The International Monetary Fund says that strong regulation helped Canada’s financial system hold up well amid the global financial crisis, but it still wants to see securities regulation rationalized.

In its latest report on Canada, the IMF says that the Canadian financial system “has displayed remarkable stability amid the global turbulence”, adding, “This outcome reflects strong regulation and supervision, along with structural factors in the Canadian financial market.”

That said, the organization cautions that “the coming credit cycle is likely to be challenging. The economic downturn will pressure bank credit quality.” It notes that mortgage delinquencies are already rising, and household debt levels are a concern in an environment of rising unemployment and falling net wealth. “In this context, pressures on banks may feed back into tighter credit conditions, dampening growth. Meanwhile, major insurers and pension funds have been adversely affected by the stock market decline,” it says.

“Against this backdrop, the key policy priority remains forestalling an adverse macro-financial feedback loop. Along with the appropriately supportive stance of macroeconomic policies, the Canadian authorities’ proactive approach to financial stability will limit this risk,” it says.

Additionally, the IMF indicates that, “Consolidating and enhancing securities regulation would further strengthen the already robust financial stability framework. Over time, bringing a greater financial stability focus to securities regulation, and achieving greater national integration would provide a more holistic perspective to financial stability arrangements.” Therefore, it supports the federal government in following the recommendations of the Expert Panel on Securities Regulation.

On the macroeconomic front, the IMF sees further weakness in the short term. “Economic activity will likely decline further in the near term, before picking up on the back of the policy stimulus already in train,” said IMF mission chief, Charles Kramer, in a statement.

“Looking ahead, continued vigilance and readiness will be essential to respond to possible tail risks amid the economic downturn. With the global outlook marked by unusually high uncertainty, Canada has prudently taken proactive steps and should stand ready to act further in case downside risks appear,” Kramer added.

The IMF said it supports the “large, timely, and well-targeted fiscal stimulus” proposed in the latest federal budget. “The stimulus package is appropriately sized — well above the Fund’s benchmark of 2% of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand,” it added.

And, it approves of the Bank of Canada’s current monetary policy position, suggesting that, “maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession.”

Federal finance minister Jim Flaherty welcomed the IMF’s statement of support.

IE