Opinion: Banking is changing. Bank regulators need to adapt
By Mark Zelmer
Canada has not had a bank failure in over 30 years. But banking is changing, and so bank regulation may need to change, too.
Bank runs can now cripple an institution in a matter of hours, not days. Deposit insurance can no longer be counted on to prevent such runs. And a very different regulatory environment has emerged in the wake of the global financial crisis. Last year’s sudden collapse of Silicon Valley Bank in the U.S. and slower demise of Credit Suisse in Switzerland are examples of crises Canadian regulators might struggle to cope with if something similar happened here.
As banking evolves away from the system that existed in the last century, the risk of bank runs is likely to grow. Our current regulatory regime will likely struggle to remain fit for purpose. If we cannot prevent bank runs, we at least need to manage them so that an institution that has been hit and cannot recover on its own can be safely removed from the financial system without sending the whole economy into cardiac arrest. Allowing a bank more time to either weather a crisis or be safely removed is key. Options include making withdrawals from savings deposits subject to notice requirements that are routinely enforced and making it easier for stressed institutions to access emergency funds from the Bank of Canada in ways that don’t stigmatize them.
The more confidence we have that stressed institutions won’t cause serious collateral damage, the more we can tolerate future failures. That may open the door to placing more responsibility on bank boards and management to run their institutions’ own affairs.
There are several ways to move forward, ranging from minor adjustments, like raising deposit insurance limits or boosting
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