September 27, 2011 / 8:50 PM / in 6 years

Move beyond Basel III debate, Bank of Canada says

VANCOUVER (Reuters) - The Bank of Canada urged the world banking community on Tuesday to move on from the debate about the fairness of tougher new rules that are intended to make financial institutions safer.

<p>Bank of Canada Senior Deputy Governor Tiff Macklem speaks during a banking event in Mumbai August 24, 2011. REUTERS/Danish Siddiqui</p>

Global banks are aggressively pushing to scale back or postpone new capital rules, known as Basel III, but are getting little sympathy from policy makers.

“The essential lesson from the financial crisis was that the financial system was over-leveraged and under-capitalized. The Basel III rules have been rewritten to discourage excess risk-taking,” Senior Deputy Governor Tiff Macklem said after a speech in Vancouver.

“They’ve been agreed. They’re a giant step forward, and we now need to move to implementation,” he said.

Macklem was responding to a question about a reported verbal attack on his boss -- central bank Governor Mark Carney -- by JPMorgan Chase JPM.N Chief Executive Jamie Dimon at a closed-door meeting with 30 banking executives in Washington on Friday. The exchange was reported by the Financial Times and the Globe and Mail newspapers.

Dimon has publicly called the new rules anti-American and said the United States should consider pulling out of the Basel group of global regulators.

The thorniest issue is a capital surcharge, on top of other capital and liquidity requirements, for 28 of the world’s banks that are considered so large that their failure would imperil the global financial system.

On domestic policy, Macklem said the central bank will proceed with extreme caution when mulling future interest rate hikes, while giving no hint that a rate cut might be on the horizon.

“As the Canadian recovery has progressed, we have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus,” Macklem said in his speech, repeating language the bank used earlier this month and in August.

Macklem said the weak U.S. economic recovery, the persistent strength of the Canadian dollar against the greenback and “elevated global risks” were all weighing on growth in Canada, although the bank has not predicted another recession in either Canada or the United States.

The bank has held its key overnight lending target at 1 percent for the past year and in a September 7 rate decision signaled that earlier plans to begin tightening policy had been shelved due to the worsening European debt crisis and bleak U.S. outlook.

Markets are pricing in the possibility of a rate cut by early next year, according to yields on overnight index swaps which trade based on expectations of the policy rate.

Analysts surveyed by Reuters on September 7 still expected the next move to be a rate hike but not until the third quarter of 2012.

Reporting by Nicole Mordant; writing by Louise Egan and Randall Palmer; editing by Jeffrey Hodgson and Rob Wilson

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