Opportunities for Better Systemic Risk Management in Canada

With the IMF scheduled to perform an update assessment of Canada’s financial sector stability during 2018-19, this paper asks: How is Canada faring when it comes to the management of systemic risk? To answer this question, I focus on capital markets, both federal and provincial, coordination issues, and how the stability responsibilities of the proposed cooperative market regulatory system should be exercised. I also make some recommendations on systemic risk management more generally. While improvements have been made, overall, the upcoming IMF assessment is likely to again point to areas where we have not made sufficient progress. As such, this paper argues that the following suggestions will point us in the right direction: • Clarification is needed that the Bank of Canada and the Cooperative Markets Regulatory Authority (CMRA) are expected to take the lead in systemic risk conjunctural analysis, with involvement of Finance and OSFI, and inter-agency coordination performed by the Heads of Agencies group given the federalprovincial aspects. • The CMRA should elaborate the framework and analysis the new authority intends to use to assess systemic risk in securities markets, it should focus on enhanced market monitoring and contributing to macro stress testing, and it should commit to publishing regular reporting on its systemic risk assessment. • The Canadian Securities Transition Office should develop draft arrangements for the sharing of stability analysis among the CMRA, the Bank of Canada, OSFI, and key provincial market regulators who are not part of the cooperative capital markets initiative, and should publish these for comment. • The Bank of Canada should broaden the regular reporting it makes in the Financial System Review (FSR) to include its analysis of systemic market risk, especially the links between markets and institutions, which it is uniquely positioned to analyze. • The federal and provincial regulators should ensure there are arrangements in place to share market data necessary for financial stability analysis of capital markets. • BC should, through legislation, rectify deficiencies identified by Financial Institutions Commission (FICOM) compared to Basel Core Principles. • Alberta should update the guidance applying to the Alberta Treasury Branches, and ensure that its supervisory resources are sufficient. • All provinces should be more transparent about the resources they are devoting to prudential regulation and supervision in the annual reports of the various agencies. • Provinces should ensure they all have the arrangements in place to access Bank of Canada Emergency Liquidity Assistance. Implementation of these measures would bolster Canada’s ability to monitor and deal with systemic risk in the financial system, with the proposed cooperative securities regulator playing a key role.