Opinion: Canadian financial regulators keep the bill off the books

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It needs to start measuring and publishing what its rules actually cost, and to design the next round of policy with those costs on the ledger, not off. Photo by Peter Power/PostmediaCanadian financial regulation has a clear bias: stability and consumer protection dominate, while efficiency and growth barely register. Three straight years of tracking new rules from banking, insurance, pensions and securities regulators show that the pattern hasn’t moved: well over nine in 10 new regulatory documents are written in the language of stability, market integrity and consumer protection. Only a small fraction even mention efficiency, competition or growth. Regulators aren’t weighing these objectives against each other and striking a balance. They’re ranking one above the other and treating growth and innovation as an afterthought.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThat’s a value judgment regulators are entitled to make. What’s harder to defend is that their lopsided focus may be quietly undermining the very stability that they claim is their overriding goal.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againStart with the clearest symptom of the imbalance: a near-total absence of public cost-accounting. Regulators in countries with more balanced priorities do things differently. The United Kingdom’s Prudential Regulation Authority publishes its cost-benefit assessments and has them reviewed by an outside panel. Australia’s issues an impact statement for every major new rule, weighing it against simply doing nothing. We do neither.A handful of regulators here are legally required to run a cost-benefit analysis before adopting a new rule, but even when a rule draws open complaints about its compliance burden, it’s hard to find any trace of real quantitative analysis behind it: no published numbers, no visible methodology, nothing outsiders can check.That’s not just a paperwork gap. A survey I conducted last year of Canadian financial firms found that nearly three-quarters of employees at regulated institutions are involved in at least some compliance-related duties. That burden hits smaller institutions hardest, since they can’t spread the cost across a large balance sheet. But these are precisely the firms Canadian policy claims it wants competing and innovating.Left unmeasured, regulatory costs stop being just a transparency problem. Regulation protects financial institutions by reducing their exposure when something goes wrong. But complying with those rules also consumes resources every day: labour, capital and attention that firms could otherwise be holding in reserve. In good times, that drain shows up as slower growth; in bad times, it eats into the cushion institutions need to survive. Push it far enough without ever checking the toll and the arithmetic flips: past a certain point, more regulation can leave the system with less protection, not more, because the drain outweighs the gain.The Canadian data bear this out. Periods of sustained regulatory tightening are followed by measurably weaker growth — a robust and statistically significant drag. Tested against the probability of an actual recession, however, that same tightening shows no measurable effect in reducing it. The cost is visible; the benefit, on this measure, is not. Those are the conditions we would expect to see if regulation had moved beyond the point where additional rules deliver meaningful marginal safety gains. A country that hasn’t seen a major financial institution fail in a quarter century is a plausible candidate for exactly that description.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.None of this argues against regulation itself or stability as a goal. Rather, it argues that stability and efficiency aren’t two dials that can be turned independently. Add more rules without checking the cost, and you can end up with less of both. Canada doesn’t need to deregulate. It needs to start measuring and publishing what its rules actually cost, and to design the next round of policy with those costs on the ledger, not off.Gherardo Caracciolo, fellow-in-residence at the C.D. Howe Institute, is author of the Institute’s newly released third annual scorecard on Canadian financial regulation.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.