Print Page

ARCHIVE: TRADE, INVESTMENT POLICY AND INTERNATIONAL COOPERATION

Global Regulator Unnecessary to Fix International Financial System

Paul R. Masson, Research Fellow and Adjunct Professor, Rotman School of Management, University of Toronto
John Pattison, Financial consultant and former executive, Canadian Imperial Bank of Commerce, Toronto
May 1, 2009

Calls for a redesign of global capitalism are misplaced, but national regulation and supervision must be strengthened to avoid a recurrence of the recent financial meltdown. That is the principal recommendation of International Financial Policy Reform and Options for Canada: Think Globally, Act Locally published by the Conference Board’s International Trade and Investment Centre.

“The current financial crisis has led to calls for greater financial regulation, including the creation of a global financial regulatory body, and for a new form of capitalism,” said authors Paul Masson and John Pattison. “Existing international financial institutions need to be strengthened, but the creation of a global regulator is neither practical nor desirable. National regulators are better placed to monitor financial institutions and take appropriate policy measures.”

No to Over-Regulation

The authors recommend that Canada resist calls for over-regulation and “reformulation” of global capitalism. While regulatory improvements are required, government intervention needs to be limited and carefully managed.

Although not immune to the global recession, Canada has suffered less than many other countries because of its more conservative regulations and the strength of its banking system. As a result, Canadian financial institutions may be more competitive in this global environment. The report recommends that Canada take a strong stand in favour of maintaining free markets and limiting regulation to what is necessary to correct market failures.

National regulation and supervision must be strengthened to avoid a recurrence of the recent financial meltdown.

Recommendations for International Reform

The report recommends that Canada consider supporting the following.

  • Replacement of the G7/G8 with the G20. The G7/G8, of which Canada is a member, is clearly inadequate to the task of overseeing international financial markets. At the same time, other forms of cooperation will be conceived and led by various coalitions among the largest countries.
  • An upgrading of existing international organizations—such as the G20, the Bank for International Settlements, the Basel Committee on Banking Supervision, and the Financial Stability Forum—so that they can do their jobs better.
  • Reform of voting powers at the International Monetary Fund (IMF) to give greater weight to emerging market economies. IMF surveillance should be further beefed up and reported on transparently, to strengthen its capability to monitor international capital flows.

Regulatory Reform at the National Level

Banking regulation needs to increase capital requirements to account for trading room risks and risks arising from securitizations. Canada should support measures to improve the transparency of securitized financial products—those bundled and sold as packages of assets. Improved risk disclosure is among the measures needed to restore confidence in this important financial channel. In addition, issuers of securitized financial products must be required to hold some of the risk. Rating agencies should also have their roles, capabilities, and limitations clarified.

Private sector governance has a role to play. For example, financial institutions should compensate senior management and key employees based on three- to five-year performance rather than on one-year results, and discourage them from taking large risks to generate short-term returns.

Read the authors’ commentary in The Globe and Mail.


Paul R. Masson
Research Fellow and Adjunct Professor
Rotman School of Management
University of Toronto
ContactITIC@conferenceboard.ca
Publication
International Financial Policy Reform and Options for Canada: Think Globally, Act Locally
John Pattison
Financial consultant and former executive
Canadian Imperial
Bank of Commerce
Toronto
ContactITIC@conferenceboard.ca
Publication
International Financial Policy Reform and Options for Canada: Think Globally, Act Locally

Related Research
Barriers at the Border: The Costs of Impediments to Business Mobility

Related Executive Networks
International Trade and Investment Centre