Reducing Bank Leverage Ratios

% Green:
81.90
% Yellow:
14.80
% Red:
3.20
Voting Detail:
Plenary
% Ratified:
0.00

Party Commentary

This motion complements existing policy G12-P06 On limits to growth. This motion provides a specific mechanism to support the aforementioned policy. This motion is also complimentary to G06-P05 on Sustainable Urban Development that requires banking reserve rules be reformed.

Preamble

WHEREAS weakly restrained bank lending is at the root of the debt crisis, while also fueling the profligate growth that lies at the heart of climate change and other environmental problems we face, and

WHEREAS the 2008 financial crisis demonstrated that the large banks are ‘too big to fail’; the consequences of a large bank failure are so enormous that governments will step in to bail them out, which has the effect
of encouraging more extreme risk-taking by bankers, and

WHEREAS under the international Basel III standards the OSFI (Office of the Superintendent of Financial Institutions) is currently requiring Canadian banks to hold capital reserves of three percent of their total assets, down from a longtime practice of five percent but with a stricter definition of capital, and

WHEREAS, notwithstanding differences in accounting practices between Canada and the US and that the mortgages that form a large part of the assets of Canadian banks are underwritten by the Canada Mortgage and Housing Corporation, US regulators are now requiring reserves of a minimum of four percent, with the eight largest institutions in the country required to hold an additional 2%, and

WHEREAS the Bank of Canada has noted that regulatory leverage ceilings are a potential policy option for mitigating procyclicality and strengthening the resiliency of the global financial system, and

WHEREAS following the 2008 financial crisis Sweden required its banks to hold reserves far beyond the Basel III requirements, and contrary to all expectations this made them more profitable and not less, and

WHEREAS Basel III standards will not come into full effect until 2018,

Operative

BE IT RESOLVED THAT a Green government will accelerate the implementation of the Basel III standards and go beyond those standards in reducing the leverage ratios for the Big Five Canadian banks to 6%, and that 6% will be made up of common equity and retained earnings (Tier 1 capital).

Sponsors:
Phillip Holland, Jan Slakov, Dona MacKie, Brigitte Hayes, Chris Dixon, Cathy Lenihan, Brenda Dixon, Sue Earle, Jacquie Miller, Don Barthel, Stefan Klietsch, Bob MacKie, Rumiko Kanesaka, Jordan Bober, Tom Mitchell, Alec Scoones, Mike Nickerson, Don Scott, Jocelyn Gifford, Susan Sheane

Background

Six years after the financial crisis of 2008 we’ve still made remarkably little progress in strengthening the regulations on our banks to make them more resistant to failure. If 2008 taught us anything, it’s that governments, including those that profess to believe in the ‘free market’, are perfectly prepared to step in and bail out failing banks. This means that when banks fail or are at risk of failure, Canadian taxpayers are
on the hook for bailing them out.

Our banking system is structured to reward risk-taking by bankers: higher risks mean higher profits, both for the banks and the bankers who manage them. The system encourages them to take ever-greater risks in the hope of getting the greater reward, and if they fail, they aren’t likely to suffer serious consequences. This is why banks are regulated; we require them to maintain a certain level of capital reserves and limit the leverage ratio – the ratio of the money they lend to the capital reserves that they are required to hold.

In recent years and especially since the financial crisis of 2008, there has been an international effort to strengthen the reserve requirements of banks. There are global voluntary standards for capital adequacy, stress testing and market liquidity risk known as the Basel Accords: Basel I, II and soon to be, III. The Basel Accords are intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage, but full implementation has been put off until 2018. Banks are resisting tougher standards for leverage ratios and reserve requirements because they believe that it will cut into their profitability, which it may do, but large financial institutions are arguably too profitable as it is. Sweden, a country not dissimilar to Canada in having a small number of relatively large banks, has taken the step of trying to make its banks more secure. And if Sweden’s experience is any indication, increasing the reserve requirements of banks might actually make them more profitable, because they will become more attractive as investments.

The goal of this resolution is to make banks more secure by reducing their leverage ratios so that there is less likelihood that the Canadian public will have to bail them out in another financial crisis. With lower leverage ratios, the amount of money created through bank lending will be reduced, giving the Bank of Canada more leeway in terms of the volume of Government of Canada debt that it is able to hold while maintaining the overall money supply at a level suitable for their inflation targets.

