Although Canada has weathered the credit crisis well so far, banks must be cautious in the face of a weakening economy, says Julie Dickson, Superintendent of Financial Institutions.

Speaking Tuesday to the House of Commons Standing Committee on Finance, Dickson said that the Canadian financial industry held up well amid the first wave of the global financial crisis, but that the second wave, the resulting economic downturn, will impact capital levels and profits at the banks.

“The extent and severity of the impact on our financial institutions is hard to predict, but the Canadian banking system is better positioned than most other systems to deal with this second wave,” she stressed.

“Many past policy and regulatory decisions made in Canada have served the system well, including having robust capital targets, paying attention to the quality of capital — such as requiring a high percentage of common shares in the capital base, and having a prudent leverage ratio in the banking industry,” Dickson noted. “At the same time, the ground continues to shift in ways that are hard to predict.”

She said that the fiscal and monetary policy initiatives that have been unveiled by the government and the Bank of Canada are expected to be positive for the Canadian economy. “While this is good news, our message to institutions is that it is also prudent to incorporate adverse outcomes in their planning, even if they think the economy will recover quickly,” she said. “They need to consider a variety of outcomes which reflect their own unique situations, and they need to stay on top of the risk as it evolves.”

Dickson also said that OSFI is involved wit international efforts to deal with the crisis, including work by the Financial Stability Forum, the G20, and the Basel Committee.

IE