Departing Bank Watchdog Dickson Keeps Focus on Risks

Canada’s banking regulator Julie Dickson says that her agency is a dark place, and that gives her comfort as she prepares to enter her final year on the job.

Dickson, speaking yesterday at Bloomberg’s Canada Economic Summit in Toronto, said she won’t seek another term as top bank watchdog when her seven-year tenure ends in July 2014, ending a reign that saw her emphasize safety over growth as head of the Ottawa-based Office of the Superintendent of Financial Institutions, which helped make Canadian lenders world beaters.

“As some have noted, ‘OSFI is a dark place’ because of our focus on all the things that can go wrong,” Dickson, 55, said in her speech yesterday. “But it is a focus that has proven to be valuable and this gives me comfort that Canada will continue to enjoy a safe and sound financial system.”

Canadian banks held four of the top 10 spots in Bloomberg Markets magazine’s annual ranking of the world’s strongest banks, released this month. The industry also has been ranked the world’s soundest for the past five years by the Geneva-based World Economic Forum.

Dickson’s record has been marked by prudence and detailed monitoring that has been met with some resistance within the industry.

Last year, the Canadian Bankers Association said policy makers should “hit the pause button” to take stock of rules put in place since the financial crisis.

“It’s a tough job, it’s a thankless job,” Scotiabank Chief Executive Officer Rick Waugh said yesterday at the Bloomberg conference. Waugh also cited work by Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney in helping the nation largely escape the worst of the global financial crisis.

Much Credit

“There was a lot of credit to share and she certainly gets it too,” Waugh said.

Dickson has focused on bolstering stress tests at financial institutions, even while warning them not to take “false comfort” from the results. She also led a broad review of the country’s six biggest banks and three biggest life insurance companies as part of efforts to augment their governance and risk management.

Day-to-day monitoring of banks and insurers has increased under her watch, with OSFI burrowing deeper into the books of their units and subsidiaries. Her agency’s most recent focus has been on the impact of growing household debt and rising home prices, which prompted a tightening in mortgage underwriting rules last year.

Ontario Teachers’ Pension Plan Chief Executive James Leech said he gives Dickson “full marks” for identifying risks to the financial system before they became realities.

Low Rates

“They were fast to recognize areas of risk and bring them to people’s attention,” Leech said at the same event.

Dickson’s focus recently has turned to how low interest rates may be threatening to increase risks for the country’s lenders.

Four years after the deepest recession since World War II, central banks are still combating sluggish economies with interest-rate cuts and asset purchases. So far this month, monetary authorities overseeing a quarter of global gross domestic product have lowered rates, including those of the euro-area, Australia and Israel. Canada’s policy rate has been unchanged at 1 percent since September 2010.

Bank regulation and supervision need to be a “strong line of defense” against the consequences of sustained low interest rates, which could include falling margins and increased reliance on higher-yielding assets, Dickson said yesterday.

More Risk

The regulator “is very focused on how banks are reacting to current conditions,” said Dickson. “The longer the low interest-rate environment persists, the more interest-rate risk can be built up.”

It was concern about complacency that led the regulator to make the nation’s banks meet new capital standards ahead of global peers. The rules require Canadian banks to hold a minimum buffer of 7 percent common equity this year.

Dickson has also labeled Canada’s six biggest banks as “systemically important,” requiring them to set aside more capital to safeguard against failure.

The six banks will be subject to a surcharge equal to 1 percent of risk weighted capital by Jan. 1, 2016. At the end of January, five of the six banks had tier 1 common equity ratios ranging from 8.2 percent to 9.6 percent. National Bank, the smallest of the six by assets, had a 7.9 percent ratio.

Dickson, born in Saint John, New Brunswick in eastern Canada, is the first woman to be Canada’s top banking regulator. None of Canada’s six largest banks has had a female CEO. The two largest lenders by assets, Royal Bank and Toronto-Dominion, have female financial chiefs.

Queen’s Alum

Dickson studied economics at Queen’s University in Kingston, Ontario, the alma mater of Royal Bank CEO Gordon Nixon. Before joining OSFI, she worked 15 years at the finance department as Canada revamped industry regulations and legislation following the failure of two small banks and Confederation Life in the 1980s and 1990s. At finance, she worked with Nicholas Le Pan, her eventual predecessor at OSFI.

Dickson joined Le Pan at OSFI in 1999. Their time has been marked by a more hands-on approach after the regulator received additional powers to intervene quickly with troubled lenders.

Dickson replaced Le Pan as OSFI chief on an interim basis in 2006 and began a seven-year term in July 2007. That was just as the U.S. subprime mortgage market was beginning to collapse, profits at Canadian banks were falling and the industry was struggling to sell commercial paper.

Losing Favor

Her departure is coming at a time when banks have been losing favor with investors. Royal Bank of Canada, Bank of Nova Scotia and six other large Canadian lenders are trading at the lowest premium to U.S. bank stocks in more than two years.

The spread between the Standard & Poor’s/TSX Commercial Banks Index and the KBW Bank Index of 24 U.S. lenders is at its narrowest since January 2011, based on price to tangible book value per share, according to data compiled by Bloomberg.

Dickson said her focus is on solvency not on profitability. Canada’s financial system continues to be “quite resilient” and banks are stronger today than they were six years ago, Dickson said during a question-and-answer period yesterday.

“In 2013, the system is far sounder than it was in 2007,” she said.

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