CANADA – Canada’s financial institutions are key to solving the country’s productivity problem, according to a new report from the C.D. Howe Institute. In “Productivity and the Financial Sector – What’s Missing?” author Jeremy Kronick argues that rules and regulations governing the financial sector need to be modernized to promote innovation and productivity among banks, credit unions, and insurance companies.
The new report finds that Canada’s financial sector – a critical component of the country’s economy – is lagging behind OECD peers in its contribution to productivity growth.
“Improving the sector’s productivity would boost not only its own performance, but the economy as a whole,” says Kronick. “Given the financial sector’s importance, it is crucial to maximize its contribution to aggregate productivity growth.”
While economic growth in the short run can be achieved through changes to labour and capital, long-run growth can be achieved only through technological progress. Therefore, productivity improvement is considered the primary driver of economic growth in developed countries.
The author finds the financial services sector’s productivity is held back by a policy approach that does not properly evaluate the link between competition and productivity, a regulatory structure that does not always reflect international best practices, and less efficient allocation of capital due to disproportionate mortgage lending incentives that favor residential over commercial mortgages.
Among Kronick’s key recommendations:
- Remove barriers to the development of fintechs through a functional approach to regulation. Current regulations are not well tailored to smaller players and regulating by functions would help close the gap, while preserving consumer protections;
- Implement regulatory oversight that is proportionate to functional risk. If a particular function’s failure is unlikely to pose a risk to the system, oversight need not be as strict as in the case where failure puts the system in jeopardy;
- Revise the Bank Act and Insurance Companies Act to allow more flexibility for banks and insurance companies to make substantial investments in fintechs and insuretechs.
“Removing the regulatory and policy obstacles would result in enhanced productivity, which in return will generate sustainable economic growth,” the author concludes.