Canada's banking system has been stuck in a regulatory rut since the financial crisis of 2007-2008.Nathan Denette/The Canadian Press
John Turley-Ewart is a Canadian banking historian and principal at Regulatory Risk Management Inc.
U.S. President Donald Trump may know little about banking in Canada – witness his recent and ludicrous suggestion on Truth Social that U.S. banks don’t do business here. But Canadian banking is one sector where changes Mr. Trump is imposing in his country may spark needed change here at home. Take regulation as a case in point.
Our banking system has been stuck in a regulatory rut since the financial crisis of 2007-2008. Despite emerging from that global banking wreck as an example to the world, Canada became an advocate for new global bank regulations (Basel III) designed for systems that failed the test of the 2007-2008 crisis, particularly those in the United States, European Union and the United Kingdom.
Canada’s primary bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), has been behind this push. Its 2022-2025 Strategic Plan’s top priority: “refocus the delivery of our mandate to place greater emphasis on contributing to public confidence in the Canadian financial system.”
This objective was odd. The last time confidence in the Canadian banking system was arguably in doubt was during the Great Depression.
The mismatch between reality and OSFI’s plan has led to a costly overshoot on regulations addressing a future global financial crisis. This makes Canadian banks less competitive on international and U.S. stages and has distracted OSFI from effectively supervising less globally glamorous matters such as compliance with anti-money laundering rules.
Canada’s banks have been force-fed new global rules that cost hundreds of millions of dollars to implement and will cost millions more annually to sustain. The goal is to impose higher capital requirements on banks using complex mathematical models, among other tools, across most lines of business.
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The rub is that no other major jurisdiction where our banks compete (the EU, Britain and U.S.) has implemented these changes despite decade-long promises to do so. Why? The changes lock up so much bank capital that they materially impact economic growth, making them impolitic.
Just how impolitic will soon be evident in the U.S.
On Jan. 20, Mr. Trump signed an executive order imposing a regulatory freeze on all U.S. executive departments and agencies as part of his administration’s promise to prioritize economic growth over red tape, a promise that has taken direct aim at banking regulation.
A seismic shift in U.S. bank supervision is now in motion, to be followed in the EU and Britain, where growth and competitiveness are taking priority over global regulations.
Signalling the shift to come is Trump adviser and former bank regulator under the Trump 1.0 administration, Brian Brooks. In early December, he told a conference: “The first thing is, you can expect a radically different kind of bank regulator to take office here in the next six months – radically different … more focused on growing the economy … than they are in making sure that there’s not a single loan default anywhere in the banking system.”
Credence was given to Mr. Brooks’s prediction in a recent statement by Travis Hill, the acting chairman of the U.S. Federal Deposit Insurance Corporation (FDIC), which in the past supported the global capital rules OSFI is enamoured of.
Mr. Hill noted that the FDIC will now “conduct a wholesale review of regulations, guidance, and manuals to ensure our rules and approach promote a vibrant, growing economy.”
We are entering an era where every bank supervisor will be steadfast on standards that make sense for the banks and economies of their own countries.
There are signs this reality is starting to sink in at OSFI, which still has time to change course on the full implementation of some of the global rules it so admires.
Comments from OSFI Superintendent Peter Routledge at the RBC Canadian Bank CEO Conference on Jan. 7 provide hope that this is so.
Mr. Routledge offered new clarity on supervising anti-money laundering, which he now calls “critically important and [a] growing area of focus” where the regulator will “act urgently and decisively” if it sees compliance failures.
Importantly, he acknowledged that, “despite OSFI’s demonstrated commitment to the Basel III reforms, we cannot extend the implementation lead we share with a small number of fellow signatories,” an awkward admission suggesting Canadian bank competitiveness and the availability of credit will not be hobbled by bowing down to global banking rules that no major jurisdiction has any intention of implementing, especially the U.S.
OSFI’s focus now, Mr. Routledge told the CEO roundtable, is on “both competitive balance in banking and soundness of Canada’s capital regime … [that] serves the best interests of Canadians.”
It’s about time.