Canadian financial regulators keep the bill off the books

Published in the Financial Post.

Canadian 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.

That’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.

Start 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.

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.