“Clouds emerging on the horizon” indicate necessary changes to existing checks and balances
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Canada may not have had a major banking failure in many years, but “clouds emerging on the horizon” suggest that current checks and balances may need adjustments to be sustainable in the future, says an official who used to work at the country’s top banking regulator. an agency.
The failure of several regional banks in the United States and the collapse of Credit Suisse Group AG in Switzerland in 2023 means that reforms implemented after the 2007-2008 global financial crisis are not enough, said Mark Zellmer, a senior fellow at the CD Howe Centre. The institute was previously deputy superintendent in the Office of the Superintendent of Financial Institutions.
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“It would be easy to say, ‘Don’t worry, be happy that everything has gone well for decades,'” he said. “But I think the events of the past year have led me to believe that the world is changing. It is better to think when times are calm about how things will develop in the future than to wait for the problem. I would hate for Canada to lose its reputation.”
Last year, authorities in both the United States and Switzerland were forced to intervene to prevent banking failures from causing broader disruptions to their financial systems and economies.
Silicon Valley Bank, one of the failed banks, lost nearly 85 percent of its deposits over two days. This suggests that bank failures — when a large group of depositors withdraw money at the same time due to bankruptcy fears — in the “age of digital and social media” can happen very quickly, Zelmer said, and that these risks are likely to continue into the future. Growth. .
He added that the situation in the US also suggests that “smaller, less developed institutions” could cause collective problems if they rely on similar business models and groups of depositors. Comment Published by CD Howe on Tuesday.
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There has also been a significant expansion in regulatory requirements and oversight over the past 15 years, which has its downsides, Zellmer said.
“There is a risk that more rules and extensive oversight of non-financial risks and governance practices… could blur the line between bank management and regulatory oversight,” he said. “This approach may also weaken incentives for innovation… and they may tend to simply deal with regulatory requirements.”
Zillmer said there are a number of “options” or steps the banking sector can take to be more sustainable, although none of them are a “clear panacea” because they would likely lead to higher costs that would ultimately be borne by Canadian households and businesses.
One option is to offer full deposit insurance coverage. Currently, Canadians are insured for up to $100,000 in each deposit category. Increasing coverage could improve depositor confidence, but he said past experience shows such steps may not significantly reduce the risk of bank runs.
“This may be a topic worth exploring in the Federal Government’s planned review of the deposit insurance framework announced in its 2024 Budget,” he said.
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The Canada Deposit Insurance Corporation, a federal Crown corporation, must also complete the Payment Modernization Project, which aims to build a system that can quickly compensate depositors if the institution fails, Zillmer said.
Banks could be encouraged to hold larger inventories of high-quality liquid assets that could be sold as needed in the event of a bank run.
“This way, they will be able to survive longer if they run,” he said.
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The Bank of Canada could also play a role by adjusting the structure of its emergency liquidity facilities to make it easier for banks to access them in times of stress.
“The minute a bank goes to the Bank of Canada looking for money, that immediately signals that the bank is in trouble,” Zelmer said. “Nobody wants to do that because it basically means you’ve lost the confidence of the financial markets at that point.”
He said that none of the options he presents are ideal, but his main message is that “people should start talking about what kind of banking system they want in the future in light of what has happened in recent years.”
• Email: nkarim@postmedia.com
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