Canada, which won global praise for its banking regulation after the market meltdown, should show leadership in adopting tighter financial controls, the Conference Board of Canada said in a new report.
The financial sector is unique from all other segments of the economy because it’s the cornerstone of all other economic engines and is critical to the function of a modern marketplace, the board said in a briefing examining the financial crisis after the collapse of Lehman Brothers.
“Paradoxically, the crisis revealed how business and consumer confidence are at the heart of the financial system. Without confidence, the system can crumble and the economy cannot function,” said Louis Theriault, director of international trade and investment for the board.
Therefore, the report argues, the financial institutions must be treated differently.
“The problems of Wall Street can quickly become those of Main Street if banks are unwilling or unable to lend to businesses and consumers,” said Theriault.
“That is the situation we faced in the autumn of 2008, and central banks and governments needed to intervene in the financial system using the nation’s balance sheets to restore confidence.”
The regulatory framework for the global and national financial system needs an in-depth review, the board said. The three areas in need of further controls include, capital requirements, transparency and accounting rules and incentive schemes.
Capital requirements should be increased to protect against the “real” risk underlying securities. Issuers should also be exposed to their own products for longer periods of time, so that they can better understand the associated risks, the report said.
Also, hedge funds should be required to regularly update their risk positions in a renewed focus on transparency.
Thirdly, compensation incentives should be changed to reward fund managers’ longer-term track record as oppose to their short-term returns in order to better protect investors.
“Canada was fortunate to avoid the worst of the financial crisis, and should take advantage of its credibility in international financial circles by demonstrating leadership in adopting changes,” the report said.
