246 PA R T I I I Financial Institutions Other Proposed Changes in Banking Regulations REGULATORY CONSOLIDATION Overall Evaluation The recent CDIC developments appear to be an important step in the right direction because they increase the incentives for banks to hold capital and decrease their incentives to take on excessive risk However, more could be done to improve the incentives for banks to limit their risk taking Yet eliminating deposit insurance and the too-big-to-fail policy altogether may be going too far because these proposals might make the banking system too prone to a banking panic The current bank regulatory system in Canada has financial institutions supervised by three federal agencies: the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the CDIC Critics of this system of multiple regulatory agencies with overlapping jurisdictions believe it creates a system that is too complex and too costly because it is rife with duplication For example, although the CDIC has no direct supervisory role, its Standards of Sound Business and Financial Practices overlap with those of the OSFI The MacKay Task Force, named after its chairman Harold MacKay and set up by the government in 1996 to review the financial services sector and propose a framework for its future, considered whether the CDIC and the OSFI should be amalgamated Although the task force recommended that the regulator (OSFI) and the insurer (CDIC) should not be combined in a single institution, it proposed that the CDIC s mandate be amended to remove the overlap with the OSFI s mandate BAN KIN G CR ISE S TH RO U GH OU T T HE WORL D Because misery loves company, it may make you feel better to know that Canada has by no means been alone in suffering banking crises Indeed, as Table 10-3 and Figure 10-1 (page 248) illustrate, banking crises have struck a large number of countries throughout the world, and many of them have been substantially worse than the one we experienced in the 1980s D j Vu All Over Again In the banking crises in different countries, history keeps repeating itself The parallels between banking crisis episodes in various countries are remarkably similar, creating a feeling of d j vu They all started with financial liberalization or innovation with weak bank regulatory systems and a government safety net Although financial liberalization is generally a good thing because it promotes competition and can make a financial system more efficient, it can lead to an increase in moral hazard, with more risk-taking on the part of banks if there is lax regulation and supervision; the result can then be banking crises.1 However, the banking crisis episodes listed in Table 10-3 differ in that deposit insurance has not played an important role in many of the countries experiencing banking crises For example, the size of the Japanese equivalent of the CDIC, the Deposit Insurance Corporation, was so tiny that it did not play a promi- An appendix to this chapter on this book s MyEconLab at www.pearsoned.ca/myeconlab discusses many of the episodes of banking crises listed in Table 10-3 in more detail