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Fox Guarding the Hen House

   

 

 
Flaherty to Tighten Regulation of Canadian Banks After Losses
 
By Theophilos Argitis and David Scanlan

April 24 (Bloomberg) -- Canada will tighten securities regulation to force more disclosure by financial institutions about their investments after record write-downs by the country's biggest banks, Finance Minister Jim Flaherty said.
 

Jim Flaherty, Canada's finance minister, speaks during an interview in New York, April 23, 2008. Photographer: Andrew Harrer/Bloomberg News

The measures, which Flaherty said he'll discuss with bank executives on April 28, may be implemented as soon as this year and will include plans for a single, nationwide securities regulator. The changes will force banks to be more transparent about their holdings and improve risk management, Flaherty said in an interview yesterday in New York.

"I genuinely do plan to discuss with the bank CEOs on Monday the development of our plan to tighten regulation,'' said Flaherty. "This is a time where it is going to be necessary to have more stringent regulation.''

Canada is joining other Group of Seven countries in increasing oversight after Canadian banks posted combined investment losses of C$7.5 billion ($7.5 billion) and a portion of the country's commercial paper market collapsed.

G-7 policy makers on April 11 urged financial companies to use their mid-year earnings reports to "fully'' disclose any investments at risk of a loss, after global banks posted combined losses and writedowns of more than $300 billion from credit markets. Firms should establish "fair value estimates'' for complex assets that investors have shunned, and boost capital as needed, the group said.

Canadian Lenders

Canadian Imperial Bank of Commerce, the country's fifth- largest bank, has taken C$4.13 billion in pretax writedowns in the last year for losses on investments tied to U.S. subprime mortgages. Bank of Montreal, the fourth-largest Canadian bank, has had writedowns and natural gas trading losses of about C$1.66 billion.

"Something's gone wrong here, and everybody has to sit back and assess what it was, and try to avoid it in the future,'' said Brad Smith, a bank analyst at Blackmont Capital Inc. in Toronto.

The nation's capital markets also have been shaken by the collapse of the market for non-bank asset-backed commercial paper. A group of institutional investors have spent seven months on a plan to restructure C$32 billion of the commercial paper that stopped trading in August, and a vote is set to take place tomorrow.

Hog Farmers

At least 2,000 investors, including retired hog farmers, teachers and flight attendants, are among holders of the debt, which was placed in bankruptcy protection last month in the largest restructuring ever in Canada.

Flaherty said he's "hopeful'' investors will approve a plan to convert the 30-day to 90-day debt into new notes maturing in nine years.

One element to shoring up the country's financial markets is establishing a common securities regulator, Flaherty said. He said a national regulator may be set up as early as next year, to replace the 13 provincial agencies that monitor the industry in Canada.

He declined to say what he would do if he couldn't get all provinces to agree to the changes. Provinces including Quebec are opposed to a national body.

"This is not something with respect to which we can dawdle, given what's been going on in capital markets,'' Flaherty said in the interview, adding the country's multiple regulators are undermining efforts to set up free trade in securities with the U.S.

Economy Slows

The Bank of Canada this week cut its 2008 growth forecast to 1.4 percent from a January prediction of 1.8 percent. Flaherty said slowing growth won't trigger a budget deficit and signaled he's prepared to trim spending and buy back less debt to protect the surplus.

"We will have sufficient economic growth that we will be OK on the revenue side, OK on the expense side, and if we have to be more restrained on the spending side, that can be done,'' he said. "The Canadian consensus now is that all governments should run balanced budgets and I intend to do that.''

Flaherty's last budget in February said the economy would grow 1.7 percent this year, and predicted a C$2.3 billion surplus for the fiscal year that started April 1, the smallest since 2004.

"We build in a cushion in our budget, so I'm confident overall we will be OK,'' Flaherty said. "We will have positive economic growth in 2008-2009.''

Boom Benefit

Canada has benefited from a global commodities boom that allowed the government to reduce the national debt by almost C$100 billion since 1997 even as spending rose. No other G-7 country has run surpluses for as long.

"We build in a surplus. We build in some for debt repayment,'' with a current target of C$3 billion a year, he said. "In a given year we might reduce it by less and we can still be on average over a period of time. In fact, right now, we're way above average.''

Finance chiefs from the G-7 this month signaled concern about the dollar's slide and said the global economic slowdown may worsen.

"Certainly some have the view that the U.S. dollar is undervalued,'' said Flaherty, who attended the meeting. He declined to say whether he shared that view.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

Last Updated: April 24, 2008 00:00 EDT

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