Banks stone-faced on 'super regulator' move

Date: Wednesday, March 25, 2009
Author: Eoin Callan, Financial Post

Bay Street is mobilizing its army of lobbyists to resist moves toward a "super regulator" that would tighten controls of the country's banks in the wake of the financial crisis.

The fresh political offensive comes as policymakers weigh the need for a new system-wide approach to managing risks in the banking system designed to protect the economy from shocks. The banks fear a new unwelcome model for overseeing the largest financial institutions will emerge from the upcoming summit of leaders of the Group of 20 nations in London on April 2.

"With the G20 happening in April, there is a growing debate on this issue," said a leading industry lobbyist. "We would rather participate in that debate than have it essentially imposed on us."

Senior executives are expected to speak out publicly in the coming weeks, while industry operatives have been instructed to knock on doors on Parliament Hill.

"We think there should be a debate in this country about a Made-in-Canada approach," the lobbyist said.

The industry push follows several weeks of internal discussions about the threat to banks' future profitability from a backlash against risk-taking. In particular, top banks are digging in their heels against any move to give Bank of Canada a leading role in overseeing the financial sector.

"We just don't think that is practical or workable here in Canada," said the lobbyist.

A preferable alternative, several bank executives and lobbyists said in interviews, would be an expanded mandate for the Office Superintendent of Financial Institutions (OFSI), which uses a principles-based rather than a rules-based approach to supervising banks.

The counter-offensive from the industry comes as central banks are being singled out in the run up to the summit on the financial crisis in London to play a greater role in overseeing systemic risks.

Tomorrow, the Obama administration is expected to outline a proposal for a new systemic risk regulator that will be a highlight of the U.S. president's contribution to the summit.

Tim Geithner, Treasury Secretary, said Tuesday that under the new plan "all institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk-taking."

Appearing next to him on Capitol Hill, Ben Bernanke, chairman of the Federal Reserve, said the U.S. needed a new oversight body with a mandate "not just to protect the soundness of individual institutions, but to protect the stability of the system as a whole."

Setting limits on banks' exposures and activities based on an overall assessment of risks to the economy would mark a departure for Canada and other industrialized countries, and makes Bay Street nervous.

With good reason, according to Barbara Matthews, a former foreign diplomat for the U.S. Treasury. A systemic approach to managing the exposures of the banking sector will increase the "regulatory burden" and "decrease risk tolerance", said the newly-minted consultant to international financial institutions.

Banks will also likely face calls for a new tax or fee to cover the costs of future crises once the full extent was known of the risks taken by Canadian taxpayers to safeguard the banking system and underwrite illiquid assets, according to Viral Acharya, a professor at the NYU Stern School of Business.

Bay Street officials stressed that the central bank had a role to play, as an adviser to the country's banking watchdog.

"The Bank of Canada is well positioned to monitor and pass intelligence along to OSFI. It is not well position to act as a regulator," said one lobbyist.

Another lobbyist held out promise for future co-operation between OSFI, the central bank and a planned new national securities regulator.

"But putting it all together in one institution would be a real experiment for Canada," the lobbyist cautioned.

There was also opposition on Capitol Hill to concentrating banking oversight in the hands of the Fed.

"Over the past decade, the Fed has demonstrated an inability to manage the internal conflict between its role as monetary authority and its partial responsibility for supervising bank holding companies and their subsidiary banks," Christopher Whalen, of Institutional Risk Analytics, said in testimony to Congress.

"The Fed's internal culture, in my view, is dominated by academic economists whose primary focus is monetary policy and who view bank supervision as a troublesome, secondary task," he said.

But Ms. Matthews, the former Treasury official, said banks in the US and Canada were going to have to learn to live with a new system-wide oversight, adding that "getting all hung up on form at this point is probably counterproductive."