October 1, 2009 / 3:49 PM / 8 years ago

Bank regulator urges caution on world rules

5 Min Read

<p>People walk past a Royal Bank of Canada branch in Ottawa August 27, 2009.Chris Wattie</p>

OTTAWA (Reuters) - Canada's top banking supervisor, Superintendent of Financial Institutions Julie Dickson, cautioned on Thursday against international regulators rushing into financial industry reform that might end up backfiring.

While Dickson said she approved of changes drawn up by the Financial Stability Board set up by the Group of 20 industrialized nations, she said international decision-makers must exercise caution in correcting mistakes that led to the financial crisis.

"I know there's a view that you have to take advantage of a crisis because often a crisis is what you need to get anything done, and I appreciate that view," she said in response to a question from the audience after a speech to insurance industry representatives.

"But there's a high risk of making a mistake, so I think we would be well served to slow down a little bit."

Canadian banks have emerged from the financial crisis in good shape relative to global peers, having accepted no bailouts and remaining mostly profitable throughout. Their capital levels are high, and their success has been chalked up to both the Canadian regulatory system and the banks' inherent conservatism.

While global policymakers are considering designating some financial institutions as systemically important -- so big that their failure could hurt the economy -- Dickson told Reuters after her speech that that could have unintended consequences, without elaborating on what those consequences might be.

"So we are urging that we discuss that a lot more before we land on it," she said.

A report will be presented to G20 finance ministers next month on how to determine if a financial institution is vital to the financial system. Regulators will also assess the need for a capital surcharge on banks that are designated vital.

Dickson said there was broad agreement that impact studies need to be carried out to determine if new regulations on liquidity and capital have harmful consequences.

"To date a lot of the things that we've done have been more high level, in setting direction, but when it gets down to the details, that's where you have to be quite careful," she said.

Canada to Comply

Dickson said she expected Canadian banks and other financial bodies to implement G20 regulations adopted last Friday on bonuses and capital without the Office of the Superintendent of Financial Institutions (OSFI) having to write new rules.

"We would expect all the institutions to be looking at that and to be incorporating that in the changes that they make. You have to be doing what was suggested internationally," she told Reuters after her speech.

"The way OSFI operates is often we say, 'This is the expectation. Please do it.' And it's done. That's the great thing about the Canadian financial system. It's part of the culture and it works."

In her speech, Dickson said she disagreed with those who say there is far too much capital in Canada's property and casualty insurance industry, noting that a final evaluation of capital levels should not come until the outcome of the current cycle is fully known.

"I also think that this question will become clearer as companies engage in stress testing that goes beyond what is currently required," Dickson said.

She said that one reason for the strong capital position is that previous years' loss reserves overstated results from current businesses, She warned that the end of the cycle of reserve redundancies could spell trouble.

Dickson said a better tool is needed to sort out the confusing effects of such things as previous year loss development, shifting discount rates and unrealized capital gains. She acknowledged that such a shift in financial reporting requirements might raise hackles in the industry.

"While I realize some of you may consider this an intrusion into the prerogatives of management accounting, it is important that we have more consistency in the way companies describe earnings," she said.

On the other hand, Dickson said she did not think liquidity rules need to be updated, or that new rules restricting investment choices are warranted.

Reporting by Randall Palmer in Ottawa and Andrea Hopkins in Toronto; editing by Peter Galloway

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