International regulators and governments are missing the mark in many of their efforts to prevent a repeat of the financial crisis, Royal Bank of Canada chief executive officer Gordon Nixon says.
“Political rhetoric is distorting the cause of this recent crisis and potentially distorting the cure,” he told shareholders at the bank's annual meeting in Toronto Wednesday. “This crisis was not caused by Wall Street, executive compensation, nor proprietary trading, although they all played a part. The root cause of the crisis was the failure of the U.S. residential mortgage market,” he said, adding that “the basic requirement to qualify for a large mortgage in the United States was a pulse.”
Mr. Nixon noted that many of the largest companies that collapsed or failed in the crisis were not even banks but investment dealers, insurers, mortgage brokers, and government agencies.
“The bulk of the losses during the crisis arguably resulted from lending practices and excessive concentration related, primarily, to U.S. residential real estate and over-extended consumers, not those activities addressed by the proposed reforms,” he said. “While new regulation in response to the recent events is inevitable, it is critical that new standards not impede the ability of the market to operate efficiently.”
While he questioned the path that many G20 governments and regulators are heading down, he also urged them to work more closely together, saying it's concerning that reforms are emerging from several bodies without any coordination.
“While a few months ago it appeared as if there was a high degree of co-operation among the Financial Stability Board countries, we are now experiencing a divide with different countries trying to initiate rules that best suit their jurisdictions,” he said. “The unified response that was necessary and commendable during the darkest days of the crisis now risks being replaced by regulatory and legislative one-upmanship, as various governments pursue local agendas.”
He called on regulators to adopt global leverage limits, adding that he believes excessive leverage in the industry was perhaps the greatest contributing factor to the problems at many banks. Canadian banks are already subject to leverage rules.
And, while he said he agrees that it's important for banks to be conservatively capitalized, he said that “the current Basel III proposals, as they're referred to, are so complex and onerous that we run the risk of no agreement being reached.”
Those proposals, suggested late last year by global regulators, will be subject to negotiations among various national regulators in coming months.
“As these rules are tested, it will become evident, in my view, that many banks around the world cannot meet the standards without impairing their ability to lend money and contribute to economic growth.”
While the new rules are uncertain, banks are being forced to take a very cautious approach to investing, growing and spending excess capital, he added.
Shareholders at the bank's annual meeting voted more than 90 per cent in favour of an advisory resolution accepting the bank's compensation practices, the so-called "say on pay" vote.
