There’s plenty still to be done in the wake of the credit market disruption, according to Superintendent of Financial Institutions Julie Dickson. Speaking to the Langdon Hall Financial Services Forum in Cambridge, Ont. on Tuesday, Dickson noted that the regulatory response to the credit crunch remains a work in progress.

For example, she said that, “Regulators are just figuring out how significant reputation risk is for a bank.”

She recalled that regulators agreed with banks when they said they could transfer credit risk, “Because we were armed with legal opinions and accounting opinions, we believed that off-balance sheet meant off-balance sheet. But since last summer, we have seen banks support off-balance sheet vehicles, and we have seen them step in to protect investors in money market funds.”

“We have always known that reputation risk was important, but until now we have not had proof that it is a serious risk for banks and that they will do what is needed to protect their reputation,” Dickson said. “That is good news for bank clients. But for regulators it also means that we cannot continue to agree that things are off-balance sheet and can be ignored for capital purposes, even if accountants and bankers say they are off-balance sheet.”

She also stressed that regulators can’t be complacent about ensuring banks hold sufficient capital. “The world of banking is never predictable, which is where capital comes in: capital is for the unexpected,” she said. “While Canadian banks are well capitalized, this is an area that can never be put to rest.”

“In my view, we still have a long way to go here, despite the implementation of Basel II, and despite views that in the run-up to the global market turmoil, regulators focused too much on capital, to the detriment of liquidity and stress testing,” Dickson said, noting that because some risks are hard to measure properly, capital cushions are essential.

On the subject of fair value accounting, Dickson said, “while many support the concept of fair value, there are enough concerns being expressed with fair value when markets are illiquid, that the [International Accounting Standards Board ] should not just push ahead to adopt full fair value accounting to create so called simplicity.”

“We need to get more clarity around the issues of fair value. Thus, the expert panel being set up by the IASB is very important before considering a move to full fair value,” she added.

“Much has already been done by central bankers, regulators and accounting standard setters to identify the causes of the global market turmoil, and to identify what should be done, but the implementation of the [Financial Stability Forum] report recommendations will take considerable effort by regulators and the industry and will go a significant way toward strengthening the global financial system,” she concluded.