Regulators around the world should tread carefully as they formulate the rules by which global banks will be governed, says the head of Canada’s third-largest bank, or they risk stifling international economic growth.

“I just worry [about having] the right balance,” says Rick Waugh, Bank of Nova Scotia’s president and CEO.

Although Waugh is generally supportive of the proposed Basel III banking regulations, he says, he is concerned that regulators are being overly reliant on “models and rules” at the expense of other methods of ensuring a stable global banking industry.

At a presentation to the United Jewish Appeal Federation’s Bay Street Cabinet in October, Waugh said: “One of the lessons that emerged from the crisis is that no amount of regulation can replace sound management and principles-based governance, or a board and management that are accountable for results to all stakeholders.”

Issues remain about how to ensure a co-ordinated global effort and, thus, a level playing field when individual jurisdictions are likely to implement banking regulations in different ways, he added. And much uncertainty still exists because of continued political involvement in the designing and implementation of banking regulation around the globe.

But Waugh’s chief concern appears to be the potential effect of new global banking regulations on the world economy, particularly as international banks seek to raise capital.@page_break@“There’s a huge amount of deleveraging that is still going on in the financial system,” Waugh says. “Many of these international banks have to raise capital or downsize their operations to meet these huge increases in capital [requirements]. That affects world growth. And although Scotiabank does not have to raise capital — that’s important [to note] — we’re not immune to international growth. So, we have to be only cautiously optimistic; not totally optimistic.”

Leadership at the big Canadian banks universally expressed their general support for Basel III when the new regulations were announced in September by the oversight body of the Basel Committee on Banking Supervision. And banking analysts agree that the Big Six will have little difficulty in meeting the Basel III capital requirements.

Under Basel III, global banks are mandated to hold a minimum of 7% in core capital and an additional “countercyclical buffer” of 2.5%. These new requirements are to be phased in gradually over the next eight years. Expectations are that the final version of Basel III will be approved at the G20 summit in Seoul this month.

Also at the meeting, the G20’s financial stability board will present its recommendations concerning “systemically important financial institutions.” These “too big to fail” banks may be required to hold additional capital reserves and be subject to other regulatory requirements.

How the global regulators will determine which banks should be considered SIFIs — and how they should be handled — has been an issue of recent debate.

In Canada, the reaction to “too big to fail” initiatives has been lukewarm.

“It is not wise to declare publicly certain institutions as systemically important,” said Julie Dickson, head of the Office of the Superintendent of Financial Institutions in Ottawa, at a presentation to the Montreal chapter of chartered financial analysts in October. “It is beneficial to focus on ways to give governments options for dealing with failing institutions, beyond bailing them out at taxpayers’ expense.”
IE