G20 Issues Requirements for Domestic Systemically Important Banks

By: Daniel Rattanamahattana on October 13, 2012

The world economy is not in the best condition, with some economists believing that certain countries are coming close to a second financial collapse, similar to the one that began in the U.S four years ago that subsequently had an impact across the globe.  This time the trigger point appears to be in Europe but with the global economy so intertwined, if one country is suffering, there are repercussions elsewhere.  Canada has not felt the more devastating effects of this financial turmoil due to our sound banking structure that so far, has served the country well and protected us.

Four years ago when Lehman Brothers collapsed the U.S began coordinating bailout plans in cases where they deemed financial institutions as being “too big to fail.” This was incorporated by the G20 to protect institutions crucial for the global economy’s welfare such as J.P Morgan Chase and Co.  These organizations now face more stringent regulations to prevent another Wall Street market crash.  As a smaller country, economically speaking, in the developed world, Canada’s banks are not considered ‘global’ enough to warrant such extra regulatory provisions, but do meet the necessary requirements to be   classified as “domestic systemically important banks” or DSIBs.

The Financial Stability Board met in Tokyo and within the meeting laid out regulations for banks such as Canada’s.  The six largest banks in Canada account for over 90 percent of financial business in the country, with activity relating from personal loans and lines of credit, to corporate account funding.  Ian Lee, a business professor at Carlton University in Ottawa, who followed the G20 meetings, says the size of Canada’s banks may not affect the global economy but would devastate the country itself if they fell into peril.

“It’s pretty hard for the Canadian banks to step around the fact that they are domestically significant.”

G20 Finance Ministers, including Canada’s Jim Flaherty, must still decide if they will support the Stability Board’s recommendation, which is expected in November.  However, Flaherty is facing tough lobbying from the Office of the Superintendent of Financial Institutions (OSFI) to not support the motion.  The OSFI argues it puts the government in too much of a controlling position if further regulation is enforced.

As the motion is further debated, it’s clear each country, including Canada, is free to determine its own way of supporting its banks, but in a DSIB classification, the G20 has made it clear some form of a plan must be in place to ward off another financial crisis.  Canada’s banks have proven strong thus far and a plan to keep them strong may be just what the country needs in these times of economic turmoil.