Single regulator needed for healthy financial system, Dodge tells Board of Trade

Properly working financial systems are key to economic growth, and for that to happen, Canada requires a single securities regulator, former Bank of Canada governor David Dodge told a Vancouver Board of Trade lunch Monday.

And that regulator must oversee not only the equities market but also fixed income, derivatives and other complex securities, he said.

Dodge, now a senior adviser at law firm Bennett Jones LLP, is worried that in response to the financial crisis of 2007- 2008, regulators are putting too much emphasis on regulating banks by introducing legislation like the Volcker rule, part of the 2010 Dodd- Frank financial oversight law, which aims to prohibit financial institutions from making risky trades with their own money.

But that’s over- reacting, Dodge said. First, it focuses on the stability of the financial system at the expense of efficiency, he said. For a good, healthy system both efficiency and stability are needed, he said, because inefficiency means higher costs, and that means less money to facilitate growth.

“My worry today is that globally and nationally we are neglecting the efficiency objective as we pursue policies to promote financial stability,” Dodge said.

Focusing on banks is also wrong, as banks and financial institutions are involved in only one- third of financial transactions, the rest being made directly in the marketplace, he said.

But new regulations on banks have not only increased their compliance costs but, given the speed at which the rules were imposed, led to a credit squeeze, and led to the development of an “unregulated shadow banking sector,” Dodge said.

And that works counter to the stability the regulators are trying to enhance, he said. Regulators should instead be focusing on the markets, which is where most of the problems in 20072008 occurred, Dodge said.

In Canada, that translates to a “unified regulatory regime,” that would have rules that promoted both efficiency and stability.

And that regime should not focus just on equities, as 80 per cent of issuances by value are for securities other than equities, such as fixed income, derivatives or asset- backed paper, complex products “which were at the heart of the global problem in 2007- 2008,” Dodge said.

For those complex products especially, a single regulator is needed to ensure a pool of sufficiently skilled people is developed to oversee the markets, he said.

Efficient and stable markets are important for everyone, Dodge said. Businesses borrowing money and issuers of securities will both have to pay more if markets are inefficient. And savers will earn less.

“So on all parts, for business, for savers and for Canadians in general, we should really worry about efficient markets and we should really encourage our governments to work together to give appropriate authority to the regulators to get on with the job and to encourage the consolidation of regulation in one place,” Dodge said.