplified by weak banks, which could affect an open economy such as ours. The third is a disorderly resolution of global current account balances – that’s been on the list for years.
“The last two are specific to Canada: the financial stress in our household sector, caused by Canadians having record levels of debt, which is something we are keeping a close eye on; and, lastly, low interest rates, which though not unique to Canada are feeding household debt here.”
In times like these, Canada’s top regulator is right not to rest on her laurels.
