* Bank of Canada official says "wrongheaded" to slow reforms
* Canada's mortgage securitization an area of potential risk
* Sees Canadian sector less risky than U.S. mortgage REITs
By Louise Egan
OTTAWA, Sept 24 A senior Bank of Canada official
urged global policymakers on Tuesday to push ahead with
financial system reforms despite economic weakness, saying
financial stability is an important precondition for growth.
"Some have argued that, given the weak recovery, now is not
the time for the broad financial sector reform being promoted by
the FSB (Financial Stability Board). That argument is
wrong-headed," Lawrence Schembri said in his first speech since
being appointed as a central bank deputy governor in February.
He said the FSB, operating under the direction of the Group
of 20 leading economies, closely monitors the effects of new
regulations for unintended consequences.
Canada's big banks emerged relatively unscathed from the
global financial crisis, buoyed by strong capital ratios and
conservative lending practices.
They are well ahead of their U.S. and European peers in
complying with higher capital requirements under the Basel III
Still, the Bank of Canada says it has identified some areas
of the shadow banking sector, the market-based financing done
outside the regulated banks, that merit closer
In response to a question from the audience after his
speech, Schembri said he saw a "potential vulnerability" in
Canada's increasingly popular mortgage investment corporations
These entities typically manage a pool of mortgages and many
investors are attracted to them because of their higher yields,
but the risks are also higher than with some other types of
Schembri said, however, the MICs were less problematic than
mortgage real estate investment trusts in the United States,
which tend to be more highly leveraged.
"In Canada, the mortgage investment corporations, one would
consider as part of the shadow banking sector but not as tightly
regulated as banks. We see this as a potential vulnerability but
for the most part it's not as serious as what we've seen in the
United States," he said.
"Part of the shadow banking recommendations are looking at
ways to address the vulnerabilities these corporations might
pose," he said. "At this point in time we don't see a large
vulnerability but we are monitoring those corporations quite
Schembri's speech stayed away from any hints about Canadian
monetary policy. The Bank of Canada has held its key interest
rate at 1.0 percent since September 2010 and market players
don't expect a rate hike until the fourth quarter of 2014.