Financial regulators should better balance the goal of creating stable markets with the need for allocative efficiency, the key contributor to the growth of the economy and Canadians’ income, according to former Governor of the Bank of Canada, David Dodge. In “Financial Regulation and Efficiency: Tradeoffs in the Post-Financial Crisis Era,” Dodge warns that Canada is being dragged along by overzealous governments and regulators in other countries.
“I would contend that since the financial crisis, many politicians around the world have focused almost exclusively on the goal of constraining instability in the financial system and have lost sight of the importance of allocative efficiency,” remarked Dodge.
In the report, Dodge argues that Canada’s move away from principle based financial supervision to overly precise black letter regulation would, in the long-term, prove expensive in terms of lost efficiency and lower growth of output and incomes. He then provides some ways in which prudential regulation might be “tweaked” to reduce efficiency losses relative to the stability gains of regulation.
Dodge concludes: “It is far better to set rules that are roughly right than ones that are precise, and possibly precisely wrong.”
For more information contact: David Dodge, Senior Advisor, Bennett Jones LLP; Chair, C.D. Howe Institute’s National Council, at 416-865-1904; E-mail: kmurphy@cdhowe.org.
The C. D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
