Canada was lucky to have “some tough lady” in banking industry regulator Julie Dickson, but U.S. regulators lack the spine to stand up to powerful banks as she did and so the government must go a step further to force banks out of risky businesses, according to key Obama financial-system adviser Paul Volcker.
While strong supervision from Ms. Dickson worked in Canada, “history suggests that is not enough” in the United States to prevent another financial crisis, Mr. Volcker said at a private event in Toronto on Tuesday evening.
Structural change is required to set up the banking system “in a way that provides structural safeguards against excesses,” otherwise, a second crisis is a big risk, he told a crowd of about 220 at the event, which Canadian Imperial Bank of Commerce organized for key clients.
“There’s not a supervisor in the world who’s going to stand up to these banks,” Mr. Volcker said.
“You’re not going to have enough supervisory spine.”
To that end, Volcker has been pushing a plan to require U.S. banks to drop some trading and investing activities to cut back their risk-taking. The so-called Volcker plan was launched with great fanfare and the endorsement of President Barack Obama, but has since run into significant opposition and is viewed by many in Washington and on Wall Street as unlikely to move ahead.
Mr. Volcker rejected the idea that he is advocating greater regulation, saying that entrepreneurs can still launch hedge funds and other businesses that can engage in risky businesses. “I just want to get it out of the banking system.”
Canada’s banks, however, provide a counterexample. They do many of the same activities as U.S. banks, but were more careful about risk in part because of careful supervision from Ms. Dickson in her role as head of the Office of the Superintendent of Financial Institutions.
CIBC chief economist Avery Shenfeld, who also took part in the discussion, argued that Canada is proof that oversight can do the job as compared to the more radical approach” Mr. Volcker is advocating.
Mr. Dodge argued that supervision is the key, because “banks are dangerous animals” that tend to get in trouble even in their core businesses, like lending.
That means forcing them to drop activities more often associated with hedge funds isn’t the answer.
Mr. Dodge predicted that a second crisis is a risk – but for a different reason. He said the issue to watch is the building deficits in major nations.
“We will have another financial crisis” if investors and citizens lose confidence in the abilities of governments to manage their finances, Mr. Dodge argued, saying governments need a “credible plan for corrective action” in the near term.
By Boyd Erman – theglobeandmail.com
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