Financial Times: Boring Canada’s Financial Tips for the World
James Flaherty, Canadian Finance Minister, recently wrote a commentary in the Financial Times titled Boring Canada’s Financial Tips for the World. Certainly, the biggest news today is the global economic and financial meltdown, but Canada seemed to have minimized the impact as a result of its financial system and policies, which Flaherty describes as “boring”. Yup, that is a good description of Canada in general 🙂 Boring is good, nothing wrong with boring.
Below is a picture of Flaherty (bottom left) at the Osaka Castle prior to the G8 Finance Ministers Meeting’s Outreach Dinner on June 13, 2008 in Osaka, Japan, where they discussed international financial issues including energy, climate change and elimination of poverty in Africa. Photo courtesy of Toshifumi Kitamura, Getty Images.
The full text of the article is copied below in case the link doesn’t work in the future.
By James Flaherty
Published: November 12 2008 19:51 | Last updated: November 12 2008 19:51
The financial crisis that began 14 months ago in the US has intensified and spread around the world, threatening to roll back economic progress that has been made over the past two decades. Governments have been responding in a co-ordinated fashion and will continue this work in the lead-up to the summit of the Group of 20 leading economies.
Few countries are as dependent on trade or as integrated into the global financial system as Canada. Yet our financial sector continues to weather the turbulence better than many other countries. This did not happen by chance. Canadians by nature are prudent and our financial system has been characterized as unexciting. Canada’s regulatory regime ensures that stability and efficiency are balanced. As a result, Canadian taxpayers have not had their money put at risk in response to this crisis. If Canada’s financial system is boring, perhaps the world needs to be more like Canada.
Before we examine grand designs for global regulatory regimes, we need to recognize that good regulation begins at home. Effective national regulatory regimes could have prevented this crisis and must be our first line of defense against any future one. We all need to draw lessons from those systems that worked well and apply them to our national regulatory regimes.
First, we need to regulate all pools of capital that rely on leverage. The crisis has demonstrated the devastating impact that unregulated entities can have. Transparency requirements must be the price of admission to global markets. Different financial services may have different regulatory requirements, but we need to bring them all under a regulatory umbrella.
Second, capital and liquidity buffers need to be large enough to handle big shocks. Moreover, regulators must restrain overall use of leverage. Some have criticized high Canadian capital requirements for banks as being too conservative. But the strong balance sheets of Canada’s banks through this period speak for themselves.
Third, it is not enough for regulation to look at individual institutions. It needs to look at the system as a whole. Risks that may appear sensible in isolation can be unsustainable from a systemic perspective. This systemic vantage point must be used to mitigate any tendency to underestimate risk when times are good. This requires co-ordination across the government, central bank and regulatory agencies.
Fourth, we need to make market infrastructure more transparent and resilient. Non-transparent over-the-counter trades and naked short-selling reduced the stability of the system.
This crisis has demonstrated that even countries with strong financial systems can feel the effects of inadequate regulatory regimes elsewhere. Countries may hesitate to impose new requirements on their own institutions if these measures will create a competitive disadvantage. This points to the importance of the fifth step: strengthening international co-ordination, review and surveillance to create a better second line of defense. Canada was a pioneer of the joint International Monetary Fund-World Bank financial sector assessment programme. This independent review of domestic financial systems should be mandatory and public. We need to strengthen the role of international colleges of supervisors to ensure better understanding of systemic risks and to co-ordinate national actions. We need IMF surveillance with teeth. Countries must live up to their responsibilities to support global financial stability and growth. Nowhere is this more important than in correcting global imbalances through appropriate exchange rate and macroeconomic policies to support growth.
The process of how we make decisions is equally important. In two decades of unprecedented growth, we have seen the emergence of dynamic new economic players that must be full participants at the global table. Canada took one of the largest share cuts of any country in the recent IMF reform exercise to ensure that emerging economies are better represented. This broader range of voices must be heard in other venues such as the Financial Stability Forum.
Together, these reforms must ensure that incentives are aligned to support stability and that resilience is built into the financial system.
The open market system did not fail in this crisis. However, some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework. We need to work together to strengthen those frameworks, and that work must begin at home.
The writer is Canada’s finance minister