The growing Indian diaspora and the increasing presence of Indian companies in Canada have resulted in many Indian commercial banks planning to scale up their presence in Canada. In an interview with Abhijit Lele, Tiff Macklem, senior deputy governor of the Bank of Canada, talks about banking relations and the state of the global economy. Edited excerpts:
During the 2008 financial crisis, Canada stood out because of its ability to face the downturn. Why?
There are a number of reasons why Canada came through the crisis better than most advanced countries. Despite the fact that the US is our trading partner, we did not have the kind of housing bubble it did. And, we did not have a big sub-prime sector in Canada. We had a more regulated housing market. Our banks are also conservatively managed.
How did the regulatory regime in Canada work in the difficult phase?
The important feature of our financial landscape is more stringent regulation. We had higher capital standards than the global minimums. We had a cap on leverage. There is also consolidated supervision—our prudential regulator supervises commercial banks. Large insurance companies, as well as pension funds, are also under consolidated supervision.
What are the takeaways from the financial crisis of 2008?
The lesson from history is recessions that come after financial crises are deeper than normal recessions and recoveries tend to be shallower. The recovery after a financial crisis typically takes twice as long. If you look at the US recovery, it had its ups and downs. Broadly speaking, it is in line with a modest and gradual recovery that you see when a country emerges from a financial crisis.
In a world awash with debt, governments have to deleverage. Banks and households also have to deleverage. And, all that is going to take years. We expect we would see growth, not decline. But it is going to be modest.
What does the current scenario mean for India and Canada?
Canada and India, though not at the centre of global problems, have an important role to play—help other countries take difficult decisions that are needed to sustain this recovery.
The Indian economy suffered a growth slowdown because of the recession that followed the financial crisis. But it did not shrink. It has rebounded quite a bit. In Canada, we are above the pre-recession peak. We are in an expansion mode.
Does the current regime for foreign banks in India fit the bill or is there room to liberalise it further?
These are decisions for India to take. We are certainly eager to grow our trade and investment relationship with India. In the context of the comprehensive economic partnership agreement (CEPA), we are interested to see this moving forward.
What advice would you offer Indian banks planning to set up base in Canada?
We have an open regime in Canada. We like to see competition and we also have high regulatory standards. Global standards that have been raised, in many respects, look like Canadian standards. But there are some additional innovations in Basel III. Whether it is Canadian banks or foreign banks, in our market, we expect them to adopt strong standards.
How you see Canada-India investment and trade relations growing in the future?
The US is likely to have a modest recovery. And, for Canada, we need to increase our exposure to rapidly-growing emerging market economies and India is foremost on that list. So, we would be pleased to see trade and investment relations between Canada and India strengthen. The two countries have launched CEPA and the discussions are ongoing.
What are the challenges in taking the relationship ahead?
I think the CEPA is trying to cut through a number of issues, with respect to the liberalisation of more investment and the trade framework. This would be an important step in strengthening relations. Broadly, the challenge is to help connect businesses in India and Canada. We have a large Indo-Candian population, and this is an important conduit.
