Canadian Financial System Doing Well, FSB Says

by Mike Godfrey, Tax-News.com, Washington

07 February 2012

The Financial Stability Board (FSB) has praised the Canadian government's response to the global financial crisis and highlighted the resilience of the country’s financial system.

The report was welcomed by Finance Minister Jim Flaherty, who said: “This report confirms that we can be proud of what we have achieved with our financial system over the last few years”.

The FSB carries out regular country peer reviews of its member jurisdictions, examining the steps taken or planned by national authorities to address International Monetary Fund (IMF)-World Bank Financial Sector Assessment Programme (FSAP) recommendations concerning financial regulation and supervision as well as institutional and market infrastructure.

An FSAP assessment is held every five years, with peer reviews taking place typically around two to three years following an FSAP, in order to complement the cycle. A country peer review evaluates the progress made by a jurisdiction in implementing FSAP recommendations against the background of subsequent developments that may have influenced the policy reform agenda.

According to the report's Executive Summary, Canada's authorities responded swiftly and effectively to the global financial crisis. The FSB acknowledged that Canada adopted a variety of macroeconomic policies to buffer the impact of the crisis on the economy, increased supervisory vigilance, expanded liquidity facilities and pro-actively addressed emerging problems. No Canadian financial institution failed or required government support in the form of a capital injection or debt guarantees. The FSB points to the strength of the economy and of the financial system at the onset of the crisis as the explanation for this.

This resilience was achieved in spite of Canada’s relatively complex regulatory structure. This, the FSB says, highlights a number of key lessons for other jurisdictions. The report argues that other jurisdictions should recognise the importance of pro-active and targeted macroeconomic policies, supported by adequate fiscal space and a flexible exchange rate to help absorb external shocks, along with prudent bank risk management, particularly a stable and well-diversified funding profile as well as conservative loan underwriting standards. A comprehensive regulatory and supervisory framework that effectively addresses domestic prudential concerns, including (when necessary) by adopting regulatory policies that go beyond international minimum standards, is also an advantage.

The peer review also makes a series of recommendations for the Canadian government. The FSB says that while the financial system has continued to perform well, the authorities will need to remain vigilant in the face of an uncertain global outlook. Two areas for particular attention are the exposure of the economy and financial system to adverse global economic developments, and the increasing indebtedness of Canadian households. The FSB recommends that the authorities continue to strengthen macroprudential surveillance and consider expanding the range of relevant tools at their disposal (these currently include the leverage ratio and various government mortgage insurance eligibility requirements).

“The actions taken by our government have strengthened this system and prepared it to better face the challenges of an evolving financial world,” Flaherty concluded.

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