Canadian banking regulators’ efforts to focus on conduct is positive for the big banks, says Moody’s Investors Service.
In a new report, the ratings agency said that the launch of the Office of the Superintendent of Financial Institutions’ (OSFI’s) new “Culture and Conduct” division is a credit positive for the banks, as it will “strengthen existing oversight of important operational risks.”
Moody’s said that the banks have historically benefited from robust OSFI oversight, and that the added focus on conduct will bolster that advantage.
“This new initiative will further strengthen financial stability and the credit profiles of Canadian banks by focusing on how corporate culture, including human behaviour, can create excessive risks,” it said. “In our view, increased scrutiny will reduce the likelihood of future improprieties.”
In particular, the initiative enhances OSFI’s processes for evaluating environmental, social and governance risks, which the regulator says are “increasingly important to investors when evaluating the overall credit profile of an individual bank or banking system.”
Moody’s said that the global banking sector’s exposure to environmental risks is relatively low, but that banks face social risks, particularly when it comes to data security and customer privacy. Corporate governance is also “highly relevant” to banks’ credit ratings.
“When credit quality deteriorates because of poor governance, such as a breakdown in operational risk controls resulting in financial misconduct, it can take a long time to recover,” it said. “In more extreme cases, a loss of confidence among clients and creditors following the disclosure of a major governance breach can result in a serious decline in a bank’s credit profile.”