Canada’s banking regulator appears to be evaluating whether it has a role to play in solving the productivity problem. 

Peter Routledge, who leads the Office of the Superintendent of Financial Institutions, was at the House of Commons finance committee this week to talk about rising shelter costs. Conservative MP Adam Chambers had questions about a different topic—global banking rules that Chambers referred to as “Basel IV,” but are more commonly referred to as “Basel III endgame.”   

Basel endgame would force banks to increase their protective cushions of reserve capital. The proposed changes have received almost no attention in Canada, but in the U.S. they have been the subject of “Sunday Night Football” ads making the case against them. The pushback south of the border was so intense that in the spring the Federal Reserve said it would take another look. 

Chambers wanted to know why OSFI was pushing ahead with the changes in Canada, given the U.S. is pumping the brakes and regulators in Europe have adopted a more gradual transition. 

Ottawa sees our financial stability as an advantage and OSFI has been knighted to protect us from the chaos that regularly afflicts the U.S. banking system. That means insisting on a level of prudence that can seem excessive. 

Yet Routledge offered a nuanced response on Basel endgame that suggests he’s open to the possibility that Canada might be better served by loosening the chain on the banks, if only a little. He acknowledged that OSFI is “well ahead of our peers” in the implementation of Basel endgame, and that “it’s become quite evident that our lead will at least stay the same or increase.” He also revealed that he’s in conversation with banks about their concerns.    

When Chambers asked Routledge to commit to waiting for the U.S. before deciding on its policy, the superintendent said he would have more to say “later this summer.” OSFI declined my request that they elaborate on Routledge’s testimony. 

OSFI could opt to stick with what has worked, and go ahead and add another layer of bricks to the fortress. That’s probably not what Canada needs right now. 

This week former Bank of Canada governor David Dodge became the latest to sound the alarm over the productivity crisis, releasing a report via law firm Bennett Jones that argues that productivity-enhancing investment must be the country’s “absolute priority.” That means any public policy that would impede investment should be run through a productivity filter, even if the measure is justifiable on its own. 

It’s widely understood that monetary policy and fiscal policy should try to complement each other. That’s why Bank of Canada governor Tiff Macklem was on solid ground when he chastised finance ministers for complaining about higher interest rates even as they contributed to inflation by continuing to increase spending.  

In Canada, there’s too little thought given to how financial regulation influences the economy’s trajectory. We boast about how no Canadian bank failed during the financial crisis, then lament weak business investment and the high cost of capital without fully appreciating the connection. Ottawa’s intolerance for bank failures is one of the reasons we have a productivity emergency. 

Basel endgame, as Routledge described it at the finance committee, is “basically a check on the models banks use to allocate capital.” Rather than let financial institutions decide for themselves how to measure the riskiness of their assets, regulators intend to set some baselines that would make it harder for lenders to cheat on their capital requirements. 

Chambers picked up on a recent report by Scotiabank chief economist Jean-François Perrault, who estimated that the new rules will force Canadian banks to shed as much as $270 billion in risk-weighted assets and reduce lending by about nine per cent of nominal gross domestic product, which is currently around $3 trillion. “There is an economic cost to making an already-safe system safer,” Perrault, a former Finance official, said in his report.  

Perrault isn’t the only one raising questions. Mark Zelmer, a former deputy superintendent at OSFI, this week called on Routledge to suspend plans to complete Basel endgame. Zelmer, now a senior fellow at the C.D. Howe Institute, disagreed that productivity or housing supply should concern the banking regulator; his point is that stricter standards seem unnecessary at this time. 

Banking regulation should be kept at a distance from politics, but it would be entirely appropriate for the government to direct the regulator to reset its tolerance for risk. The Bennett Jones report—written by a team of public policy advisers that includes Dodge and former Alberta premier Jason Kenney—said there is a “case” for reviewing financial regulation to ensure the “savings of Canadians can be channeled efficiently to productive investment.” The report observed the inconsistency of the federal government asking Crown lenders to take on greater risk, while the regulator squeezes the big banks.

“A sound financial system is one that is stable but also one that has reasonable tolerance for risk-taking,” the report said. “The balance, across all channels of financing for businesses, should be assessed very carefully given Canada’s chronic gap in productive investment.” 

Routledge might start to rebalance the scales on his own. If he doesn’t, Chambers and the rest of the finance committee might want to start a conversation on whether OSFI is working at cross purposes with a productivity agenda. 

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.