Bank of Canada Should Lead Monitoring of Shadow Banks

The Bank of Canada should take the lead on monitoring the country’s mortgage brokerages, private-equity pools, and other parts of the shadow-banking industry, according to Michael Wilson, chairman of Barclays Capital Canada Inc.

The central bank should collect information from the country’s non-federally regulated financial companies, analyze it to identify risks such as leverage build-up and credit deterioration and publish it quarterly, said Wilson, a former federal finance minister

“There is no established authority in Canada to perform this function,” Wilson said in a report scheduled to be released Thursday on the C.D. Howe Institute website. “I suggest this is something that the Bank of Canada could take the lead on as part of its responsibility for a sound financial system.”

Canada’s shadow-banking industry was equal to about 40 percent of the country’s gross domestic product at the end of 2012 compared with about 95 percent in the U.S. in 2011, according to a 2013 speech by Tim Lane, deputy governor at the Bank of Canada.

The industry has grown in recent years amid tightened regulations to cool a housing boom that’s also made regulated banks more conservative.

“Our banking sector is not immune to risk,” Wilson said. “The risk factors in shadow banking are no different than those which have precipitated financial crunches in the past.”

The Bank of Canada has no comment on the recommendation, spokeswoman Rebecca Ryall said in an e-mail message.

Global Collaboration

Aside from crunching data from shadow lenders and increasing their contact with the companies, the central bank should also work with other financial bodies, including the Department of Finance, the Office of the Superintendent of Financial Institutions and global counterparts such as the Financial Stability Board.

The Bank of Canada has increased its collaboration with other organizations to monitor Canada’s shadow banking sector and potential risks, the central bank said in a June 2013 report.

Governor Stephen Poloz has said, like his predecessor Mark Carney, that monetary policy is the last line of defense to correct imbalances in the financial system. Other measures should come first such as good behavior by private lenders and tighter regulations from other agencies, the governors have said.

While the central bank has been working on ways to improve the safety of the sector, the industry’s “lack of transparency” could be hiding issues such as overextended balance sheets and faulty risk management, the bank said in 2014.

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