Scotiabank CEO Rick Waugh calls for balanced regulation: "It's the Canadian way"
TORONTO--Scotiabank CEO Rick Waugh says banks around the world need to strike the right balance between capital, assets and liquidity and risk culture to ensure global economic growth. Waugh addressed the Empire Club of Canada today in Toronto, with a speech entitled, "The future of financial services: finding the right balance for stability and economic growth".
Waugh's speech explored the effect of regulation on the financial industry and the global economy, and stressed the need for a strong risk culture to ensure stable banks around the world.
"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," Waugh said to an audience of more than 250 people. "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. I would argue strongly for principles-based supervision versus prescribed rules.
"It takes the right people, who are well-trained, customer-focused, and who have strong personal and community values. It's about how we behave and execute on the policies and processes in place."
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."
To illustrate how regulation is having a transforming effect on banks, on Waugh cited a survey conducted by the Institute of International Finance that says 44 per cent of banks are exiting activities, as well as markets and geographies, in response to regulatory requirements for more capital and liquidity.
He examined the roles the banks play in the current global economy, and the need for a continued debate and 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."
"We share the same goals - to make this world a better place for our children, our countries, and our economies. In order for banks to help economies grow, a certain level of risk must be taken. It's how those risks are managed that makes all the difference."
Waugh acknowledged that the economy is still in a delicate period with little ability to absorb more challenges, and that to prevent another crisis, banks must be part of the solution.
"Ultimately it comes down to finding the right balance. Our collective future prosperity depends on our ability to collaborate and find this balance - which is, of course, the Canadian way."
Waugh is the Vice Chair of the Institute of International Finance. His last day after 10 years as CEO of Scotiabank will be October 31, 2013. He will remain as Deputy Chairman until January 31, 2014.
The ECC is recognized as one of Canada's oldest and largest speakers' forums with a membership comprised of some of Canada's most influential leaders from the professions, business, labour, education and government.
Scotiabank is a leading multinational financial services provider and Canada's most international bank. With more than 83,000 employees, Scotiabank and its affiliates serve some 21 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. In December 2012, Scotiabank became the first Canadian bank to be named Global Bank of the Year and Bank of the Year in the Americas by The Banker magazine, a Financial Times publication.