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OSFI tiptoes around elephant

Sean Silcoff

Friday, April 18, 2008

MONTREAL -It's too bad you can't get a refund for a useless speech. Attendees at yesterday's speech by Julie Dickson, Canada's superintendent of financial institutions, to the Canadian Centre for Ethics and Corporate Policy in Toronto probably feel their $40 fee could have been better spent.

In the midst of global financial turmoil, this should be the moment for Canada's top financial-services regulator to shine and offer something meaningful. There's certainly much to discuss. Last week, OSFI released its list of priorities for 2008 to 2011. And in yesterday's National Post, Liberal finance critic John Mc-Callum urged her to explain how regulations established by OSFI in 1994 helped create the biggest financial crisis in Canadian history -- the meltdown of the $35-billion nonbank asset-backed commercial-paper market.

Instead, according to speaking notes on OSFI's Web site, her message was disappointingly bland: The current financial climate is tough, but Canadian banks are doing OK. Most people are "inherently good," well, except for some "unsavory actors" in the United States who pushed people into unsavory subprime mortgages.

CEO pay needs a good looking at (apparently by her office, though how that fits her mandate is puzzling). Then, she said, it was time to discuss "the elephant in the room."

Finally, the good stuff. That elephant, she said, is "the whole question of risk" and whether risk management by banks was adequate.

That's a pretty meaty topic to be sure, but the truth is the elephant in any room Ms. Dickson enters is what role her Office of Superintendent of Financial Institutions (OSFI) played during the ABCP crisis. In her speaking notes, there is no mention of it.

But of course, Ms. Dickson has already said -- in a speech last fall -- the ABCP meltdown was outside her jurisdiction. Unregulated players sold third-party ABCP, not the banks she oversees, and, "We do not tell unregulated players how to go about their business," she said.

Indeed, OSFI does not regulate the non-bank ABCP sector. But it did play a key role in creating the whole mess. The original OSFI guidelines set out that banks either had to set aside a large chunk of capital to prevent a default in the event demand for short-term ABCP dried up or they could offer conditional liquidity protection in the event of a vaguely defined "general market disruption" (GMD). The banks opted for the latter, cheaper constraint, and nonbank issuers followed suit. But when demand for nonbank ABCP fell last summer some banks backing the ABCP issuers disagreed there was a GMD and refused to honour their funding commitments.

If OSFI didn't realize it had created the "Canadian-style liquidity" loophole, it should have at least made a top priority in the ensuing months of helping to fix the problem, and ensuring history didn't repeat. Given that Canadian banks played all kinds of roles in the non-bank ABCP market (as liquidity providers, marketers of the paper and sources of assets contained within), OSFI should have played a proactive role. Instead, the market players led the process of crafting a solution that could actually work.

OSFI, meanwhile, tiptoed about. After shrugging her shoulders about it last fall, Ms. Dickson now won't even acknowledge the ABCP crisis in a speech. But if you read her list of priorities for the next three years, it does actually lead with a call to improve OSFI's ability to understand and spot emerging risks to Canada's financial system.

That message shouldn't remain buried in a report -- Ms. Dickson should be out there, delivering the message loud and clear:We're sorry we were nowhere to be seen during Canada's greatest financial crisis, we've learned our lesson, please do not adjust your confidence in our financial markets. It's certainly better than saying, "What elephant in the room?"

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