Dickson tells banks to prepare for greater supervision

“Gaps in supervisory quality were evident across the member countries of the G20,” she said. “These gaps remain evident today.”

Efforts around the world to reform financial industry regulation in the aftermath of the crisis have not placed enough emphasis on supervision, Dickson said. She pointed out that neither the Dodd-Frank legislation in the U.S. nor the Vickers report from the Independent Commission on Banking in Britain address supervisory failures sufficiently.

“Too many people are advocating increased capital as the cure-all, but it is not an effective treatment if it is not accompanied by enhanced supervision,” she said.

While Dickson said she’s satisfied with the level of supervision in the Canadian banking sector, she said the Office of the Superintendent of Financial Institutions is beefing up oversight in certain areas within the sector. These include corporate governance, compensation and liquidity.

“It’s not a system that can stand still,” she said. “You always have to be adjusting it.”

Dickson said financial institutions and regulators must ensure that adequate resources are assigned so that supervision is effective. In many countries, she said oversight bodies are lacking sufficient resources to hire and retain staff with the expertise necessary to supervise the industry effectively.

“You get what you pay for,” she said. “We cannot accept situations where supervisory agencies themselves do not have the resources they need to oversee such activities effectively.”

In the case of OSFI, Dickson said it’s “fortunately been able to recruit talented resources over the years.”

Steps must also be taken to ensure that supervisory agencies around the world are independent, she said, since they must make decisions that are unpopular in the industry.

Avoid becoming complacent, Dickson warns

While Canadian financial institutions emerged from the crisis in better shape than many others worldwide, Dickson said they must not become complacent.

“They may feel given their status and their strength, they should be allowed more leeway while everybody else in the world catches up to them, in the meantime allowing Canadian institutions even more flexibility to grow and expand,” she said.

This is not the case, Dickson said. Rather, she said Canadian banks must make improvements to their risk management, governance and information systems.

“Our current strength should not be taken for granted – it was hard-won and it will be harder to maintain in the future, unless it is improved and supported now,” Dickson said.

She warned that the effects of the financial crisis – similar to a severe concussion – will be long-lasting. The effects will include slower economic growth, tighter government spending and constrained consumer spending.

“This is the new normal and it is not nice – especially for the unemployed, for investors saving for retirement, and for people living in countries undergoing huge structural adjustments,” Dickson said. “It is also the new reality in which financial institutions – as well as regulators – must operate.”

Systemically important FIs likely to be identified

On the topic of global systemically important financial institutions, Dickson said she expects the Financial Stability Board to release a public list this fall of the 28 institutions considered systemically important. But she doesn’t expect any Canadian institutions to be on that list.

Still, OSFI and several other bodies in Canada are focusing on the issue of living wills for financial institutions. These require firms to have detailed plans outlining how they would deal with a crisis, and require regulators to detail how an institution could be resolved in an orderly fashion if it were determined to be non-viable.

“This is a very sensible approach because it makes it more likely that if a serious problem were to arise, a solution would be found without resolving to a taxpayer-funded government bailout,” Dickson said.

IE