Two recent developments threaten to undermine Canada’s hard-earned credibility as a prudent financial center.
The first is our apparent readiness to go along with the with ex-post facto fad of new banking regulations without due consideration being given to why such reforms are actually needed
As former Bank of Canada Governor, David Dodge, recently observed in a meeting with the Calgary School of Public Policy (Feb. 11 Financial Post), many of these changes will impose costly new rules on the Canadian banking sector for a problem that was not of our own making and are directed primarily at punishing miscreants in Europe and the US rather than providing greater stability to global financing.
Canadians will ultimately bear the brunt of these reforms in higher banking fees and charges.
The prevailing conventional wisdom is that the financial crisis of 2007–09 stemmed from the absence of a sensible regulatory framework and specifically from the failures of banks, notably those in the U.S. and Europe, to follow prudent banking practices. Any remedy should therefore ensure that the cost of future failures falls on those institutions that neglected fundamental principles of prudence. It should certainly not penalize further taxpayers who were obliged to support expensive bailouts. In any event, ‘one-size-fits-all’ prescriptions are not the best antidote to such problems.
The stampede by politicians and regulatory authorities to implement new measures in the name of “stability” is understandable especially when one examines the gross misconduct of banks in the U.S. and Europe. Such measures are not warranted, however, in the case of Canada, which has become something of a poster child for its regulatory prudence in recent crises. Nevertheless, we are now caught up, as Dodge observes, in “black letter regulations ostensibly to improve stability, regardless of efficiency losses and the dead-weight, overhead cost of compliance.” Whatever the new regulations may achieve in the name of stability, they may also retard efficient allocations of capital, hence economic growth. At a minimum, there is a need for greater transparency from those introducing greater regulatory oversight and control.
There are few lessons that the Canadian banking system needs to learn from either America or Europe. If anything, as Dodge implies, the lessons and the advantages of the “principles-based” approach to prudent regulation that kept us out of the 2007-09 morass should be a model for others. We should not abandon a regulatory framework that served us well in order to feed the new found zeal of regulators in other jurisdictions who were asleep at the switch before the last crisis occurred. Canadians should be asking why we are following like lemmings rather than leading this crusade for reform.
The second deeply troubling development is the “U.S. Tax Compliance Act (FACTA)”. As of July 1, Canadian banks will be obliged to scrutinize all accounts exceeding $50,000 to determine if they are “U.S. reportable”. They must then inform the Canadian Revenue Agency which, in turn, will convey the information to the IRS. All of this new, regulatory oversight comes at no expense to the IRS. Instead, Canadian banks and their customers will be stuck with the bill. The ostensible objective is to nab “tax cheats” but, as many Canadians know to their chagrin, the long arm of the IRS has few limits and even less capacity for rational judgment when it comes to asserting claims of outside its jurisdiction.
This new requirement is a blatant example of extra-territorial application of US law by the IRS, an agency of the U.S. government that is hardly a beacon of ethical propriety these days. The sheer power of the United States may be sufficient to oblige compliance – ‘going along in order to get along’ – but one is left to wonder why our government should reward the U.S. government on the backs of Canadians. Isn’t it enough that we pay billions to build a bridge, including the land on which U.S. Customs facilities will be built, connecting Windsor to Detroit or that we also contemplate the purchase of hugely expensive, U.S. fighter jets without any practical, bilateral dividend in return. Perhaps we should propose a similar form of scrutiny on U.S. financial institutions. Sauce for the goose no less.
Canada should not blithely follow the drumbeat of new banking regulations promoted by those who failed to mind their own store and provoked their own crisis. Furthermore, why should Canada comply with unilateral over-reach by any U.S. regulatory agency without at least seeking to preserve legitimate privacy and sovereignty concerns? If we resist U.S. extra-territorial ploys, as we should, other countries might just follow suit.
If we don’t stand our ground now, we may next be asked to acquiesce into actions by the National Security Agency to monitor phone calls between and among Canadians. But, wait a moment, that is already happening, even if it is not anchored by any kind of formal agreement.