Skip to main content

Former Bank of Canada governor David Dodge says the new rules could cut bank pretax profits by as much as 20 per cent

Sean Kilpatrick/The Globe and Mail

Canada is being dragged into "overzealous" financial regulation by a global campaign to root out risky bank lending practices, former Bank of Canada governor David Dodge argues in a new report.

Meeting tighter new capital, liquidity and leverage rules could cut bank pretax profits by as much as 20 per cent, Mr. Dodge warned in a report being released Thursday by the C.D. Howe Institute.

Regulators are losing sight of efficiency in their drive to promote stability in the banking system, he said.

Story continues below advertisement

"Little effort has been directed at ascertaining the least-cost way of achieving stability goals," he writes in the report, Financial Regulation and Efficiency: Tradeoffs in the-Post Financial Crisis Era. "Governments around the world have demanded stability at any price."

Inefficient and overly precise "American-style" regulation will "cabin, crib and confine" Canadian financial institutions, according to Mr. Dodge.

The new rules have been pushed on Canada by the international Financial Stability Board, an association of regulators that advises G-20 countries, and have been gradually tightened since the financial crisis, with more changes to come by 2019. The FSB is chaired by Bank of England Governor Mark Carney, Mr. Dodge's successor at the Bank of Canada.

For example, the FSB issued a proposal in November that would require banks to hold equity and bonds equivalent to 16 to 20 per cent of their assets to shield taxpayers in a collapse.

"There was tremendous pressure on the Canadian authorities to fall in line with that … because we didn't want to be offside with the world," Mr. Dodge said in an interview.

"Our folks were dragged along by this international pressure."

Mr. Dodge acknowledged that tighter rules were needed. But he lamented that Canada has acted as the "good boy scout," going "above and beyond" other countries in imposing stricter capital ratios for banks.

Story continues below advertisement

"We've gone faster in implementing the capital rules than the Europeans, which has made it tougher for our banks competing against the Europeans in global markets," he said. "We could have been less aggressive."

In the report, Mr. Dodge pointed out that financial regulation held up well in Canada during the 2008 financial crisis – a regime that relies more on principles than strict rules.

The Canadian system relies on a "continuing dialogue" between large banks and insurers and key federal regulators – the federal Office of the Superintendent of Financial Institutions, the Finance department, the Bank of Canada and Canada Deposit Insurance Corp.

"We in Canada would be well advised to stick with our pre-2008 principles approach to prudential regulation," Mr. Dodge said.

Canadian financial consumers benefit when there is a "co-operative relationship" between financial institutions and regulators, he added.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter