The Bank of Canada should play a "clear leadership role" in efforts to safeguard the country's financial system, but the final say over how regulators should address risks, such as record household debt, must be left with Finance Minister Jim Flaherty, according to a report.
The study, being released Wednesday by the C.D. Howe Institute, argues that, while Canada's oversight framework has kept the system stable during three-plus years of turmoil, there are still ways it could improve. Chief among those, the report says, is by beefing up a committee of senior officials from various agencies that advises Mr. Flaherty and giving Bank of Canada Governor Mark Carney a senior role, while leaving ultimate authority in Mr. Flaherty's hands.
C.D. Howe's report, written by McGill University economist Christopher Ragan, is part of a continuing post-crisis push to achieve what officials call "macro-prudential" regulation, policies aimed at protecting the entire financial system, and keeping problems there from spreading to the wider economy.
Under Prof. Ragan's proposal, the so-called Senior Advisory Committee (SAC) – currently a loose grouping without formal status – would be strengthened through legislation and given more resources. It would be chaired jointly by Mr. Carney and Deputy Finance Minister Michael Horgan.
It would send policy recommendations and minutes of its proceeding to Mr. Flaherty, who would then decide whether, and precisely how, to act.
At the moment, Mr. Horgan chairs SAC while Mr. Carney is just one member, even though the central bank under his watch has become a "go-to" institution for analysis of financial threats and how certain behaviour can impact the economy.
Prof. Ragan's proposal would give Mr. Carney a more explicit role in formulating government policy, while keeping politicians such as Mr. Flaherty accountable for regulatory decisions since, unlike in the United States and Britain, the Bank of Canada is not a regulator.
"On the one hand, it is important that the Bank play a clear leadership role in driving the macro-prudential discussion and debate in a timely manner," Prof. Ragan writes in his report. "On the other hand, it is crucial to protect the Bank's operational independence so as not to undermine its ability to deliver long-run price stability."
Indeed, keeping prices stable remains Mr. Carney's No. 1 job and the only real policy tool he has is raising and lowering interest rates. Policy purists say that making him responsible for taming the housing market, for example, could push him to act in ways that are at odds with his main mandate. (Mr. Carney recently rang alarm bells about Canadian households' record levels of debt, but left borrowing costs untouched at his last decision on Jan. 17 because the European debt crisis remains an even bigger threat.)
Prof. Ragan's report does not go into what might happen if Mr. Carney and Mr. Horgan were to disagree on a point, suggesting the panel would be expected to debate until it comes up with a consensus view, which then would be passed on to Mr. Flaherty, along with its minutes.
Canada Mortgage and Housing Corp. would be brought into SAC, as would the national securities regulator, if one is ever created. CMHC's inclusion would be significant: The International Monetary Fund last month questioned whether there is sufficient oversight of the Crown corporation, through which the government insures the bulk of home ownership loans.
Prof. Ragan acknowledges the changes he is pushing are relatively minor. Nonetheless, he contends they could go a long way toward ensuring that all the relevant agencies are connecting the dots and sharing information in a way that was lacking in the United States when authorities failed to spot the dangers posed by the subprime-mortgage market.
"An almost unthinkable political price would be paid if the necessary reforms are not taken and a crisis occurred," he writes. "Like purchasing insurance to protect against possible future costs, a straightforward approach to risk management should lead the federal government to devote the time and financial resources to ensure that Canada's system of macro-prudential oversight and policy coordination is as effective as possible."