Bank of Canada says economy no excuse to delay financial reforms

Thu Sep 26, 2013 7:38pm EDT
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By Louise Egan

OTTAWA (Reuters) - A senior Bank of Canada official urged global policymakers on Tuesday to push ahead with financial system reforms despite economic weakness, saying financial stability is an important precondition for growth.

"Some have argued that, given the weak recovery, now is not the time for the broad financial sector reform being promoted by the FSB (Financial Stability Board). That argument is wrong-headed," Lawrence Schembri said in his first speech since being appointed as a central bank deputy governor in February.

He said the FSB, operating under the direction of the Group of 20 leading economies, closely monitors the effects of new regulations for unintended consequences.

Canada's big banks emerged relatively unscathed from the global financial crisis, buoyed by strong capital ratios and conservative lending practices.

They are well ahead of their U.S. and European peers in complying with higher capital requirements under the Basel III global standards.

Still, the Bank of Canada says it has identified some areas of the shadow banking sector, the market-based financing done outside the regulated banks, that merit closer monitoring.

In response to a question from the audience after his speech, Schembri said he saw a "potential vulnerability" in Canada's increasingly popular mortgage investment corporations (MICs).

These entities typically manage a pool of mortgages and many investors are attracted to them because of their higher yields, but the risks are also higher than with some other types of investment products.   Continued...

The Bank of Canada building is pictured in Ottawa July 19, 2011. REUTERS/Chris Wattie