Feds + Provinces Should Close Gaps in Systemic Risk Monitoring

September 25, 2017

– The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies through research that is nonpartisan, evidence-based and subject to definitive expert review.

CANADA – Ottawa and the provinces should bolster their ability to monitor and deal with systemic risks to the financial system, according to a report from the C.D. Howe Institute.

In “Opportunities for Better Systemic Risk Management in Canada,” author Nicholas Le Pan recommends greater coordination by regulators to fill gaps in the current system, and outlines a key role for the proposed cooperative securities regulator.

“The International Monetary Fund, for example, has identified gaps in Canada’s ability to monitor and deal with systemic risk in its financial system,” says Le Pan, a former federal Superintendent of Financial Institutions. “I propose the next steps for Ottawa and the provinces to close those gaps.”

Le Pan provides an overview of how Canada is faring when it comes to the management of systemic risk. He focuses on capital markets, both federal and provincial, coordination issues, and how the stability responsibilities of the proposed cooperative market regulatory system should be exercised. He also makes recommendations on systemic risk management more generally.

As for gaps in the current system, Le Pan’s findings include:

  • It is clear that there are numerous federal and provincial regulatory agencies that have an interest in the management of systemic risk; however, no one agency or formalized grouping of agencies has the clear legal authority or mandate to manage all aspects of systemic risk across the country.
  • At the provincial level, there have been improvements in prudential regulation and supervision post-financial crisis across some provinces, changes that will lead to better systemic risk analysis in these places. But more remains to be done in provinces lagging behind, including BC and Alberta. As well, he notes a lack of contribution to systemic risk monitoring of securities markets.

Le Pan makes a number of recommendations that would improve coordination of systemic risk monitoring. He argues Ottawa’s Capital Markets Regulatory Authority (CMRA), a cooperative securities regulator, could play a key role in these efforts. As envisioned, it will have a specific responsibility related to systemic risk in markets, with a national scope (and international outlook), he notes. “It has the potential to be a marked improvement on the existing situation.”

Notably, says Le Pan, this new authority has the potential to fill a meaningful contributory role in an area – systemic risk in capital markets – that has arguably been under-developed in Canada. Monitoring market data, including collecting market intelligence, should be a focus of the new authority from a systemic risk perspective. Here the authority should supplement the market assessment already being done by the Bank of Canada.

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