October 1, 2024 – Canada is blessed with a stable banking system with no failures of any significance for nearly 30 years. But a new paper by Mark Zelmer suggests that there are storm clouds on the horizon of the global financial system and that regulators in our country need to adapt.
Bank runs can not only bring down a deposit-taking institution but also create panic that seriously cripples confidence in the broader financial system and the economy. In “Better Safe than Sorry: Options for Managing Bank Runs in the Future,” Zelmer lists several changes in the nature of banking that current regulations may fail to capture, such as bank runs now sometimes happening in a matter of hours rather than days and how even smaller banking institutions can become a collective systemic risk to the financial system.
Zelmer explores a spectrum of options to guard against these new risks, ranging from some fairly minor adjustments to more radical options that even include, at one extreme, separating the money creation and credit extension roles of deposit-taking institutions.
He concludes none of the options are a perfect fit. Nevertheless, he argues there is no excuse for inaction. “While there’s no obvious home run, there are steps we can take now to strengthen the system,” he says.
Zelmer recommends several steps the Canada Deposit Insurance Corporation (CDIC), the Office of the Superintendent of Financial Institutions (OFSI), the Bank of Canada, and their federal partners can do to improve current regulations. These include the CDIC completing its payout modernization project to ensure deposits are quickly covered if a financial institution fails, and a review of the assumptions underpinning the major bank recovery and resolution plans, in light of high-profile bank failures elsewhere in the world in 2023.
“While Canada has not had any banking failures for many years, we should not be complacent,” Zelmer concludes.
For more information contact: Mark Zelmer, Senior Fellow, C.D. Howe Institute; and Daniel Kitts, Communications Officer, C.D. Howe Institute, 416-220-8470, dkitts@cdhowe.org
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