April 8, 2010 / 6:07 PM / in 8 years

Scotiabank warns new global rules could hurt banks

TORONTO (Reuters) - Bank of Nova Scotia Chief Executive Rick Waugh said on Thursday new global banking rules could weaken Canadian banks even though they emerged relatively unscathed from the financial crisis.

Warning that Canada could get sucked into unneeded new regulations when global policymakers draft financial industry reforms, the head of Canada’s most international bank said it was up to Canadian bankers and policymakers to fight changes that will compromise Canadian competitiveness.

“There is a real danger that Canada will, perhaps inadvertently, be significantly weakened by these reforms,” Waugh told shareholders at the bank’s annual meeting in Newfoundland.

“Our model has worked well and we should make sure it does not damage us as others try to cover the failures of their own financial sectors. The devil here is in the detail and there are many potential risks and unintended consequences in Basel III,” Waugh said.

International decision makers are mulling reforms including higher minimum capital levels and lower leverage limits for banks. World leaders agreed to a sweeping set of reforms in Pittsburgh last September, but final changes are not expected to be approved until the second half of 2010 or later.

The new rules, dubbed Basel III, are expected to be watered down and several countries have expressed concern about their impact. The subject will be in focus when leaders of industrial and emerging market economies meet in Canada in June.

Waugh, who oversaw Scotiabank’s U.S. operations after the junk-bond trading scandal that hit many banks with losses in the 1980s, said Canadian banks, not regulators, deserve credit for not getting into the subprime mortgage and derivatives products that sank global competitors.

“No amount of regulation can replace the sound management of principles-based governance or a board and management who are accountable,” he said.

Canadian banks took no government bailouts and remained mostly profitable right through the world financial crisis. Robust regulation, good supervision and a conservative culture are all given as reasons for their success.

Toronto-based Scotiabank managed to avoid the worst of the crisis by taking few risks and sticking to retail banking and piecemeal expansion into 50 countries, mostly in Latin America.

Waugh said his concern was not with the regulators’ call for higher capital requirements. He said Canadian banks are already far better capitalized than global peers and can handle the rise in capital levels that will be mandated.

“Rather it is the more prescriptive rules based on what is now called Basel III that threatens Canadian banks’ ability to achieve growth and our ability to provide our customers with mortgages, credit cards and business loans,” Waugh said.

Specifically, Waugh warned that Canadian banks could actually be forced to securitize and sell their mortgages -- a common practice of U.S. banks that contributed to the financial crisis. Securitization has been eschewed in Canada, where subprime mortgages are nearly nonexistent and banks prefer to hold most of their mortgages as relatively safe assets.

“Our unique Canadian mortgage market was one of the important reasons why we did so much better than others, and this now may be in peril due to several proposed rules that go over and above the requirements for more capital,” Waugh said.

He was referring to a proposal to cap banks’ leverage ratios, bluntly measured as a bank’s total assets divided by their equity. Under that plan, banks with big mortgage balances -- even insured mortgages considered the safest assets outside of government bonds -- would be penalized and forced to either cut lending or reduce asset levels by selling the mortgages.

Waugh called on fellow chief executives and Canadian policymakers to push back against over-regulation as changes are discussed.

“We have to -- all of us, but particularly our regulators and our government -- rigorously state our case and protect our interests,” Waugh told the annual meeting.

Reporting by Andrea Hopkins; editing by Janet Guttsman and Peter Galloway

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