As anyone paying attention during the 2008–2009 financial crisis is aware, the Canadian financial system weathered the storm uniquely well. Exactly why Canada’s system remained so comparatively stable, while so many other foreign systems broke down, is a question that remains largely unsettled. One explanation may be that the regulatory system that emerged from a very specific history of prior crises had both prepared Canada well for such a crisis, and responded effectively as the crisis unfolded. But the very regulatory system that provided stability in recent years may also be at risk of becoming warped by its own success, with regulators so emboldened by the acclaim for their recent achievements that they overreach to ensure their track record remains unblemished in the future. The stunning collapse of a pair of western Canadian banks, a number of major Canadian trust companies and several insurance companies, as well as some other precarious near misses in the 1980s and 1990s, were a shock to the financial regulatory system, highlighting deficiencies that would be addressed with new regulations and, most notably, the creation of the Office of the Superintendent of Financial Institutions (OSFI). Canada’s centralized regulatory approach, through the OSFI and just four other major regulatory bodies, has proved both more elegant and effective than, for instance, the more complicated, more convoluted and more decentralized American financial-oversight system. But some regulated companies, insurers in particular, have long maintained that the concentration of power in Canada’s large banks has resulted in a one-size-fits-all regulatory approach that does not offer a relatively lighter burden for smaller institutions, potentially stifling growth. In other words, an over-emphasis on stability may be hampering market efficiency. Nor is there any economic evidence to shed light on whether those and other costs of regulating stability are justified by the costs spared by avoiding instability. Received wisdom would naturally assume that avoiding certain institutional collapses are worth any cost, but of course there must be some limits to that logic. To be clear, Canada’s regulatory model almost certainly appears to be a better-functioning one than that of many in its peer group, and the OSFI approach is gaining acceptance by many countries, particularly in emerging markets that are implementing cohesive regulatory systems for the first time, using the Canadian framework as a template. This does not, however, mean that Canada’s regulatory system cannot still be refined and improved. Suggestions for improvement include: the possibility of creating an industry-based collaboration committee — similar to the regulators’ Financial Institutions Supervisory Committee — that would monitor industry risk over time; the modernization of the Winding-up and Restructuring Act, conceived more than a century ago, to address the modern reality of immense and complex institutions of today, providing regulators the flexibility to resolve such entities when they become troubled; and the strengthening of board structures for large institutions, which remain much as they were in the 1980s, including the possibility of appointing permanent, full-time, independent directors and requirements for boards to better train directors and utilize outside expertise when warranted. Canada’s regulatory system is arguably one of the most effective in existence, but its success through the recent financial crisis is no guarantee that it will be sufficiently prepared for the next
The Regulation and Supervision of Insurance Companies after the Recent Financial Crisis