Banks around the world need to strike the right balance between capital, assets and liquidity and risk culture to ensure global economic growth, Scotiabank CEO Rick Waugh said at the Empire Club of Canada today in Toronto.
“We need capital to give comfort and trust, but it is the quality of a bank’s assets that generates profitability, and protects it from ever needing to use the capital buffer,” he said.
“The quality of its assets depends on the quality of its risk management. One of the key elements of risk management is establishing a strong risk culture where the tone is set at the top, and then embedding that culture throughout the organization.”
Waugh warned that an over reliance on prescribed capital and leverage rules has a direct impact on economic growth, and can have unintended consequences.
“Leverage ratios and the original Basel-based capital rules treated a government-backed home loan the same as a subprime mortgage security,” he said. “That encourages stockpiling of risky assets to achieve a higher return on capital — exactly the behavior that led to the financial crisis and the collapse of Lehman brothers.”
Waugh stressed the need for continued debate between regulators, policy makers, economists and the industry on how to increase the financial safety system, while ensuring economic growth.
“If regulators and policy makers spent more time working with the industry on building this strength versus continuing to add more complexity and fragmentation to the regulatory environment, I believe we could make some real progress to avoid crises. I would argue strongly for principles-based supervision versus prescribed rules.”