Finance Minister Jim Flaherty stands in the House of Commons in Ottawa, Monday January 27, 2014 to announce he will deliver a budget on February 11.Fred Chartrand/The Canadian Press
When it comes to financial regulation, Finance Minister Jim Flaherty isn't one to tinker.
If something is broken, like, say, Canada's disjointed approach to securities oversight, he'll fix it – even if he has to do all the work himself. As for upgrades that would in theory improve the odds of avoiding a financial meltdown, Mr. Flaherty is content to leave the wonks and pinheads to have their internal debates and to write their papers.
So Mr. Flaherty will be selective in his interpretation of the International Monetary Fund's review of the Canadian financial system, the second Financial System Stability Assessment of Canada since the IMF started conducting the periodic reviews for bigger economies back in 1999.
Like most everyone, the IMF generally has high praise for Canada's supervision of banks and insurers. But it's the fund's job to criticize, and it finds fault with the informality of some aspects of the system.
For example, the ability of the superintendent of supervision to put six executives responsible for more than 90 per cent of the country's bank assets in a small room to read them the riot act is often described as a strong point of Canada's approach to regulation. The IMF isn't so sure, pointing out that the expectation of the Office of the Superintendent of Financial Institutions to be "informed by bank management whenever issues arise" relies more on trust than on statute.
"This informal approach to information flows is vulnerable to staff turnover at the banks and OSFI, and may not work well when the system comes under stress," the IMF says in its report.
Another potential flaw in Canada's system is the absence of any agency or body whose primary responsibility is preparing for a financial crisis. There are four inter-agency committees in Ottawa that meet regularly to discuss issues related to the financial system, but "no single body has the mandate for macroprudential oversight nor do any of the oversight committees have the membership that would allow for a comprehensive view of systemic risk across all financial institutions and markets in Canada," the IMF report says.
The obvious hole in Canada's financial safety net is securities, which could be plugged by the national regulator that Mr. Flaherty is so stubbornly trying to will into being. But federal regulators still would lack a clear line of sight into what's going on with credit unions, which are supervised by provincial regulators.
"A unified approach to analyzing risks that stem both from federally and provincially regulated institutions and markets is lacking," the IMF says. "No one has a mandate to collect and analyze data for the financial system – federally and provincially regulated institutions, unregulated entities, and markets – as a whole."
In October, I happened to ask Mr. Flaherty during an interview whether he thought Canada would benefit from having an entity with defined power and accountability for financial stability. He said no, and that he liked the system that way it is now. "I believe in things that work because I'm pragmatic, and it works," he said. "So don't try to fix something that works. I'm comfortable with where we are."
And as important as the fund's critiques may be on a theoretical level, the IMF's review of Canada's financial system probably only will reinforce Mr. Flaherty's point of view.
Canada's banks easily passed the IMF's stress tests. A recession that caused gross domestic product to shrink by 3.3 per cent in 2014, the unemployment rate to surge to 10.9 per cent, and property prices to fall more than 20 per cent would have only a "moderate" impact on the country's biggest banks, the fund said.
It's hard to argue Canada's system needs fixing, even if it does.