Scotiabank CEO Waugh warns against overregulation

Tue Apr 5, 2011 2:19pm EDT

*Scotiabank CEO says rules should not be one-size-fits-all

*Says regulations won't prevent future crises

*Says Basel III too backward-looking

By John McCrank

TORONTO, April 5 (Reuters) - Financial regulation will not prevent the next financial crisis and it can work against firms in financially sound countries such as Canada, Rick Waugh, chief executive of the country's No. 3 bank, Bank of Nova Scotia (BNS.TO), said on Tuesday.

New rules being put in place to govern the global financial system, such as Basel III, and the U.S. Dodd-Frank legislation, impose a one-size-fits-all model and are backward-looking, Waugh said at Scotiabank's 179th annual general meeting, this year held in Halifax, Nova Scotia.

"Remember, prescriptive rules can be like (France's) Maginot Line, which of course was that very complex system built prior to World War II, based on the experiences of World War I, and of course, was not effective at all because of the newer methods of attack," he said.

Basel III, to be phased in over a period of several years starting in 2013, requires banks to shore up capital reserves and large internationally active banks to hold additional capital to better prepare them for another global shock.

The rules, developed by international regulators to help avert future crises, will require Canadian banks to redeem or convert more than C$70 billion ($73 billion) in securities that do not comply with Basel III. [ID:nN07207105]

Waugh, vice chairman of the Institute of International Finance, which represents 460 of the world's largest financial institutions, argued that those jurisdictions that were hurt worse than others in the crisis require greater changes and oversight than those that came out relatively unscathed.

"Many of these regulations impose a one-size-fits-all -- a one size that works against countries with strong financial models," he said. "Models such as the one we have in Canada."

Scotiabank, like other Canadian banks, went into the crisis well capitalized, took no government bailouts, and remained mostly profitable right through the world financial crisis. Robust regulation, good supervision and a conservative culture were given as reasons for their success.

Canadian banks were forced to put dividend hikes on hold when the financial crisis took hold in 2008 and rules surrounding new capital requirements were unclear. Some, including Scotiabank have only recently started increasing dividends again. [ID:nN24267496] [ID:nN07110134]

Scotiabank avoided the worst of the crisis by taking few risks and sticking to retail banking and piecemeal expansion into 50 countries, mostly in Latin America.

"No regulation, no rule, prohibited us from participating in subprime, CDOs, high-yield bonds, covenant-light loans, all of these toxic, toxic assets," Waugh said. "We chose not to participate, or if we did ... and we did make some mistakes, but at low levels, so it never put our bank at true risk."

Waugh added that Basel regulations actually encouraged institutions to buy European sovereign debt, from countries such as Iceland and Ireland, because the rules did not require capital to be put up against it.

"History has shown that no amount of prescribed regulation can replace sound management and principles-based governance, or a board or a management team who are accountable to the results to their shareholders," he said.

($1=$0.96 Canadian) (Reporting by John McCrank; editing by Peter Galloway)

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