Canada watchdog puts focus on banking supervision

* Says supervision as important as rules

* Supervisors must have clear mandate, power

TORONTO, March 16 (Reuters) - Global banking regulators should focus on improving supervision, not just setting new rules, as they craft ways to prevent another financial crisis, Canada’s top banking supervisor said on Tuesday.

Julie Dickson, the head of Canada’s Office of the Superintendent of Financial Institutions (OSFI), said she is concerned that regulators who are drafting new banking regulations are ignoring the importance of effective supervisory oversight in favor of rewriting global rules.

“If we take the view that supervisory judgment has failed time and again, and that we should therefore rely far more on rules than on supervisors going forward, we may create a system with even more risk, as rules often have unintended consequences which can take quite some time to see,” Dickson said in a speech in New York.

“As well, our record in getting rules right is not stellar,” Dickson noted.

International decisionmakers, including the Group of 20 nations, are mulling financial industry reforms including higher minimum capital levels and lower leverage limits for banks. Final changes are not expected to be approved and be in place until the second half of 2010 or later.

Canadian banks have emerged from the financial crisis in good shape relative to global peers, having accepted no bailouts and remaining mostly profitable throughout, a success Dickson attributes to robust regulation, good supervision and a conservative culture among the banks themselves.

Now, Dickson said she believes global regulators are focusing on new rules rather than better supervision in part because changing rules is seen as “taking decisive action” -- a public way of showing regulators are responding to the flawed system that sparked the financial meltdown in late 2008 and crippled the global economy.

But, using a sports analogy, Dickson pointed out that the rules are important, but “ultimately it is the referees that control the flow of the game”.

Good regulation, Dickson said, comes from nuts-and-bolts supervision of financial institutions. That means asking the right questions, meeting the right players and dealing with push-back from the institutions, as well as determining how often to go on-site.

“Stricter rules, like substantially higher capital requirements, can create a false sense of security; an institution will never have enough capital if there are material flaws in its risk management practices. That is why supervision matters,” Dickson said.

Noting that it is easy for supervisors to focus on compliance but much harder to identify and mitigate risks, Dickson said supervisors must have clear responsibilities and adequate power to protect the interests of depositors while allowing financial institutions to compete.

She also said there is no clear way of knowing who makes a good supervisor -- those outside the industry or those who come from within. The fear of an abuse of power is what prevents some nations from building an effective supervisor, which is why global regulators must debate and discuss the issue, Dickson said. (Reporting by Andrea Hopkins; editing by Peter Galloway)