Posted by: Armel | February 14, 2010

Financial Reform: The Canadian Model

  

How Financial Regulation saved the Canadian Banking System from the crisis.

Has anyone noticed that Canada is the only country member of the G7 where the state did not have to bail out its financial sector? A recent World Economic Forum report rated the Canadian banking system the World’s soundest. Understanding why the Canadian system survived could be a key to making the rest of the west equally robust.

Julie Dickson the head of the Office of the Superintendent of Financial Institutions (OSFI), points to 3 specific restrictions: capital requirements (tier one of 7%), quality of capital (75% in common equity),  and a leverage ratio (debt to equity of 20 to 1). The Canadian system is based on principles; it is about the spirit, not the letter, of the law. Therefore, financial institution have to know the risks undertaken.

Five or 10 years ago when financial engineering was in vogue across the world and light-touch regulation seemed to be a pre-requisite, the mystery is how did Canadian policymakers avoid to get into that race? Paul Martin who was finance minister for some time, and served as Prime Minister of Canada, knew there was going to be a banking crisis some day.  He just worked with the legislators to be damn sure that when a crisis occurred, it wouldn’t occur in Canada.

The irony is that even the IMF chided Canada for being too timid and not promoting debt securitisation enough! May be the rest of West can learn something from Toronto’s Bay Street.

 
Chrystia Freeland
Source: "Canada's Great Escape" by Chrystia Freeland for FT
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Responses

  1. Hey, I found your blog by accident but your posts are really interesting so I enjoy reading it. Well done! I’m def going to visit again for more updates.

    Thanks again,

    Neil


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