This is a topic I do not understand at all well, but I am confident that some of our readers will. But I do hear that the myth that Canadian banks are more strictly regulated is largely...well, a myth. One colleague who used to work in banking told me he never actually met a regulator, there are so few. It's more a difference in style, or method? Our US readers might also be interested in the comparison.
This article by Tara Perkins in the Globe and Mail caught my eye. Here's an excerpt:
In many ways, OSFI's style of regulation is one of trust, or in Dickson's lexicon, "reliance." Dickson is like the loving parent who coaches a child in the right direction through frequent heart-to-hearts, and who cautions them when she sees them veering off course. OSFI ranks Canadian financial institutions on a ladder according to its perception of how much trouble they might be. Those at the top—that list typically includes the Big Five banks—are the good kids who have their bedrooms in order and require minimal ongoing supervision. A team at OSFI will monitor their financial reports, meet with their officials and, once a year, report to the Minister of Finance on their health. Those at the bottom are disasters waiting to happen, and the regulator steps up its oversight accordingly. Only when banks slip to the bottom rungs will OSFI go into their rooms and clean things up on its own.
"We rely on the management and the board and the controls within the institutions," says Dickson. "We spend a lot of our time focusing on the quality of controls." OSFI has been actively pushing banks not to be complacent when it comes to risk management, for example, by promoting ways they can spot problems early, including ensuring that managers in various parts of an organization are in close communication, finding effective ways to monitor employees, and "stress testing" or running the institutions through Armageddon-like economic scenarios to see how they will fare.
The U.S. system of bank oversight, in contrast, more closely resembles a group of babysitters who lay out dozens of rules and then watch—if the rules are broken, they bring out the punishments. This emphasis on rules has led to a concomitant focus on circumventing them: Observers say financial institutions often hire teams of lawyers to help them find loopholes in the regulations. Ed Clark points out that TD Bank has some 17 individuals from various regulatory bodies working on site in its American operations, attending meetings and looking at documents. "There's always a risk in the U.S. system that you say, 'As long as I satisfy these 17 people, then I'm all right.' Whereas Julie says, 'No, you own responsibility to make sure that TD Bank lives another 150 years—not me. My job is just to make sure that I'm happy that you're doing a good job.'"
Comments? Does that sound right?