C.D. Howe calls for tougher regulation of shadow banks

By James Langton | February 4, 2020 | Last updated on February 4, 2020
1 min read

The so-called shadow banking sector should face tougher regulation, argues a new paper from the C.D. Howe Institute.

The Toronto-based think tank reported that assets in the shadow banking sector in Canada have continued to grow since the global financial crisis.

While this phenomenon has ramped up competition in the traditional financial sector, it also heightens the sector’s potential vulnerabilities. Shadow banks are not as tightly regulated as banks, they aren’t covered by deposit insurance and they can alter the impact of monetary policy, the C.D. Howe paper noted.

“Our findings suggest that both the traditional monetary policy tool of the overnight rate and tightening mortgage underwriting standards through macroprudential policy might have the unintended side effect of increasing financial instability,” the paper said.

The paper suggested that one way to address this is to beef up regulation on shadow banks to level the playing field with traditional banks.

“At a minimum, the systemically important [shadow banks] should face capital requirements and underwriting standards similar to those imposed on traditional banks,” the paper said.

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James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.