“Shadow banking” system must be regulated, says report

OTTAWA—It’s time for the “shadow banking” system to come out of the closet and be regulated, just as the banks are, says a report released today by the Canadian Centre for Policy Alternatives (CCPA).

“The recent financial meltdown worldwide has been the result of a failure to recognize the basic instability of this new near-banking system,” says co-author Doug Peters, former Secretary of State (Finance) and former TD Bank Chief Economist. “The failure to properly regulate it has, in effect, resulted in a severe global recession.”

In Canada, the “shadow banking” system includes finance companies, hedge funds, private capital funds, and the trusts that are an integral part of the securitization process.

The report makes several recommendations to reduce the instability and systemic risk in Canada’s financial system, including:

• accelerating the effort to bring about a single national Canadian securities regulator;
• setting up an authority under the Office of the Superintendent of Financial Institutions to approve all financial instruments that are available to Canadian investors;
• requiring credit card companies such as Visa and MasterCard to have their Canadian operation operate as federally-regulated financial institutions; and
• retaining Canada’s current mortgage-lending model instead of adopting the U.S.-style model.

“No set of regulations is ever a complete panacea for irrational panics, such as we have seen recently,” says economic consultant Arthur Donner, co-author of the report. “But careful regulation can give a country a more stable financial system with clear benefits to the nation.”

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Some Thoughts On Financial Reform In Canada is available on the CCPA website at www.policyalternatives.ca

For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.