NEW YORK (Reuters) - Increased regulation stemming from the global credit crisis need not stifle the financial innovation needed to help push economic growth forward, the head of the Bank of Canada said on Thursday.
In prepared remarks for a speech he was giving in New York, the central bank’s Governor Stephen Poloz urged the financial industry to find a balance between risk and innovation.
“What I am suggesting is that the industry be at the vanguard of positive change, and voluntarily embrace the spirit of financial regulation,” Poloz said. “Use this positive response as a brand to rebuild trust in the street, especially Main Street.”
While global regulatory reform has been essential, the net effect of that probably means a reduction in the availability of credit, which will mean greater innovation will be needed to facilitate growth, provided it does not pose new or growing risks to the financial system, he said.
Central bank policy will need to remain stimulative until the economic rebuilding phase takes hold, Poloz said, and a “necessary ingredient” in that rebuilding phase will be creative financial intermediation to help foster new firm creation and young company survival. He also called on financial players to uphold not just the letter but the spirit of regulation.
“I see such innovation in financial intermediation as essential to fostering regulatory balance between maintaining financial stability on the one hand and facilitating competitive market forces on the other hand,” Poloz said.
Speculating on what the future of financial intermediation might look like, Poloz pointed to the need for expansion and innovation in bond financing; securitization to create new high-quality, low risk products; peer-to-peer lending; and public-private partnerships.
Speaking specifically about Canada, Poloz said “we have plenty of room to grow,” so it will likely take another two years before the economy returns to steady growth with inflation sustainably on target. He said that the cycle of export growth that should lead to increased business investment and job creation looks like it may have finally begun.
Writing by Leah Schnurr and Randall Palmer; Editing by Chizu Nomiyama