Code

G14-P28

Proposal Type

Policy

Submitter Name

Brian Smallshaw

Party Commentary

This motion complements existing policy G12-P06 On limits to growth. This motion provides a specific mechanism to support the aforementioned policy. This motion is also complimentary to G06-P05 on Sustainable Urban Development that requires banking reserve rules be reformed.

Preamble

WHEREAS weakly restrained bank lending is at the root of the debt crisis, while also fueling the profligate growth that lies at the heart of climate change and other environmental problems we face, and

WHEREAS the 2008 financial crisis demonstrated that the large banks are ‘too big to fail’; the consequences of a large bank failure are so enormous that governments will step in to bail them out, which has the effect
of encouraging more extreme risk-taking by bankers, and

WHEREAS under the international Basel III standards the OSFI (Office of the Superintendent of Financial Institutions) is currently requiring Canadian banks to hold capital reserves of three percent of their total assets, down from a longtime practice of five percent but with a stricter definition of capital, and

WHEREAS, notwithstanding differences in accounting practices between Canada and the US and that the mortgages that form a large part of the assets of Canadian banks are underwritten by the Canada Mortgage and Housing Corporation, US regulators are now requiring reserves of a minimum of four percent, with the eight largest institutions in the country required to hold an additional 2%, and

WHEREAS the Bank of Canada has noted that regulatory leverage ceilings are a potential policy option for mitigating procyclicality and strengthening the resiliency of the global financial system, and

WHEREAS following the 2008 financial crisis Sweden required its banks to hold reserves far beyond the Basel III requirements, and contrary to all expectations this made them more profitable and not less, and

WHEREAS Basel III standards will not come into full effect until 2018,

Operative

BE IT RESOLVED THAT a Green government will accelerate the implementation of the Basel III standards and go beyond those standards in reducing the leverage ratios for the Big Five Canadian banks to 6%, and that 6% will be made up of common equity and retained earnings (Tier 1 capital).

Sponsors

Phillip Holland, Jan Slakov, Dona MacKie, Brigitte Hayes, Chris Dixon, Cathy Lenihan, Brenda Dixon, Sue Earle, Jacquie Miller, Don Barthel, Stefan Klietsch, Bob MacKie, Rumiko Kanesaka, Jordan Bober, Tom Mitchell, Alec Scoones, Mike Nickerson, Don Scott, Jocelyn Gifford, Susan Sheane

Background

Six years after the financial crisis of 2008 we’ve still made remarkably little progress in strengthening the regulations on our banks to make them more resistant to failure. If 2008 taught us anything, it’s that governments, including those that profess to believe in the ‘free market’, are perfectly prepared to step in and bail out failing banks. This means that when banks fail or are at risk of failure, Canadian taxpayers are
on the hook for bailing them out.

Our banking system is structured to reward risk-taking by bankers: higher risks mean higher profits, both for the banks and the bankers who manage them. The system encourages them to take ever-greater risks in the hope of getting the greater reward, and if they fail, they aren’t likely to suffer serious consequences. This is why banks are regulated; we require them to maintain a certain level of capital reserves and limit the leverage ratio – the ratio of the money they lend to the capital reserves that they are required to hold.

In recent years and especially since the financial crisis of 2008, there has been an international effort to strengthen the reserve requirements of banks. There are global voluntary standards for capital adequacy, stress testing and market liquidity risk known as the Basel Accords: Basel I, II and soon to be, III. The Basel Accords are intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage, but full implementation has been put off until 2018. Banks are resisting tougher standards for leverage ratios and reserve requirements because they believe that it will cut into their profitability, which it may do, but large financial institutions are arguably too profitable as it is. Sweden, a country not dissimilar to Canada in having a small number of relatively large banks, has taken the step of trying to make its banks more secure. And if Sweden’s experience is any indication, increasing the reserve requirements of banks might actually make them more profitable, because they will become more attractive as investments.

The goal of this resolution is to make banks more secure by reducing their leverage ratios so that there is less likelihood that the Canadian public will have to bail them out in another financial crisis. With lower leverage ratios, the amount of money created through bank lending will be reduced, giving the Bank of Canada more leeway in terms of the volume of Government of Canada debt that it is able to hold while maintaining the overall money supply at a level suitable for their inflation targets.