Progress in establishing international standards that promote trade, investment and prosperity is facing headwinds from the global rise of nationalism and populism, according to a report from the Toronto-based C.D. Howe Institute published on Thursday.
The report, International Prudential Standards in a World of Growing Nationalism and Protectionism, argues that financial industry standard setters, such as the Basel Committee on Banking Supervision, should adapt to the evolving international co-operation cycle.
Rising protectionism isn’t just a threat to global trade, it also poses a growing risk to global standards in the financial industry, the report suggests. This is a problem for Canada, the report adds, as the country and its financial firms benefit from the adoption of international standards.
For example, global standards make it easier for Canadian banks and insurers to fund themselves, and to expand abroad, the report states. At the same time, Canada also benefits from other countries agreeing to follow international standards.
“The global financial crisis was a good reminder that our financial system is not an island onto itself. We are but a small component of a large highly connected global network — a network that is only as strong as its weakest link,” the report states.
With that in mind, the report calls on Canadian policymakers to continue to favour global co-operation.
States the report: “As some of our trading partners turn inward, it is important that we in Canada not lose sight of the prosperity provided by international co-operation.”
“We need to continue supporting the international standard-setting process if we are to fully realize the benefits that come from being a medium-sized participant in the global financial system.”
With the idea of voluntary international co-operation under increasing threat, the report suggests that policymakers will have to change how they operate to accommodate the new political realities.
Among other things, global policymakers should be cautious in setting minimum standards and allow a great deal of local flexibility. They should also focus more on working with countries directly to co-ordinate their work, rather than among themselves.
“This approach would reduce the risk of local initiatives unintentionally working at cross-purposes with the global financial system, especially in times of stress,” says Mark Zelmer, co-author of the report and former deputy superintendent at the Office of Superintendent of Financial Institutions (OSFI), in a statement.
Policymakers should also focus on ensuring that current standards are implemented before proposing reforms.
In addition, enhanced disclosure is required so that markets can “understand how differences in institutional settings are affecting the measurement and management of risk at financial institutions as well as the calculation of regulatory capital and liquidity ratios,” the report states.