Financial Planning > Behavioral Finance

Next Global Bank Crisis May Be in Wings, Says Canadian Regulator

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Ted Price, assistant superintendent of the Office of the Superintendent of Financial Institutions (OSFI), said Sunday that the next global banking crisis could be on its way and that regulators should bear down on the financial industry before it hits.

 His remarks came as global banking regulators discussed extra capital cushions that could be implemented based on risk and size of financial institutions classed as systemically important financial institutions (SIFI), banks considered “too big to fail.”

Reuters reported that Price spoke in Calgary regarding the possibility of another crisis as the Institute of International Finance (IIF), a global banking lobby group, was pushing back against G20 efforts to tighten capital and liquidity requirements to try to prevent just such an event.

From a regulator’s point of view, said Price according to the text of prepared remarks, banks are entering a “dangerous” stage thanks to high profits and a willingness to pursue risky asset investments that offer the potential for high returns. He was quoted as saying, "I believe we have passed the easy part of the cycle, and it is time for regulators to get tough." If they fail to do so, another crisis could result: "I think we have seen this movie before, but the amazing thing is we continue to expect a different ending."

The Basel Committee on Banking Supervision has been asked by world leaders to come up with additional safeguards for big banks so that they will not believe that they will automatically be rescued thanks to their size and importance, and so that they will be less likely to need taxpayers to bail them out in the event one oversteps and lands in trouble. A requirement to hold extra capital is one such measure, and according to regulators, banking officials and analysts, the committee is considering 1-3% of additional capital on top of a bank’s minimum requirements.

On Friday, Handelsblatt, the German business daily, was reported to have said that regulators were also considering a new systemic relevance category.

While currently no bank holds this category, an institution that fell within its purview—a “super systemic” lender—would be required to add a 4% cushion of capital.

The G20 had wanted the SIFI requirements finished by last November, but now hope to have agreement on all its elements by this November. It had split over the question of mandatory capital surcharges.

Other measures under debate include the use of hybrid debt or contingent capital (CoCos); whether to require pure equity or contingent capital; and how and when any approved measures would be phased in. Currently some countries have already seen the introduction of a surcharge; Britain, Ireland, Spain, Sweden, and Switzerland push banks to hold 10% or more of core Tier 1 capital ratios. This is considerably higher than the 7% required by Basel III, to be phased in from 2013.

Josef Ackermann, chief executive of Deutsche Bank and chair of IIF, termed the methods used to identify systemic banks inherently flawed and "spurious." Rick Waugh, IIF vice chairman and Scotiabank chief executive, said that believing rules alone could forestall any future fiscal crises was a mistake.