The speed of the deposit flight that led to the failure of Silicon Valley Bank means more questions need to be asked about financial oversight in the digital age, according to Canada’s top banking regulator.
“The global financial system is deeply interconnected,” Superintendent of Financial Institutions Peter Routledge told an April 27 Economic Club of Canada event in Toronto. “Contagion is always a threat, so problems on one part of the system ripple across the globe at lightspeed.”
Routledge said the trouble at the technology lender, which spilled over into the wider U.S. regional bank sector and led to the forced takeover of Switzerland’s Credit Suisse Group AG, came despite measures put in place in the global banking system after the financial crisis in 2008.
One of those measures included was a liquidity coverage ratio, requiring banks to hold strong liquid assets that can cover cash outflows for at least 30 days.
“Those ratios weren’t supervised in the United States the same way we do here,” Routledge told reporters after the event. “And so one explanation could be if you supervise these ratios, you’ll have more stability and funding.”
Those ratios weren’t supervised in the United States the same way we do here
Peter Routledge, OSFI head
Routledge said there was room to do more to improve liquidity requirements in a digital world, but that regulators had to be wary of changes that could dramatically alter strategies such as maturity transformation, where banks borrow short term and lend long term.
“There’s plenty of degrees of freedom to do sensible things with rules so that you can try and find an optimum and balance those two ideals: stability versus maturity transformation, which fuels economic growth,” Routledge said.
Routledge said he had more confidence in the stability of deposits at Canada’s financial institutions now that lessons of the SVB crisis are being learned.
“I don’t want us to communicate that it’s all clear, rest easy,” Routledge said. “One of the core tenets for any bank is build a solid deposit franchise that lasts through the ups and downs. I haven’t seen any — as shocking as events over the last month — I haven’t seen anything that undermines that.”
When the next crisis comes along, Routledge said the Office of the Superintendent of Financial Institutions’ playbook would involve a three-pronged approach.
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When rates rise and credit becomes scarce, Routledge said the regulator will take swift and decisive action to protect depositors and creditors; be transparent about financial sector risks in their reports; and continue to advance key regulatory policies to maintain financial system stability.
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