Who Likes Surprises? A Policy Framework for Avoiding Financial Crises: C.D. Howe Institute

TORONTO, May 22, 2012 /CNW/ - Canada needs a policy framework and new governance structure beyond what is in place to reduce the potential for future financial crises, according to Paul Jenkins, former Senior Deputy Governor, and Gordon Thiessen, former Governor of the Bank of Canada. In "Reducing the Potential for Future Financial Crises: A Framework for Macro-Prudential Policy in Canada," a report released today by the C.D. Howe Institute, they make the case for establishing a formal committee with a mandate to identify potential systemic risks and to act promptly before they materialize.

The global financial crisis demonstrated the importance of addressing risks to the financial system as a whole, with a view to protecting the economy from severe disruptions in financial services. While Canada's system of regulating and supervising financial institutions might hold up as a model of good performance, changes can and should be made, say Jenkins and Thiessen. Future crises undoubtedly will have different antecedents than the last one, and we need to be sure that Canada's financial system will be equal to the task of dealing with them as they arise.

As things stand, the Bank of Canada monitors potential systemic risks, and comments on them in its semi-annual Financial System Review. As well, the federal government sometimes uses macro-prudential tools to respond to potential build-ups of systemic risk in the expansion of residential mortgage credit in Canada. However, what is lacking is the formal assignment of responsibility for macro-prudential policy and a framework in which to carry out that responsibility.

The authors examine potential arrangements for macro-prudential policy in Canada and conclude that a formal committee is the preferred governance arrangement. The committee should comprise the governor of the Bank of Canada, the deputy minister of finance, the Superintendent of Financial Institutions, a representative who monitors and has the capacity to respond to systemic risk in securities markets, and perhaps the president of the Canada Deposit Insurance Corporation. In the authors' view, the governor of the Bank of Canada would be the most appropriate chair of the committee.

For the report go to: http://www.cdhowe.org/reducing-the-potential-for-future-financial-crises-a-framework-for-macro-prudential-policy-in-canada/17791

C.D. Howe Institute Senior Fellows Paul Jenkins, former Senior Deputy Governor, and Gordon Thiessen, former Governor of the Bank of Canada; or Philippe Bergevin, Senior Policy Analyst, C.D. Howe Institute. 416-865-1904; email: [email protected]