A key pillar of Mark Carney’s book Value(s) is his contention that capitalism needs more government because markets are amoral. Recent history is on his side. Leaving profit-maximizing companies and welfare-maximizing consumers to pursue their desires unchecked led to a massive financial crisis, a climate crisis and social networks that addict children, hurt our mental health and undermine democracy.

Carney, who shared the 2021 National Business Book Award, argues that liberal democracies lost their way by forgetting that capitalism was meant to be anchored by moral values. Milton Friedman effectively put an end to that idea in 1970 with his essay on why the only values managers should worry about are profit margins, stock prices and dividend cheques. By the late 1980s, the dominant ethos of business was the pursuit of wealth, so much so that Oliver Stone’s film Wall Street, a critique of ruthless corporate raiders that entrenched “greed is good” in the lexicon, ended up inspiring a generation of bankers.

Alas, it’s easier to critique the moral emptiness of modern capitalism than to do something about it. A decade after the Great Recession, the banks that caused it had paid more than US$320 billion in fines, but only one banker from the U.S. or the U.K. had gone to jail. The ESG movement has stoked a political backlash against “woke capitalism,” blunting the Business Roundtable’s embrace of stakeholder capitalism in 2019.

If societies are unhappy with the way business conducts itself, regulation remains the most effective way to curb capitalism’s ethical shortcomings. With little fanfare, Canada’s banking regulator has gone about doing something to that effect. 

Earlier this week, the Office of the Superintendent of Financial Institutions published integrity guidelines that, among other things, give OSFI the authority to pass judgment on the character of the leaders of the banks and insurance companies that it regulates.

In effect, the regulator has decided that Gekko-inspired bankers represent a threat to financial stability, making character a risk vector that needs oversight. 

“The way people behave depends to an extent on their character,” the guidelines state. “Responsible persons and leaders who behave honestly and responsibly demonstrate elements of good character. The more senior someone is in an organization, the more power and influence they typically wield. It is, therefore, particularly important that responsible persons demonstrate integrity through their actions, behaviours, and decisions.”

It’s hard to read that and not worry about government overreach. You can use math to estimate how much cash a bank should keep in reserve to keep it from failing, but how do you measure character? Assuming you could thread society’s core beliefs into an ethical standard, should a liberal democracy’s banking regulator have the right to overrule a board’s hiring decisions? 

Well, maybe. The financial industry hasn’t covered itself in glory in recent decades, and though examples of Canadian malfeasance are rare, the stakes warrant extraordinary levels of diligence. A banking licence comes with privileges, such as taxpayer-backed deposit insurance and, in the case of the biggest lenders, an implicit guarantee of a government bailout should one ever be needed. The banks are special, and therefore warrant special attention. The lax approach of American and British regulators contributed to one of the worst recessions in history. But there’s an opportunity cost to punishing bad behaviour after the fact instead of trying to prevent it. Carney wrote that the capital that the banks used to pay their fines could have supported around US$5 trillion in lending to households and businesses.  

Peter Routledge, the superintendent, insists he isn’t some woke renegade. In an interview, he said the integrity guidelines, which also include measures to protect banks from foreign interference, represent OSFI’s best attempt to implement Parliament’s overhaul of the Office of the Superintendent of Financial Institutions Act last year. The industry had time to review draft guidelines and no one appears to have complained too loudly. Nonetheless, Routledge said, the regulator will apply the new standards carefully and he is open to adjustments. 

“I can’t mention names, but there have been institutions that have been undermined by character issues,” Routledge said. He clarified that none of the bad actors on his mind were under his jurisdiction, but that doesn’t mean it could never happen here. “I can’t ignore it,” he said.

If the guidance sounds a little abstract, that’s because it is. Unlike the U.S., Canada’s approach to financial regulation is to set out principles rather than publish thousands of pages of prescriptive rules. The idea is that a rules-based approach inevitably creates loopholes that bad actors are adept at finding, while a principles-based approach leaves more room for regulatory discretion. OSFI will want to know what financial institutions did to ensure they hired leaders of good character, but it isn’t going to provide a checklist of the moral virtues that it thinks make for an ethical banker.

“We don’t give them the Ten Commandments,” Routledge said. “We won’t define it. We’ll just say to the boards, ‘We expect you to define it.’” 

Still, it might be time to watch Wall Street as its director intended: a morality tale, not a how-to. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.