Bank of Canada Governor Stephen Poloz holds a news conference on January 21, 2015 in Ottawa. THE CANADIAN PRESS/Adrian WyldAdrian Wyld/The Canadian Press
'Shadow banking" sounds sinister and shady, all the more so because the phrase was reportedly coined in 2007, just shortly before the eruption of the "Great Recession" of 2008-2009, in which both shadow and conventional, more regulated banking figured hugely. But as in visual art, light and shadow both have value and can complement each other.
Then again, the longer the shadows get, the more we're all in darkness. A good case can be made that not nearly enough is known and understood about the inner workings of Canada's less familiar financial firms, often called shadow banks.
This week, former federal finance minister Michael Wilson gave a speech at the C.D. Howe Institute, titled Taking the Shadow Banks out of the Shadows.
Shadow banking in Canada is proportionately quite small, compared with its equivalents in other developed economies. Even so, the Canadian asset-backed commercial paper crisis (ABCP) in 2007 – which broke out before the full-blown global financial crisis – was a severe shadow-bank episode.
Mr. Wilson points out that, eight years later, Canada still has no clearly designated agency keeping an eye on shadow banking. He suggests that the Bank of Canada should take the lead on the file. The central bank and the Office of the Superintendent of Financial Institutions already watch the shadow sector, as can be seen in various speeches and papers, but there's no formal, consistent mandate. There should be.
Mr. Wilson notes that the country's securities regulators could in theory take on this job, but without a single, national securities regulator, "the data and the analysis might not be consistent."
He also says that he is only proposing a voluntary approach, and "not recommending new regulation for the shadow banking sector." That may be too timid.
It's true that these enterprises exist in order to be more flexible than the heavily regulated chartered banks. In the nature of things, they will continue to be – and should be – somewhat riskier than the banks. But nobody wants another ABCP crisis. Transparent and consistent communication between governmental institutions and financial enterprises of all stripes is necessary. And right now, it's not clear exactly who's in charge of looking into banking's shadows.