The world needs a new way to supervise and regulate financial systems to restore stability and might want to follow Canada's example, the governor of the Bank of Canada said yesterday.
In a lecture to the University of Alberta's school of business, Mark Carney said Canada has weathered the financial storm better than most.
"Our system is better,'' Carney said. "Regulation has been more consistent. Our banks have been more conservative.
"Credit conditions in Canada remain superior to those in virtually every other industrialized country," he said.
"Canada is in a good position to offer sound advice as leaders of the G20 prepare for this week's summit in London. The core of our system has many -- although not all -- of the elements of a more sustainable, global financial system.''
Carney said that all financial activities that can pose a major risk to stability should be regulated.
However, he disagreed with the idea that banks should be tightly restricted to their core functions -- taking deposits and making loans -- and kept away from financial markets.
"To this way of thinking, banks could not then get themselves into trouble, or if they did, their demise could be safely managed," Carney said.
"But this is impractical, because banks and their roles are vital to the existence of markets. They are agents and underwriters and traders of most government and corporate debt.
"They provide cross-border financing products which are key services in a world of global corporations."
The better solution, he said, is to expand the perimeter of regulation to better supervise more players.
Carney placed much of the blame for the present financial crisis on the rise of a so-called shadow banking system, which appeared in recent years and usurped many of the functions normally provided by banks.
Canadian Mortgage brokers, finance companies, hedge funds, structured investment vehicles and the like grew enormously, but were performing without a safety net. The shadow system was wholly reliant on the continuous availability of funding markets.
As liquidity began to dry up last August, the whole structure tottered.
"The regulatory system neither appreciated the scale of this activity, nor adequately adapted to the new risks created by it," he said. "The shadow banking system was not supported, regulated or monitored in the same fashion as the banking system. With hindsight, the shift toward the shadow banking system that emerged in other countries was allowed to go too far for too long."
"It's time to regulate this system and this week's G20 meeting will have to start that process,'' he said.
"Canada will contribute an important perspective on these issues."
