Tighter financial rules must allow for ‘natural’ market forces: Poloz

OTTAWA—Bank of Canada governor Stephen Poloz says it was crucial to tighten regulations following the 2008-09 financial crisis but reforms must leave enough room to allow for the creativity of “natural” market forces.

In a prepared speech to be delivered to the Economic Club of New York, the head of Canada’s central bank said the introduction of costly new financial rules were key to rebuilding the public’s trust.

But Poloz called on regulators to allow for competitive market innovation as a way to ensure future prosperity.

“A return to sustainable economic growth around the world will require continued financial innovation,” said Poloz in his speech titled ‘Speculating on the Future of Finance’.

“Regulation must allow these natural forces to manifest themselves, albeit in a safe way.”

Poloz’s speech explored several different areas where the “forces of competition” could emerge under new regulations: Market-based finance; private lending and equity; and public finance.

He noted all of these market structures already exist, which he said leads him to wonder what other possibilities could be out there for the future of finance.

“Does anybody besides me wonder what the banking system looks like in the background of Star Trek?” Poloz said.

Poloz recalled how the financial crisis destroyed more than 60 million jobs worldwide and, by the end of last year, had led to a cumulative loss in global output of roughly $10 trillion, or close to 15 per cent of the world’s gross domestic product (GDP).

“Financial regulation is costly, but that cost pales compared with the fallout from the financial crisis,” he said. “We are still paying for that. Global regulatory reform was absolutely essential.

“So, let’s work to make it better.”

The Bank of Canada’s governor said the core of the world’s financial system is far safer today, even though some issues must still be addressed.

Poloz also credited the resilience of Canada’s financial system in helping the country emerge from the financial crisis in better shape than most countries.

“Even so, we saw significant destruction in our export sector, the backbone of our economy,” Poloz said.

He added, however, that Canada has seen signs of increasing exports, business investment and job creation, though he noted it will likely take another couple of years before the economy will have steady growth with inflation on target.

“It is this return to natural growth that we all want to see,” Poloz said.

“We need to embrace our new regulatory architecture and get on with the job.”