Canada should take a leadership role in the global banking industry and spearhead smart regulatory reforms to prevent another financial crisis, says the Conference Board of Canada.

Canada should take a leadership role in the global banking industry and spearhead smart regulatory reforms to prevent another financial crisis, says the Conference Board of Canada.

In a study released Wednesday titled Lessons from the Recession and Financial Crisis, the non-profit research group says Canada should capitalize on its new clout on the world stage to shepherd a much-needed regulatory overhaul.

The best way to do this is to keep working with other major countries and international bodies such as the IMF to improve policy co-ordination, refine early warning systems and address policy weaknesses, the Conference Board said.

Canada has won international accolades after the World Economic Forum ranked its banking system as the soundest in the world for two years running despite the onset of the global financial crisis.

Although Canadian banks have collectively taken more than $20 billion in debt-related writedowns and other charges since the onset of the global credit crisis in 2007, they have largely skirted the worst of the turmoil. Unlike in the United States and Europe, no banks collapsed or had to be rescued in Canada during this financial crisis.

And while Ottawa has agreed to purchase up to $125 billion in mortgages from financial institutions to free up liquidity, the program is being conducted on commercial terms.

For its part, the Conference Board contends that fundamental rules governing the global financial system must be transformed to avert another crisis. It notes the global economic recovery, while nascent, is already proving that memories tend to be short. As a result, there are already suggestions that opaque securities and high financial leverage could once again become the norm in the short- to medium-term, its report said.

Changes in key aspects of financial sector regulation are required, the board said. Broad principles regarding minimum standards and best practices for capital requirements, transparency, and accounting rules as well incentives to implement and follow such rules need to be established internationally and put into force locally.

Specifically, capital requirements should better reflect risk, while financial institutions that sell structured products need to keep more of those securities on their own balance sheets, the report said.

New accounting standards should compel hedge funds to regularly disclose their risk positions and compensation should be geared to long-term performance rather than short-term returns, it added.

Canada’s chief banking regulator, meanwhile, has said it is «inadequate» for global regulators to merely create new rules, because preventing another crisis also requires an equivalent focus on the day-to-day industry supervision.

Julie Dickson, superintendent of the Office of the Superintendent of Financial Institutions, has said her office is updating its supervisory framework and increasing its oversight of risk management.