Title: Strategies for Banking Sector Modernization: Lessons from Canadian Experience
1Strategies for Banking Sector ModernizationLesso
ns from Canadian Experience
-
- Financial Modernization Seminar
- Bank of Thailand
- January 22, 2002
- Fred Gorbet
- Director, Financial Services Program
- Schulich School of Business (York University)
2Agenda for this morning
- Background on Canadian financial system
- Overview of MacKay Task Force
- Some key implications of change and key issues
outstanding - Lessons from the Canadian experience
3Background Constitution
- Prudential Regulation
- Banks clearly federal
- Credit unions clearly provincial
- Everything else shared (but mainly federal)
- Market conduct
- Securities markets and licensing clearly
provincial - But situation re banks not clear (current legal
challenge)
4Evolution of Financial Sector
- Clear importance of banks
- Some world-class insurance companies, growing in
importance - But no strong second-tier deposit-takers
- Bank mergers a continuing, difficult issue for
the industry and for the government
5Relative size of major Canadian banks
6Evolution of Financial Sector
- Nature of banks is changing
- Capital markets are increasingly global
- Banks supply less than 1/3 of corporate debt
- Consumer risk/reward tradeoff shifting and banks
becoming increasingly disintermediated (eg.,
mutual funds)
7Changing role of banks deposits and mutual funds
8Key regulatory developments
- No bank failures from 1923-1985
- Substantial change in late 1960s
- Deposit insurance introduced
- Wide ownership of banks
- Two bank failures in 1985 led to reexamination of
system - OSFI created in 1986
9Key regulatory developments
- Four pillars broke down in late 1980s
- Banks bought major investment dealers
- Trust and loan industry essentially disappeared
in 1990 recession - 1992 legislative reform effectively recognized
convergence 5 year sunset clause introduced
10Recurring policy issues
- Competition versus stability
- Regional sensitivity
- Community and small business access
- National control and ownership
- Rules versus discretion
- Regulatory overlap and duplication
11Task Force established in 1996
- First comprehensive look at sector since 1967
- Reported in September 1998
- More than 250 submissions 100s of meetings
- 18 research volumes five background studies
- 124 recommendations.
- Virtually all recommendations accepted by
government and became law in June, 2001.
12Basic philosophy of Task Force
- Change is pervasive needs to be managed in
public interest - Change driven by technology, globalization,
changing consumer preferences, and demographics. - Change would continue to lead to new competitors,
pressure on existing institutions, and
convergence within the sector. -
13Banks are roadkill on the information
highway Bill Gates, 1995
What we now describe as banks, trust companies,
credit unions, insurance companies, mutual fund
companies and securities dealers may well be
unrecognizable within the coming
decade. (MacKay Task Force Report)
14Managing Change in the Public Interest Requires.
- A vision should be consumer driven
- Leadership and flexibility in achieving
this vision
15The vision of the Task Force
- Robust competition and consumer choice
- Successful financial institutions headquartered
in Canada and competitive at home and abroad - Empowered consumers
- Responsible financial institutions
- Streamlined and effective regulation
16Increasing competition
- Ownership policy
- Foreign entry
- Access to payments system
- Easier start-up conditions
- Increased business powers (rejected)
- Capital tax holiday for startups (rejected)
17Institutional Adaptability
- Clear and transparent merger process
- Allow organizational flexibility through
regulated holding companies - New definition of wide ownership to allow
strategic investments - Expand range of permitted activities
- Remove capital taxes on financial institutions
18Empowering Consumers
- Improved framework for competition through
empowered consumers - Disclosure/Transparency
- Privacy
- No coercion (particularly tied-sales)
- Easy and accessible redress through ombudsman
19Responsible Financial Institutions
- Access to basic banking services
- Notice to close branches
- Annual accountability statements
- New framework to monitor and report on financing
of small businesses
20Streamlined and Effective Regulation
- Competition vs. institutional safety
- Make OSFI responsible for consumer protection for
federal institutions (new agency instead) - Integrate consumer protection plans (rejected)
- Government moved on own to give OSFI new powers
and to strengthen Ministerial oversight of
payments systems
21Implications of change
- Much more competitive retail marketplace
- Intensification of convergence banks will
continue to become less special - Expect greater strategic diversification
- Major bank mergers unlikely for some time but
holdcos provide new options - Consolidation will continue
22Challenges for regulators
- Manage shift in balance (competition vs. safety)
mindset and culture - New rules for holding companies
- Are banks still special? How to deal with too
big to fail issue? - Implications of North American integration
23Key Issues Outstanding
- Regulatory overlap and duplication still exist,
particularly in securities markets - Implications of convergence for consumer
protection plans still need to be addressed - Corporate governance and interaction of
regulators and boards - Continuing health of Canadian banks in an
over-banked marketplace
24Lessons from Canadian reform experience
- Speed is important
- A clear vision is essential
- Build in flexibility of action
- Emphasize transparency
- Build an integrated regulatory structure
- Staff it with the right people
- Let them do their job and support them