The financial sector needs higher capital requirements, greater transparency and compensation reform, says the Conference Board of Canada.

In a report that examines lessons to be drawn from the financial crisis of 2008, the think tank concludes that the financial system plays a special role in a market-based economy, and, as a result, its regulatory frameworks need a careful review, “so that the global and national financial systems are operated responsibly to serve a wider interest.”

In particular, the Conference Board recommends that:

• capital requirements should be increased to better represent the ‘real’ risk underlying various securities, and this should be accompanied by better due diligence to understand the risks;

• efforts to redesign regulation should focus on rules that improve the transparency of the risks being securitized;

• new accounting rules should require hedge funds to report risk positions on their balance sheets on a timely basis; and,

• financial incentives should be changed so that they reward fund managers based more on their long-term performance and less on their short-term returns.

The Conference Board points out that “Canada was fortunate to avoid the worst of the financial crisis, and should take advantage of its credibility in international financial circles by demonstrating leadership in adopting changes.”

“The rapidly cascading sequence of events that followed the bankruptcy of Lehman Brothers in September 2008 reinforced the fact that the financial sector is a cornerstone for every other part of the economy. No other sector is so fundamental to economic activities; without it, capitalism would not be able to exist,” said Louis Theriault, director, International Trade and Investment Centre.

“Paradoxically, the crisis revealed how business and consumer confidence are at the heart of the financial system. Without confidence, the system can crumble and the economy cannot function.”

““The problems of Wall Street can quickly become those of Main Street if banks are unwilling or unable to lend to businesses and consumers. That is the situation we faced in the autumn of 2008, and central banks and governments needed to intervene in the financial system using the nation’s balance sheets to restore confidence,” he added.

IE