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Right-sized regulations needed for smaller financial institutions

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Simply because something works in other jurisdictions or other countries doesn’t necessarily mean it’s right for Ontario. And in many cases the same can be said for whether it is right for Canada.

Nowhere have we seen foreign pressure to act on perceived “issues” greater than in Canada’s – and Ontario’s – housing market and banking supervision. Much of the pressure came from the subprime mortgage crisis in the U.S. and, I believe, runaway imagination stemming from people taking the movie The Big Short as fact and not simply a Hollywood movie based on real events.

I say movie because most people who point to the issue have never read the book. But give it a read. It is a wonderful synopsis of what happened during the sub-prime mortgage crisis. That crisis had a major impact on the U.S. financial sector deregulated by former president Bill Clinton in the late-1990s. Other countries also followed that pattern, Canada did not and that is why we weathered the crisis better than almost anywhere.

While Canada was smart enough not to follow the U.S. in the 1990s, the same cannot be said today as the Canadian mortgage market has undergone massive upheaval since the U.S. created crisis in 2008. Everything from new stress testing rules, debt levels and arbitrary limits on how much of a house you can insure has led to massive tinkering of Canada’s housing market.

One of the things the federal finance department or Evan Siddall, CEO of the Canada Mortgage and Housing Corporation, won’t tell you is what mortgage default rates are in this country. In the summer of 2018 during the height of the mortgage crackdown, Canadian banks had a 0.37 per cent mortgage default rate — and the country’s credit unions 0.24 per cent — galaxies away from U.S. “big short” default rates that saw people walking away from entire subdivisions.

Many in the housing finance and housing sales industry have called the work of Finance Minister Bill Morneau supported by Siddall nothing more than policies looking for problems.

You see it constantly with new governments and these changes do range back to the federal Liberals’ 2015 win. A hobbyhorse of the bureaucracy is suddenly hoisted upon the incoming government and presented as a way to fix a perceived mess, but “the last guys didn’t listen.”

Ontario and Ford Nation haven’t avoided this phenomenon. For example, there is an issue facing the Ministry of Finance that is no doubt embedded in academia and “world-think” that could have a serious negative impact on an Ontario industry.

The industry is the credit union sector. Specifically the promised re-write of the Credit Union and Caisses Populaire Act – a remaining relic of the Bob Rae NDP government. This legislation, written before the Internet, is the guide to regulate the institutions charged with the management of $61 billion of Ontarian’s investments — deposits, loans, mortgages, etc.

While there have been major changes in the past five years — increased deposit insurance, Canada-wide loan syndication, ability to broker property and casualty insurance — the overall legislation is old, clunky and not fit for modern member-responsive institutions. Thus, the last three finance ministers have promised the re-write.

The key to this re-write goes back to what Christian Bale — or the guy he was playing — found in The Big Short and one of its love children — Basel III. Rules from the third report of the Basel committee on banking supervision are being adopted worldwide.

These rules were built for the largest of the large financial institutions. Conjecture says the Royal Bank of Canada is the only local institution large enough to really need the rules — I would say Canadian Imperial Bank of Commerce and Toronto-Dominion Bank’s exposure in the U.S. mean they should apply to them as well.

Why not throw the Bank of Montreal and the Bank of Nova Scotia in there too? They have international holdings. Credit unions do not.

So as regulators and ministries all the world over look to shoehorn Basel III rules onto financial institutions and the massive costs that come with it — Ontario is doing the same. They are basically trying to find a way to adapt credit union capital, based on the co-operative model, into the Basel III rules — rules created for monolith multinational institutions.

During the summer of 2018, I spoke about the need to apply such rules on smaller financial institutions at the World Council of Credit Unions (WOCCU) held in Singapore. My presentation focused on the idea of proportionality and how over-regulating is actually more dangerous due to extra costs, staff burnout and too much focus on unneeded rules.

It would be kind of like rules around deployment of jetways at the St. Thomas Municipal Airport, the rationale being people need to be safe when getting into planes. And the opposing argument would be, they walk up stairs and we don’t have jets.

Thankfully on Dec. 3, the Basel Committee on Banking Supervision and the Basel Consultative Group issued a joint statement supporting the use of proportionality when implementing Basel III and its capital adequacy rules.

“National-level regulators tend to use the highest standards allowed by Basel III — which were designed to apply to large, international banks. To apply them in equal measure to credit unions is often either inappropriate or excessive,” said Andrew Price, WOCCU vice-president of advocacy.

I wanted to paraphrase that, but it hit the nail on the head and is something that is needed when looking at extra-jurisdictional regulations’ impact on Ontario and Canada. Yes they should offer as a guide, but our rules should be based on what is best for the safety and future of our industries.

Finance Minister Rod Phillips and his Parliamentary Assistant Stan Cho should consider this when looking at what is appropriate for Ontario institutions and plan around that. Sometimes they are in fact good ideas; regardless, the impetus for creating them may embed unnecessary rules. As for the credit union lobby, trying to get ministry buy-in on a program and then say, “ya, but just these parts,” is mind-numbingly difficult, so pump the brakes on adopting too much from other jurisdictions.

So this is to say, rather than being Lloyd Christmas falling off a jetway “again,” let’s keep your eyes open, look where you are going, figure out what is best for Ontario and if it’s easier, just take the stairs.

Originally publisher in QP Briefing December 20, 2019

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