Remarks to the Montreal Chapter of Chartered Financial Analysts (CFA)
October 27, 2010 — The past few years have seen an incredible amount of focus on not only Canada’s financial system, but the global financial system as well. These were times of significant disruption, the depths of which we may only truly understand with the passage of time, and subsequent reflection.
As you have likely heard innumerable times, Canadian financial institutions weathered the financial storm relatively well when compared to many of their international peers. This does not mean that the “all-clear” siren has sounded and we are back to business as usual; a great deal of change is still working itself through the system.
These changes, why they need to be made, and why we need to be on guard against the unintended consequences they may bring, will be the subject of my remarks today.
Multi-dimensional Oversight
Over the many months that have transpired since the start of the global financial crisis, much has been written about its root causes and how future crises can be avoided. There has been a lot of action as well. Of note, the Basel Committee on Banking Supervision (BCBS) has agreed on much tougher new rules under the banner of Basel III, and we have seen reports and suggestions from many countries, as well as a number of international bodies.
All of these initiatives typically come with language about how effectively the problems of the past have been, or will be, dealt with. But what has become clear is that there is no single element anyone can point to that will guarantee financial sector stability. In fact, I would say that strong financial systems reflect many different factors, including multi-dimensional oversight of banks by multiple parties. This includes:
- oversight by regulators via strong rules and robust daily supervision;
- oversight by the market (e.g. investors, analysts, rating agencies);
- oversight by bank senior management, risk management, and internal audit;
- oversight by bank boards;
- oversight by external auditors who provide audits of financial statements; and,
- policy setting and action by central banks and governments in the form of sound macro and micro polices.
It is virtually impossible for one party to do the job – not the CEO, not the board, not the regulator, not investors with money at stake, not analysts poring over disclosures, not central banks and not governments. All parties play a role and must carefully perform their critical functions.
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