Canada sets the global standard for financial regulation– but it can still be improved

As anyone paying attention during the 2008–2009 financial crisis is aware, the Canadian financial system weathered the storm uniquely well. Exactly why Canada’s system remained so comparatively stable, while so many other foreign systems broke down, is a question that remains largely unsettled. One explanation may be that the regulatory system that emerged from a very specific history of prior crises had both prepared Canada well for such a crisis, and responded effectively as the crisis unfolded. But the very regulatory system that provided stability in recent years may also be at risk of becoming warped by its own success, with regulators so emboldened by the acclaim for their recent achievements that they overreach to ensure their track record remains unblemished in the future.

A new report released today by The School of Public Policy, written by Lawrie Savage, takes an in-depth look at the evolution of the Canada’s financial regulatory system and points to what features may have contributed to its success and what areas may still need improvement. The stunning collapse of a pair of western Canadian banks, a number of major Canadian trust companies and several insurance companies, as well as some other precarious near misses in the 1980s and 1990s, were a shock to the financial regulatory system, highlighting deficiencies that would be addressed with new regulations and the creation of the Office of the Superintendent of Financial Institutions (OSFI). Canada’s centralized regulatory approach, through the OSFI and just four other major regulatory bodies, has proved both more elegant and effective than the more complicated, and decentralized American financial-oversight system. But some regulated companies have long maintained that the concentration of power in Canada’s large banks has resulted in a one-size-fits-all regulatory approach that does not offer a relatively lighter burden for smaller institutions, potentially stifling growth and may be hampering market efficiency.

Canada’s regulatory model almost certainly appears to be a better-functioning one than that of many in its peer group. The OSFI approach is gaining acceptance by many countries, and emerging markets are using the Canadian framework as a template. This does not, however, mean that Canada’s regulatory system cannot still be refined and improved. The author provides suggestions for Canada’s regulatory system, such as creating an industry-based collaboration committee that would monitor risk over time or strengthening the board structures for larger institutions. He argues that, although Canada’s is one of the most effective regulatory systems in existence, its success is no guarantee that it will be sufficiently prepared for the next crisis.

The report can be found here.