The global banking industry is undeniably interlinked, and the banking crisis of 2008 exposed good reasons for international co-ordination on banking regulation. The question, however, is how far global institutions should be able to go to set banking regulations for domestic institutions around the world – such as Canada’s.
The first round of reform last year saw a list of 29 major global banks, insurers and other financial firms being designated as “systemically important” on a global scale and therefore too big to be allowed to fail. New rules required them to hold more capital in reserve to try to ensure they are conservatively managed and more stable in the face of crisis.
No Canadian banks were put on that list, but Canada could be significantly affected by the next tier of reform now under way. It will require countries to designate their “too-big-to-fail” firms, and impose new regulation and capital requirements on them. Regulators have pledged to have the new rules ready by November, but Canadian banks argue that higher reserve requirements would stifle growth and are unnecessary, given their demonstrated strength through the last crisis.
It would be difficult for Canada to reject the global standards outright, given our commitments as a member not only of the G20, but also of the new global Financial Stability Board – headed by Canada’s Mark Carney – and the Basel Committee on Banking Supervision, which is drafting the regulatory standards. But Ottawa needs to continue to push for as much flexibility as possible in how local authorities implement the Basel standards, recognizing that some countries already have different practices, which have led to different, generally favourable outcomes.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has rightly argued that this country should not be forced to implement someone else’s one-size-fits-all rules. Business practices and internal risk-management policies vary around the world, and countries are not all starting from the same base. There is good reason to learn from the experiences of global banks devastated by the 2008 financial crisis, and it would be foolhardy to assume Canadian banks are simply immune from danger. But the price of global co-operation ought not to be the loss of all domestic control.