June 25, 2015 / 4:12 PM / 3 years ago

Bank of Canada takes aim at Dodd-Frank on bank failures

WINDSOR, Ontario (Reuters) - The Bank of Canada, frustrated by unilateral U.S. moves which regulate Canadian banks with U.S. subsidiaries, called on Thursday for the two countries to work out a bilateral agreement to clarify responsibilities in winding up failed banks.

Deputy Governor Lawrence Schembri took aim at the U.S. financial reforms under the Dodd-Frank Act of 2010, which required U.S. subsidiaries of big international banks to meet separate capital and liquidity requirements inside the United States.

“If a Canadian bank with U.S. subsidiaries were to fail, it bears asking whether the preemptive actions of U.S. authorities would create obstacles for the orderly resolution of the consolidated bank by Canadian authorities,” Schembri said.

Dodd-Frank might constrain the Canadian bank’s ability to allocate capital and liquidity in the North American market, he said.

“Canada and the United States should consider the option of a bilateral agreement on the resolution of banks with cross-border operations in order to clarify responsibilities and enhance cooperation,” he told a business audience.

Schembri, one of two members of the central bank’s governing council responsible for financial reform, said the Group of 20 leading economies should also keep pressing for a multilateral agreement, but this could take several years.

He also said a Dodd-Frank provision on the reporting of data on derivatives effectively precluded data that was reported by Canadian banks to U.S. authorities from being used by Canadian financial authorities to assess systemic risk in the over-the-counter derivatives market.

“To summarize, national authorities should strive to build trust and achieve more cross-border recognition of comparable regulatory requirements.”

Answering audience questions, Schembri reiterated the bank’s expectation of a soft landing in housing.

“Over time we expect that as the Canadian economy strengthens, we all know that interest rates will eventually start moving up,” he said. “That will work to cool the market and will achieve what we call a soft landing, where nominal prices will stabilize.”

Asked about the effect of a possible Greek economic collapse on Canada, he said he would not expect to see a large impact if Greece exited the euro zone, with the Canadian financial system relatively insulated from Greece.

He added: “My bottom line is I think the Greek authorities will recognize that the Greek people want to stay in the euro zone and they’ll find a way to come to an agreement.”

Writing by Randall Palmer and Leah Schnurr; Editing by Chris Reese and David Gregorio

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