Investors Scrutinizing the Regulators

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'Asleep at switch,' ABCP critics say

Bank regulator defends role in asset meltdown

David Akin

Tuesday, June 17, 2008

OTTAWA - The head of Canada's banking system regulator fended off accusations from MPs yesterday that she and her agency, the Office of the Superintendent of Financial Institutions, bear some responsibility for the failure of the non-bank asset-backed commercial paper market.

It was a financial crisis that froze billions of investments and panicked more than a 1,000 everyday Canadians, who had bought into what they thought were risk-free savings vehicles.

Despite her refusal to accept responsibility, OSFI head Julie Dickson, told MPs on the House of Commons finance committee that her office will soon change a key rule that will require Canadian banks to back up ABCP products with more cash assets.

Critics say the changes are a tacit admission that there was more OSFI could have done, and that had OSFI made a change to banks' capital requirements earlier, all players -- bank and nonbank -- in the ABCP market might have taken greater care about the assets in their portfolios and might have avoided staking some of their notes to the crumbling U. S. housing market.

"To me, at least with the benefit of hindsight, it would have been a good move," said Liberal MP John McCallum, his party's finance critic and former chief economist at the Royal Bank of Canada. "I would also argue there were a number of red flags emerging."

NDP MP Thomas Mulcair, a lawyer by training and a former Cabinet member in Jean Charest's government in Quebec, was more harsh. "OSFI was asleep at the switch," Mr. Mulcair said in an interview.

At committee, Mr. Mulcair pressed Ms. Dickson, asking her why she did not sound the alarm earlier and alert investors to potential liquidity problems with the banks.

"There was no alarm to be sounded," Ms. Dickson said. "My job is protecting banks and protecting depositors. There are securities commissions whose job it is to protect investors. We were focusing on the risk to banks."

After meeting with MPs, Ms. Dickson told reporters the pending change to the key guideline, known as B-5, was a response to evolving regulatory conditions worldwide and not an admission that OSFI could have acted earlier to avoid the crisis or to respond to it.

She told the committee one of the new goals will be to require banks to provide some capital to back up short-term liquidity lines, which currently they are not required to do.

She did not say when the revision to B-5 would be published, nor did she indicate how much capital banks would have to use for short-term liquidity lines.

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