A former banking regulator urges Canada to reconsider regulations to address emerging financial threats
Canada has not experienced a major banking failure in years, but “emerging clouds on the horizon” suggest that existing checks and balances may need adjustments to remain sustainable, according to an official formerly with the country’s top banking regulatory agency.
The failures of several regional banks in the United States and the collapse of Credit Suisse Group AG in Switzerland in 2023 indicate that reforms enacted after the 2007-08 global financial crisis may not be enough.
As reported by Financial Post, Mark Zelmer, a senior fellow at the CD Howe Institute and former deputy superintendent at the Office of the Superintendent of Financial Institutions, made this observation.
“It would be easy to say, don’t worry, be happy because everything has gone well for several decades,” Zelmer said.
“But I think last year’s events have led me to think that the world is changing. It is better to think when times are calm about how things could evolve in the future as opposed to waiting for the problem. I would hate for Canada to lose its reputation.”
In 2023, authorities in the US and Switzerland had to intervene to prevent banking failures from causing broader financial system disruptions. Silicon Valley Bank, one of the failed US lenders, lost almost 85 percent of its deposits in just two days.
This suggests that bank runs can happen quickly in the “digital and social media age,” a risk that Zelmer believes will continue to grow.
The US situation also highlights that “smaller, less sophisticated institutions” can collectively create problems when they depend on similar business models and depositor groups, Zelmer said in a CD Howe commentary.
He also pointed out that while there has been a significant expansion of regulatory requirements in the past 15 years, there are potential downsides.
“There is a risk that more rules and more intense supervision of non-financial risks and governance practices … could blur the line between bank management and regulatory oversight,” Zelmer said.
“This approach could also potentially dampen incentives for innovation … they may be tempted to simply manage ‘to the regulatory requirements.’”
Zelmer mentioned several “options” for the banking sector to improve sustainability, though he noted that none would be a “clear panacea” as they would likely result in higher costs for Canadian households and businesses. One option is full deposit insurance coverage.
Canadians are currently insured for up to $100,000 per deposit category, and increasing this coverage could boost depositor confidence. However, Zelmer said past experience shows this may not significantly reduce the risk of bank runs.
“This could be a topic worth exploring in the federal government’s planned review of the deposit insurance framework announced in its 2024 budget,” Zelmer added.
He also suggested that Canada Deposit Insurance Corp. complete its payout modernization project to quickly reimburse depositors if an institution fails. Banks could also be encouraged to hold larger reserves of high-quality liquid assets to survive a bank run for a longer period.
“That way, they would be able to survive for a longer time in the event of a run,” Zelmer said. He added that the Bank of Canada could help by modifying its emergency liquid facilities to make them more accessible during times of stress.
“The moment a bank goes to the Bank of Canada looking for money, it immediately signals that the bank is in trouble,” he said. “Nobody wants to do that because it basically says that you have lost the confidence of financial markets at that stage.”
Zelmer concluded by stating that none of the options are perfect, but his key message is that “people should start talking about what kind of banking system they want in the future given what happened in recent years.”
